After the economy continued to decline in 1993-1997, 1998 was hit by the Asian financial crisis and massive floods. Faced with the complex and severe economic situation, the Chinese government successfully carried out market-based reforms and macro-control, opening a new chapter in economic and social development, and laying a solid foundation for the “golden decade” after 2000.

I. 1996-2000The economic difficulties faced each year and their causes

The current economic situation is quite similar to 1996-2000. After a round of rapid growth in the early stages, they all experienced external shocks and internal adjustments. Economic growth was weak, and problems such as corporate losses, overcapacity, financial risks, deflation, and unemployment were highlighted.

There are differences over the reasons and policies: is it insufficient external demand and cyclical adjustments, or are there institutional and structural issues? Stimulate again or push for reform? Around 1996-2000, China successfully carried out macro-control and market-based reforms, promoted de-capacity, deleveraging, and structural transformation, and opened a new chapter in economic and social development. Understanding and dealing with problems at that time was worth learning from.

(1) The situation is grim:Losses, deflation, unemployment, high failure rates

At the beginning of 1992, Comrade Deng Xiaoping's Southern Tour speech greatly liberated the mind, set off a new wave of reform and opening-up, and the economy rebounded rapidly. The GDP growth rate that year reached 14.2%, the CPI growth rate reached 6.4%, and the M1 and M2 growth rates were as high as 35.9% and 31.3%. At the same time, economic bubbles such as the fever of fund-raising, the boom in development zones, the real estate boom, and the stock boom have worsened. There are serious phenomena such as the spread of projects, random fund-raising, random borrowing, and the establishment of financial institutions in various places. The economy has clearly overheated, and the central government has begun to take austerity measures.

In June 1993, the Party Central Committee and the State Council issued “Opinions on the Current Economic Situation and Strengthening Macroeconomic Control”, which adopted “16 measures” combining economic and administrative measures such as controlling currency issuance, strictly prohibiting illegal borrowing of funds, raising interest rates, stopping random fund-raising, and strictly controlling the scale of credit. The pressure on economic overheating was relieved. In November 1993, the Third Plenary Session of the 14th CPC Central Committee passed the “Resolution of the Central Committee of the Communist Party of China on the Establishment of a Socialist Market Economy System”, which made overall arrangements for constructing a socialist market economy and a number of major reforms. The National Economic and Trade Commission was established in 1993 to promote the reform of state-owned enterprises with the aim of establishing a modern enterprise system. At the beginning of 1994, the central government introduced a series of supporting reforms such as taxation, finance, and foreign exchange, which mainly included: a tax-sharing system; the establishment of policy financial institutions, separation of policy finance from commercial finance, and implementation of asset-liability ratio management and risk management for financial institutions; the harmonization of exchange rates and implementation of a bank foreign exchange settlement system to achieve conditional exchangeability of the RMB and a deep depreciation of the RMB under current accounts.

Under the dual influence of reform and opening-up and macro-control, the economy successfully achieved a “soft landing” in 1996, with GDP growth of 10%, CPI growth of 8.3%, and M2 growth of 25.9%.

The Asian financial crisis broke out in 1997. In 1998, China adjusted its macroeconomic policy direction and implemented an active fiscal policy and a prudent monetary policy. After a short-term recovery from the 3rd quarter of 1998 to the 1st quarter of 1999, the economic growth rate fell again and a new low was found. The GDP growth rate fell to 6.1% in the fourth quarter of 1999, even lower than the 6.8% in the second quarter of 1998 during the worst period of the financial crisis.

Various types of risks are highlighted:

(1) Large-scale losses of state-owned enterprises are basically one-third open losses, one-third hidden losses, and one-third profits; At that time, the contribution of state-owned enterprises to economic growth, profits, and employment declined sharply. The share of the output value of state-owned industrial enterprises in the total output value of all industrial enterprises fell from 78.5% in 1979 to 26.5% in 1997; the share of newly employed people in urban areas fell from 72% in 1978 to 34.4% in 1996; the share of profits of state-owned industrial enterprises fell from 50.5% to 29.3% in 1994-1996, and there were even overall losses in some competitive industries. Contrary to the plight of the state-owned economy, the non-state economy (collective, individual, private, foreign economy, etc.) grew rapidly and gradually became the main body of the national economy. In 1996, the non-state economy accounted for 71.5% of the total output value of all industrial enterprises, and 65.6% of the newly employed in urban areas.

(2) Overcapacity is severe, falling into a deflation—debt cycle, and rising levels of explicit and hidden unemployment.

(3) The bank's non-performing asset ratio is too high, technology has gone bankrupt, and financial risks have increased.Due to property rights restrictions, inadequate corporate governance, and factors such as economic overheating, financial chaos, administrative intervention, and losses of state-owned enterprises, commercial banks' non-performing assets have increased dramatically, and the non-performing asset ratio is even higher than in crisis countries. According to lower accounting standards at the time, the non-performing asset ratio of commercial banks in China was around 30% in the late 90s of the last century, and they have technically gone bankrupt. Non-bank financial institutions have a higher ratio of non-performing assets. Some localities and departments have set up a large number of illegal financial institutions without permission, and there are many illegal acts in the stock and futures markets. As the financial order was rectified in 1997, banks tightened credit, further worsening the economic situation and the risk of deflation.

(2) Reasons and policy debates:Externality and cyclicity or institutional and structural?

There were certain cyclical factors in the economic downturn at the time. After rapid growth in 1992-1996, the national economy accumulated a large amount of inefficient production capacity and excessive leverage. However, although macroeconomic policies continue to be tightened, capacity decoupling and deleveraging have been progressing slowly due to institutional barriers, backward production capacity has been maintained, and corporate inventories are high.

The economic difficulties of 1996-2000 were ostensibly cyclical, but in essence they were institutional and structural. The market was supposed to be cyclical, but it was difficult to achieve due to institutional barriers. Decommissioning and deleveraging could not be carried out, and overcapacity and debt risk increased. It can be inferred that even without external shocks, institutional and structural problems will come to light.

The structural problem at the time meant that ineffective oversupply coexisted with insufficient effective supply. A large amount of production capacity is concentrated in the field of supply of low-end homogenous products. The supply of high-end high-quality products that meet consumption and export upgrades is scarce, and financial resources are wasted on the “inefficient production capacity - passive inventory” cycle.

The institutional problem at the time meant that the macro-structure and microstructure of the market economy were not perfect.State-owned enterprises and local governments have long had soft budget constraints and investment hunger. The government interfered too much in resource allocation in competitive fields, and the modern corporate governance of state-owned enterprises “looked like a god.”The financial structure, dominated by state-owned banks, has “identity discrimination” against financiers with different forms of ownership. Credit resources tend to be allocated to inefficient and loss-making state-owned departments, which become “secondary financial” subsidies.The financing structure does not match the economic growth structure and performance structure, and there is a serious mismatch of resources.The continued flow of credit resources to state-owned loss-making departments has caused huge amounts of social and financial debt to hang in the air, preparing a financial crisis or currency crisis.

II. 1996-2000The year's policy response:Easing policies and speeding up reforms

(one) Implement an active fiscal policy that continues to be moderate, mainly by issuing additional long-term treasury bonds, and implement a prudent monetary policy that focuses on indirect regulation. There has been no loss of credit control or a “return” of the system due to short-term goals.

There are four valuable experiences in macro-control this time: First, they have successively adopted strong measures to relax banking and counter deflation, such as abolishing loan scale management, lowering the statutory reserve ratio, carrying out open market operations, and cutting interest rates. The shift from direct regulation to indirect regulation has been achieved, and the direction of market-based reform has been maintained. From 1996/5 to 1996/9, interest rates on 1-year loans were lowered from 12% to 5.85%. The reserve ratio was lowered from 13% in 1997 to 6% in November 1999. Second, issuing more long-term treasury bonds and strengthening infrastructure construction is the main content, which is borne by the central government. This not only enhances long-term growth potential, but also does not increase the burden on local governments and enterprises. The third is to continuously and moderately implement an active fiscal policy. An average of 100 billion yuan of treasury bonds is issued every year, and a total of about 900 billion yuan is issued over seven years. There is no short-term large-scale stimulus. It not only maintains the bottom line, but also avoids excessive interference with market expectations and the behavior of micro players. Fourth, the government did not pressure banks to lend large amounts, prevented 1992-1993 credit from getting out of control, and there was no “return” to the planning system.

(two) Adjust the layout of the state-owned economy, revitalize the private economy and small and medium-sized enterprises, and improve micro-efficiency.

Proposing a “three-year escape” for state-owned enterprises, promoting the closure and elimination of backward production capacity of disadvantaged enterprises, and adopting necessary administrative measures to promote “textile pressure”; “focus on downsizing” to promote mergers and restructuring of enterprises. The main method of “downsizing” is to transfer some or all of the property rights to internal employees, sell them as a whole to non-public legal entities or natural persons, etc., to promote the transformation of local small and medium-sized state-owned enterprises; strategically adjust the layout of the state-owned economy and shrink the front; implement “debt-for-equity swaps” to turn bank claims of more than 600 households and nearly 500 billion yuan into loans to state-owned companies over three years Shareholding of financial enterprises; granted to small and medium-sized enterprises Tax cuts and credit support; breaking industry monopolies, lowering entry barriers, etc. By the end of 2000, most large and medium-sized state-owned loss-making enterprises had been lifted out of poverty; at the same time, private small and medium-sized enterprises grew rapidly.

(three) A series of major financial market-based reform measures have been introduced, effectively mitigating financial risks.

First, state-owned commercial banks carry out financial restructuring.In 1998, 270 billion yuan of special treasury bonds were issued on a targeted basis, specifically to supplement capital. In 1999, 1.4 trillion yuan of assets were divested to four newly established asset management companies;

The second is to improve the internal management of state-owned banks.Abolish the loan scale, implement asset to liability ratio management and risk management, reform and improve the capital replenishment mechanism of state-owned commercial banks and the withdrawal and write-off system for bad debts and bad debt reserves, and expand the pilot reform of the five-level classification method for loan quality;

Third, in 1998, the management system of the People's Bank of China implemented major reforms, abolish provincial branches and establish nine branches across provinces (autonomous regions and municipalities directly under the Central Government)The central bank's authority in implementing monetary policy and its independence in implementing financial supervision have been strengthened.The division management system has been improved, and the Securities Regulatory Commission and the Insurance Regulatory Commission have been established successively;

Fourth, in order to prevent financial risks, financial institutions such as urban credit cooperatives and trust investment companies began to be overhauled in 1999A number of risky institutions, such as Hainan Development Bank and Guangdong International Trust and Investment Company, have been shut down one after another.

(four) Implement housing system reforms and speed up opening-up to the outside world.

1In July 1998, the State Council issued the “Notice on Further Deepening Housing System Reform and Accelerating Housing Construction”It was announced that cities and towns across the country will stop physical distribution of housing starting in the second half of 1998, fully monetize housing distribution, and at the same time establish and improve a multi-level housing supply system based on affordable housing, develop housing finance, and cultivate and regulate the housing exchange market. Housing consumption by Chinese residents has been fully initiated.On November 11, 2001, China officially joined the WTO and was deeply integrated into globalization. Relying on the advantages of cheap labor and improved infrastructure, foreign trade grew rapidly.

III.Policy Implications:Turn the crisis into an opportunity to drive market-based reforms

Since the current economic downturn is mainly structural and institutional rather than external and cyclical, the policy response is mainly structural reform rather than large-scale stimulus.In the face of economic bottoming out, we should cultivate new growth momentum and build a new growth platform by promoting reforms on the premise of maintaining strength and maintaining the bottom line. At this stage, China is simultaneously facing various policy tasks such as steady growth, risk prevention, structural adjustment, and reform. According to the “Dinbergen Rule”, several independent and effective policy coordination are needed. Policy tools and their combinations can draw on the successful experience of 1999.

(1) At present, it is possible to consider steady growth by issuing additional long-term treasury bonds.Steady growth is necessary, mainly to prevent risks, protect employment, and gain time for active reforms, rather than passively waiting for a recovery in the cycle or an improvement in the external environment. Macroeconomic control is the function of the central government. Steady growth by increasing local financial burdens is a mismatch of power. In the future, it should be implemented through the central government issuing additional long-term construction treasury bonds and supporting policy financial institution financing, and intervention in the normal lending behavior of commercial banks should be avoided.

(2) Adopt a combination of market and administrative measures to promote market clearance within the system.The core of the current problem is that market clearance faces institutional barriers, making it difficult for the market to fully perform its function of survival of the fittest. Due to factors such as local protection, government credit endorsements, and banks' reluctance to make non-performing loans explicit, it is difficult to clear the market in areas within the system, such as state-owned enterprises with overcapacity and local financing platforms. This shows that every time a risk is revealed, it is solved by “rigid payment”, and enterprises with overcapacity become “zombie enterprises”, creating financial risks and hidden unemployment. Areas within the system should be cleared by a combination of market and administrative means. At the same time, allow non-performing loans to be made explicit, increase tolerance for short-term economic downturns, do a good job of risk isolation and mitigation, and improve unemployment benefits.

(3) It is possible to consider divesting the non-performing assets of existing commercial banks to restore the normal financing function of the financial system.Currently, commercial banks have extensive risk exposure to local financing platforms and state-owned enterprises in the field of overcapacity. These hidden non-performing loans were largely due to banks replacing financial functions around 2009, and it is reasonable to divest non-performing loans and corresponding assets back to state-owned asset management companies. However, this process requires spending money to buy the system, establish deposit insurance and bankruptcy exit mechanisms, strengthen the construction of internal risk control mechanisms, appropriately reduce the deposit reserve ratio, and abolish the deposit-loan ratio assessment.

(4) Give full play to the important role of capital markets in supply-side reforms to promote transformation and innovation.Accelerate the formation of a stock market with complete financing functions, solid basic systems, effective market supervision, and full protection of investors' rights and interests, so as to promote economic transformation and upgrading. Vigorously promote asset securitization and mitigate financial risks. Develop open and inclusive multi-level capital markets to reduce corporate financing costs. Encourage capital market optimization and restructuring to eliminate backward production capacity. Relying on the capital market, liberalize access, introduce new investors, and speed up administrative monopoly industry reform. Implement structural tax breaks to encourage innovation. Promote the reform of state-owned enterprises and increase the asset securitization rate.

(5) While promoting supply-side reforms, build a “complete network” of society to cover the bottom line of social stability.Supply-side reforms will have an impact on poor banks, P2P, employment, etc. Solutions include debt restructuring and divestment, vigorous development of the service industry, improvement of the social security system, and improvement of unemployment benefits.

(6) Vigorously reform the macro-structure and microstructure of the market economy so that the market plays a decisive role in resource allocation. This is fundamental to solving the problem. While doing a good job of steady growth and risk prevention, speed up reforms in areas such as simplification and decentralization, fiscal and taxation reform, state-owned enterprise reform, liberalization of the service industry, and marketization of interest rates and exchange rates to cultivate new economic growth points and increase total factor productivity.

(This article began in 2014)