Narrated by Li Yining, collated by China Today staff reporter Liu Qiong
 
Li Yining is a well-known Chinese economist with an impressive set of responsibilities. Currently he is president of the Market Economy Academy of Peking University, honorary president of the Guanghua School of Management of Peking University (and its doctoral supervisor for work related to national economic policies), member of the Standing Committee of the National Committee of the Chinese People's Political Consultative Conference (CPPCC), and deputy director of the Subcommittee of Economy of CPPCC. Li Yining didn't start out thinking of himself as a "numbers guy." Born in 1930, his earliest career aspirations were to "bring salvation to the people through science" and "rejuvenate the nation through industry."
 
They used to call me Private Enterprise Li (Li Minying), but I would rather be known as "Three F Li" (Li Sannong). It was by accident that I became an economist. At the very beginning of China's economic reform, I presented the concept of transforming China's economy through shareholding, and suggested that the private sector and the state-owned sector enjoy equal status in the economy. As a participant in economic policymaking in China I have witnessed a lot of changes to the People's Republic. These days I am looking for solutions to problems posed by rural development, or what we know as the "Three F (Sannong)" issue – farmland, farmers and farming. 
 
Three F Li”–Li Yining
   
The Winding Path to Economics
From primary school to middle school, I was partial to literature. I read carefully, over and over, such Chinese classics as A Dream of Red Mansions, Romance of the Three Kingdoms, and poetry. I was also moved by the works of foreign authors, such as Balzac, Maupassant, Tolstoy, and Turgenev.
 
Then as an adolescent, I experienced Japanese aggression, the curse of civil war, and the dire poverty of those years. On the eve of my graduation from high school, the school authorities organized a student visit to a large chemical plant. It was there that I began to realize the importance of chemical fertilizer to strengthening China's agricultural production. That's what inspired my "salvation through science" phase. So on graduation, when I was recommended for immediate admission to Nanking University, I chose the Department of Chemical Engineering without hesitation.
 
However, when I received the admission notice from the department in February 1949, the political situation had changed. Two months later Nanjing was liberated. Instead of going to college I went to Yuanling in Hunan Province that December to work, first as an accountant for the county's school supply cooperative, and later as a clerk with the county's construction committee. In the summer of 1951, I decided to take the entrance examination for university. For convenience, I asked my former classmate Zhao Huijie, who at that time was studying in the Department of History of Peking University, to sign up for me. He considered several factors in selecting a field and a major for me – my working experience as an accountant, my academic strength in both the arts and science, and the country's needs – before deciding the Department of Economics was the best choice and one where I had some advantages. So the application was filed with the Department of Economics as my first choice. In August, I was admitted into this department and my lifelong academic preoccupation with economic theory and practice began.
 
Upon graduation in 1955 I didn't leave Peking University, but was engaged for translation and compilation work in the Reference Room of the Department of Economics. At that time, in addition to loaning books and materials to teachers, the Reference Room also undertook collecting, collating, translating and compiling new materials. To me, work is best experienced as total immersion, like putting a fish into water. Facing a wall of texts on economics – Chinese and foreign books, and scores of foreign periodicals – I naturally became familiar with the spectrum of viewpoints on economic management, and translating books and theses on economics was a way to continue my education. Later I served as the main contributor to Economics Information Abroad, a journal run by the Department of Economics of Peking University.
 
In the late 1970s, a nationwide debate on the maxim "practice is the sole criterion for testing truth" raged for six months. Minds were emancipated, and it became clear there were serious disadvantages to the blind worship of theory. Since then, I balanced my book-learning by participating in China's economic reform, and, I hoped, did my share to contribute to it.
 
"Shareholding Reformer Li"    
It was the spring of 1980 that I suggested shareholding reform for the first time. As an associate professor at the Department of Economics of Peking University, I participated in the Labor and Wage Forum convened jointly by the Research Office of the Secretariat of the Central Committee of the Communist Party of China and the State Labor Bureau.
 
In those days, millions of "educated youth" (middle school graduates who were sent to labor in the countryside during the "cultural revolution") had returned to the cities and were demanding the government provide them jobs. At this meeting I suggested one way to solve the problem of unemployment was to have people pool money to run shareholding enterprises, and the enterprises could then expand their operations through issuing stocks. My suggestion got no response, although shareholding had emerged in the countryside by that time.
 
Certain commune-run enterprises adopted a system of pooling capital, issuing shares and providing dividends. These enterprises developed well, and their operations showed great vitality. Farmers became shareholders through pooling various elements of production and forming rural shareholding cooperative enterprises. These are the rudiments of shareholding. Of course, operations were not always smooth.
 
Of all those in Chinese economy, the reform of state-owned enterprises turned out to be the hardest nut to crack. In late 1978, China embarked on a drive to ease government control on the management of enterprises and allow them a share of their profits. Enterprises would have greater decision-making power over their operation. But more decision-making freedom alone couldn't fundamentally improve the management of state-owned enterprises. They remained in a quagmire throughout the early 1980s.
 
Many officials then sought a cure in the contracted responsibility system for cities. They demanded state-owned industrial and commercial enterprises, in the fashion of the nation's farming communities, carry out a management contracting system based on economic performances. Haiyan Shirt Factory, located in a small town in Zhejiang Province, became a shining example of the success of this reform. Bu Xinsheng, director of the factory, learned a lot from linking remuneration to output in rural operations, and introduced the practice in his workshops. With compensation linked to production, a worker's wage was geared to the number of shirts he produced, without a ceiling or floor. But for every defective shirt a worker made, he or she would be fined a sum double the price of the shirt. The saying at that time was "smash the communal pot." This factory was a trail-blazing enterprise, and the "Bu Xinsheng miracle" aroused a sensation nationwide. The gravel road leading to his factory in Wuyuan Town, Haiyan County, was always crowded with curious visitors.
 
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      
Photo credit: 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.
 
In the wake of Zhucheng's example, the central authorities issued explicit guidelines that "in general, it is permitted to sell small state-owned enterprises to collectives or individuals." As a result, the ranks of China's private enterprises swelled from 90,000 in 1990 to 238,000 in early 1994.
 
At the dawn of 2005, the State Council circulated the "36 Articles on Non-Public Sectors of the Economy" (full title: Several Opinions of the State Council on Encouraging, Supporting and Guiding the Development of the Private and Other Non-Public Sectors of the Economy). Now non-public sectors of the economy could enjoy equal status with their state-owned counterpart. The spring of 2005 was known as the "spring of China's private economy" in Chinese and foreign economics circles.
 
I was the earliest advocate of the principles set out in this document. Leading up to the drafting of the articles, I served as the deputy director of the Subcommittee of Economy of the CPPCC National Committee and was entrusted to lead a committee investigation in Liaoning, Jiangsu, Zhejiang and Guangdong provinces. On the trip we discovered that the private sector faced many obstacles in its development. For instance, it was greatly limited with regard to access to certain types of fields or industry by the current system. It was also treated unfairly by legislation governing financing, taxation, land use and foreign trade. Public opinion remained unfavorable to the private sector as well. Our investigation concluded with a detailed report in the fourth quarter of 2003, which we then submitted to the National Committee of CPPCC. Meanwhile, we wrote a letter to Premier Wen Jiabao, as a companion commentary on our report. Premier Wen paid close attention to this, and drafted a lengthy directive in early 2004, entrusting the State Council Research Office and the National Development and Reform Commission to take responsibility for drafting the "36 Articles on Non-Public Sectors of the Economy."
 
In 2005 the 36 Articles were formulated and enacted. This was the first document encouraging, supporting and guiding the development of private and other non-public sectors of the economy ever issued in the name of the central government. Under the new system capital put up by private investors or enterprises was allowed to enter monopoly trades and fields, such as finance, public utilities, telecommunications, public transportation, civil aviation, and the petroleum industry, as a measure to stimulate market competition. It also stipulated that it was illegal for any unit or individual to violate the legitimate property rights of non-public enterprises, or to illegally alter the right to proprietorship of private enterprises.
 
After the enactment of the 36 Articles, various regional and departmental supporting measures found their way into policy and regulations. The whole environment for the non-public sector was greatly enhanced, ushering in a new era in the development of China's private economy. By the end of 2008, private corporations made up 61 percent of the country's total number of enterprises.
 
"Three F Li"
In 2004 and 2005, I conducted a field study in 16 provinces while touring the countryside, and was impressed with the latest advancements in rural reform, such as transference of land use rights, eco-oriented relocation of rural populations, and shareholding methods applied to farmland management.
 
In my opinion, China's reform will continue, especially in rural areas. A shareholding system is not only related to urban economics, but also closely pertinent with rural economics. In the countryside of Zhejiang Province, particularly in rural Wenzhou and Taizhou, shareholding enterprises established by farmers appeared as early as the 1980s. They channeled private funds into production, solved unemployment problems for millions of people, and spurred annually two-digit GDP growth for successive 20 years. They also contributed taxes valued in RMB hundreds of billions, and drove the emergence of hundreds of new cities and towns. The rural communities in these areas have become well-off. All this indicates that a shareholding system can also play an important role in rural areas.
 
To us, reform and opening-up is an unprecedented practice, and setbacks and shortcomings are unavoidable. The planned economy has two major pillars. One is the system of state-owned enterprises featuring non-separation of enterprise and administration, and indistinct property rights; the other is the dual urban-rural structure featuring segregation between cities and the countryside and the subsequent restricted flow of production elements between them. These two pillars help up the planned economy. The contracted responsibility system in agriculture was set up on the precondition of recognizing the dual urban-rural structure, so basically this structure was not touched by reforms during these years. The result is farmers' incomes increase only incrementally, and the urbanization process is also slow. Inequality still exists between urban and rural inhabitants. A living example is the migrant worker. Clearly, rural reform is only in its initial stages, and there is still a long way to go.
 
Besides, there is another issue – the social security system. Due to financial difficulties and other reasons, this system is proceeding very slowly, with many problems needing resolution.
 
Matters concerning farmland, farmers and farming, often referred to as the "Three F" issues, are of primary importance. I have been consumed by making appeals regarding these problems. In early 2008, I published a lengthy article in the Journal of Peking University entitled "On Reform of the Dual Urban-rural Structure." In it I pointed out that to promote the development of the agricultural sector and increase farming income, the key lies in changing this duality, so farmers can enjoy equal rights with urban inhabitants, and equal opportunities. In my opinion, without a reform that eliminates this split there would be no significant improvement in farmers' livelihoods, and the income gap between the city and country dwellers cannot be narrowed in any real sense. In the past, people called me "Shareholding Reformer Li" (Li Gufen) and "Private Enterprise Li" (Li Minying), but now, I prefer to be called "Three F Li" (Li Sannong).
 
Reprinted by permission of China Today
www.chinatoday.com.cn

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