Chinas Economics

Chinas Economics For various reasons, China has always been an important country in the world. With its increasing large population, it was determined by other countries that is has a lot of economic potentials. In just one decade and a half, China has transformed itself from a giant that use to live in poverty into a wealthy powerhouse to the world economy. With one-fifth of the worlds population, China is now producing 4% of world merchandise and a proportion of global production. It has also one of the worlds oldest and most influential civilizations. China has established three approaches to the world economy and they are establishing an alternative socialist system (1950s); isolating itself from the system (the 1960s to mid 1970s); and participating in the system again from the 1970s.

Chinas economic system was quite similar to Soviet Unions because it is central planning system. However, after the 1950s, this central planning is broken into regional planning by different provinces in China. In another words, China has changed from a centrally based country in a regionally based country, in which different provinces produces different goods and servies. This change has encouraged the development of small enterprises, which are the main driving forces of Chinese growth. In 1978, China has liberalised its economy and start participating in the world economy. With its new market reforms in every sector, Chinas door has opened its economic door to foreign investors and freer trade in special economical zones.

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Beginning in 1994, China’s economic structural reforms have begun new breakthroughs. Major changes have been made to sectors like personal enterprises, taxation, finance, foreign investment and foreign trade. At the same time, the Chinese government is speeding up its establishment of a socialist market economy system. Hopefully, this socialist market economic system can be in place by 2010. (Roy 1-5) Major Structural Reforms Reforms already launched: 1. Reform of the state-owned enterprises has been furthered. h Some adjustment and reorganisation have been carried out in industries like textile, coal, oil and weapon-makings.

2. The social security system has made huge changes. h People established re-employment centres that can help laid off workers to find jobs in other economic sectors. Almost 99% of the laid-off staff and workers who were fired from the state-owned enterprises are using this re-employment service centre. Reforms to be launched: 1.

Financial reforms will be undertaken h To achieve the perfect management system, sectors like banks, securities, insurance and trust businesses are becoming independent from each other for clearer financial supervisions. h Government is speeding up the reform of state-owned commercial banks, in order for the banks to operate independently. h In case when companies have bad credit and unpaid debts, banks are reinforcing strong policies to ensure the quality of bank loans. h To safeguard financial assets and eliminate corruption of people who have political positions. 2.

To increase export to maximize the economy h People are expanding export productions. h People are improving the development of international tourism to increase non-trade exchange earnings. (Online) Economic Activity GDP/GNP China must have annual GDP growth greater than 5% to maintain social stability and political survival. Economic freedom has increased Chinas prosperity. With its Real GDP of US$960.91 billion, it seems that is has increased its output by 7.8% from 1997.

Within the GDP, primary industry increased by 3.5%, secondary industry up by 9.2%, and tertiary industry enlarged by 7.6%. The social labour productivity rose by 6.9% over 1997. In the first half of 1999, GDP grew at the rate of 7.6%. (Morrison) Beginning in 1979, China launched several economic reforms. To improve the standard of living of farmers, government is now allowing them to sell a portion of their crops on the free market. The government also established four special economic zones to attract foreign investment and boost exports and imports.

The decentralisation of economic control of various enterprises was given to provincial and local governments. This allowed enterprises to operate more freely and competitively, rather be controlled by the central government. Some coastal regions and cities were designated as open cities and development zones, which allowed people to experience free market reforms and to attract foreign investment. Therefore, the state price controls on good and services were gradually eliminated. Starting from the introduction of economic reforms, China’s economy has grown proportionately faster than during the pre-reform period (see Table 1).

This Chinese statistic shows the growth of real GDP from 1979 to 1998, which is making China one the world’s fastest growing economies. According to the World Bank, China’s rapid development has driven 200 million people out of poverty. Table 1. China’s Average Annual Real GDP Growth: 1960-1998 Time Period Average Annual % Growth 1960-1978 (pre-reform) 5.3 1979-1998 (post-reform) 9.8 1990 3.8 1991 9.3 1992 14.2 1993 13.5 1994 12.7 1995 10.5 1996 9.7 1997 8.8 1998 7.8 Sources: Official Chinese government data reported by the World Bank, World Development Report (various issues), and DRI/McGraw-Hill, World Economic Outlook, various issues. Economists who worries about China’s rapid economic growth are mainly concentrating on two factors: large-scale capital investment (by large domestic savings and foreign investment) and rapid productivity growth.

These two factors appear to interdependent of each other. Economic reforms led to higher efficiency in the economy, which boosted output and increased resources for more investment in the economy. Most of the Chinese are known to have a high rate of savings. When reforms began in 1979, domestic savings as a percentage of GDP turned out to be 32% (nearly as high as Japan’s at the time). Eventually, savings as a percentage of GDP has steadily risen; it was 42.7% in 1998, among the highest savings rates in the world.

In U.S. dollars, China’s GDP in 1998 was $968 billion with its per capita GDP of $769 billion. Such data would indicate that China’s economy and living standards were significantly lower than those of the United States, Japan, and Germany. China’s 1998 GDP was about 45% the size of Germany’s, 23% of Japan’s, and 11% that of the United States. Surprisingly, China’s per capita GDP was only 2.4% of the United States (see Table 2). The following data shows that China’s per capita GDP is $3,701. However, it falls far below the PPP per capita GDP levels of some major developed countries.

For example, it is only 12% of U.S. levels. The International Monetary Fund estimates that China might surpass the United States as the world’s largest economy in the year 2007. However, even if that does occur, it would take China significantly longer time to achieve U.S. standard of living levels.

Table 2. Comparisons of U.S., Japanese, German, and Chinese GDP and Per Capita GDP In Nominal U.S. Dollars and PPP: 1998 Country Nominal GDP ($Billions) GDP in PPP ($Billions) Nominal Per Capita GDP Per Capita GDP in PPP U.S. 8,500 8,500 31,414 31,414 Japan 4,190 2,969 29,860 23,228 Germany 2,109 1,637 26,024 21,376 China 948 4,610 769 3,701 Source: DRI/McGraw Hill. World Economic Outlook, Volume I 1st Quarter, 1999, p.A-27. Employment/unemployment By the end of 1998, China’s employment was 699.57 million, 3.57 million more than at the end of the previous year. Of the total, 32.32 million people were in urban private enterprises.

In 1998, great changes were made in the re-employment program, which enabled 6.09 million laid-off staff and workers of state-owned enterprises to find new jobs. By the end of 1998, the registered unemployment rate in the urban areas was 3.1% with no significant changes from the previous year. The income of people that are living in urban and rural areas increased steadily, and their living standard continued to rise. With the falling price levels, the growth of the per-capita disposable income of urban residents rise 5.8%, and that of rural residents increased by 4.3%. The registered unemployment rate in the urban areas is 3.5% in 1999.

The number of people laid off in 1997 was 15 million, two-thirds from state owned enterprises. If privatisation of state enterprises continues, it is estimated that 15 million more workers would be laid off over the next two years (although the unemployment number may vary in different provinces). In some undeveloped provinces, the ratio of laid off to working labour was 3:1 in 1998. (Morrison) Inflation Inflation has reached 25.5% in 1994 and has become a prime concern of the government. Therefore, the government has planned a tight credit policy which helped to bring inflation figures down to 17.1% in 1995, 8.3% in 1996, and 4.1% in 1997. Due to statistics, the year-end figures for 1997 shows an average inflation of 2.8% for CPI.

This steady drop in inflation during 1997 was due to large stockpiles of inventory such as wheat and cereals, which produced more competition in the economy. It looks like steady deflation would continue for the next few years. In 1998, the total retail sales of consumer goods amounted to US$352.14 billion, up by 6.8% compared with 1997. Despite the deflation, the actual growth was 9.7%. (China: Economic Overview) Value of currency During the period of the Asian financial crisis, China has enforced a policy of maintaining the stability of RMB.

There has also been a favourable balance in Chinas current account for five consecutive years. Foreign direct investments have continued to flow in. All these made it possible for RMB to remain stable in 1998. Now, its exchange rate against the US dollar is at US$1: RMB 8.2789. Unlike HK dollar, value of RMB might change over the year because RMB is not pegged to the US dollar. Specific contributions From several observations, it is known that the fastest growing provinces are Zhejiang, Jiangsu, Guangdong, Fujian, and Shandong. These places are where the state-owned industries have fallen most sharply.

From 1981 to 1994, the shares of state-owned industry in each of the five provinces dropped by more than 40% for it was creating a lot of non-state owned enterprises. On the other hand, in the western regions, the state-owned enterprises have experienced a much slower structure reformation. The decline of importance of the coastal provinces was caused by the fast growth of enterprises in provinces like Jiangsu and Zhejiang. It can also be caused by foreign-invested enterprises in Guangdong as well as private enterprises in Wenzhou, Zhejiang. The output of these enterprises grew at an annual average rate of 25 %, that is, 14 % higher than that of the state-owned industrial enterprises. The five fastest growing provinces are construction of free enterprise or indirect macro-management because they all attract foreign investments.

In contrast, the inland areas lack foreign-invested enterprises and private enterprises. The fasted growth province, Guangdong, has an annual average GDP growth rate of 12%, while Jiangsu and Guizhou grew at an annual average growth rate of 6%. However, this increasing difference of provinces’ growth performance could lead to serious economic and political tensions among regions. (Decentralisation and Provinces’ Growth Performances) Government production of public goods/services State economy includes all enterprises that are funded by governments of various levels. Because of the economic reform, companies and business that use to receive government funding now have none. To increase growth without arising regional crisis, the government is using the good old-fashioned Keynesian approach V spend big on public programmes.

Last year, government investment in telecommunications has increased by 53.4% and funding in agriculture and water conservation increased by 47.8%, as well as cement production jumped by 37.2%. The Statistical has shown that government owned retail sales grew at 9.4% pa in 1998. Due to the socialist system, most of the companies in this economy are state-planned production companies. The main financial burden that these state companies have to carry is the workers’ life long security, that is, paying for a worker’s child delivery bill and covering the funeral expenses of the dead retired worker. Along with other reasons, more than half of such companies are currently not profitable.

Therefore, government is slowly re-organising small state-owned companies and selling them to private entrepreneurs. At the same time, they are transforming large ones into corporations. To maintain social stability, the government has to make sacrifices in this economic sector. (Roy 48) Economic Stability Fiscal policy Chinas political and economic systems lack of transparency and constant enforcement has created many uncertainties for foreign investors. The complexity of national and local laws has made foreign trade and investment more difficult in China.

Chinas main problem has always been the incompleteness of economic reforms and the absence of political reforms. This was due to the fact that Communist Party Officials are functioning as Chinas ruling class. They are a self-selected group accountable to nobody. Fiscal reforms China has made the following new pledges: 1. To eliminate high tariffs.

2. To have a more “balanced and equitable access” for foreign companies. They also made the following decisions about State-Owned-Enterprises: 1. Lend to those enterprises that can survive in the market. 2.

For enterprises without a lot of hope for survival, better performing ones will acquire them. 3. Support bankruptcy for extremely insolvent enterprises. Mr. Jiang Zemin, Chinas new President has brought some strong changes in China. However other countries in the World Trade Organisation (WTO) are saying that Chinas should obtain lower tariff and freer trades because the use of high tariffs made it difficult to export to China. Import taxes in the form of value-added tax (VAT) and other taxes are added to tariffs on items entering China.

This highly discouraged trade inflow. In 1995, the National People’s Congress (NPC) established banking reforms, including the Peoples Bank of China Law. This new law gives NPC more authority in its functioning. It also abolishes loan and corruption from politicians. The reforms has sped up the commercialisation of the big four State-owned specialised banks, which include Agricultural Development Bank of China, Export and Import Credit Bank of China, and State development Bank. As a result, the Chinese government has opened its doors to some foreign banks to emerge new banks in China.

The new banks are more efficient than the big four and offer much better quality of service. Monetary policy In 1994, Consumer Price Index was up by 24%. This is a sign of Chinas failure for the interest rates being set by the government and not economically. Monetary policy is useless in China because the central bank is not independent. Inflationary pressure resulted in money supply growth of 34.4% in 1994. China is not allowed to use the “raising interest rates” tool for fighting inflationary demand because it fears that the effect on state owned industries that survived on borrowed working capital.

The raise in interest rates would greatly effect state-owned firms as they already borrow money from banks to pay their interest bills. Monetary reform Formerly Bank of China, it was transformed into a central bank in 1983. Its responsibilities include: 1. Making and improving financial polices to meet government rules. 2. Controlling the supply of money. 3.

Setting exchange and interest rates. 4. Setting policies concerning credit. 5. Controlling both domestic and foreign banking activities.

6. For practical purposes, the bank of China is the overseas agent of Central Bank. Therefore, privately owned firms are left to fund their own funds from sources outside the state banking system which include foreign investments, foreign currency borrowing, domestic share sales, bond issues, credit unions, non-bank financial institutions and unofficial private banks. The new interest rate for 6-month loans is now 9.5% and officials say, “Over the next five years our monetary policy direction will be a moderately tightening one.” Banking system China now has specialist banks and other financial institutions, which include: 1. The big-four State-Owned Specialised banks i.e.

Agricultural Bank of China, Bank of China, Industrial and Commercial bank of China and The Peoples Construction Bank; 2. China International Trust and Investment Corporation; 3. The Industrial / Commercial Bank of China; 4. Bank of Communications, etc. Since the central bank in China is not independent, the transparency in the banking sector is then very poor.

This makes the precise measurement of banks loans to become more difficult. The accounting principles are inconsistent and poorly understood by bankers. Interest rates are still be dictated by the bank and government instead of allowing the market to determine it. However, with the new reforms and laws to its state owned enterprises, China may be on its way to a substantial economic recovery with a bright future in sight. (Grace Bosede) Economic Equity Income distribution/Standard of living Less than 60% of Chinese are covered by unemployment insurance. In 1997, most of the laid off workers received payments of less than 10% of the average national wage.

There are virtually no social securities or pensions in China. Therefore, some people live at starvation level. However, the high rate of China’s economic growth last year has provided people with higher standard of living. Urban residents who use to make 27% of the national income are now making more than 50%. There is also a great difference depending on the specific provinces in which people work in (see Table 3). Table 3. Comparison of per capita income between urban and rural sectors in 1995 Province Urban Per Capita Income (RMB) Rural Per Capita Income (RMB) Anhui 2,767 973 Fujian 3,508 1,578 Guangdong 5,877 2,182 Zhejiang 4,691 2,225 Source: Internet article: “How to Benefit from the Booming Retail Market in China” Because China has a large population, the government rarely interferes with income distributions of individuals.

However, there is more interference from the government in the state owned businesses than the privately own ones. Therefore, private businesses that try to maximize their profits often exploit workers who are in serious need of money. The average per capita income of urban resident raise from RMB1,826 in 1992 to RMB3,179 in 1994. Recent figures show that the high growth rate …