Read the given passage carefully and answer the questions that follow.

The early 1990s marked a turning point in the Chinese economy, which had been gradually evolving since the late 1970s when the policy of reform and opening was adopted. As the significant changes got underway in the early 1990s, they had the effect of enhancing, or of continuously exacerbating, an already unbalanced situation. First, as reforms of the service sector began to be implemented, with a focus on education, housing, and medical care, the government retained its monopoly of lucrative services such as telecommunication and financial services while discarding the burden of some public services. Most of the latter were used as consumer services, with some of them (e.g., medical services) provided by the private sector but with lower quality and higher prices in the absence of orderly market competition and feasible public management. Consumers have therefore borne more of the burden for educational and medical services. Second, reforms to the tax system were carried out, giving the central government an increasing share of the total fiscal revenue and thereby enhancing its dominance over the allocation of resources. This has seriously threatened marketization reform and, arguably, has even damaged the market mechanism and competition. Third, the share of government expenditures in the total final expenditure has begun to rise, but this has been accompanied by a decrease in household expenditure as a share of the total. This implies that the government has become bigger and bigger. Fourth, the investment by the central government and its state-owned enterprises (SOEs) and state-owned banks (SOBs) began to increase, including the implementation of numerous ostentatious government office buildings and urban image projects (e.g., Shanghai's magnetic levitation train transport project, which was launched in the early 2000s). Fifth, overproduction of tradable commodities such as apparel and electrical household appliances (due to insufficient domestic demand) coexisted with underproduction of non-tradable services and goods (due to monopoly and high prices or costs). This had the effect of causing the merchandise trade surplus to grow and the services trade deficit to persist. Sixth, a foreign exchange regime reform was introduced so that the renminbi (RMB) devalued significantly against the US dollar in a way that pushed up foreign demand for domestic surplus tradable. Finally, processing trade (i.e., processed and assembled exports using imported materials or intermediates) began to flourish, accounting for almost 50% of the total trade because of lower labor costs, a relatively weak RMB, and attractive incentives to foreign investors.
The reforms to the service sector and the tax system suggest that the Chinese government has become stronger and stronger in pursuing economic growth, thus intervening in and even replacing the market mechanism, while simultaneously becoming weaker and weaker in the provision of public services. Government officials have an incentive to pursue GDP growth because they can gain promotions and ‘benefit’ that is, creating and seeking all kinds of rents. If they do what they should do (i.e., provide public services), the opportunities for ‘benefit’ are very limited. This has damaged social and business honesty, making market transactions costlier, and has hindered the division of labor and the externalization of producer services. The third and fourth developments since the early 1990s (outlined above) mean that, in effect, government expenditure is squeezing out household expenditure, and government investment policies (via SOEs and SOBs) are discouraging and even forcing out private investment. The emphasis in manufacturing on processing and assembly in China will likely continue, but it will be at the expense of demand for producer services, including upstream services such as R&D and downstream services such as marketing and after-sale services that are still largely controlled by foreign firms. This unusual processing trade pattern is characterized by two ends abroad and, thus, the coexistence of rapidly developing manufacturing and underdeveloped producer services at home. The overproduction of tradable commodities and the foreign exchange controls are a natural outcome of the distorted government function and behaviors.
Thus, the underdevelopment of market-transacted services remains an integral part of the economic imbalances that are found in the Chinese economy. This is mainly caused by distortions in the level of government involvement and behavior relative to competitor nations rather than the fact that China is still at an earlier stage in the economic development process than many of the economies that have been used for comparison in this study. Institutional and policy distortions have hindered the functions of the three previously discussed mechanisms of service industry development. So the current problems are reflected in three aspects: a lower level of division of labor and specialization due to higher market transaction costs or transaction inefficiency, backward organizational management, and sluggish demand.