Zhu Rongji: the architect of China’s hardest fiscal reforms

In an era of rapid economic growth of countries, public needs also evolve as part of shared growth. Governments and institutions design, implement, and sustain fiscal and financial structures for resource mobilization. Laws, rules, and procedures are also developed for the management of debt and allocation of funds for financing development.

Zhu Rongji, China’s premier from 1998-2003, undertook China’s hardest fiscal reforms, a crusade against orthodoxy and social problems. He passed away on August 12 at the age of 97. He left behind a legacy of institutional reforms during the transformation of China’s economy under “Reforms & Opening-up”, taking further the mission of Deng Xiaoping and President Jiang Zemin. The trio has been famous for being critical reformers. They led China through a critical decade of economic modernization, financial and fiscal management, integration with the global economy, and political stabilization within the country after the eventful 1989 Tiananmen Square crisis.

Market-oriented reforms were introduced during the 1990s across a wide range of sectors, particularly in public finance and taxation, foreign trade, finance and investment, pricing mechanisms, restructuring of state-owned enterprises and measures for social security. A public-funded housing scheme was launched on the pattern of Singapore in 1991. The famous handover of Hong Kong (1997) and Macau (1999) to China also took place in this era.

Zhu was the architect of revolutionary fiscal statecraft in 1994. Hitherto, local governments used to collect taxes and remit a paltry portion to the center, thus leaving it resource-constrained. He overhauled the system by splitting taxes into central and local, and introduced a formula of shared revenues. After abolishing decades-old fiscal contracting, he devised a system of allocating a lion’s share of tax revenue to the government to increase the financial capacity of the centre. For better policy formulation, he started inclusion of technical/sectoral experts, private entrepreneurs, professionals, and businessmen in the state institutions like the Chinese People’s Political Consultative Conference (CPPCC), a political advisory body.

He created independent national and provincial tax bureaus. The new intergovernmental fiscal structure operated on central political authority with heavily decentralized public spending on health, basic education, and local infrastructure out of 50 percent of regular budgetary revenues, while the deficits, wherever occurring, were funded through intergovernmental transfers, general equalization grants, and project-based, special-purpose funding. Value-Added Tax was split evenly between central and local tiers, while corporate and personal income taxes were divided on a 60/40 basis.

The success of his reforms is attributed to his clarity of thought and knowledge of the systems, decisiveness, and determination to confront deep-rooted economic issues in the international context. Through a pragmatic approach, he emphasized the Chinese-style of piloting reforms (GST from Guangdong and Services Tax from Shanghai) before extrapolating at national levels through a bottom-up approach, tackling easier issues before more complex ones, and using economic development at more than 8 percent to promote stability, without causing disruption under the famous approach of “looking to the world while remaining rooted in China”.

The new financial, fiscal and institutional frameworks included capacity building of the People’s Bank of China (the central bank) and other government banks such as China Development Bank, Agriculture Bank and EXIM Bank of China on modern lines. Expatriate Chinese who had been well-versed in international monetary and fiscal realms were enticed to come back for service to the country, which had a profound and lasting impact on China’s subsequent development of the financial system and treasury, resulting in huge foreign investment.

Reforms of the Jiang-Zhu era profoundly reshaped China’s development and laid important economic and institutional foundations for future endeavors. He sustained the significant structural pain of the historic transition from a Leninist-Communist planned economy to an open-up market economy. Throughout these historical reforms, China learned from global experience, respecting local ground realities, and drove progress with pragmatism without creating ripples.