In 1988, the government of the People's Republic of China attempted to carry out a price reform. This reform aimed to solve a series of complex economic problems under the dual-track price system by raising the prices of most commodities in the short term. However, before the reform could be implemented, the news leaked and triggered a buying frenzy among the people, which led to even more severe inflation on the basis of existing inflation, and the reform was forced to be shelved.

Background From the fourth quarter of 1984, the economy developed too fast and credit was issued too aggressively. The central government tried to control credit issuance through administrative means, but it failed. In 1987, the gross national product grew by more than 10%, national income grew by more than 10%, total industrial output grew by more than 17%, agriculture grew by nearly 6%, and the commodity retail price index rose by 7.3%.赵紫阳，〈经济过热、软着陆和治理整顿〉，载 《改革历程》，香港：新世纪出版社，2009年

At that time, China was carrying out reform and opening up, transitioning from the original planned economy to a market economy to a certain extent. Commodity prices were subject to a dual-track price system, that is, the prices of some commodities were controlled by the state plan, while the prices of others were determined by the market. The problem brought about by the state controlling commodity prices was that, on the one hand, the state needed to invest a lot of fiscal funds in price subsidies for urban agricultural and sideline products, and on the other hand, the wages paid to workers were too low and their purchasing power was weak; while enterprises lacked the motivation to produce and could not reform according to market rules, thus failing to gain real competitiveness. This led to dissatisfaction among the state, enterprises, and the people. At the same time, some people took advantage of the dual-track system to arbitrage, hoarding products under the state plan control at low prices through various means, and then selling them at high prices in the market to make huge profits, which affected the state's control over prices and caused market instability and price fluctuations.赵紫阳，〈闯物价改革关〉，载 《改革历程》，香港：新世纪出版社，2009年

In early 1988, CPI growth reached a turning point. During the inflation cycle from 1986 to 1988, the monthly CPI exceeded 5% in January 1987 and reached a peak of 28.4% in February 1989, lasting for 26 months. The CPI in January 1988 increased by 9.4% year-on-year, which was the turning point of this inflation cycle. This means that on the one hand, inflation continued to worsen and prices continued to rise, which drew strong reactions from the people, while on the other hand, the situation of severe price distortion did not change significantly. The dual-track pricing system led to power-money transactions and " official profiteering," which caused great dissatisfaction among the people  and was also heavily criticized in terms of policy.

At that time, the top leadership of the Central Committee of the Chinese Communist Party believed that these problems were caused by the dual-track pricing system implemented under the planned economy system, and that prices should be brought back to market regulation as soon as possible. Deng Xiaoping also proposed that we should be determined to carry out price reform, "better to get it over with sooner rather than later" and "better to have a short pain than a long one". General Secretary Zhao Ziyang believed that since the price distortion phenomenon had not been fundamentally changed and prices were rising, we should simply adjust prices in a planned and comprehensive manner within a certain period, such as two or three years, by bearing a certain price increase index, such as a price increase of 30-50%, so as to change the current situation of serious price distortion.

History

The proposal Following a conversation with Deng Xiaoping on 5 May 1988, Premier Li Peng reported to the Politburo that Deng wanted to speed up reforms to solve the problems regarding the price system. Zhao initially took this as a goal for "the next few years" instead of an immediate push. He told a Politburo Standing Committee meeting on 16 May that urban prices would rise 15–18 percent and said warned against "dragging it out again and not making a systemic decision" but said this would involve "a long-term plan" that would replace the dual-track price system "step by step" instead of full price liberalization. Yao Yilin was picked for leading the reform by Zhao. Deng, unhappy by the gradualist approach, asked Zhao why he was pursuing a gradualist approach. On 19 May, he said that "The problem of prices has remained unsolved for many years. . . . We have no choice but to carry out price reform, and we must do so despite all risks and difficulties".

Zhao's tone changed after Deng's reaction. On 30 May 1988, Zhao delivered a report entitled “Establishing a New Order of Socialist Market Economy” at an enlarged meeting of the Politburo. The report proposed to use a certain price increase index each year for five years to achieve price rationalization and solve the problem of unreasonable wages. Zhao Ziyang had shown his proposal to Deng Xiaoping beforehand and received Deng Xiaoping's approval. The meeting decided that the State Council would formulate the plan, and the specific plan was later drafted by Vice Premier Yao Yilin and others. In July, Zhao warned against notions that "a market system would appear after a price reform without reform of the public sector". He heard proposals from the eight teams of economists, though none of them promoted immediate price liberalization. Deng continued to promote rapid price liberalization. From 5 to 9 August, Premier Li Peng held a State Council meeting which endorsed a "safe and feasible" pace for price reform.

In August 1988, the reform plan was finalized. There was no obvious internal disagreement when the central government formulated the plan; although Beijing and Shanghai had concerns, they did not express their opinions clearly. From 15 to 17 August 1988, the 10th plenary meeting of the Politburo was held in Beidaihe, and adopted the "Preliminary Plan on Price and Wage Reform"; Yao Yilin presented the reform at the meeting. The meeting believed that the general direction of price reform was: "The prices of a few key commodities and services shall be managed by the state, while the prices of the vast majority of commodities shall be opened up and regulated by the market, so as to transform the price formation mechanism and gradually realize the requirement of 'the state regulates the market and the market guides enterprises'." The meeting required that the prices of most commodities be liberalized. The Politburo approved the plan on 19 August.

Bank runs and panic buying Xinhua News Agency announced the reforms in bold language, stating "price and wage reforms are the key to the reform of the entire system". After news of the price reform was about to be implemented spread in society, the trend of a sharp rise in prices appeared ahead of schedule, and a wave of bank runs and panic buying occurred in both urban and rural areas. Various depositors rushed to withdraw their money from banks, and banks were in dire need of funds. In a county in Hubei, the bank counters were overturned by depositors because the bank had no money to pay them. Bank runs across the country led to savings withdrawals of an estimated renminbi 38.94 billion. This also alerted the government.

Major cities and cities experienced a serious buying frenzy. In the height of summer, Hangzhou residents rushed to buy sweaters and trousers; in Kunming, where the climate is mild, people rushed to buy electric fans, which are usually hard to sell; a woman in Guangzhou rushed to buy 10 boxes of laundry detergent; a resident in Nanjing rushed to buy 500 boxes of matches; and a resident in Wuhan rushed to buy 200 kilograms of salt. Amid the frenzy of buying, commodity prices continued to rise. Cheng Zhiping, then director of the State Price Bureau, said, "The price of a 1-jin bottle of Moutai liquor jumped from 20 yuan to more than 300 yuan, Fenjiu from 8 yuan to 40 yuan, Gujinggongjiu from 12 yuan to 70 yuan, and Zhonghua cigarettes from 1.8 yuan to more than 10 yuan per pack." Wang Yongzhi, president of the China Price Association, said, "People went crazy and bought whatever they saw, regardless of whether they needed it or not, and they didn't care about the quality. They would buy anything that had cold air in the refrigerator and any television that showed a picture."

A wave of competition to purchase agricultural and sideline products also occurred in rural areas. In Hechuan County, Tongliang County, Tongnan County, Wusheng County and other places in Sichuan Province, some units and individuals competed to raise prices to buy silkworm cocoons, which forced state-owned purchasing stations to raise their purchase prices. The purchase price of silkworm cocoons in Taihe District of Hechuan County reached 12.8 yuan per kilogram, which was almost double the maximum purchase price set by Sichuan Province. On 8 June 1988, some state-owned purchasing stations had to suspend the purchase of silkworm cocoons due to a lack of funds. Inflation also spiked; a survey of thirty-two large and medium-sized cities revealed a 24.7 percent price increase during the month of August.

Reform postponed On 24 August 1988, Zhao chaired a meeting of the Central Financial and Economic Affairs Leading Group regarding the 'lack of public confidence in the price reforms". In the following days, Zhao spoke repeatedly with Yao Yilin and Li Peng about the panic buying. On 30 August, Li Peng chaired an emergency State Council meeting focused on "curbing price hikes and panic buying". On 2 September. Zhao acknowledged problems caused by the price reforms in a Politburo meeting. On 12 September, Deng held a meeting with top Party leaders where he acknowledged the need for retrenchment to improve the economic environment, but stressed that reform and opening up should continue. In late September 1988, Zhao presided over the third plenary session of the 13th Central Committee, where he said inflation had not been properly controlled and that focus would be on "managing the economic environment and rectifying economic order". Previously, Zhao had talked to Yao Yilin about postponing price reform, and Yao thought it could be postponed until the second half of 1989. Later, Zhao believed that the current economic environment was not conducive to price reform, so he decided to postpone the reform and carry out rectification and consolidation first to improve the economic environment and solve problems such as inflation. Price reform would be carried out after these problems were solved. Zhao Ziyang emphasized: "The final decision to postpone price reform and shift to rectification and consolidation was my determination."

Before Zhao decided to postpone the reform, Deng Xiaoping, who was unaware of the situation, spoke with Premier Li Peng, encouraging Zhao and Li and saying that he could take the risk if anything happened. After Zhao Ziyang made up his mind, he talked to Li Peng and Yao Yilin once. Li Peng and Yao Yilin agreed, and Zhao Ziyang then reported to Deng Xiaoping. Subsequently, a meeting of the Politburo was held, and the decision to postpone the reform was finally made.