The development strategy oriented toward heavy industry was pursued through a trinity of the traditional economic system: micro incentives, resource allocation, and macro policies (Chapter 4). The focus of industrial reform was on the cities. So, in this chapter I elaborate on the different approaches and impacts of the urban reforms before and after 1978 to identify the main problems – and their solutions.

Reform of the urban industrial sectors

China's urban industrial sectors had three major problems at the outset of reform and opening: structural imbalances, poor coordination, and weak incentives. Structural imbalances were manifest in the simultaneous existence of shortages and surpluses. Products in short supply continued to suffer from even more severe shortages, while some other products were overproduced. There was a popular saying: “Oversupplied products were always in excess supply, and products in shortage were always in short supply.” Oversupplied products were those produced by heavy industries, especially the finished products. But even in heavy industries, some products were in short supply, such as energy and raw materials. Products in short supply usually referred to household products and other light industrial products. The coexistence of shortage and excess, leading to structural imbalances in resource allocation, was economically inefficient.

Second was poor coordination. Under the old system all resources were allocated by a central planning organ. A telling story: An Steel is in northeast China, and Wu Steel is in central China. Both areas have heavy industries.