First emerging in the early 1980s and became pervasive through the early 1990s in China, the term "profiteers," in Chinese expression daoye 倒爷, refers to a new group of private businesspeople who operate as brokers, using their market knowledge and connections to obtain goods at low prices for resale at a high prices. The term “daoye”, combining Chinese words dao (speculation) and ye (a respectful title for a male), is Beijing slang for profiteering and speculation and was especially common in Beijing at the time. In English, “profiteer” is a pejorative term for those who reap excessive profits by charging exorbitant prices for goods. In Chinese, however, “daoye” is more ambiguous. On the one hand, the term disparages the people engaged in this activity as parasites for exploiting state assets. And, on the other, the term regard such people as harbingers of China's first post-revolutionary wealthy class.
Overview Daoye is a side effect of the distinctive pattern the Chinese Communist Party (CCP) adopted to implement economic reform: dual-track system (shuangguizhi 双轨制), in which a traditional plan and a market channel coexisted for the allocation of a given good, as a transitional device. Before its formal operation in 1985, resource allocation in China was done mostly under the plan via the planning bureaucracy. In the early 1980s, the Chinese government relaxed bureaucratic control over resource allocation by allowing State-owned Enterprises (SOE) to produce and sell above-plan output at the market. Rather than dismantling the plan immediately, reformers guaranteed a long-run dynamic process that would gradually increase the share of non-plan, market transactions in the economy and made the dual-track system into an unabashed transitional device. This approach had obvious advantages, including the opening up of opportunities for the development of the private sector, while avoiding a “big bang” reform, that is, sudden transformation to marketization that was attempted in Eastern Europe and Russia. Nonetheless, the uneasy coexistence of disparate elements of old (centrally planned) and new (market oriented) economic institutions and policies induce contradictions and weaknesses, all of which generated a skewing of opportunities for daoye to capture windfall profits by engaging such activities as speculation, profiteering, bribery and corruption.
Daoye took enormous forms of behavior associated with attempts to make profit in the dual-track environment. Some are entirely innocent and even conducive, for they alleviated the shortage of some products and increased the market transactions in the dual-track system. Much behavior represents a kind of mild corruption, with private traders’ buying goods at the fixed state price, usually through their connection to official employees, and reselling at a market price. And some are profiteer of government officials and their relatives, demanding from bribes and extortion in exchange for massive deals. These government officials collaborating with businessmen in price speculation are also known as “official profiteer” guandao官倒. In many cases, the above three categories of profiteer are interwoven. It is noteworthy that profiteer is not technically illegal unless it involves committing a crime. For example, profiteering exists when companies manipulate their prices, or when those in positions of authority abuse their powers. In China, however, under the criminal law in 1979, daoye would be put in prison as long as they increase prices when there is a supply shortage. For example, a daoye would be considered guilty if he transported clothes from Guangdong Province to northern cities and resold at high prices. This “speculation crime” was not abolished until 1997.
Daoye phenomenon has been the subject of much controversy, reflecting a call to account for success and failure of China's first decade reform. Using techniques of questionable legality, these men and women, many of whom had been political prisoners during the Cultural Revolution of the 1960s and 70s, wrote an important chapter in China's economic and political history following Beijing's decision in 1978 to loosen its reins on the economy. For the most part, daoye exploited loopholes in the transitional system to turn huge profits. But regardless of their machinations, it is the labor and hustle—and sometimes sleaze—of these businessmen, that accelerated the country's economic transformation in the 1980s and 1990s. They started a process that has proved to be unstoppable. In this sense, they played an important role.
Background Daoye is a side effect of the dual-track (shuangguizhi 双轨制), in which the command economy and the market economy co-existed, as a transition strategy during the initial phase of economic reform. China's pre-reform economy, particularly with regard to heavy industrial development, rather closely followed the model of Soviet Union style command planning. After the People's Republic of China (PRC) was established in October 1949, the CCP gave overwhelming priority to channeling the maximum feasible investment into heavy industry. To achieve this goal, a command economic system was adopted, by which production and allocation were placed in the hands of state “command” and “plan” rather than left up to market forces. Planners controlled a large volume of resources in the economy, particularly the scarcest and most vital inputs, and controlled the flow of those resources from producer to consumer through the process of price settings. On the whole, therefore, the signals upon which economic actors based in this type of economy came from bureaucratic commands rather than market-responsive prices.
The command economy was an effective way to subordinate individual economic decision-making to the overall national development strategy of building China into industrial power. But the substantial distortion in the price system and in resource allocation made the economy unable to realize the scale of economy and general equilibrium. On the eve of economic reform, there is substantial evidence suggesting that China's command economy was performing relatively poorly, which made China continuously sought a workable set of principles for decentralization. Rather than dismantling the plan immediately, reformers guaranteed a long-run dynamic process that would gradually increase the share of non-plan, market transactions in the economy and made the dual-track system into an unabashed transitional device. This approach had obvious advantages, including the opening up of opportunities for the development of the private sector, while avoiding a “big bang” reform, that is, sudden transformation to marketization that was attempted in Eastern Europe and Russia. Nonetheless, the uneasy coexistence of disparate elements of old (centrally planned) and new (market oriented) economic institutions and policies induce contradictions and weaknesses, that is, price differences between plan and market, supply scarcity, institutional and administrative disorder, all of which generated a skewing of opportunities for daoye to capture windfall profits.
Dual-track Price Short after the third Plenary Session of the Eleventh CCP Central Committee held in December 1978, the Chinese government relaxed bureaucratic control over resource allocation. The July 1979 State Council allowed SOEs to sell above-plan products, giving birth to the second track – that is, the market – for the circulation and pricing of enterprise output. At first, the market for goods that were subject to negotiated pricing was small and it did not have much influence. In January and February 1985, official recognition caught up with concrete reality, and enterprises were formally given the right to transact outside plan goods at market determined prices. With this decision, the dual-track system was fully in place and given clear legitimacy for the first time. In so doing, the government gave explicit definition to two separate spheres of economic activity, each marked by its own characteristic means of regulation. The planned sector, with compulsory deliveries at state fixed prices, was to persist but its scope was clearly delineated and fixed in absolute terms. The market sector, with freely determined prices, was to cover the remainder of the economy, and was to grow steadily as the economy grew. Markets for outside-plan products then developed rapidly in China in parallel to the existing plan.
Because nearly every good has more than one price, illicit income can be made merely by transforming the status of a good. Anyone who can purchase a good at the low, state-set price and then sell at the higher market price derives substantial profit. For example, during the mid-1980s, a standard medium-weight truck sold for a plan price of 20,000 RMB, and a market price around 35,000 RMB. Illicit sale of a single truck in high demand by emerging peasant entrepreneurs would yield a profit of 15,000 RMB, about fifteen times the average annual urban wage. Distortions are large relative to money incomes, so temptations are great.
Supply Scarcity The tension between overall social demand and supply is another critical reason for daoye. In the early 1980s, private operators still depended mainly on state supply organs for the bulk of producer goods and consumer goods. The state wholesalers often discriminated against private buyers. This was attributed in press report to the state units’ inadequate grasp of the importance of the private economy or lingering leftist attitudes (i.e., conservatives’ opposition to the policy of encouraging private business) and to feelings of solidarity with state retailers threatened by private competition. The methods used against private business also indicate that in some cases state wholesalers discouraged individual buyers because their small orders were less convenient to handle than those of the larger state and collective buyers. Even if a series of reforms in marketing worked to reduce the importance of state distribution agencies and to widen the supply avenues open to private business, private operators continued to be disadvantaged, though in another way, when obtaining supplies. These markets, authorized in 1984 to sell above-plan supplies, obviously operated in what are essentially sellers’ markets. For example, in Hubei in 1983, over 95% of the goods sold by private retailers were bought from state commercial outlets and supply and marketing cooperatives. By 1987 this had fallen to 48.5%. Until around 1984, private sectors usually complained of outright refusal to sell them popular goods. In later years such complaint continued to appear, but they began to be far outnumbered by complaints that wholesalers took advantage of a seller's market by charging high prices or demanding bribes and favors. Such was the nature of this supply system, however, with its uneasy mesh of planned and market distribution, inadequate distribution arrangements and pressing demand, that the opportunities for profiteering, were immense. To private businesses this meant that high-demand goods could be obtain – but at a price.
Continuing material shortage is further exacerbated by rapid economic growth. Since 1984, China's economic development had been overheated with the scale of investment increasing year by year and the excessive growth in consumption funds. The high-speed economic growth, with GNP accelerated to a remarkable 11.5% annual rate between 1983 and 1988, developed into a situation of double inflation of both vestment demand and consumption demand. For four consecutive years, social demand had exceeded social supply, with the supply-demand difference ratio being expanding from 4.7% in 1983 to 13.6% in 1987.
Institutional and Administrative Disorder