In 1988, Zhao Ziyang’s authority as general secretary came under renewed challenge by hard-line Premier Li Peng. Backed behind the scenes by party elders Chen Yun, Wang Zhen, and Bo Yibo, Li Peng spearheaded a drive to undermine Zhao’s authority by attacking his economic policies and priorities. This, in turn, sent China’s economy in a downward spiral.
Series of Rumors
Things took a downward turn for China’s economy in the late spring of 1988. Rumors of unknown origin began circulating, warning of an imminent deregulation of all remaining state-controlled prices. According to the rumors, there would be no more preferential retail pricing and indirect subsidies for urban consumers.
Fearful of a new inflationary spiral, anxious urban consumers responded to the rumors by going on a sudden binge of panic-buying. Banks were suddenly flooded with people rushing to withdraw their savings to stock up on price-controlled luxury goods like refrigerators, color TVs, and air-conditioners before the rumored price hikes could take effect.
This is a transcript from the video series The Fall and Rise of China. Watch it now, on Wondrium.
Blow to Zhao’s Political Prestige
Though it was never proven, it was widely conjectured that the rumors triggering the wave of panic-buying had been planted by the hard-liners themselves, precisely to embarrass Zhao Ziyang and discredit his reformist policies.
If that was their plan, then it worked to near-perfection. Li Peng and his backers managed to put the blame squarely on Zhao for the consumer panic of 1988. They were also able to persuade Deng Xiaoping that Zhao was ill-suited to govern China’s economic policy planning.
As a result of this episode, Zhao suffered a severe blow to his prestige and a substantial loss of Deng’s confidence. These were blows from which he never fully recovered. And by the time Beijing’s students took to the streets in the spring of 1989, Zhao was already a deeply wounded leader.
Learn more about Deng’s economic reforms.
Meanwhile, urban discontent continued to mount. Fueled by rumors of imminent price decontrol, urban inflation exploded, reaching 20 percent in the summer of 1988. This caused severe hardship for many urban wage-earners whose fixed incomes couldn’t keep pace with the spiraling cost of living.
The surge in commodity prices even led some city dwellers to long for a return to the good old days of Maoist egalitarianism. As one urban housewife lamented in the late summer of 1988, “Under Mao, society was in chaos, but prices were stable; under Deng, society is stable, but prices are in chaos.”
However, society was not so stable either. In addition to widespread fears of inflation, there were other signs of malaise. One focal point of rising urban discontent was Zhao Ziyang’s plan to privatize state-owned housing and decontrol rents for urban dwellers.
These moves would force families to pay a substantially larger share of their disposable income for rent. The fact that this came at precisely the time when food prices were already rising sharply did not help to bolster Zhao’s waning popularity.
Labor Problems and Enterprise Failures
Labor problems also began to increase in 1988. Following the enactment of the 1986 enterprise reform law, which for the first time empowered factory managers to lay off redundant workers and cut the wages of unproductive ones, there was a surge of industrial unemployment—the first since 1949.
By the middle of 1988, more than half a million workers had been laid off from state-owned enterprises.
Under the new rules of market competition, inefficient and poorly-managed state enterprises found that they were unable to earn sufficient income to meet their tax obligations. For private entrepreneurs, the tax delinquency was officially estimated at 80 percent.
Enterprise failures were most common in rural townships and villages, where large numbers of indigenous, low-tech manufacturing ventures had sprung up in the early 1980s to serve local needs in the aftermath of agricultural decollectivization.
As China’s national economy became more highly specialized and more regionally integrated in the mid- and late ’80s, and as price reforms gradually eliminated the raw-material subsidies that had benefited small, inefficient rural factories, large numbers of township and village enterprises, known as “TVEs”, found that they were unable to survive in competition with larger, more highly-capitalized firms. Consequently, tens of thousands of these small- and medium-sized TVEs were forced to shut down.
Learn more about the income gap across China.
Increase in Labor Emigration
With farm income falling off and small-town industries beginning to fail in large numbers, labor emigration from the countryside increased dramatically. By the end of the 1980s, tens of millions of rural dwellers were on the move, migrating to China’s urban areas in search of employment.
For the most part, they clustered in the cities and Special Economic Zones of the newly commercialized eastern seaboard. In Beijing alone, migrant rural workers comprised a “floating population” of over a million people, most of whom lived a squalid existence on the margins of “polite” society. The numbers were even higher in Shanghai.
Forming a broad urban underclass, migrants generally took unpleasant low-wage jobs shunned by local workers. Many became street vendors, hawkers, or panhandlers. Young rural women turned increasingly to prostitution.
For the first time since 1949, beggary was widely observed in many Chinese cities, accompanied by a dramatic rise in the incidence of street crime, particularly petty larceny. With the threat of industrial layoffs and bankruptcies now looming larger, labor unrest also began to spike.
Common Questions about How China’s Economy Suffered in the Late ‘80s
In the late spring of 1988, rumors began circulating in China, warning of an imminent deregulation of all remaining state-controlled prices. According to the rumors, there would be no more preferential retail pricing and indirect subsidies for urban consumers.
Li Peng and his backers managed to put the blame squarely on Zhao Ziyang for the consumer panic of 1988. They were also able to persuade Deng Xiaoping that Zhao was ill-suited to govern China’s economic policy planning. As a result of this episode, Zhao suffered a severe blow to his prestige and a substantial loss of Deng’s confidence. These were blows from which he never fully recovered.
The 1986 enterprise reform law empowered factory managers in China to lay off redundant workers and cut the wages of unproductive ones.