3 - The institutional setting

Summary

Under the open-door policy, the traditional Chinese system of foreign trade proved to be inadequate for meeting the demands of an increasing variety of economic interactions. Organizational changes and new incentive structures were thus adopted from 1979 onwards.

Prior to 1979, international trade had been monopolized by nine National Foreign Trade Corporations (NFTCs) under the control of the Ministry of Foreign Trade. The Foreign Trade Corporations operated according to mandatory plans, purchasing fixed quantities of domestic goods at fixed prices for export and importing fixed quantities of foreign goods for domestic distribution at fixed prices. All foreign exchange earnings had to be remitted to Beijing. Because the renminbi was overvalued, corporations usually incurred losses on exports but earned profits on imports. However, this was not a matter of concern since the Ministry of Foreign Trade bore the losses and siphoned off the profits.

The system enabled planners to enforce their priorities at the cost of inhibiting international trade. Buyers and sellers could only conduct business through an intermediary. This lack of direct contact between producers and end-users also obstructed the transfer of technology that usually occurs between foreign producers and endusers. Moreover, such a rigid system could not respond to rapid changes in the international market.

The first reform drive and retrenchment (1979–81)

In 1979, new central agencies for trade and investment were created by the State Council in response to the need for functional specialization in implementing the open-door policy.