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The Economic System of China

  • Steven N. S. Cheung EMAIL logo
From the journal Man and the Economy


“The Economic System of China” by Steven Cheung was originally presented as the lead paper at the 2008 Chicago Conference on China’s Market Transformation, organized by Professor Coase. While the paper, with a Chinese translation, has been available in China since 2009, it has not received the attention it deserves outside China. In this new version, Professor Cheung added a postscript to the original paper, which Professor Coase praised as “powerful” and is kept intact.


The author is grateful to Ronald Coase, Lars Werin, Yoram Barzel, and Michael Cheung for their detailed comments on various drafts of this paper.


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  1. 1

    Institute of Economic Affairs (London: 1982), Hobart Paper 84.

  2. 2

    When Shanghai announced plans to build a second international airport in Pudong in 1997, skeptics argued that the old airport was not even used to capacity. The new Pudong airport began operations in 1999 with one runway, which soon proved insufficient. A second runway was added in 2005, and a third runway, with an added terminal, was built in 2008. A second runway for the old airport is now under construction, so that Shanghai ended up building one additional runway every 2.5 years.

    Similar stories can be told for toll roads and bridges, where money-losers soon turned into money-makers. A friend mourned his decision to sell a section of a highway which was soon loaded with traffic. The output of a small producer of instant noodles from Taiwan increased to 30 million packages per day in five years. There was a period of about six years, from 2000 to 2006, when the investor almost could not go wrong! Unfortunately, this bullish environment has been changing for the worse, and by late 2007 it is changing rapidly.

  3. 3

    张五常, 《千规律, 万规律, 经济规律仅一条》, 一九七九年十月《信报财经月刊》。

  4. 4

    孙冶方, 《千规律, 万规律, 价值规律第一条》,一九七八年十月《光明日报》。

  5. 5

    The important thesis of the dissipation of rent originated in the analysis of common property resource usage, where rental value may be competed away or replaced by a higher cost of use when the resource is subject to unrestrained common exploitation. I have further argued that, so long as the market price is not used or is suppressed by policy measures, some other criteria must emerge to determine the outcome of competition, and any such criterion would lead to rent dissipation. The interpretation of economic behavior in terms of rent dissipation is truly important, but it has been neglected by the profession. In particular, I have found the approach to be very useful when analyzing constraints arising from transaction costs.

    On the literature, see Frank H. Knight (1924); H. Scott Gordon (1954); Steven N. S. Cheung (1970, 1974).

  6. 6

    Using price is costly, but as a criterion of competition it is unique in that no further rent is dissipated. For the costs of using price, see R. H. Coase (1937); George J. Stigler (1961); Steven N. S. Cheung (1983).

  7. 7

    张五常, 《中国会走向资本主义的道路吗?》, 一九八二, 重刊于张五常, 《中国的前途》, 一九八五年八月初版, 再版多次, 今天由香港花千树出版。

  8. 8

    张五常, 《从科斯定律看共产政制》, 一九八四年一月二十七日发表于《信报》, 转刊于《卖桔者言》, 后者一九八四年十一月初版, 再版无数次, 今天由香港花千树出版。

  9. 9

    During the 1980 American Economic Association annual meeting in Detroit, Coase urged me to return to China because he heard that the country was considering reform, and he believed I was the best person to impart knowledge on the operation of economic systems to the Chinese people. A few months later, I was informed that the Chair of Economics at the University of Hong Kong would soon be open. I was appointed to that chair in May 1982 and retired 18 years later.

  10. 10

    R. H. Coase (1960). In an earlier and equally important paper, Coase wrote:

    What does not seem to have been understood is that what is being allocated by the FCC, or, if there were a market, what would be sold, is the right to use a piece of equipment to transmit signals in a particular way. Once the question is looked at in this way, it is unnecessary to think in terms of ownership of frequencies or the ether. (1959: 33)

  11. 11

    张五常, 《中国的前途》与《再论中国》, 二者皆再版多次, 目前由花千树出版。

  12. 12

    On 31 July 2002, Milton Friedman’s 90th birthday, I wrote in Chinese on “The General Theory of Contracts,” which appeared in a chapter entitled “Contract Theory and the Nature of the Firm” (张五常, 《制度的选择》, 第五章。). From 24 May to 9 August 2007, I published 11 articles discussing “The Missing Link in Economics”(张五常, 《经济学的缺环》与《从安排角度看经济缺环》, 后者分十篇。《壹周刊》). This second series of articles was written to prepare myself for the present paper dedicated to Coase. In my view, Section 3, when combined with the above articles, yields a complete general theory of contracts.

  13. 13

    In a different way, hierarchical ranking is also observed in firms in a capitalistic economy. However, the ranking of comrades in a communist system differs in important aspects with the ranking of personnel in a private firm, with the former being closer to the ranking system of a government-funded enterprise such as a public hospital or a public university. In so far as rankings go, the main point of departure from capitalistic firms is that, under communist China, a citizen did not have the right of not joining and had no right to change jobs without government approval. Freedom to choose jobs would bring about the collapse of the comrade-ranking system. When this began to emerge in the Pearl River basin in late 1983, I immediately wrote that economic reform in China had reached the point of no return. Up north, this freedom of choice did not occur until around 1992, after Deng Xiaoping toured the south in the spring of that year.

  14. 14
  15. 15

    Price is a constraint which restrains competition. As Adam Smith puts it in Wealth of Nations: “Give me that which I want, and you shall have this which you want…” (Cannan edition, p. 18). A market price is implied.

  16. 16

    In Cheung (1970), I noted in addition “that the cost of policing investment in a tree, perennially ‘attached’ to the common land, is high, whereas cattle are driven home at night.”

  17. 17
  18. 18

    张五常, 《从全球暖化说人类灭亡》, 二∘∘七年二月二十二日;《世界末日好文章》, 二∘∘七年三月八日。二文皆于《壹周刊》发表。

  19. 19

    张五常, 《官商的天堂》, 一九八五年四月十二日发表于《信报》, 其后转刊于《中国的前途》。

  20. 20

    “Back-door transactions” refer to the buying and selling of favoritism. Favoritist transactions do not imply corruption, but are based on rights implicitly granted to comrades of different ranks. There is no violation of the law. 见张五常, 《贪污的后患》, 一九八五年一月三十日发表于《信报》, 其后转刊于《中国的前途》。

  21. 21
  22. 22

    张五常, 《从“大锅饭”到“大包干”》, 一九八四年十一月十五日发表于《信报》, 其后转刊于《中国的前途》。

  23. 23

    Elaborations of this view can be found in Sections 2 and 3 of my Chinese work On China Again 《再论中国》, which contains nine articles written between May 1986 and March 1987.

  24. 24

    See the sources in Footnote 29 and my Chinese work The Economic Revolution of China 《中国的经济革命》(1993), reissued with additional chapters in April 2002 (花千树出版有限公司).

  25. 25

    The granting of economic power to xians via responsibility contracts has given rise to an interesting debate during the past few years. Should cities in China be abolished? The pros argue that while economic power rests with the xians, politically city officials are ranked higher, so that unavoidable conflict would emerge which interfere the operation of the system. This is a complicated issue which I did not tackle during my research. Beginning fiscal year 2007, xians report financial matters directly to provincial governments, skipping the cities. In other political or administrative matters, a city is still ranked higher than a xian.

  26. 26

    In June 1986, I published an article discussing three advantages of selling land. Shengzhen officials liked that article and invited me to a meeting in the spring of 1987. 张五常, 《出售土地一举三得》, 一九八六年六月二十五日于《信报》发表, 其后转刊于《再论中国》。

  27. 27

    In the fall of 1988, I took the Friedmans to tour the Yangtze River basin. Milton was happy to see street vendors doing business on muddy roads and told the General Secretary (whom we later met in Beijing) that street vendors would have to bribe to obtain a license. Suzhou officials obligingly showed us their famous town-and-village enterprises, which were embarrassing. During dinner, a vice mayor of Suzhou argued with Milton on the superiority of state enterprises. In the fall of 1993, I again took the Friedmans to China. One main street in Shanghai was fully lit at night, and we all applauded when our bus passed a shop owned by traveling companion Jimmy Lai. The Friedmans stopped briefly in Shanghai in 1998, and Milton could hardly believe what he saw.

    Two episodes of the Friedmans’ China visits should go on record. First, I taught Milton a lesson in Chinese economics. In Shanghai, 1988, walking in the street and hungry, I saw a dumplings vendor and pulled out my wallet, but found out money was not good enough: food coupons were also required. A passer-by saw that I was arguing with the dumpling man and gave me a small stack of food coupons. I was delighted, and Milton asked why I was so happy. I said, “The gentleman gave me these coupons free of charge. Can you imagine food coupons worth nothing? This city is going to explode!” It did. A second episode is that Milton lost a debate! In Chengdu, 1993, the governor of Sichuan province received us. Milton tried to teach the governor about the proper way to reform, saying that to cut the tail off a mouse, don’t do it inch by inch: To reduce pain the whole tail should be cut off all at once. The governor responded: “My dear professor, our mouse has so many tails we do not know which one to [be] cut first.” Milton could not respond. Sadly, that governor is no longer with us. A courageous man noted for his bold criticisms, it is said that he lost support from Beijing at the end.

  28. 28

    This was the figure in 2004, in the middle of the fastest rise in peasant income in the history of China. It was a daily wage, and by 2007 the figure had risen to about US$8.50. The amount varies in different areas, and I took rough averages when I toured villages in China on photography trips. From 2003 to 2005, I produced enough photographs to publish seven books, so what I say about the livelihood of peasants in China, though deviates sharply from all other reports, is based on prolonged and intensive investigations conducted on site, in exactly the same way as I investigated apples and bees in the State of Washington in 1972. See Steven N. S. Cheung (1973).

  29. 29

    张五常, 《还不是修宪的时候》, 二∘∘四年二月十六日, 《信报》。

  30. 30

    By November 2007 this rule applied to Shanghai also, but different parts of that very large city have different ways to get around it. The rule has therefore never been enforced in Shanghai. In Shenzhen the rule was enforced for a while, then an outsider who wanted additional living quarters could buy a way for about US$4,000, and then the property market fell and the government looked sideways.

  31. 31

    On 1 January 2007, Beijing imposed two items on the xians. First, compensations paid to peasants to obtain land were substantially increased. This is a judgment call. Second, all land sales for construction purposes must go through auction. In principle this latter would run counter to the workings of the xian system, but there is a way out. A xian would make a land auction project specific, and with obscure advertising and short lead time, a successfully negotiated investor is usually the auction winner.

  32. 32

    张五常, 《权力引起的通货膨胀》, 一九九三年五月二十一日, 《壹周刊》, 转刊于张五常, 《二十一世纪看中国的经济革命》, 花千树出版, 一七五至一七九页。

  33. 33

    I did not publish this explanation at the time in fear it might trigger further disturbance in the currency market. When I finally did so on 27 April 2006 in a Chinese article entitled “The Story of the Iron Prime Minister,” a Beijing friend who was expert on the crisis was stunned and told me that my explanation must be right. He and his colleagues were fanatically seeking an explanation for the crisis at that time, but in retrospect whatever they came up has proved false. 见张五常, 《铁总理的故事》, 二∘∘六年四月二十七日发表于《壹周刊》。

  34. 34

    Bonus contracts provide automatic downward adjustment in wages. Piece rates are equally flexible because they are often renegotiated when new orders from buyers arrive. 见张五常, 《制度的选择》, 第四章, 第六节, 二∘∘二年花千树出版。

  35. 35

    张五常, 《以中国青年为本位的金融制度》, 二∘∘二年六月二十日发表于《壹周刊》。

  36. 36

    张五常, 《令人羡慕的困境——朱镕基退休有感》, 二∘∘三年三月十一日发表于《苹果日报》。

  37. 37

    张五常, 《新劳动法的困扰》, 二∘∘七年十二月十三日发表于《壹周刊》。

  38. 38

    After losing a fortune in the stock market, Newton said, “I can calculate the motions of heavenly bodies, but not the madness of people.” See John Carswell (1960: 131, 199).

  39. 39

    陈桂棣与春桃, 《中国农民调查》, 二∘∘四年一月人民文学出版社。

  40. 40

    《林毅夫称收入分配不合理越来越明显》, 二∘∘八年三月七日《新京报》。

  41. 41

    张五常, 《灾难的先兆——三论新劳动法》, 二∘∘八年一月十七日发表于《壹周刊》。

  42. 42


  43. 43

    There are some people who believe that the efficiency-wage theory stems from my paper “Why Are Better Seats ‘Underpriced’?” (op. cit.), but what I meant in this work is not what the new theory says. A critique of the efficiency-wage theory can be found in my Chinese book The Choice of Institutional Arrangements (2002), pp. 156–159. 张五常, 《制度的选择》, 二∘∘二年花千树出版, 一五六至一五九页。

Note: This paper is dedicated to Ronald Coase, whose idea on the clear delineation of rights inspired the economic awakening of a great nation, and to celebrate the 30th anniversary of what must be the greatest program for economic reform in history.

Published Online: 2014-6-11
Published in Print: 2014-6-1

©2014 by Walter de Gruyter Berlin / Boston

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