Good morning, everybody
Now we start our explanation
about the fifth cyclical crisis in China
We need to have the basic knowledge to notice that this time
the fifth economic crisis
had a very special character: hard landing
When giving a brief account of the other four crises 
since 1949 to 1974/1975
I indicated that these crises all had achieved soft landing
This was not only because the government adopted the right policy
but also because the rural society played a very important role 
to be the base for the city industrial capital's soft landing
When they talk about soft landing or hard landing
it is not for people
It is for the state capital
For an indigenous-population country
there is no chance to take overseas resources
overseas properties and overseas surplus 
for your own industrial capital's soft-landing
So you only can make a kind of space 
to absorb the industrial-capital's cost 
when the industrial capital 
has crisis in the urban sector (city)
On average
most industrial capital is located in the urban regions, in cities
So when there's an economic crisis
if the costs must be taken by the cities
there will be a hard landing in the cities
If they can transfer out the institutional cost to rural sector
if agriculture can be the base 
for taking the city's industrial capital cost
there can be a soft landing
So that may not be very easy to understand
but even if you cannot understand now
I hope you make a record
write it down in your notebooks
and then step by step
you'll be able to understand the situation in your own country
and to compare it with others
You may know that there is a big difference
between a hard landing and a soft landing
If there's a hard landing in the cities 
and the institutional costs cannot be transferred out 
to the countryside
it means that there must be a big change 
or  institutional transition
During 1979/1980 
when China had a big crisis happening in cities
this time there was no way to transfer out the institutional cost 
and there was a hard landing in the urban sector
So that is the big difference
When we talk about crises
I suppose that people understand 
there is a kind of cyclical crisis - a kind of economic regularity
No doubt it's easy for people to accept
to understand that for any economic system to develop 
and people want to set up industrialization
cyclical crisis will be bound to happen
This cyclical crisis is due to a kind of economic regularity
and not by our theoretical creativity
Even before Marx there were many scholars 
who had described such economic regularity
Cyclical crisis must happen from time to time 
when a developing country wants to set up industries
because industries need capital-intensive investments
If you're short of capital you must have debts that turn into costs
Costs mean that you have to pay it somehow
That is the reason for the economic crisis
But few people talk about
how the institutional costs of the economic crisis are being transferred out
from the urban sector where industries are located to the rural sector
So the Chinese economy is characterized by a dual system
The urban and the rural do not have the same institutions
they do not have the same culture
They are not even the same society
So in China before the 1980s
most of the institutional costs of the crises could be transferred out
For an example of a very critical case
the crisis in the 1960s involved the transfer out of the unemployed population
especially the young unemployed population, to countryside
And then in 1968, when the second industrial crisis happened
China also could transfer out the unemployed youth
from the urban to rural regions
And also in 1974
So these three are very typical examples
of the transfer out of unemployed youth
which reduced the potential risk of social chaos happening in the cities
You know, that is a kind of regularity that every political system 
or regime having a very big number of unemployed youth
there must be potential social conflicts that may lead to social chaos
happening in the economic crisis zone, in the cities
Because China could transfer out its unemployed youth
from the cities to the countryside
each time they could achieve soft landing
No social chaos or social conflicts in the city
means that you reduce the institutional cost in the cities
So modernization -modern political superstructure - is mainly set up in cities
And all modernized political superstructure is of high cost
For example, you need the police as a big force, which involves a big cost
When you use them to suppress social conflicts on the street
there is a much higher cost
I think most people can understand this
But this time from 1978 to the 1980s
when the crisis happened
why could the Chinese government not transfer out the institutional costs
caused by the economic crisis to the rural sector?
The cost of crises was transferred out three times before
but why not this time?
I should give an explanation
As they were not able to transfer out the crisis
and there was a hard landing in cities
what followed?
What happened?
The fifth cyclical crisis happened 
and ended with a hard landing
leading to the so-called reform
that is, the economic transition or institutional transition
Whatever we call it and whenever we talk about such a transition
we must know where did such institutional transition come from
This also means that you should know where you are
and where you came from
and then you may know further
where you are going to
So let's come to the explanation first, also the background
We will need to do analysis of the international environment
and then domestic issues
So, about the international environment
since 1971, China regained full diplomatic relations 
with the UN and the United States and so on and so forth
China regained formal diplomatic relations with different kinds of countries
because the UN accepted People's Republic of China
You can see that at the beginning of the 1970s
China regained its seat in the UN
Then in 1974
Chinese leaders announced the Three Worlds Theory created by Mao Zedong
That is Deng Xiaoping
Later, that changed
In the 1970s
Mao's Three Worlds theory was very influential in the Third World countries
The geopolitical environment of the regions 
around China changed more and more for better
At the time many of the geo-political conflicts
mainly happened in South Asia, the Middle East
in Africa and the Latin American countries
far from China
And the North East Asia had settled down
Japan came to establish friendship with China in the 1970s and 1980s
These two countries had been major enemies
since the 19th century，they fought many times 
but they were reconciled in the 1970s
Japan started providing very low interest-rate loans to China
Every year a large amount 
on average about 80 billion yen per year (1979-1983) were given to China
for industrial construction
These loans were combined with the selling of machines 
and production facilities
China got a lot of facilities
especially for petrochemical and machinery industries
many of which came from Japan
So the Northeast Asia had settled down, becoming a peaceful region
And China did have a chance to develop “state-industrialization”
I should emphasize that it was “state-capitalist industry”
Chinese state-capitalist industry expanded thanks to the peaceful environment
The state took this opportunity to develop state-capitalist industries
I just give you a second to think about this argument
Inside of China there was also big change
In 1976, Zhou Enlai, Zhu De and Mao Zedong
three big men of the revolutionary period
very important leaders, passed away, one after the other
Mao had appointed Hua Guofeng to be the new leader
and concentrated all the power to him
But only three years later
he was replaced by a group of collective leadership
This means that a single leader was changed into a group of politicians
including Chen Yun, Deng Xiaoping, Li Xiannian, Peng Zhen and Deng Yingchao
At that time since the late 1970s
it was a transition period
from 1976 to early 1980s until 1989
We had at least 12 years in which the political leadership
changed from one extremely important man 
to a group of important men making decisions
So that was an internal change - few people understand what that means
That means China has a leadership structure
the decision making of which is not determined by one person
this is structural decision-making
It means they can represent different interest groups
and express what they want to involve in the decision-making
After they took power in the late 70s
the Third Plenary of the Eleventh Central Committee 
an important meeting of the Party 
made in 1978 an important decision to want to change
A lot of people think that 
this was the important starting-point of Chinese economic reforms
but that is not exactly right
That meeting was mainly criticizing Mao's Cultural Revolution
because it went against many highly-positioned leaders
Now that they had regained their positions and power
they expressed their ‘feedback’
and criticized Mao's policies and thoughts
So, that was an anti-Mao political meeting 
and de-Maoist thought now became an important instructional ideology
But while this ideology could satisfy the high-ranking political leaders
it could not satisfy the lower class
So, the lower class was short of political mobilization
Originally
when Mao set up “class-struggle” theory and “continuous class-struggle” etc
it was sort of workable and effective
to mobilize the lower class to join the state construction
because at the time there was no capital
You had to make the people as manpower devoted to the state construction
So at that time the Western media presented a lot of photos
to show China's so-called people mountain people sea
which suggested that 
“you are very foolish, you only use manpower and you are very backward”
And, yes
when western societies have a lot of colonies
they can take the surplus from other people
They don't need to use themselves to invest their labor
So they stand from a high position
and then look down at you and say
“You are foolish. You can only use your own people. This violates human rights”
and whatever
They can give many criticisms
But this practice is very workable if you have zero capital
When you need to repay debt
your capital stock is actually minus
So, originally, by Mao's thoughts
the state could use class struggle as a kind of theory
as an ideology to mobilize the lower class to volunteer themselves
with little or even no pay
You just gave them food
and they organized themselves as a sub-military organization
taking part into reservoir construction, irrigation construction
and even the Three Defense Lines Construction
That was for the state-capitalist industry
not for people's livelihood
not for the infrastructure in the countryside for higher yields
It's for the state capital
And the people volunteered to contribute
because they thought that they now joined in the worldwide class struggle
to help poor countries, the colonized countries
in anti-colonization and anti-imperialism
So there were many things that made them believe that
whatever they did was right
But later, in the 1970s
in 1978 when the economic crisis hadn't happened yet
and when the political leadership was changed
followed by a change of ideology
that gave many critical comments on the 1960s and 1970s
they weren't aware
that they had lost their “hands” to mobilize the lower class
So that was a potential risk for a hard landing of economic crisis
That is very important
And also in 1978 
the state started to rehabilitate the “rightist” intellectuals and party cadres
This was a kind of political movement
to right their political wrong
to allow them to resume their positions
This took place from 1978
At that time I was a member of a team
to recheck the personnel documents
We took out all these “bad” documents
and to clean up all the bad records in these documents
to turn an intellectual or cadres into a man with everything right
I was at the time a team member
to do such kind of document record cleaning work
There was an anti-Rightist movement in the 1950s…starting from 1957
Around a million of intellectuals were labeled as the Rightists at the time
But not all of them were actually ‘rightists’
There were some mistakes
Some were misdeemed as rightists and got penalties or mistreatment
The total number of rightists was around half-million
the other half-million were mistakes involved in the anti-Rightist movement
We cleaned up the records of this million
so they had nothing wrong from the 1950s
If you made them carry their mistakes from 1957 until 1978 - 20 years 
they would have a very heavy political burden on their shoulders
They would not be able to go about as regular people
which would even affect their children
So that was a big political movement in 1978
The shangshanxiaxiang (going to countryside and mountains) movement
involved first the children of these politically-tarnished people
Their children were among the first to be sent to the countryside
And if there was some opportunity
to be a worker in a county or in some factory or some mine
certainly these young people
the young generation with “bad” family backgrounds, would not have a chance
So at that time
when you gave those millions of older generation a chance
the records of their younger family members needed to be cleaned up again
This was related to the educated youth movement
In 1979 the educated youth came back to the cities
It was a big movement
There were more than 10 million, maybe 20 million, educated youth
who came back to live with their families in cities
I cannot remember the exact number
But it is big
The economic crisis happened in 1979
And this time
there was no possibility to send the unemployed youth
 from the cities to the countryside
On the contrary
there was the need to absorb the more than 10 million educated youth
from the countryside back into the cities
That's why there was a hard landing
because unemployment became more severe than at any time in the past
So this time 
they needed to have a lot of measures to deal with this hard landing crisis
All of these measures were renamed as “economic reforms”
So the reform started from late 1970s
exactly from 1979 
not from 1978 which saw political vindication and rehabilitation happening
And in 1979 the economic crisis broke out 
and then they started to deal with the economic crisis
with measures in the name of “economic reform”
So that is the Chinese story
I just give you one second to put this explanation into your mind
And starting from this point
you can have many explanations about modern China since the 1980s
There's another thing that is also very important
There was the border war between China and Vietnam
When Vietnam won the Vietnam War
they wanted to reshape the Indochina peninsula
And there were three countries involved: Cambodia, Laos and Vietnam
When the French colonized this region
they wanted to set up a Union - the south-east Asian Union in the peninsula
When the Vietnamese communist regime took power from the French colonial system
they were trying to take up the historical heritage to establish this Union
So after Vietnam was unified
they were going to expand to take others
So why was there a border war
Few people understand 
that China sent a lot of troops to attack the north Vietnam territory
and then retreated
Why should China do that
and also keep the heavy pressure at the border
One reason was to make the Vietnamese withdraw from Laos and Cambodia
Because there was a tense situation at the north of Vietnam territory
so they needed to deploy the troops to the north to protect the border
The north border is adjacent to two provinces in China
So China deployed troops at the border
Putting pressure on Vietnam meant that
the Vietnamese had to relieve military assault in Cambodia and Laos
That was to make their attack weaker
and these countries in this region could still maintain their sovereignty
Nowadays you can see it's important
In ASEAN + 1
some ASEAN countries are close to China
Cambodia is one
Laos is another
So when these countries play a role in ASEAN
they have a country vote that is geopolitically close to China
That result is from 1979
Because of the border war with Vietnam
there was a big cost of the military expense
estimated to be almost half a billion
which was not included into the budget plan
but then turned into budget deficit
This means that
one-third of the annual budget deficit came from the China-Vietnam border war
So that's why in 1979 the budget deficit crisis happened
It was not only caused by the foreign debts
but also caused by the budget deficit
So the title of this lecture is the crisis caused by the foreign debts 
and the budget deficit
The budget deficit came partially from the war
that happened in the China-Vietnam border
So that is why I put some pictures here to make people understand
But mainly, the reason for this crisis was yangyaojin
the great leap of foreign capital investments
The new leader Hua Guofeng, when taking power in 1976
needed to show that his performance was much better
So he made a decision
not only himself but also his staff including Chen Yun and Li Xiannian
these senior persons of old time
so they made a decision wanting to have an eight-year project
to introduce US$ 8.2 billion of foreign facilities and machines
in order to systematically adjust the industrial structure
coming from Russian aid
USSR-style industry was heavy and military industry
By that time it comprised seventy percent of the total industries in China
Mao changed a part of it
Now Hua Guofeng wanted to keep going
to change the structure of heavy & military industries
towards mainly meeting domestic demand, people's livelihoods
They also wanted to have chemicals, fertilizer, textiles and automobiles
Nowadays these cadres resuming their positions wanted to enjoy cars
and consumer goods imported from Japan, Korea and also from Europe
In the late 1970s
China started to take automobile plants from Brazil
And Brazil took these plants from Germany
meaning it's second hand
but somehow not cheap
because China didn't have it
So at that time Santana, originally a German brand
was transferred as secondhand to Brazil
Then Brazil sold it to China as third-hand
It was set up in Shanghai at a high-cost
because it passed through the Latin America
But at that time it's also considered very advanced in China
because we didn't have one
Previously there were only automobile models from Russia (the USSR)
Now China had Western European style automobiles
This started from the late 1970s
and had to be repaid by foreign exchange reserves
At that time, the same as in the 1960s and 1970s
China could only sell agricultural products，textile, clothes and shoes
these very low-profits products to earn hard currency
to pay for these high-priced machines, facilities
and also high-paid technicians
So that was unfair trade 
with low-price agriculture products which China only had
And another thing: even Brazil didn't need your Santana cars
Certainly, China could not sell them to Europe
because it's a very old brand which they had given up
If China did want to sell these cars
they had to be at a very low-price as second-hand products
So it means that
China could not sell high-priced industrial products to other countries
This was similar as in the 1950s with Russia
China could only sell them minerals and agricultural products
China was at that time a developing country at a low position
So when China wanted to have foreign investment and foreign machines
they had to be paid at very high cost
So this is the so-called “great leap with foreign capital”
That was the plan when the new leaders wanted to set up an 8-year plan
to introduce these foreign investments
But in the first year in 1977 and the second year in 1978
they introduced much greater amount of foreign machines
much more than the total amount of eight years as planned
In the first year it was worth four billion dollars
almost half of the plan
And because China did not have much hard currency
they needed to arrange a long-term payment
which meant debt
40% debt, so 60% paid in hard currency
As a result
almost 80% of the total foreign exchange reserves had been paid out
Another 40% - debt – had to be repaid later
But later China didn't have enough ability
to increase foreign exchange reserve
Just in two years
China had bought
more than 10 billion dollars worth of foreign machines and facilities
from western countries
That immediately turned into the foreign debt
These foreign debts had to be paid back by the central government budget
then turning into budget deficit
So in 1979 the budget deficit was nearly 30 billion Chinese yuan
whereas the total budget revenues in 1978 were just 100 billion
It meant an almost 30 percent deficit
It was a terrible situation
Originally one third of the central budget
was for maintaining the social management
national defense, government expenses
Another one third
was for social welfares
pensions for aging people, medical services, education
and such sort of public needs
So, management took up one third, social needs took up another one third
And another one third of the budget
was taken up by infrastructure construction, for factory construction, etc
Before the 1980s every penny paid in China was from the budget
If one third of the budget was deficit
the state needed first to cut the construction expenses
If there were not enough construction expenses
there was no room for expanding employment
This is the crisis that happened in late 1979 and early 1980
It was caused by the huge deficit of about 30 billion
almost one third of the budget
China had no ability to invest into infrastructure construction 
and therefore no room for new employment
At that time there was nobody
no politician having charismatic power like Mao before 
to mobilize the young unemployed people to go to the countryside
In the late 1990s
the premiere Zhu Rongji could enforce the lay-off of 
more than 40 million state-owned enterprise workers
But in the late 1970s nobody could do that
because at that time the working class was proletarian
They occupied, nominally, the whole of the political superstructure
In the late 1970s
the Chinese system hadn't totally changed its political superstructure
At that time it was illegal to lay off workers of the SOEs just like that
It was no good and politically incorrect
In the late 1990s
it was politically correct but in late 1970s it was politically incorrect
So that is the difference
Let's see the crisis here
This was budget revenues
down to -20 percent and the budget expense was up to 40 percent
This gap was big and turned into budget deficit
It is like you had no ability to earn income but you invested too much
This gap turned into budget deficit and they also turned into foreign debts
So that was the late 1970s
And foreign investment turned into the crisis
and hard landing turned into economic reform
We also need to notice that at that time social instability
social contradictions became potentially intensified
This was triggered in 1976 by Mao's and Zhou's death
The lower class and middle class also thought
that the death of these figures was a kind of chance 
to show that they were dissatisfied
That was 1979 when we saw the criticism of Mao's thought
Sending the educated youth to the countryside was deemed politically incorrect
and they wanted to come back to cities
And that was their petition
So they dropped to their knees to show that
if they weren't given the right to going back to their original cities
they would keep kneeling down, and also stop eating
The central government had to send high-ranking cadres to Yunnan
to this farm trying to solve the problems
and finally allowed them to go back
Millions of educated youth came back to cities in 1979
and made the situation more severe
The cities at that time had an economic crisis
they had to reduce investments in construction
There were no enough rooms for these returning youth
so they became jobless and roomless
They had families but their homes didn't have enough rooms for them
I remember in 1978
all of my family members, one after another, came back to Beijing
Originally we had a three-bedroom apartment
before we were sent to the countryside
So my parents, my sisters
and I and my younger brother once had a three bedroom
just enough for our six-member family
But when we came back we only had a two bedroom apartment
But we were at that time more than 18-years-old
so we could not hustle into two bedrooms
And also my mother's father lived with us
so we had three generations and two bedrooms
which was a very difficult situation
At the universities
they divided the classrooms to accommodate many families
They had only a curtain to block different families
So at that time the situation was very difficult
If you had no bed room you could not have a wife
They were around twenty years old
There was not only a surplus labor force but also surplus of energies
These young people had big energy but nowhere to go
so they might fight in the street, for a young girl, maybe, or for whatever
At that time they all liked to have a military cap, or a dress
or even a belt, or a bicycle, whatever
If they like, they wanted to take and then they fought
At that time street violence, street fighting, was everywhere
So when these millions of young people came back to cities
there was no room for their lives
When the economic crisis broke out, they ended up in jail
Look at these young people in jail
They had to learn some skill in jails or correction centers
These were young people captured by policemen
There were two kinds of the so-called criminals
One was economic criminal
another was xingshifanzui
those committing criminal cases, like violence
Anyway, if you were involved in street-fight, you became a criminal
If you became an individual dealer, buying and selling something
that was also a crime
At that time there was no free market
So young people easily became jobless
then they might fight in the street and end up in jail
That was what happened in the crisis with a hard landing in the cities
turning into social disorder
So the state got to use the police to suppress street violence
And the government got to take measures
one was to suppress crimes
another was to open the market 
to allow individual to do private business
which solved the problem of young people having no job
And another important policy
the government gave orders to almost all universities
government departments
and state-owned enterprises to open door 
to absorb these young people
This meant five people got to share three portions of food
and then going further 
five portions of food needed to be shared by ten people
Now state-owned enterprises needed to absorb unemployed youth
Even if they had little duty you needed to give them salary
But then one result was important
the enterprises became economically inefficient
Ten people share five people's work
Even if you could feed them 
with very low salary, the productivity per capita became lower
But that was also the reason 
to reform the state-owned enterprises
You have no efficiency
so we need to reform you to make you private
I'll stop for a second
to give you room and you can think about that
what is the further reform
They ordered you to open the door
to absorb these unemployed youth
and finally, they said that you have no efficiency
What made you to become inefficient
The crisis
You helped the government to solve the problem of unemployment
but then you became inefficient
Then you needed to reform yourself
Is it logical or not
Nobody is so foolish
So you can think about what this further reform was
That is very important
When we talked about China's reform
 we said it started from rural society
Why? 
As seen here
they put into the museum this kind of hand-written document
There were eighteen households
which wanted to re-distribute arable land among themselves 
in the name of dabaogan
Bao means contract
Not exactly contract, but redistributing land equally to every household
So that is the so-called start of the reform from the countryside
These pictures show that once the Chinese government gave the rights
to all the rural people to take part of the land from the collective system
the people were very active to join this movement
dividing land from the collective
especially in poor regions
When they had the land they needed to sign the contract
so contract was a document at that time
And that also means that in the 1950s China had for the first land reform
In 1980 we had the second round of land reform
The land reforms were the same
to re-distribute land to every rural household
In the 1950s in the name of the land revolution
land was taken as a property right from the landlord, the kulak
But this time (from 1980) land was taken from the collective
The measures were the same
equal distribution depending on how many family members you have
So what was the reason of the second land distribution
In late 1979
the politicians in the central government 
thought about not having fiscal ability to invest into the countryside
Originally 
the highest percentage of the budget invested into the countryside
was 17%
meaning that 17% of the budget investments going down to the countryside
Even though small but still there
But when they had the budget crisis
they said “reduce the investment into countryside”
Then they said, “give land to these peasants
these households, and they can feed their own stomachs.”
So baoduzi means peasants' self-reliance to fill their stomachs 
by contracting the land
Interesting? 
This was a crisis and these were measures to deal with the budget crisis
To deal with the budget crisis
they had to give up some economic field covered by the budget
the first of which was rural sector, agriculture
They were trying to protect the urban industries
because urban industries are State Capitalism
Rural sector was to contribute surplus to urban sector
But now 
more than 85% of the budget revenues came from urban industries
The rural sector could only contribute less than 15%
But agriculture still needed more than 15% of the budget
so they were trying to give up rural sector
to reduce budget expenses
So after this contract system
the peasants have to take care of their stomachs
The budget only paid less than 3% to whole of the countryside construction
Even the salaries of local party cadres had to come from the land
from agriculture at that time
Another intrinsic reason of the rural reform
was that the production teams 
in the natural villages 
had practices similar to contract system for a long time
A team leader might come to a plot of arable land and said
Ok, you two contract the land 
and in three days you finish your work
and I'll give you some labor credit points
Previously they only had 10 credits per day
but the team leader said, “I give you 12 credit points.”
But the two close friends said, “We need 15”
Then the team leader said, “OK, give you 13.”
And they eventually got 13.5
So that was this sort of negotiation within the collective system
Now they got a contract of a plot of land
and the two close friends worked together to finish this work
and then earned the credits
When you had more credit, you could have more income
Many things had happened in the countryside
now they said it's a contract system 
everybody understood that
Then they said dabaogan (comprehensive contracted responsibility)
It meant you took all care of your stomach with the land you contracted
It meant the government stopped giving you subsidies
stopped investing into countryside
Now the peasants took care of everything for themselves
including township and village administration expenses
So that was the contract system happening in China
that was later renamed as “rural reform”
But everything needs to pay the institutional costs
Here the rural reform also entailed very big cost
Because the collective system was disbanded and abandoned
one fourth of public properties were lost
Hillside forestry used to belong to the collective system 
was also contracted to households
All these households wanted to cash these resources
 to buy consumption goods
So they cut down a lot of trees
The hillside land was ruined
Also at the county levels and township levels
the collectives used to set up a lot of factories 
to produce agriculture machines
even little tractors
Now more than two thousands of these county tractor factories
were bankrupted
Large number of the industrial properties
at county levels were lost or privatized
This was a big loss in agriculture
It was not until late 1990s
when the governments again subsidized to regenerate
the agriculture machinery factories 
at county level or city level
but never down to the township level
Originally, almost every people's commune would have five small factories
When the government set up 90,000 townships to replace people's communes
almost all of these people's commune factories were closed down
more than 90,000 small factories
Some parts of the coastal regions
like Jiangsu, Zhejiang, Shandong, Liaoning, Guangdong
these coastal provinces had people's communes nearby the cities
that could still maintain their factories
Totally 25,000 people's communes were
still keeping their original system 
because their factories could somehow contribute a lot
to the people's communes
So they could subsist
But most of the people's communes were dismissed
A big institutional return of the rural reform was rural industrialization
Because land was re-distributed to every household
the surplus labor force could be liberated
Peasant households didn't need so many laborers
working in very limited land resources 
so a lot of young laborers were liberated
from farming and joined the village factories
These factories had very simple production facilities
They were just families putting together tools as a kind of workshop
That was rural industry
It was labor intensive
The rural industry had no technicians, no engineers
But they had weekend (Sunday) technicians from cities
They paid the technicians double price
An engineer was free on Sunday
So he or she could come down to a village
to help the peasant household workshop to solve technical problem
So this guy was a Sunday engineer
who came from the city to the countryside
to facilitate the technical issues in township and village enterprises
The total amount of rural labor was almost hundred million
One hundred million laborers, especially young laborers
were liberated from agriculture 
to join the rural industrialization
making rural income go up very fast
faster than urban income growth
So when the rural people had more incomes
rural consumption index
was more than seventy percent
while the urban index was less than fifty percent
It means when urban citizens had one yuan as income
they used only half for their family consumption
But rural people used seventy percent of income for consumption
That enlarged local and domestic demands 
and helped to solve the economic crisis
Now I'm going to talk about 
the macro-economic measures the government adopted
The government issued forty billion worth of bank notes
That should have caused high inflation
but why was there no high inflation
Because rural people's income went up
and absorbed these cashes newly added into circulation
So at that time there was not very serious inflation
This was similar to 1950
when China's new authority issued a lot of paper currency
trying to solve the problem of budget deficit
With how much deficit, they printed how much cash
They were also absorbed by rural people
because in 1950 
the state started to distribute land to every household in the countryside
These people wanted to sell their products
and take cash to buy land 
or other facilities to increase their agricultural production
So they were all active to take the cash
That was the same situation as in the 1980s
when the central governments issued a large amount of currency
14 billion
to solve the problem of budget deficit
They succeeded
By what?
Not by the politicians but by rural people
So it was a very interesting phenomenon that happened in the 1980s
So that's why I said that the real reform happened in the countryside
because they did the same as in the 1950s in Mao's time
Unlike the urban reform measures, in rural area
it's the second land reform, the second land redistribution
And it happened to drive these young laborers into rural industrialization
and also rural townization
Many, many rural towns thus grew up
These rural factories were located in towns
So this was a kind of townization, local industrialization
all turned towards localization
So localization is alternative, it's not the mainstream
Think about these rural industrialization and rural townization
was there any relation with state capitalism
No. It's people's, it's local, it's peasants
They belonged to local people
So their returns also belonged to local people
That's why the rural income
the peasant incomes 
increased mush faster in the 1980s
faster than the urban citizens
So the rural-urban income gap (Gini coefficient) went from 3 down to 2.3 or 2.4
Anyway it decreased
So that was the institutional return in the rural reform
We need to know that
the rural reform contributed a lot
for the relief of the hard landing crisis in cities
Here, because the people's communes were dismissed
the rural governance system got to be changed
Rural governance system had more and more expenses
which needed to be taken by the rural people
and became the peasants' burden
Since they changed the governance system
the peasant's burden started to become heavier
This was even heavier in the 1990s
but in the 1980s it just started
So, let's talk about Part 4, the crisis in urban sector
The crisis originally happened in the urban sector- hard landing in the urban
What were the measures the government adopted to 
deal with the hard landing crisis
From 1979 to 1980 there was a big fiscal deficit
almost 30 billion
It's much bigger than that in 1960 when the second crisis hit China
It was also very much bigger than in 1974
when the deficit was 10 billion
In late 1970s
just five years later
the deficit became 30 billion
three times bigger than Mao's time
So, the government started to issue government bonds
It's not exactly treasury bond
the guokuquan means the bill of the budget reserve
Indeed, it was treasury bond
So the issuance of treasury bonds started from the 1980s
At the same time the state issued paper currency worth of 40 billion
They wanted to issue 4 billion RMB of treasury bonds
combining with 40 billion of additional money to solve the budget crisis
This was more than 50 percent of the budget deficit
because they needed to keep investing into state-capital industries
It means that they adopted “going long”
not “going short” measures
And because of the agricultural growth, of rural people's income growth
these measures were not so bad because there was no inflation
And they were trying to open more to foreign investment
so the open up policy also started from 1979
Originally, during Mao's time
the state could only use the hard currency reserves
to purchase foreign facilities and machines
Foreign investment in any form and joint ventures were not allowed in China
Transnational companies had no room in China
But since 1979, it was opened
They said whatever the international society can do
 we must do
This started from 1979
This was the first joint-venture with foreign capital
A joint-venture company was set up
In 1981
they set up the Special Economic Zone for openness to foreign capital
These were step-by-step
In the late 1970s, early 1980s
they allowed transnational companies in the Special Economic Zone
but not in inland China
That was the beginning
Finally, they were allowed go to everywhere in China
That is openness
And that's the state-owned enterprises reform
That one: they were trying to learn some so-called experience
 from rural China
They allowed the enterprises to expand their self-management rights
And then, going further
allowed the manager or the CEO to contract the whole factory
 It meant you got a contract and managed this factory by yourself
or by your staff and contributed profits to the government departments
So they said the contract system was workable in the rural regions
However, indeed, in rural regions land was redistributed to peasant households
It was not exactly but nominally contract system
So in the urban reform they duplicated the nominal reform 
from the countryside
but they didn't re-distribute the state-owned properties to workers
That's the so-called privatization
They contracted the factory to the factory leader
the official, the manager, especially the CEO 
that means they did something like semi-privatization
When the managers took the power
the management of the factory
they required to change the internal management mechanism
They were given the rights to have the salary and income difference
Step-by-step
they changed the management system of the state owned-enterprises
And then going further
the government allowed the private sector, starting from the 1980s
In 1981, the managers were allowed to contract the big factory
And then in 1983
private sector was allowed to run business and industry
One person could contract the whole factory
So these were the enterprises contracted by individuals
Combining such kind of policy
they had a new policy to allow private business
Originally they were not allowed to have employee
You could individually run your business
That was in 1979
But just two or three years later
it was very common for these businessmen 
to have their own employees and laborers
And then in 1984
I remember
there was a serious discussion about the Capitalism in China
State capital controlled factory was okay
because it's state capitalism
still belonging to the whole people ownership
It's politically correct
But if you allow private managers, private businessmen
to have laborers working for him
it means they exploit the surplus from the workers
That is not socialism
 it's capitalism
It means that you re-set up the capitalism in China
This was a serious discussion
Finally
they found some texts from Marx 
saying that if there are less than eight workers
this is a small workshop
Small workshop is not capitalism, just pre-capitalism
So they got the evidence to show that is okay
The government therefore allowed private business to hire 
less than eight workers
Nobody could block them
So the private sector grew up very fast
So since the 1980s beginning
in 1979 the state allowed only individual business
only run by one person
But very soon they found all the family and the relatives
They said that's my nephew
and they had many nephews
The government could not stop them
The private sector thus had room to grow up faster and faster
That was a big change
This was mainly originated from Wenzhou in southern Zhejiang
because they had little land
The arable land in Wenzhou was just 0.4 mu (=0.02 hectares) per capita
which was not enough to produce basic food
it implied hunger
The UN gave the standard – if the per capita arable land is less than 0.8
it implies hunger
In Wenzhou, southern Zhejiang
it was a half of the UN standard
meaning they could not produce enough basic food 
from the land to feed their people
Most of these people were going to the private sector
They did a lot of business
Some business was very bad
But anyway people needed to have income
so no leader in Wenzhou could stop that
We have interviewed many party leaders in Wenzhou
asking them why they allowed these bad things to happen
They said they could not feed these people
They didn't have state-owned enterprises, no factories
because Wenzhou was at that time a frontier facing Taiwan
Every day they had to prepare for war
so the government did not invest in Wenzhou
to set up any state-owned enterprises
So they didn't have factories
they only had agriculture
When land was contracted to every household
they had a large number of surplus labor
Where had they gone
They got to go to private business
So, that was the basic situation in different areas
So you needed to allow local people have self-reliance 
by their resources: labor force
So these laborers needed to have a job
even if they were given a low salary
They got to have income to feed themselves
So that was the situation
So when the governments had a very big crisis, a hard landing in cities
they could not care about everything
So they released control and people developed at their own
People had different models in different areas
That is the truth
As we're going to finish this lecture
we may summarize
what we've talked about: the late 1970s and early 1980s economic crisis
You can see that when we do the crisis analysis
we first need to know the basic environment: political and economic
Political environment
in the late 1970s
China had started a political transition
from Mao's time to post-Mao's time
It's not exactly Deng's time
which started from the beginning of the 1980s
In 1976, Mao died and Hua Guofeng took power
But it was not Hua Guofeng's time
It's post-Mao's time for almost five years until early 1980s
when Deng took power
But it still wasn't exactly Deng's time 
because he was just a group leader until 1989
when the political incident happened in Beijing Tiananmen Square
In the early 1990s, in the summer of 1990
Deng said, “I'm the core of the second generation leadership.” 
That was exactly the point when Deng's time started
Before that he needed to consult Chen, Li
and other senior politicians' ideas
and their suggestions and concerns
so not one person could make a decision
When Deng said he was the core of the second generation leadership
Jiang was the general secretary of the party committee since 1989
So it was not exactly Deng's time 
as Jiang also played a very important role in the party
It's very complicated 
but you can name the time between 1976-1981
as transforming period
and post-Mao
as no one could claim himself to be the key person
in the political leadership
As the mainstream politicians regained power
they needed to set up their political correctness
so they criticized Mao's time
labeling Mao's time as “extreme left”
So when they defined what was “politically incorrect”
a lot of effective experiences
institutions
measures and policies in Mao's time were all deemed as “extreme left” 
and “politically incorrect”
I've discussed the case
about 1979 educated youth coming back to cities in large numbers – millions
Educated youth going to the countryside
was now regarded as “politically incorrect.”
It was somehow like a kind of bad treatment
Originally, it's because they believed they joined the world revolution
so they had such kind of passion going to countryside
Those with the politically worst family backgrounds
were active going to countryside
I am one of the case
At that time I did want to have self-criticism, self-reform
I said that
“I need to go to the countryside to live with peasants and to change myself”
I had such a passion
because I thought that my family's political background was bad
my grandparents were from bad family
Even my parents joined the revolution 
but I could not forgive
this bad family background of the old generation
So I needed to do the self-criticism
I needed to change myself
I needed to work hard
Actually I wanted to do it
But when you change the political correctness
you change the ideological system
That might seem okay
I was released from my political burden
I became normal as others
My brain, my mind, and whatever was liberalized
So I could do whatever just by my effort
I could join the social competition
Maybe previously I did have some emotion or some feelings
saying that it was unfair
that I did a lot of hard work
but did not have the same treatment
I thought it's unfair
But it's clandestine, potential, not obvious
But when this ideology was changed
I thought that I should have the same position
to join the competition with others
Certainly, people have different ability
and you cannot have exact fairness
Finally, I understand
But in the late 1970s, for us, it's a big opportunity
especially when the universities were open
and the admission no longer depended on one's class background
Originally, young people like me
with bad family background might have no chance
But when these chances were reopened for all
we stood on the same ground to join the competition
We had the chance to join the exams
If you passed the exams 
you had the credit and could go to university, college
So, many things happened
Some things that changed were very positive
but some things negative
To be a scholar we need to do the analysis more carefully
You cannot think that
you can throw out the bathwater with the infant
So we need to do more detailed
more careful analysis about this change
especially in the later 1970s and the beginning of the 1980s
This change nowadays became politically correct 
and nobody can challenge
Reform, okay
but is there anybody who has challenged reform?
No, because the reform has become exactly politically correct
But we are now trying to give the objective analysis
that is a kind of challenge
We said that the reform exactly came from the crisis
especially from a hard landing
You had big institutional costs 
and needed to deal with such costs
taking such kind of measures
and then you coin a comprehensive name
That is “reform”
We still have some ability to do the reflection
 to do the analysis
That is extremely important
So I hope that you people, after listening to my lectures
you do have your own thoughts to do your analysis
to know what is negative and what is positive
During the post Mao time
 they said the experiences in Mao's time were not politically correct
Then we would be short of a lot of ability 
to do objective analysis about economic crises
The crisis hard-landing
was mainly due to the post-Mao collective leadership 
set up their ideology
yet with no ability to mobilize the lower class people
So it was no longer possible to mobilize unemployed youth 
to go down to the countryside
The state capital utilized foreign capital to expand industries
facing the challenge of debts 
 foreign debts turning into budget deficits
This could only result in hard-landing
with no chance for a soft-landing
So, hard-landing befell not only to economic events
but also social and political events
When talking about educated youth coming back to cities
we need to think about that event
together with the re-appraisal of the political movements
from 1957 until 1979
twenty-two years of political movements
were now all labeled as “politically incorrect”
All these people who got punishment
even put in jail
 were all re-liberated
 re-liberalized after twenty years
These events and policies
together made people having gone to the countryside now think that
they had got a kind of punishment
So they did have the right
to re-enjoy their life in their original position in the cities
This caused confusion in ideology or ideas
In their minds
they could not figure out which is right or which is wrong
This confused thought or feelings in the street or society
made people at that time have unnamable emotions
They could not be satisfied with anything, dissatisfied with everything
So when they could not take the traditional ideology
a large number of these people with very confused thought
turned towards the western ideology
The western ideology is exactly the Cold War ideology
So since the 1980s
a lot of people in China 
more easily accept western Cold War ideology
until now
So even if you've succeeded in the economic reform
you failed in ideological competition
That is until now a big trouble in mainland China
Talking about hard-landing
we said that the institutional cost in China 
was not only economic and social
but also in the theoretical fields
in social sciences
in cultural studies
It was a potential problem since that time
In the 1990s, it became obvious
In the scholar circle
no one believes that we also have a politically correct tradition
including traditional cultures
because everything has been criticized
Until recently some people start to be aware of the dangers
and they stand up
but it is not easy to fight with the majority
not easy to argue with the mainstream
So that's why I think that hard landing is not only about economy
So in conclusion
I give a hard landing explanation 
mainly for the theoretical issues in social science
and cultural studies etc as well as ideological issues
Regarding the government measures
how they dealt with this crisis
We see that the government directly used the police system
a very strong force
to directly deal with the hard-landing crisis
Thousands of people were put in jail
When they came out of jail
what could they do
No normal job
they could only work in private sector
So from late 1980s to 1990s
the private sector grew very fast
These young people did have the ability and energy
but they were put in jail
When they came out of jail
they could only go to the private sector
No SOE, or government departments
or university institutes wanted people from jail
so the more people you put in jail
the more you enlarged the private sector
That's logical
The government also required the SOEs 
and government departments to open door 
to absorb unemployed youth
and that meant that
the governments ordered low efficiency in these SOEs and faculties
Low efficiency then became the reason for further reform
The rural reform 
came exactly from the government's thought “xiuyangshengxi” (recuperation)
implying the state would take less from the rural sector
Now, 85% of the government's revenues came from urban sector (industry)
The government then released its control over agriculture
Gave agriculture to peasants and made peasants enjoy their agricultural life
And so the dual system became separated
It's a historical opportunity for the peasants
There were industrial models, factories in cities
so everyone could learn from it
The peasants noticed that if they set up industries, workshop
they could have extra income
So when the government released control
the rural people immediately not only took the agricultural resources 
but also used their manpower
their human resources, for rural industrialization
That is why, just ten years later
rural industrialization finished primitive accumulation
without those kind of dirty things as in western history
Yeah, they did have 
but it's mainly the destruction of environment, natural resources
taking too much from labor as surplus
but nobody complained, no social conflicts, no mass movement
unlike Western industrialization
which exploited large amount of resources from colonies and killed people etc
The process was quiet
Chinese peasants achieved primitive accumulation
setting up a big number of factories
almost 27 million rural factories and workshops
And they contributed half of the industrial outcome
industrial products
If you calculate the value
you'd find they contributed a half with very little investment
No external exploitation but they built a big rural industry
That was the outcome of the rural reform
So we said the peasants not only took over the agriculture
but also turned it into rural industry
And then there was the state-owned enterprises reform
Individual business and the private sector were growing up fast
As the macro-economic measures
the government issued the treasury bonds
and also greatly enlarged money supply
 And also set up the open up policies
So these were the four measures to deal with the crisis
They were working but left a lot of trouble
a lot of big issues for further reform
One thing also needs to be taken into consideration
that is
the government allowed the cadres' children set up companies
They could take resources from the government
and then sold them to the markets
At that time
Chinese scholars emphasized shuangguizhi - dual price system
One price was controlled by the government at low price
while the other was market price which was much higher
The more the government controlled the raw materials
the higher the price in market
Who took these profits
The officials' young offspring
who set up these companies to take these big profits
And also the government controls the financial sector
which means all the banks belong to government, to state capitalism
Who could have loan
If you were a factory you need to negotiate with the bank
There was a big gap between the market interest rate 
and the government-controlled interest rate
Whoever could make a deal at the government interest rate
would take the differential as profits
Corruption was caused by such measures 
as the government departments were given the chance
to set up companies run by the officials' children 
in the name of tertiary industry
in the name of services
Yes they did provide service
but it was guandao gongsi (bureaucrat speculation company)
Corruption came from such kind of measures
until the next crisis happened and the inflation went much, much higher
The inflation further enlarged the interest gap
These companies run by the officials' young offspring
then made even greater profits
Their first bucket of gold came from this institutional change
that was also the reform
So why these scholars
when first contributing suggestions to the dual price system
said, “okay you need to draw a line”
It meant corruption
After this line you don't need corruption
but before that I don't want to criticize you
"I don't want to deal with the problem.”
Many new suggestions
They are trying to block
people from deepening their studies to know the root
where it originally came from
I said it originally came from here
And then you know where is the people's right
The workers also had young offspring
but where have they gone? 
Where are they?
So you had a rich company
you controlled a large number of properties
and then you made the gap between the poor and the rich larger and larger
And who is the poor
and who is the rich?
What is the opportunity the rich take
what is the loss the lower class got?
How did they lose?
You need to know the details about this process
and then you may have your own thought, your own analysis
So that is why we need to look into these economic crisis one after another
to know the details of these crisis
and then to know what kind of danger and what kind of opportunity
The term “crisis” in Chinese 
is putting the word “danger” and the word “opportunity” together
But crisis to whom, danger to whom and opportunity to whom?
We still need further studies
And, finally
after these things happened 
the state-owned enterprises became low at efficiency
The new company got big properties 
and so going forward that's “marketization”
And market reform 
and also “marketization” became a kind of mainstream ideology
That's later
So let's do further studies in the next lecture
Thank you
