The far-reaching impact of Zhu Rongji’s tax reform and the dual differentiation of China’s economy

In 1994, the People's Republic of China implemented the largest tax reform since its founding, which significantly increased the proportion of central fiscal revenue and reduced the proportion of local government revenue in national fiscal revenue. The move had a profound impact on the Chinese economy. The implementer of this reform was Zhu Rongji, then Vice Premier of the State Council and Governor of the Central Bank.

The Neue Zürcher Zeitung article used the fierce dispute between officials and villagers in the suburbs of Beijing that a special correspondent on China witnessed in 2010 as an example to review one of the consequences of the tax reform: "Counties and cities at that time expropriated farmers' land on a large scale - using violence was not uncommon - and sold it to real estate developers for residential construction. Local governments used the revenue to fill empty finances. At the time, counties and cities were starved of funds because of a tax reform implemented in 1994 by a key official considered by many then and now to be the most reform-minded politician in China since Deng Xiaoping.

The article quoted analysts from Rhodium Group as writing that Zhu Rongji intended to strengthen Beijing's power and succeeded. In 1994, the central government's fiscal revenue doubled from the previous year. However, this also forces local governments to find new sources of revenue: "Local governments need funds to stimulate local economic development. They are keen to build bridges, train stations, highways and airports, and provide subsidies to foreign companies investing locally. Therefore, they are increasingly expropriating rural residents' land, causing farmers to lose their homes and farmland. By 2020, land transfer revenue has accounted for more than half of local government's total revenue."

The article quoted China Watch, a think tank based in Hong Kong. A study by Perspectives wrote, "Between 2004 and 2014, land expropriation occurred in 43% of villages, and an estimated 40 million Chinese citizens were directly affected. Among them, 60% later faced very difficult living conditions." The article also mentioned that although Beijing has introduced laws and regulations requiring compensation for landless farmers, tragic tragedies have still been staged in some areas, such as some farmers choosing to commit suicide.

The article also mentioned other impacts of Zhu Rongji's tax reform, such as the surge in land sales that indirectly triggered a boom in the real estate market and "weakened the autonomy of rural credit cooperatives that were originally decentralized." The article said: "A well-known American economist based in Beijing pointed out that Zhu Rongji is pursuing a highly centralized policy centered on the capital... ... Economic growth momentum has slowed in rural areas, and income growth has come under pressure, which has affected private consumption. In the 1980s, private consumption accounted for 51% of economic output; under Zhu Rongji, this proportion fell to 39%. This is a reflection of the state’s dominance of the Chinese economy.”

China's economy split into two

"Business Daily" published an article titled "China's economy is splitting into two", focusing on the complex and multi-faceted scenario facing the Chinese economy: "On the one hand, some of China's future-oriented industries are experiencing booming development; on the other hand, the traditional economy is still weak. Singaporean economist Tan Kong Yam therefore pointed out that there are two distinct economic forms within China. One is a globally competitive technology-driven economy led by artificial intelligence, electric vehicles, batteries, robotics and semiconductors; the other is a struggling traditional economy characterized by a real estate industry in crisis, high local government debt, shrinking population, sluggish private consumption and fragile market sentiment.”

The article believes that this is one of the biggest problems facing the Chinese economy, that is, "the country's technological rise no longer automatically translates into broader prosperity."

The article said that Chinese state media reports mainly focus on success stories in China's "new economy" field, but "despite this attempt to guide public opinion, there is still a fierce debate within China's economic circles: whether the artificial intelligence boom mainly benefits a few technology giants while ordinary household incomes stagnate, or whether it can quickly translate into higher productivity, better wages, and broader prosperity."

The article quoted Chinese economist Cai Fang as saying, “The improvements in efficiency and productivity brought about by technological progress must be balanced with sharing and wealth distribution. "Cai Fang therefore advocated the expansion of the social security system and emphasized the need to share "production gains." The article wrote that the influential economist Liu Shijin also called for a substantial increase in the income of low- and middle-income groups, especially the rural population: "This gap is particularly obvious in the level of pension payments. The economist noted that some 180 million pensioners - most of whom live in rural areas - receive an average monthly basic pension of just 249 yuan (about 32 euros). This is in sharp contrast to the treatment of urban retirees: the average monthly pension for urban enterprise retirees exceeds 3,000 yuan (approximately 390 euros), and the average monthly pension for government agency and institutional retirees is 6,000 to 7,000 yuan (approximately 770 to 900 euros) or even higher. "