Zhu Rongji served as mayor of Shanghai from 1987 to 1991, was China’s vice premier from 1991 to 1998, and served as fifth premier of the People’s Republic from 1998 to 2003. Between 1993 and1995 he served concurrently as governor of the People’s Bank of China.

Henry A. Kissinger was U.S. secretary of state from 1973 to 1977.

Helmut Schmidt was chancellor of West Germany from 1974 to 1982.

ZHU RONGJI ON THE RECORD

The Road to Reform 1991-1997

By Zhu Rongji, June Y. Mei

Brookings Institution Press

Copyright © 2013 FOREIGN LANGUAGES PRESS
All rights reserved.
ISBN: 978-0-8157-2519-0

Contents

Publication Note…………………………………………………..ixForeword by Henry A. Kissinger………………………………………xiForeword by Helmut Schmidt………………………………………….xiiiNote from The Brookings Institution………………………………….xvii1991……………………………………………………………..1 Clearing up Triangular Debt Must Start with the Source—Fixed-Asset
Investments……………………………………………………….12 Comments on the Economic Development of Western China………………..173 Work Hard to Develop the Shipbuilding Industry………………………204 On-Time Performance Is at the Heart of Civil Aviation Service Quality….255 Speed Up Technical Improvements and Do a Good Job at Large and Medium
SOEs……………………………………………………………..306 The Key to Controlling Redundant Construction Lies with the Banks……..447 Work Hard on the Internal Restructuring of Industries………………..481992……………………………………………………………..8 On Comprehensively and Correctly Understanding the Spirit of Deng
Xiaoping’s Talks in Southern China…………………………………..539 On Being a Scholar and Being a Person………………………………6910 Quality Is the Lifeblood of Enterprises……………………………7011 Raising Labor Productivity Is the Key to Turning around Losses and
Improving Efficiency in the Coal Sector………………………………8312 Speech at a Symposium on Stock Market Pilot Programs in Some Provinces
and Cities………………………………………………………..9213 Guangdong’s Practice Demonstrates the Success of the Policy of Reform
and Opening Up…………………………………………………….10214 Some Comments on the Current Economic Situation and Macroeconomic
Controls………………………………………………………….1091993……………………………………………………………..15 Speed Up Railroad Construction and the Pace of Reform……………….12316 Implement Genuine Separation of Government and Enterprises…………..13117 Thirteen Measures for Strengthening Macroeconomic Controls…………..13318 “Three Ground Rules” for Financial Work……………………………14419 Rectify the Fiscal and Tax Order, Step Up Fiscal and Tax Reforms……..15520 Eight Measures for Solving the Shortage of Funds……………………17121 Tax Streaming Will Promote Guangdong’s Development………………….17722 Letter to Jiang Zemin, Li Peng, and the Standing Committee of the
Politburo on Implementation of the Tax-Streaming System………………..18923 Establish Environmental Awareness among All the People………………19424 Summation Speech at the 1993 National Conference on Economic Work…….19825 Stabilize Grain and Oil Prices and Steady the Market Supply………….2181994……………………………………………………………..26 A Conversation with U.S. Secretary of the Treasury Lloyd Bentsen……..23227 Revenues from Land Sales Should First Be Used to Relocate Displaced
Households………………………………………………………..24028 Taking a Critical Step Forward in Financial Reforms…………………24129 Establish a Social Security System with Chinese Characteristics………25630 A Conversation with Alan Greenspan, Chairman of the U.S. Federal
Reserve Board……………………………………………………..25931 Strengthen Management of the State’s Forex Reserves and Foreign Debt….26732 A Letter to Central Government Leaders on the Report by the National
People’s Congress on Implementation of the Agricultural Law…………….2721995……………………………………………………………..33 A Conversation with Japanese Finance Minister Takemura Masayoshi……..27434 On Current Monetary Policy……………………………………….28035 On Economic Work in Beijing………………………………………28336 A Memorable Two Years as Governor of the Central Bank……………….28637 Thoughts on How Xinjiang Should Develop Its Economy…………………29238 Congratulations to Mr. Chen Daisun on His 95th Birthday……………..30239 Letters and Petitions Are an Important Channel for Gaining a Sense of
the People………………………………………………………..30540 Take Effective Measures to Lift Impoverished Areas out of Poverty…….3091996……………………………………………………………..41 Selling Off Small SOEs Is Not a “Miracle Cure”……………………..31542 Adjust and Refine Processing Trade Policy………………………….32243 Do a Good Job of Opening Up the Financial and Insurance Market to the
Outside…………………………………………………………..32944 On Enterprise Bankruptcy and Capital Restructuring………………….33445 Some Issues in Macroeconomic and Tax Work………………………….3421997……………………………………………………………..46 Forcefully Promote Enterprise Reforms and Actively Implement
Reemployment Projects………………………………………………36647 What to Do after a Bumper Harvest…………………………………37548 On Reform of the Housing System…………………………………..38249 A Conversation with Alan Greenspan, Chairman of the U.S. Federal
Reserve…………………………………………………………..39150 Having a Lot of Cotton Is a Joyous Burden………………………….39751 Don’t Start a Fad When Implementing a Shareholding System……………40652 Basic Medical Insurance Should Be Low in Level but Broad in Coverage….41053 Deepen Financial Reforms and Guard against Financial Risks…………..41854 Truly Learn the Lessons of the Asian Financial Crisis……………….437Index…………………………………………………………….445

CHAPTER 1

Clearing Up Triangular Debt Must Startwith the Source—Fixed-Asset Investments

September 3, 1991

This conference has several distinctive features. First, the leadership attachesgreat importance to it, and the State council is very supportive of the clearingup of triangular debt. The State council is very determined and has allocatedRMB 35 billion to support the clearing up. Second, this conference isn’t treatingthe clearing up of arrears solely as a fiscal settlement or a financial issue. Rather, itis dealing with the problem of triangular debt comprehensively, by not only clearingup arrears in fixed-asset investments, but also by using “linking reductions toloans” to control the stockpiling of finished goods. Next year we’ll further investin technical upgrading, which will include using US$1.5 billion annually of ournational foreign exchange holdings to import advanced technology, and willgradually reduce enterprise payments to the “Two Funds,” thereby improvingthe ability of enterprises to repay and to upgrade. Third, we’re combining thetangible with the intangible, studying a series of State council policy documentswhile also drawing up highly operable methods and sharing the actual experiencesof the Northeast region in arrears clearance. Fourth, this conference hasemphasized the integration of both the payment and the prevention of arrearsin order to prevent the emergence of new arrears. Our attendees have found thisapproach very productive and feel more confident about clearing up arrears.

Now I’d like to say a few words in response to the issues brought up here.

We Have to Focus Hard on Fixed-Asset Investments—the Source of TheseArrears—and Strive for a Good Outcome in Arrears Clearance

Many people still have a “wait and see” attitude toward triangular debt, andthey’re not very confident. I feel that this problem can’t be resolved withoutdetermination. Last year, we gained some experience and had some success inclearing triangular debt, but because of deep contradictions that had built upover many years and are impossible to resolve in a short time, new arrears wereappearing even as old ones were being paid off. With debts being paid off andrun up simultaneously, arrears were growing larger and larger.

Several indicators from the first half of this year show that the rate of productionis quite high. From January to July, the value of state-owned enterpriseproduction in the national budget increased by 10.4% in comparison with thesame period last year, and sales revenue increased by 15.6%, yet realized profitsfell by 13.1%. The proportion of loss-making enterprises reached 36.7%,which is 2.7 percentage points higher than in the same period last year, whilelosses amounted to RMB 17.78 billion, which is 18.6% higher than for the sameperiod last year. Finished goods locked up RMB 133.25 billion, and inventorywas RMB 70 billion higher than normal levels.

The contradiction between a rising rate of production and a lower economicreturn hasn’t been resolved. In the first half of this year, the number of and totalinvestment in new infrastructure projects around the country valued at morethan RMB 50,000 were, respectively, nearly 100% and 80% higher than in thesame period last year, while the scale of state-owned investments grew by 18%.A very large part of the production rate and of fixed-asset investment is sustainedby owing arrears to production enterprises.

The national and local governments as well as the enterprises are all undervery intense pressure, which they have trouble coping with, and all regions,departments, and enterprises are loudly demanding that triangular debt becleared up. Deputies to the National People’s Congress and members of the ChinesePeople’s Political Consultative Conference have tabled several dozen proposalsfor clearing up these debts. Many older comrades are also very concernedabout this issue and have made many valuable suggestions. In particular, manypeople at the grassroots level have written letters with suggestions, and their zealis touching. I feel that the time is ripe to resolve this problem.

The State Council attaches great importance to the problem of triangulardebt. In late May, Premier Li Peng entrusted me with this task. On June 1, hechaired a Premier’s work conference that conducted a special study of this topicand proposed to make a breakthrough by using the clearing up of triangular debtto invigorate large and medium state-owned enterprises and improve productivity.We are expected to make a breakthrough in this regard within six months.

Major Reasons for New Arrears. Based on an analysis of the arrears clearancesituation last year, the State Council’s leading team on triangular debt believesthat there are three major reasons why new arrears are accumulating even as oldones are being paid up.

—The first is the serious shortfall in fixed-asset investment, resulting in massivearrears owed to production enterprises for equipment and materials, as wellas to contractors for project funds. Construction is completed but still hasn’tbeen paid for, so the production enterprise has to assume the debt and pay theinterest for the developer. Last year alone, arrears amounted to RMB 50 billion,causing production and contracting enterprises to pay RMB 5 billion in interest.

—The second is enterprise losses. Enterprises that lose money are supposedto be shut down, but for various reasons this hasn’t been done, and they evencontinue to produce, running up arrears because they’re unable to borrow.In last year’s budget, state-owned industrial enterprises openly acknowledgedlosses of at least RMB 50 billion. This doesn’t even count concealed losses,which appear to be profits but are actually losses. As a result, these enterprisesowe working capital to other units.

—The third lies in over RMB 70 billion of stockpiled goods, which are lockingup working capital. In order to maintain production, enterprises have nochoice but to run up arrears.

These three factors have been responsible for almost RMB 200 billion in triangulardebt. Furthermore, the trading of goods is disorderly, settlement disciplineis lax, and credit is poorly understood—also important causes of worseningtriangular debt. These and the above three sources have created serioustriangular debt.

Any assessment of the seriousness of triangular debt must look at it from twoperspectives. On one hand, it should be seen as the manifestation of deep contradictionsthat have built up over many years and can’t be resolved in a shorttime. We plan to resolve them within three years. On the other hand, we mustrecognize that they can indeed be resolved if appropriate measures are taken.This year, we want to clear up RMB 100 billion—this is an attainable goal. However,it’s quite risky to tackle all three sources at once. Last year, we put RMB50 billion into paying off arrears. Of this amount, RMB 10 billion went towardclearing up arrears for infrastructure projects, with effective results. If we startby clearing up the fixed-asset investment arrears of projects, each debt paid willbe one debt less, and this won’t create any new arrears. However, if we start witharrears of working capital, this might lead to new stockpiling. The State Councilhas agreed to start at the sources and feels that we must be cautious in clearingup working capital arrears.

A Pilot Program for the Northeast. We have also decided to start a pilot programfor triangular debt clearance in the Northeast, which will constitute the firststage of nationwide clearance. The method proposed to resolve the stockpilingof goods in the pilot program is “linking reductions to loans.” In july andAugust, the State Council sent clearance work teams to the Northeast and otherregions in conjunction with the pilot program.

According to a study of typical cases in the Northeast, arrears of fixed-assetinvestments account for only 15-20% of total arrears. Many people are skepticalabout starting with fixed-asset-investment arrears, thinking this won’t resolvethe problem. Similar views have been voiced at this conference. We’ve oftenrepeated this fact: fixed-asset-investment arrears may constitute a very smallproportion of total arrears when counted as single debts, but this doesn’t factorin the overlapping effect of serially linked arrears. If you put money into apower plant that is in arrears, it will be able to pay its equipment manufacturer,which will then pay the steel mill, which will in turn pay the coal mines and railways.Because of this overlap, the effect is magnified, and RMB 1 invested canclear up RMB 3-5 of arrears.

The pilot program in the Northeast hasn’t ended yet, but so far has alreadyachieved a 1:3 clearance ratio, that is, RMB 1 will clear up RMB 3. If this is donewell, it looks like we can achieve ratios of 1:4 or 1:5. The Northeast pilot programproves that clearing arrears by starting with fixed-asset investment doesn’tcreate new burdens and doesn’t expand the scale of infrastructure construction.Rather, it clears up old debts and is workable, effective, and risk-free.

Sequence of Clearing Arrears. There have been loud calls at this conference forclearing arrears of working capital as a first step, owing to misgivings about theeffectiveness of starting at the source of fixed-asset investment arrears. Somehave also argued that most fixed-asset-investment arrears come from projectswith poor returns or lack of funding, and that putting money into them wouldonly make us assume new burdens. We respond that it will take three years tofinish clearing up arrears created by fixed-asset-investment shortfalls. For nowwe should first clear up the arrears of projects with good returns, and of largeand medium projects. I’m in favor of clearing arrears in this sequence, and thereare specific requirements in the implementation plan.

As for projects with poor returns, it’s not that they aren’t repaying any debtsthey owe. There are quite a few projects of this sort, and if they were all failingto repay, the production enterprises wouldn’t be able to survive. The investmentquota is already used up. If the developing unit doesn’t pay the unit thatproduced the raw materials and doesn’t pay the project costs of the contractingenterprises, then the producers and contractors can only maintain productionby borrowing from banks, which is equivalent to paying the interest for thedeveloping unit. This is transferring the burden of the shortfall in constructionfunds onto the producing and contracting enterprises. This is one of the mainreasons why large and medium core enterprises are in such difficulties. Thereforeregardless of whether a project’s returns are good or poor, it must repay. Ifthe developing unit can’t pay, then the bank loan should be made to that unit,and it should pay the interest, rather than letting production enterprises bearthe burden. This is the only way to set the financial order straight.

If we inject money to clear fixed-asset investment arrears, will that increasethe credit quota? Will there be risk? I say there will not—at least theoretically itshould not increase the credit quota. When a developing unit owes money to aproduction enterprise, the latter borrows from the bank to sustain production.Now the bank will give the fixed-asset-investment loan to the developing unit,which will use it to repay the production enterprise, and the enterprise can thenrepay the bank. Overall, there will be more loans for fixed-asset investments andfewer loans for working capital. There won’t be an increase in the total volumeof loans, only an adjustment in the structure of the loans. Of course, this is onlyspeaking theoretically. In practice there will inevitably be some delays and losses,and funds invested will be greater than funds recaptured.

To resolve the problem of triangular loans, it will be necessary to increaselending, but there’s no great risk. And once the money starts flowing, we’ll stillhave to draw up a sequence (of steps) to ensure, to the greatest extent possible,that the funds don’t flow to enterprises that have stockpiles of goods. The hardestthing will be to offer money to some enterprises for repaying their debts,but then find that they refuse to borrow, preferring instead to stay in debt andnot even paying interest. That won’t do! There still has to be administrativeintervention—we must order them to borrow. Why is it that they never gavea thought to repayment when they were proposing projects, seeking approvals,and starting up construction? If you’re in debt, you have to repay.

Guarantees. Some provinces say that because of natural disasters enterprisereturns are poor, local government revenues have gone down, and it’s hard forthem to raise money on their own. Funds injected need government guarantees,but government leaders have reservations about giving them. We say thatguarantees are needed because these funds are supposed to be raised by the localgovernments and enterprises themselves, yet for the time being you can’t raisethem, so the only option is for the banks to lend to you, but the governmentsmust guarantee repayment.

When launching a project, you thump your chest and say you have the money.Perhaps at the time you had only a certain amount but used it several times.When starting up the first project, you may have said you had RMB 100 million.When starting up a second project, you may have again said you had RMB 100million. When starting up a third project you still said you had that amount.Now that “one daughter has been married off several times,” when the workstarts there’s no money. So in restoring normal economic order and clearing upold debts, locals will indeed have difficulty raising funds. The banks can lend tothem but will require fiscal guarantees from the local governments, which mustrepay the banks in the next fiscal year. If local fiscal authorities won’t give guaranteesand won’t repay, they may still plan to start up major projects the nextyear, and then the scale of construction will truly grow larger than ever.

Guarantees are a measure to prevent new arrears. Self-raised funds accountfor 30-50% (of total project costs), which is quite high. If banks don’t put insome money and enterprises aren’t able to raise any money on their own, thenthe effort to clear arrears won’t yield the desired results. In order to support keynational industries and infrastructure projects as well as key technical upgrading,the State Council has decided that this year, the Construction Bank and theIndustrial and Commercial Bank will jointly issue RMB 10 billion of nationalinvestment bonds. Of this sum, 8 billion will be used for infrastructure and2 billion for technical upgrading; amounts have already been allocated to thevarious provinces and municipalities. Before the bonds are issued, we’ll ask thebanks to lend to the locals, and the local governments will guarantee these loans.Once the bonds are issued, the locals will repay the banks. These will be consideredself-raised funds and will still require guarantees. In short, if you can’trepay this year, you’ll have to repay next year, and if you can’t repay next year,you’ll have to repay the year after, but you can’t let the debt go bad.

Some provinces and municipalities have indicated that they have difficultyraising funds, and I do understand. That’s why the self-funded portion will besuitably reduced for the provinces and municipalities experiencing greater difficulties,and we’ll give them more bank loans. However, I still hope that all ofyou here will report to your provincial Party committees and governments afteryou go home—cut back a bit on the projects planned for next year and do fewerof them, and cut back especially on those projects to build fancy buildings. Takesome of the funds reserved for those projects and use them to pay back moneyyou owe others. That way, things will start moving for everyone.

We hope that through our joint efforts, we’ll be able to clear up RMB 100billion this year. That’s about one-third of the current triangular debt, perhapseven a bit more. In October we should calculate the results of the clearing up toshore up everyone’s confidence.

We Must Resolutely and Steadily Shrink Stockpiles and Do a Good Job of”Linking Reductions to Loans” and Clearing Arrears of Working Capital

Many provinces and municipalities have reported serious arrears of workingcapital, and are pressing loudly to have these arrears cleared up. I want to stressthat we have to be very cautious in clearing up arrears of working capital. Wecan’t just “add flour if it’s too watery and add water if it’s too floury.” We haveto use desperate measures to shrink the massive inventories and then put themoney from downsizing inventories into technical upgrading and technologydevelopment. Only then can we achieve the desired results. This is because thestockpiling of inventories is a major source of arrears of working capital.
(Continues…)Excerpted from ZHU RONGJI ON THE RECORD by Zhu Rongji, June Y. Mei. Copyright © 2013 FOREIGN LANGUAGES PRESS. Excerpted by permission of Brookings Institution Press.
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