The relationship between the government and the market is the concern of all countries or regions in the world. The role of the government is to create a favorable environment of fair competition for businesses by means of macroeconomic control. But the government can only play a limited role, and the problem of government intervention is called the "government failure". Market competition can effectively reduce the information costs and supervision costs of market operation, thus saving transaction costs and realizing effective allocation of resources. Nevertheless, there are notable drawbacks in the operation of a market economy, such as monopolization and incompleteness of information, known as the "market failure". The best way to overcome "market failure" and "government failure" is to combine the roles of the government and the market in an appropriate way, so as to bring the positive aspects of the two into full play.

Compared to the governments of Western countries, the Chinese government plays an entirely different role in developing a market economy. On the whole, China's market economy is the result of the government-orchestrated reform of the traditional planned economy, and the role played by the government is extremely important in the whole process. During the marketization process, the Chinese government not only assumes the basic functions such as providing public goods, stabilizing the macro-economy, implementing external administration and formulating rules for the monopolized industries, but also takes responsibility to reform the system of the planned economy and perfecting the system of the emerging market economy. The marketization process of China's economy is nothing less than a process for the government to gradually change its functions, to cut down the size of the government. to reform the economy administration methods and to perfect the market economy system.

I. Restructuring Process of Government's Administrative System in Retrospect

In order to adapt to the needs for transforming from a planned economy to a market economy, a series of reforms have been introduced in China since l978, such as cutting down the size of the government, changing the government's economic functions and administration measures over economy. The restructuring of the government's administrative system was roughly carried out in three stages:

(Ⅰ) Initiating the Reforms (1978-1988)

This stage of restructuring is mainly manifested in the decentralization of powers. Necessary reforms to the administrative system covering several aspects including planning, investment, fiscal policy, finance, wages, Prices and government institutions were initiated.

-- In reforming the planning administration system, the original centralized planning was split into three forms: mandatory planning, guidance planning and market regulation. At the same time, the scope for mandatory planning shrank smaller, while the scope for guidance planning was expanded.

-- In reforming the investment system, all capital investment within the state budget that was formerly subject to fiscal allocation was turned into loans, the examining and approving powers for capital investment projects were decentralized, and six specialized investment companies were set up by the government for this purpose.

-- In reforming the fiscal and taxation systems, state-owned enterprises were to substitute tax for surrendered profits in two steps; the government was to implement a new fiscal system with "separate categories of taxes, designated scope of revenues and expenditures and responsibility contracts at various levels".

-- In reforming the financial system, the People's Bank of China got rid of the status of an attachment to the government fiscal authorities, specialized banks were either restored or newly established one by one; and the credit fund control system was reformed so that it is under unified planning with designated funds, ensuring that loans and deposits are actually realized and encouraging inter-bank allocation of funds.

-- Concerning the price mechanism, prices of most farm produces and consumer goods are set free to be determined by the market; with regard to the means of industrial production, a dual-track system is implemented, according to which there are two types of pricing methods: one is within the planned framework and the other free to fluctuate.

-- In nurturing the market entities, a system of household production on contractual basis was implemented, so that peasants are turned into commodity producers responsible for their own operations and losses and profits; state-owned enterprises tried out the systems of expanded enterprise autonomy and economic responsibility, substituted tax payments for profit delivery in two steps, and implemented the system of "contracted operation responsibility".

-- In restructuring the government administration, the government experienced two institutional reforms in 1982 and 1988 in order to change the functions, cut down the institutions, reduce the number of staff members and improve the efficiency. After the reforms, the number of the institutions directly under the State Council was reduced to 66 from the previous 72.

(Ⅱ) Adjusting the Reforms (1989-1991)

During this period, the government's economic administration system underwent fine-tuning. Under the combined influence of factors from the new and old systems, the performance of the economy in 1988 became overheated, bringing about a chaotic order and intensified inflation. The government took a series of planning measures and economic measures to streamline the economic environment and order. At the same time, adjustments were made to the price administration and macro control measures.

-- With respect to the pricing mechanism, the "bottle-neck" restrictions caused by distorted prices were relaxed; the differentials between the dualtrack prices of means of production were narrowed; the rising of overall level of prices was curbed by a comprehensive use of economic levers, and widespread target price responsibility system was applied lo supervising and regulating prices, forming a preliminary price administration framework mainly relying on economic and legal measures with administrative measures playing a secondary role.

-- In macroeconomic control, monetary and fiscal policies based on demand management were put to use. Monetary and austerity fiscal policies such as decreasing money supply and raising interest rates started to play a significant role in controlling the expansion of aggregate demand. This demonstrates that the government macroeconomic control administration system has shifted from direct regulations of economic entities to indirect control

(Ⅲ)Deepening the Reforms (1992-2001)

This is a stage in which the government's economic administration system was gradually adapted to the requirements of a market economy. In this stage, focusing on the objective of establishing a market economy system, reforms in fiscal and taxation, financing, price administration, foreign exchange administration and government institutions were enforced and a framework of macroeconomic control system was preliminarily established to meet the needs of a market economy.

-- In the reform of fiscal and taxation system, the fiscal administration system whereby tax revenues are shared by central and local authorities was implemented, the turnover tax system consisting mainly of the value added tax (VAT) was promoted, and the income taxes for domestic funded enterprises and individuals were unified under the same standards.

-- In reforming the financial system, it is statutorily determined that the central bank is to implement an independent monetary policy under the leader-skip of the State Council to establish a powerful central bank macroeconomic control system. The specialized banks were managed according to the asset debt ratio, and were in transition to commercial banks in the real sense. The China Development Bank, the China Agricultural Development Bank and the Export-Import Bank of China were established to be specially engaged in policy credit businesses.

-- With respect to foreign exchange administration system, interest rates were unified, a uniform and regulated fluctuating Renminbi exchange rate system was established based on market supply and demand; inter-bank foreign exchange market was established, the mechanism of the formation of exchange rates was improved, and the exchange rate of the renminbi was kept at a reasonable level and remained relatively stable. Earnings in foreign exchanges were to subject to a settlement system, while the regulations on foreign exchange retention, hand-over and quota administration were abolished. Foreign exchange selling system is implemented in banks, and the renminbi under current accounts was to be subject to conditioned convertibility.

-- With regard to pricing, the mechanism of price formation based on market prices was firmly set up, and was playing a principal role in the commodity and production factor markets in China.

-- In transformation of government institutions, the government underwent two institutional reforms in 1993 and 1998 aimed at adapting to the needs for establishing a market economy system and for intensifying the macroeconomic control by the government, so that the functions of the government would be gradually changed, and the functions of the government and the enterprises distinctly separated.

-- In cultivating, standardizing and supervising the market system, a series of laws, rules and regulations were promulgated and enforced in order to establish a unitarily open and orderly competitive market system, so that the government could standardize and supervise market entities, market organization forms and market transaction behavior within a more systematic framework.

(China.org.cn November 7, 2003)