Change of Plans: Making Market Capitalism Safe for China

Since the Mao Zedong era, five-year plans (FYPs) have been a defining feature of China’s political economy. That FYPs still guide the country’s macroeconomic priorities today reflects Beijing’s enduring preference for control and the perpetuation of one of its most important institutions: the central planning agency.

But the fact that China has prospered both in spite of and sometimes because of the influence of the planning agency has surprised many free-market economists. The very existence of such an institution is anathema to market dogma.

While the Chinese economy was never as planned as that of the Soviet Union, “planning” has served a key role in the structure and operation of the country’s growth. From its origins as the State Planning Commission (SPC) in 1952 to its current incarnation as the National Development and Reform Commission (NDRC) since 2003, the central planning agency has been adapted in response to China’s economic transformations.

The planning agency’s power has waxed and waned under different administrations. But it was often considered as “first among equals” in the bureaucratic pecking order of ministerial-level agencies. Because of the Chinese Communist Party’s (CCP) continued belief in state-directed growth—also a crucial source of its political legitimacy—the dissolution of the NDRC seems unlikely.

Still, Beijing has seen the necessity of progressively curtailing the agency’s authority by overhauling its core mandate. In the four decades since the sixth FYP in 1981, the NDRC’s focus has shifted markedly from microeconomic control to macroeconomic coordination, mainly manifest in the management of the FYP process that guides nationwide economic programs. The cyclicality of NDRC influence has in many ways reflected the gradual yet uneven retreat of the state and the rise of more market-oriented policies.

The NDRC has played both hero and villain in the winding course of China’s 40 years of reform and still serves as a proxy for tensions between the state and market. Grappling with the role of the Party-state in the Chinese economy is now more important than ever as Xi Jinping’s “new era” seems to argue for a strong CCP role in the economy and for hybrid economies as a “new choice” for other developing nations.

The Worst-Laid Plans (1952-1976)

Nicknamed the “mini State Council,” the NDRC’s sprawling responsibilities have long included industrial policy, price setting, and administrative approval of state investment projects. Some of those mandates are still in place, albeit in attenuated form, while others have been eliminated. But to understand the extent of the changes brought by Reform and Opening, one must consider the NDRC’s progenitor, the SPC.

The genesis of the SPC was China’s attempt to emulate Soviet-style economic planning. Mao was attracted to the Soviet model for ideological but also practical reasons, chief among them being how the Soviet Union had achieved rapid economic growth while preserving tight political control.

After World War II and the Chinese Civil War, Mao’s new People’s Republic of China inherited a devastated agrarian economy with weak production and high unemployment and inflation. The Soviet economic framework of “five-year plans,” which dated back to 1928, offered a strategy to transform China into a self-reliant industrial powerhouse. CCP propaganda from the time often praised China’s “Soviet big brother” and declared that “The Soviet Union’s today is our tomorrow.”

“With the mighty assistance of the Soviet Union, we will exhaust the greatest effort, to gradually bring about national industrialization!”
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In November 1952, after several years of consultation with Soviet advisers, the SPC was formed in large part to administer China’s first FYP (1953-1957). That first FYP was “the apex” of central planning in China’s economic history. Even Deng Xiaoping, the architect of Reform and Opening, helped to design it.

The plan’s basic strategy was to deploy agricultural surpluses to achieve rapid growth in urban industry. Toward that end, the plan included thousands of specific output targets for industrial products, manufactured goods, agricultural crops, public services, and even the number of theatrical troupes. It designated enterprises that would be responsible for certain targets and specified the land, capital, and labor resources they would receive to achieve these objectives.

The SPC controlled inputs, prices, and credit—in other words, it basically oversaw the entire economy—and cadres and managers would be punished or rewarded based on whether they met FYP targets.

Yet Mao grated at the power of both the planning bureaucracy and the Soviet Union. His personal power and extreme suspicion meant that even the best-laid plans would often be abandoned on his whim. This had tragic consequences when the second FYP (1958-1962) was sidelined by Mao’s insistence on grassroots mobilization under the Great Leap Forward (GLF). In a delusional bid to surpass Britain in steel production in five years, the GLF instead contributed to a famine that killed tens of millions of Chinese.

The third and fourth FYPs did not fare so well either, as Mao’s preoccupations lay elsewhere. He rejected the third plan by declaring the creation of a “Third Front” with the relocation of industries to China’s interior. (The SPC estimated that this policy wasted $50 billion of investment funds and caused indirect losses of $100-$150 billion.) The fourth FYP was also marginalized as the decade-long Cultural Revolution undermined governance.

Politics hijacked well-intentioned planning after the first FYP, as Mao’s economic ideas relied more on ideological vigor than empirical input-output calculations. A small silver lining of this era was that Mao’s efforts to mobilize the masses and purge the SPC did decentralize economic decision-making to some extent. Nonetheless, political volatility significantly weakened the SPC and the bureaucracy writ large.

Prying Open the Bird Cage (1976-1998)

After Mao’s death in 1976, the SPC emerged back into the spotlight. That’s because Deng Xiaoping, who took the reins of power in 1978, began a decisive break with Maoist policies at the Third Plenum of the 11th Central Committee in December that year. The process of Reform and Opening that Deng initiated at that meeting heralded a pragmatic approach to development that focused on economic rather than ideological metrics of success.

One of Deng’s key early supporters was Chen Yun, a powerful economic planning veteran who became one of the “eight immortals” of the CCP. The SPC became his power base within the central bureaucracy after 1980 when Deng helped Chen install one of his political allies as the head of the SPC—which was then led by Chen loyalists until 1993.

Chen did not want to see reforms proceed as fast or as far as Deng wanted. His more statist inclinations precipitated a political war of attrition between “reformers” and “conservatives” over how China’s economy ought to evolve. Chen and his conservative allies argued that rapid marketization and foreign money would destabilize the country and make China dependent on capitalist powers.

Chen instead advocated a “bird cage” approach that allowed market forces to operate only within the confines of the plan. On the reform side stood liberals like Hu Yaobang and Zhao Ziyang, both Deng protégés, who wanted markets to supersede most planning and sought to curtail state intervention, decentralize economic decision-making, and bolster foreign investment. In short, the fundamental tension was over whether to let market forces drive rapid growth or to pursue steady expansion based on enhanced central planning.

Chen Yun and Deng Xiaoping at the closing of the Thirteenth Party Congress in 1987.
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The SPC was a natural base for Chen as its core mandate is planning after all, and therefore, relinquishing planning to market-based allocation would be tantamount to driving a nail into one’s own coffin. So, while the commission had to go along with much of Deng’s reform agenda, it used its considerable clout to staunchly protect its own turf.

Indeed, under Chen’s patronage from 1980 to 1993, the SPC remained “the largest, most powerful and most comprehensive Chinese economic policymaking organ.” It retained control of many purse strings, numerous project approvals, the management of SOEs, and kept on its payroll thousands of staff.

Resistance from conservatives meant that reformers had to figure out ways to get around the SPC to modernize the economy, particularly as the sixth FYP (1981-1985) continued to set investment projects, output targets, and prices in broad swathes of the economy. Even a local planning official grumbled later that “there was nothing they didn’t cover, down to the smallest thing, like how many staples to produce in a year.”

Starting in the late 1970s, reformers had begun the offensive with the “household responsibility system” to decollectivize agricultural production, “township and village enterprises” to effectively enable private commerce in rural areas, and other market experiments far from the official “bird cage” of Beijing. The creation of Special Economic Zones in southern China, led by Xi Zhongxun (Xi Jinping’s father), was a particularly bold move that proved successful in attracting foreign investment and opening trade relations.

One of the areas on which reformers focused their attention were prices. From 1981, China adopted a “dual-track pricing” system—first covering agriculture, then consumer goods, and finally industrial goods—whereby producers had to meet output quotas at fixed prices but could sell any surplus at higher market prices.

This policy turned out to be an ingenious play to chip away at the influence of the SPC and its target-obsessed planners. The incentive to sell to the market caused firms to ramp up production and contributed to impressive growth, allowing China to essentially “grow out of the plan.” By the mid-1980s, it was clear that market pricing raised output significantly, and, as the SPC increased procurement prices and cut output quotas in the mid-1980s, the market came to determine decision-making more than SPC targets.

The early success of such policies lent Reform and Opening greater legitimacy (see Figure 1). Over the course of the 1980s, planning bureaus in ministries were closed down, provincial planners became more independent of the SPC, and “mandatory targets” (zhilingxing zhibiao) were reduced and replaced with less rigid “guidance targets” (zhidaoxing zhibiao). In October 1984, the central government decided to expand the scope of reforms from rural to urban areas, introduced economic incentives for state-owned enterprises (SOEs), and redefined China as a “planned commodity economy” (you jihua shangpin jingji).

Figure 1. GDP Growth in China (%)
Source: World Bank.

Unshackling prices certainly gave economic actors more freedom, but it also led to a perennial problem of rapidly-developing economies: inflation. Inflation and social instability tend to be strongly correlated, and marketization risks triggering rampant price increases if not well managed. The SPC’s administrative levers often provided a much-needed economic brake for Deng to fall back on, but sometimes he pushed too far.

Many factors contributed to the Tiananmen Square protests of April-June 1989. In addition to desires for political liberalization and anger at government corruption, another cause of social discontent was excessive inflation (see Figure 2). Deng unintentionally helped create this situation when, during an economic uptick in 1988, he insisted on liberalizing a large number of consumer prices, which predictably triggered an inflationary spike.

Figure 2: Consumer Price Inflation in China (%)
Source: World Bank.

The Tiananmen massacre was a political boon to conservatives at the end of a decade in which they lost influence in economic policymaking. Yet they failed to capitalize on this opportunity because growth faltered post-Tiananmen and the SPC unveiled a haphazard eighth FYP (1991-1995) that was unambitious, internally inconsistent, and failed to identify clear priorities. This mixture of policy failures and a sluggish economy discredited the SPC and produced an atmosphere conducive to Deng’s 1992 Southern Tour to revive reforms.

That October, the 14th CCP Congress formally endorsed the market by declaring that China was a “socialist market economy” (shehuizhuyi shichang jingji). By August 1993, the SPC’s power to directly allocate resources was removed. Three months later at the Third Plenum in November, the CCP issued a watershed resolution on the “Establishment of a Socialist Market Economic System” that required cadres in effect to “take markets as the foundation” of policymaking.

What the socialist market economy meant was that Beijing embarked on an ambitious plan for market reforms that included overhauling SOEs, unifying prices and exchange rates, and modernizing China’s tax code, business regulation, and financial system. It aimed to create markets that operated with neutral regulation, fairer competition, and better market access without much need for direct administrative measures.

Figure 3. Central Plan Mandates Decreased Sharply in the 1980s and 1990s
Note: Approximate data based on available sources. Includes controls on prices, exports, agricultural production, industrial production, material allocations, and state procurement.
Source: Jae Ho Chung, ‘China’s Local Governance in Perspective: Instruments of Central Government Control,’ The China Journal.

The first two decades of Reform and Opening, then, came at the expense of the SPC, as it became a shadow of its former self and experienced something of a “legitimacy crisis” (see Figure 3). Indeed, some cadres even began to question whether it should continue to exist. The SPC survived, but the economic reforms of the early 1990s heralded a fundamental shift in its core mandate from dictating microeconomic behavior to broader policy coordination, resource mobilization, and ensuring stability.

In short, the CCP maintained control of the “commanding heights” of the economy, but the SPC would now focus mostly on “macro-coordination” (hongguan tiaokong), leaving most decisions to the market.

Ceding Control (1998-2003)

In 1998, the SPC’s name was changed to the State Development and Planning Commission (SDPC) to further reflect its new mandate. And the agency’s industrial policy mandates were transferred to the State Economic and Trade Commission (SETC), which absorbed ten industrial agencies as state bureaus.

The SDPC existed for five years under a State Council that was headed by Premier Zhu Rongji, the firebrand official and reformer who oversaw sweeping privatization of the state sector, steered China through the Asian Financial Crisis, and negotiated China’s accession to the World Trade Organization.

The fact that Zhu wanted the state to retreat meant that he was no friend of the SDPC. Despite having served many years at the planning agency early in his career, Zhu was purged twice for his progressive views on structural reforms. During his tenure as vice premier and then premier from 1993 to 2003, Zhu never once visited the planning agency.

Neither was the political environment especially kind to the SDPC’s influence, as General Secretary Jiang Zemin’s theory of “Three Represents” in 2002 formally welcomed capitalists into CCP ranks. Since then, the value of state-controlled entities has continued to decline (see Figure 4).

Figure 4. Percentage of Industrial Sales Value from Wholly State-Funded Enterprises
Note: Data include SOEs and state sole-funded LLCs but exclude industrial enterprises with partial state ownership. Data are in present value.
Source: National Bureau of Statistics.

Zhu oversaw a number of moves in the ninth FYP and tenth FYP to whittle away the SDPC’s power. These included, among others, abolishing mandatory economic targets, eliminating national-level investment projects from the FYP, and downgrading legacy ministries like the Ministry of Metallurgical Industry. Moreover, Zhu also redirected the focus of the Tenth FYP to addressing the costs and negative externalities of China’s breakneck growth, including lowering the official GDP target from 8% to 7% and striving for more sustainable growth through structural reforms.

Planning Revived (2003-2012)

As Zhu exited the political stage, many of his policy goals remained. Key issues of balancing economic growth with environmental protection, moving up the value chain, and reducing social inequality, defined the tenures of President Hu Jintao and Premier Wen Jiabao from 2003-2012. But Zhu’s campaign to weaken the planning agency was reversed as the Hu-Wen administration gave it something of a second life.

The National People’s Congress (NPC) in March 2003 renamed the planning agency again to become today’s NDRC, thereby eliminating the word “planning” from government nomenclature. The official reason for the change was because planning “is no longer able to exercise sufficient controlling power” in an economy where market forces are “the main engine determining economic growth.” But the overhaul actually strengthened the planning agency by dissolving rival agencies and giving the NDRC responsibility for industrial policy, enterprise guidance, technology investment, and system reform.

NDRC headquarters in Beijing, formerly the home of both the SPC and SDPC.
Source.

The Hu-Wen administration revitalized planning because the leadership believed that to achieve its objective of a “harmonious society,” the state had to address market failure with policies for “scientific development.” Everything from environmental degradation and inadequate social welfare to rising inequality and regional disparities all required urgent state intervention.

In essence, the new administration wanted more socialism in the socialist market economy. State planners in the new NDRC were poised to recover some of their lost powers over markets. In fact, early in his tenure, Premier Wen issued a confidential instruction at a State Council meeting that approvals should only be given to investment projects that were incorporated into official plans (meiyou guihua jiu bu pi xiangmu).

This statist tilt became more evident after significant overheating in early 2004 created a pressing need for macroeconomic stabilization. Vice Premier Zeng Peiyan, who had been promoted from being head of the SDPC, dealt with the problem through an NDRC-led intervention that decided which lower-level investment plans should be discontinued.

Still, economic reforms did not come to a halt. The overall shift in China’s economic policymaking from microeconomic mandates to macroeconomic coordination remained in place, and was further reinforced in the 11th FYP (2006-2010)—its name in Chinese was also tweaked from jihua (plan) to just guihua (guidance).

This FYP also introduced hard and soft targets (yueshuxing zhibiao and yuqixing zhibiao), signaling to lower-level cadres which central priorities were “must haves” and which were “nice to haves.” The former category determined cadres’ career prospects, while the latter were important but not essential.

Most of the hard targets aligned with Hu-Wen objectives to increase environmental protection and improve social welfare, reflecting a resurgent but more focused planning that would carry though to subsequent FYPs, which allowed localities to make major decisions about how to best meet their targets (see Figure 5).

Figure 5. Number of FYP Quantitative Targets Increased from 22 to 33 since 2001
Source: CSIS, ‘National Targets,’ Perfecting China, Inc.

The NDRC’s more prominent role in the “state capitalism” of the Hu-Wen era produced significant blowback from rival ministries and liberal economists. For instance, the head of the National Audit Office said the NDRC was the part of government “most in need of reform,” while a Chinese scholar complained that “From national strategy to county-level development, there’s nothing with which the NDRC doesn’t get involved.” Indeed, the NDRC’s intimate involvement in industrial policy contributed to cycles of damaging overcapacity in sectors ranging from steel to solar panels.

But nothing would accelerate the agency’s ascendancy as much as the Global Financial Crisis (GFC) of 2007-2009. The crisis not only helped delegitimize free markets in the eyes of Chinese policymakers but also prompted the CCP to radically readjust its economic plans to accommodate a steroidal 4 trillion yuan ($590 billion) stimulus package, inspired partly by a 1998 stimulus plan the SDPC formulated in response to the Asian Financial Crisis.

In the face of this exogenous shock, the CCP feared the worst and resorted to its old playbook of empowering planners in the NDRC to administer the stimulus by directly approving local, SOE, and ministerial investment projects. Various agencies, for instance, would have a corresponding NDRC department that had to approve their plans.

The stimulus did stave off a severe economic recession, but came at the expense of letting the state encroach on microeconomic decisions in ways that it had not done in many years. Industry observers complained that “Even price increases for instant noodles and the models produced by car manufacturers needed an approval from the NDRC.”

The post-GFC resurgence of the NDRC cemented its reputation as a “super ministry” that was effectively “one half-step above” other peer agencies. Such a status emboldened the NDRC to develop “a high propensity to intervene in market operations and outcomes,” extending its tentacles into areas that increasingly overlapped with the responsibilities of other agencies. This overreach invariably caused bureaucratic turf battles, led to inefficient policy implementation, and incentivized rent-seeking behavior by bureaucrats involved in project approvals.

The NDRC was regularly at loggerheads with the People’s Bank of China and the Ministry of Finance, both of which were headed by more liberal-minded officials that advocated more market-based approaches. But with champions at the highest level of government, including Wen himself, the NDRC was riding higher than it has been for decades.

Down But Not Out Yet (2012-Present)

The NDRC fiefdom was but one aspect of criticisms lodged at the Hu-Wen administration for progressively losing the Party center’s grip over policy outcomes. When Xi became CCP leader in November 2012, the new General Secretary’s immediate priorities were to centralize decision-making power and embark on an intense anti-corruption campaign to pressure the state apparatus to fall in line behind CCP edicts.

Neither of these priorities worked in the NDRC’s favor. Although the agency emerged unscathed from the March 2013 ministerial reshuffle, it was one of the first major bureaucracies to fall under Xi’s anti-corruption radar. Dozens of NDRC officials were netted, including deputy director Liu Tienan, who managed the energy portfolio.

Xi then announced at the Third Plenum of November 2013 that market forces should now play a “decisive” (jueding xing) role in allocating resources within the Chinese economy, and particularly in determining prices. Soon thereafter, the government also abolished the NDRC’s power over “non-administrative license approvals.”

Although the unleashing of market forces did not quite live up to expectations, the neutralization of the NDRC continued. Xi advanced the notion of “top-level design,” which was essentially a belief in the need to consolidate authority over economic governance under a small cabal of trusted advisors.

Xi first created new “central leading small groups” (CLSGs) and then upgraded these and existing CLSGs to become permanent commissions with formal administrative powers. The most important are the Central Finance and Economics Commission (CFEC) and Central Commission on Comprehensively Deepening Reform (CCCDR)—both of which are led by Xi and answer to the CCP Central Committee.

For instance, one of Xi’s closest economic advisers, Liu He, headed what is now the CFEC work office while he simultaneously served as an NDRC deputy director from 2013 to 2018, when he became a Vice Premier. Liu reportedly never worked from his NDRC office as his real power came from the CFEC.

Liu He
Source.

In practical terms, these changes were aimed at improving inter-ministerial coordination and solidifying central-local alignment on major policies and strategic initiatives such as “Made in China 2025.” In political terms, these changes coincided with the sidelining of Premier Li Keqiang and his State Council. And, as the role of the State Council waned, so too did the status of the NDRC as a “mini State Council.”

Under Xi, the declining fortunes of the NDRC became more evident after the NPC in March 2018, when the agency emerged as a loser in the organizational reforms passed at the meeting. It lost significant powers in the inspection of major state projects, climate change policy, natural resource management, agriculture investment, price adjustment, and anti-monopoly regulation. This fit into a wider reform agenda to create ministries with exclusive control of specific issue areas that could serve as more efficient state executors of central Party directives.

Yet even as the tentacles of a powerful “vested interest” are being chopped off, the NDRC probably still remains one of the more powerful state agencies, given its resources, accumulated expertise, and the role it plays in supervising and implementing FYPs at all levels. That sort of institutional knowledge and function cannot be easily replaced.

Conclusion 

Economic planning is a hallmark of the hybrid market economy that has emerged in China over the 40 years of Reform and Opening. The peaks and troughs of the planning agency’s journey—from microeconomic dictator to macroeconomic coordinator—appear to correlate with cycles of decentralization and recentralization in the Chinese political economy. Planning has had its drawbacks but it will not disappear so long as the CCP remains adamant that the word “socialist” precedes “market economy.”

The NDRC and its predecessors provided effective policy levers in times of economic uncertainty. Since the Chinese state itself is a massive shock absorber during market volatility, the NDRC is a major stabilizer that reinforces that shock absorber. When macroeconomic stabilization from monetary and fiscal policies are inadequate, the NDRC can often provide an additional countercyclical jolt by changing investment decisions.

That role has come with its own costs. Relying on the NDRC has meant that the Chinese economy is not as efficient as it could be and not as de-politicized as it should be. Yet that trade-off is one that Beijing has been willing to make. The NDRC’s evolution over the reform era reflects China’s broader efforts to spur growth by grafting elements of the market onto a state-led development model that is ultimately dictated by the CCP.

The survival of the central planning agency over 65 years yields a fundamental truth about China’s reform process: the CCP embraced the market not as an end in itself but as a means to enhance its power. Deng did not dramatically reduce reliance on planning in favor of markets because he liked capitalism—indeed, Chinese leaders still reject the label. It simply seemed the best way to grow the economy, boost state finances, raise living standards, and bolster the political security of the regime.

From the CCP’s vantage point, state versus market is almost a false dichotomy. Planning and the market are merely instruments wielded at various times to serve the singular purpose of preserving and perpetuating the political status quo. That, too, was the raison d’être of the Reform and Opening experiment—it was ultimately a gambit to save the political system from self-destruction.

So far, the gambit has worked, but it remains uncertain whether China can become a high-income country without further dismantling its economic bird cage.