ABSTRACT
The economic reform process in China was placed in jeopardy during 1988-1989 by the outbreak of very high inflation. This chapter examines the basic trends in fiscal policy, economic reform, and monetary policy in China. The changing position of state-owned industry should be considered in the context of the economic reform strategy followed in China. The reform strategy adopted can be characterized as a "dual track" economic system, used as a transitional form in the creation of a market economy. Unable to rationalize financial relations in the state sector, reformers opted for marketization at the margin. The government is unwilling to raise urban food prices because of fear of inflation and is unwilling to allow energy costs to rise to market levels, since this would accelerate the erosion of their revenue sources in state-run industry. Indirect evidence is provided by the gradual convergence in the composition of fixed investment funded by the central government and that funded by bank lending.
