The death of former mainland Chinese premier Zhu Rongji on August 12 has renewed discussion of his economic legacy. Zhu—who served as premier from 1998 to 2003 after previously overseeing much of mainland China’s economic policy as vice premier—was one of the principal architects of the market-oriented reforms of the 1990s. He restructured state-owned enterprises, strengthened the central government’s fiscal capacity, promoted housing reform, and used mainland China’s accession to the World Trade Organization as a means of exposing domestic firms to greater competition.
Yet remembering Zhu as a market reformer raises a more interesting question: What did he actually understand a market economy to be?
A useful comparison is Zhao Ziyang. Zhao served as premier from 1980 to 1987 and then as CCP general secretary until 1989. He was a central figure in the first decade of post-Mao economic reform, particularly the expansion of enterprise autonomy, the dual-track transition away from administered prices, and the growing role of markets. After opposing the use of force against the Tiananmen protesters, Zhao was removed from power in 1989 and remained under house arrest until his death in 2005.
Both Zhao and Zhu understood that Maoist central planning had failed. But they eventually arrived at different understandings of the relationship between the market and the state. Zhu tried to make markets work under a strong and competent party-state. Zhao, particularly during his years under house arrest, moved toward a more fundamental conclusion: a market economy cannot depend indefinitely on whether those controlling the state happen to favor markets.
Zhao Ziyang: From Reforming Planning to Questioning the State
Zhao was certainly not a laissez-faire economist when he held power. His well-known formula was that the state should regulate the market while the market guided enterprises. The state therefore remained above the market.
Nevertheless, Zhao’s thinking had already moved far beyond conventional socialist planning by the late 1980s. We have unusually good evidence because he discussed these questions directly with Milton Friedman in Beijing in 1988. Zhao argued that property rights should be clearly defined, that price reform should create a mechanism in which prices were determined by markets rather than merely readjusted by officials, and that bankruptcy was desirable because it allowed new enterprises to replace unsuccessful ones. Friedman disagreed with Zhao’s continuing belief that the state could “manage the market,” but was impressed by his understanding of economic problems.
Zhao’s thinking continued to evolve after 1989. The principal primary source for his later views is Prisoner of the State: The Secret Journal of Premier Zhao Ziyang, assembled from approximately thirty hours of audio recordings Zhao secretly made while under house arrest. His later reflections increasingly connected economic reform with secure property rights, the rule of law, freedom of information, judicial independence, and political reform. By the end of his life, Zhao had concluded that parliamentary democracy offered the most viable institutional framework for a modern mainland Chinese political system.
This was a significant intellectual transition. The problem was no longer simply how to reform a planned economy. The deeper problem was how to prevent political power from overriding the institutions on which a market economy depends.
Zhu Rongji: Building Markets through a Stronger State
Zhu followed a different path. His own economic thinking can be reconstructed not only from the policies of his government but also from his speeches and discussions collected in Zhu Rongji on the Record and Zhu Rongji Meets the Press.
It would be inaccurate to describe Zhu simply as a defender of planning. Some of the reforms implemented under his leadership were extraordinarily disruptive to the old socialist economy. During his first four years as premier, urban state-sector employment fell by about 34 million jobs, according to Brookings economist Nicholas Lardy. Zhu also regarded WTO membership as a mechanism for forcing domestic enterprises to confront international competition.
But Zhu never embraced comprehensive privatization. Under the policy commonly summarized as “grasp the large and let go of the small,” many smaller state enterprises were sold, merged, transferred, or closed, while large enterprises in sectors regarded as strategically important remained under state ownership.
The 1994 tax-sharing reform reveals the same philosophy even more clearly. The reform dramatically increased the central government’s share of fiscal revenue and rebuilt Beijing’s capacity to direct national economic policy.
This is the key to understanding Zhu. He believed in markets, but he also believed in a powerful technocratic state capable of constructing, regulating, and disciplining those markets.
Chenggang Xu and the Institutional Question
The economist Chenggang Xu provides a useful framework for understanding why this difference matters. Xu—a Harvard-trained economist—is a Senior Research Scholar at Stanford University’s Center on China’s Economy and Institutions and a Visiting Fellow at the Hoover Institution. He previously taught at the London School of Economics, the University of Hong Kong, and Tsinghua University.
In a widely-cited 2011 Journal of Economic Literature article, Xu characterized the reform-era mainland Chinese system as “regionally decentralized authoritarianism”: political control over personnel remained centralized while regional governments exercised extensive authority over economic activity. This combination helped generate local experimentation and competition without dismantling the political monopoly of the center.
Xu develops the argument further in his recent work on “institutional genes.” The idea is that some fundamental institutional elements reproduce themselves across time and shape the evolution of later institutions. Policies can change substantially while deeper structures governing political authority and property remain remarkably persistent.
Seen from this perspective, Zhu transformed many economic mechanisms without fundamentally rewriting the institutional genes of the party-state. Prices became more important, private firms expanded, foreign investment increased, state enterprises faced stronger competition, mainland and China entered the WTO. Yet ultimate political authority over personnel, finance, major state assets, courts, and political organization remained concentrated within the CCP system.
Zhao’s later thinking moved closer to recognizing this deeper problem. If property rights exist because political leaders currently choose to respect them, they are not fully secure property rights. If courts cannot ultimately constrain political authorities, contracts remain politically contingent. If political power faces no institutional competition, there is no reliable mechanism preventing future leaders from reversing earlier reforms. At that point, economic reform becomes a constitutional question.
