Price reform began as the adjustment of relative prices to international relative prices. At the beginning, like most reforms, they were aimed only at improving economic performance, not for installing market mechanisms. But, as the characteristics of China's economic reform changed, price reform also changed its meaning. After 1984, price reform meant introducing market prices. Small changes in relative prices of some products affected other products. Price reform itself accelerated the reforms and the transition to the market economy.

## 2 -5 Budgetary System Reform

Even now in China, it is rather difficult to find a modern budgetary system. The main source of revenue has been taxes and the profit transfer from SOEs. Distribution of budgetary income has been carried out based on the contract between the central and local governments. After 1994, a new tax division system between the central and local government will be installed, but even in this new system, distribution will be based on the records of the past few years. $ ^{90} $

The distribution system between the government and SOEs was described in the section on SOEs reform. Income distribution between the central and local governments was done by both grouping of income items and total amount of income by a decision in February 1980. In 1985, the decision was reviewed and “Enterprise Tax System” began to be introduced from 1983.

In China’s system, “negotiation between the center and provinces” is the most important characteristic. The amount of budget has been mainly decided by contracts between the central government and each province since the beginning of economic reform. The system is very similar to the contract system of enterprises. If the provinces fulfill their contracts to the center, part of the additional tax income belongs to the provinces. $ ^{91} $

In this system, tax only worked as a budget financing system. For example, with the imperfect tax structures, tax did not work as the means of income redistribution and macro control. This imperfection was one reason for using administrative measures to control the overheated economy. The rich coastal provinces can earn a lot of excess income, the money became the source for building infrastructures, and in some periods overheated the economy. On the contrary, poor provinces which received a fixed amount of subsidies from the central government could not achieve high-speed development. In this system, not only the income gap but the difference in infrastructures between advance areas and delayed areas was enlarged. Even the central government could not finance enough of the budget.

In November 1993, the Third Plenum of the 14th Party Congress was held. In this Plenum, the financial and tax systems were two of the most salient issues. A new tax dividing system, which had been tested since 1992 in some provinces was decided on, and it aimed at enhancing the whole country, including Guangdong province. In this system, the tax system is simplified: each tax item is classified as a central tax, provincial tax and common tax. This new framework of tax distribution will reduce the portion decided by negotiation. The central budget will function as the redistribution function from the advanced coastal areas to delayed inland areas.

As the new system clearly divided the tax revenue, some advanced areas – which earned