Recent Statistics:

GDP per head ($ at PPP) GDP (% real change pa) Government consumption (% of GDP) Budget balance (% of GDP) Consumer prices (% change pa; av) Public debt (% of GDP) Labour costs per hour (USD) Recorded unemployment (%) Current-account balance/GDP Foreign-exchange reserves (mUS$) 2000 2001 2002 2003 3,980 8 13.08

-3.62

0.35

30.4

0.59

8.2

1.9

168,278 4,340 7.5

13.39

-2.97

0.73

30.6

0.69

4,720 8 13.2

-2.96

-0.77

31.1

0.8

9.3

1.48

9.75

2.8

215,605 291,128 5,180 9.1

12.9

-2.5

1.17

29.6

0.92

10.1

2.2

401,036

•

2006: A fixed exchange rate (around 8.007 Yuan to $1 now but may break the 8 Yuan barrier later this year) and strong capital inflows => The government’s five-year plan, which runs to 2010, aims for growth of 7.5% per year (but official projections tend to be low). Goldman Sachs predicts growth of 8.6% in 2006 and 8.2% in 2007. The economy grew 9.9% in 2005.

• • •

The Chinese Economy Since 1976

For hundreds of millions of Chinese, the past 60 years have required adaptation to a series of political, economic and cultural revolutions, punctuated by

cycles

of order and chaos, liberalization and repression, plan and market, social protection and individual responsibility.

During the mid-90s, after a decade of gradual market reform, China recorded the world's most rapid rate of economic growth … nearly 10% per year that hasn’t slackened since. Based on comparisons of economic performance, many observers conclude that the policy of gradualism in China had proved more effective than the "shock therapy“ used in Eastern Europe and the new CIS countries.

• Indeed, based on its enormous population, its expanding consumer market, and its strategic position in Asia, a rising chorus of voices claim that China will become an economic superpower in the 21st century.

• • • • History and Environment: With about 1.2 billion people, China constitutes more than one-fifth of the world's population.

In surface area, only Russia and Canada are larger.

Only 10% of China's land is suitable for cultivation.

Thus, with more than 70% of the Chinese labor force engaged in agriculture, the average farm worker controls less than one acre of land (India - 2 acres on average; in USA - 100 acres).

• The Chinese empire was the only giant of the ancient world to survive into the twentieth century.

- The post-1949 civil war China provides an opportunity to study both the effects of ideology on system design and also some major experiments with new strategies and forms of motivation.

• • 1. CCP came to power Oct. 1949 – faced two problems: Had to consolidate its political position.

Had to establish itself as the center of a reorganized decision making system.

• • • 2. The Peoples’ Liberation Army and its related organizations penetrated into every area of economic activity yet do to its military orientation the government had neither trained personnel nor information to assume complete control of the economy in 1949.

Economy was totally disorganized … government under Kuomintang in 1930s and Japanese during WWII required thorough overhauling.

Government embarked on a course of gradual change … despite Marxian theory Mao proposed to skip the capitalist stage replacing it briefly with a stage of “democratic centralism.” To gain support of rural population and to alter the decision making structure, widespread land reform was pursued (“collectivization”).

• • By 1952 CCP had nationalized most foreign firms.

By the late 50s, CCP had succeeded in its initial goals – now faced choice of a system that would best promote the ideas of the CCP.

A period of centralized command and bureaucracy … framework of system: 1. Decision-making system with CCP at center – individual agent under the influence of party cadres, trade and labor organizations, agricultural communes, and state enterprises at the lowest echelons.

2. During this whole period there was constant friction between two party factions…

• • Moderates – believed growth as a balanced, orderly process … careful, methodical planning and progress.

Radical Left (Mao) – feared CCP losing sight of inherent dynamism of the broader social revisions and the confrontation of opposites and was being stifled by the preoccupation with bureaucratic and technical considerations.

• The Great Leap Forward – 1957 Radical Left gained control … put aside 5 year plan in favor of

The Great Leap Forward

… in which China would elude the timetable imposed by the rate of capital accumulation by calling upon the vast resources of its industrial and agricultural force, thus “walking on two legs.”

• Vast initiatives implemented in five months … too brief for proper preparation … organizational chaos … Russia withdraws support … radicals forced to abandon the effort due to falling agricultural/industrial output.

• Entered a period of “Readjustment, Consolidation and Repair (1961-65) … with the abandonment of the GLF, the moderates within the CCP effected sharp changes in policy to restore order and to repair damage done to economy. Particular emphasis was given to agriculture to reduce threat of mass malnutrition and starvation. … focus on communes.

The Great Proletariat Cultural Revolution (Jan. 1967) …

• • • • • • Not intended as a systematic reform … SR impact on economy was minor … basically it was a more intense expression of Mao Tse-tung’s beliefs.

Witnesses sweeping change in organizational structure from the CCP down to communes.

Power shifted to newly formed networks of “revolutionary committees.” Tremendous decentralization in decision making structure.

Anti-intellectual and professional.

Time of great suffering.

• • By 1970 Mao had to back off … disruptions/starvation in the millions Moderates held sway although Mao and his radicals present in Politburo • • Transition of Power: 1976-1978 In 1976, China was shaken by the death of Zhou Enlai in January, an earthquake in July that killed 240,000 people, the death of Marshal Zhu De in July, major floods on the Yellow river in August, and the death of Mao Zedong in September.

An intense battle for succession erupted between Deng Xiaoping, Zhou's handpicked successor, and Jian Qunig (Ching), who was Mao's widow, a leader of the Cultural Revolution, and a member of the radical Gang of Four.

• • The power struggle, together with mass demonstrations, riots, and natural disasters interrupted economic growth in 1976 and caused Deng Xiaoping to fall from power once again.

Hua Guofong - compromise candidate - had the Gang of Four arrested in an attempt to consolidate power - grudgingly rehabilitated Deng Xiaoping for a second time - China reached crossroads in 1978 at Party Congress over Hua's ambitious industrialization scheme (7 year plan to build 120 large scale projects) … Industrialization scheme was found to be unrealistic and Deng made serious political ground. Following decisions were made in this Congress: 1. The focus of the party's work would shift from political agitation and class struggle to socialist modernization and improvement of living standards.

2. To remedy the effects of long-term ruination and neglect, economic modernization would begin in the agricultural sector, supported by a substantial increase in agricultural prices paid by the government.

3. Work incentives would be strengthened in the communes, based on the Marxian prescription for early stages of socialism: "To each according to his work.“ 4. Local authorities and industrial and agricultural enterprises would gain greater autonomy under the guidance of unified state planning.

5. The Party would continue to play a leading role in society, but clear lines would be drawn between the responsibilities of the Party, government, and enterprise leaders.

• • • Socialism with Chinese Characteristics (1979-Present) Early in 1979, Deng initiated an enormous agricultural reform -

the household responsibility system

- that led to dissolution of the people's communes.

In 1980 Deng rose to power after the Gang of Four were convicted of crimes causing more than 34,000 deaths during the cultural revolution and Hua offered his resignation (he was implicated as an accomplice in conspiring to overthrow Mao in 1971).

With Deng in power China entered a remarkable period of economic transformation.

[a] Introduced a new philosophy of pragmatism (1983), displacing the leftist ideology of Mao.

• 1984 Central Committee called for development of a "socialist commodity economy with the following 4 major features: [1] China would continue "on the whole" to have a planned economy, but planning would become indicative: macroeconomic guidance would replace mandatory targets.

[2] Markets would establish a "rational price system," which would be "the key to reform of the entire economic structure"; never-the-less, markets would not allocate or control ownership of labor, land, mines, banks, railways, or state owned enterprises (SOEs).

[3] The economic functions of the government would be defined more narrowly, and the enterprises would be allowed to make more of their own decisions.

• [4] State enterprises would remain "the leading force" in the economy, but other forms of collective, individual, and foreign joint venture ownership would be encouraged.

• [5] Special enterprise zones begun (1980 … in south of country).

After 1984, the scope of market activity grew very rapidly. Price controls lifted across the board.

Also in 1984, the rural communes were disbanded with ownership of their industrial holdings transferred to the new units of local government: TVEs – “township and village enterprises.” [1] Between 1984-1995 they created 95 million new jobs, and their rates of productivity growth were twice as high as those in the state sector.

[2] Reasons for...

…Strong kinship links among rural villagers create implicit property rights in a setting of collective ownership.

… Chinese public finance has been decentralized since 1984, so financial benefits and burdens of the TVEs are felt locally.

… Communities with TVEs engage in stiff competition with one another to attract local and foreign investment.

… TVEs have acted flexibly to supply light industrial goods and services that were neglected by the state system.

… Many of the TVEs have taken advantage of their freedom to form supply and technology alliances with state industries and foreign investors.

• Chinese leaders have a lasting enthusiasm for philosophy and ideology.

• Articulated in October 1987 by Premier Zhoa Ziyang... at l3th Party Congress...

… China would continue to operate in the

primary stage

until al least 2050.

2. “Primary stage of socialism”… idea of professor Li Yining… a Marxian rationale for a wide range of market reforms and ownership arrangements… argued that China did not achieve a high level of capitalist development before its socialist revolution, so it must employ institutions usually associated with capitalism to prepare it for a higher stage of socialism. (Same reasoning used by Lenin in the 1920s to justify his “New Economic Policy” in Russia)

[a] Until 2050, to develop “Socialism with Chinese Characteristics”, the government should encourage individuals to engage in market exchange and pursue individual wealth, but it should carefully preserve the political monopoly of the Communist Party.

[b] Reforms proceeded most rapidly in agriculture, population policy, and foreign trade, and were accompanied by modest efforts in industry and finance.

… Special economic zones - localize experiments.

[c] reforms seemed to go smoothly until second half of 1985 at which time a wave of consumer price inflation began => caused a temporary tightening of economic controls.

[d] Despite a new "anti-bourgeois liberalization" campaign supported by Party conservatives, the Thirteenth Party Congress in 1987 reaffirmed China's commitments to ideological pragmatism, economic reform, and the “Open Door” (...of foreign travel, trade and investment), but it continued to oppose national political reform at the national level (it had been supported at local level since early 80's).

[e] The conservatives succeeded in having Hu Yaobang, the reform-minded General Secretary, resign and when he died in April 1989, university students honored his memory with a memorial service in Tienanmen Square… subsequent events well known:

[d] Conservatives in Party again gained ground and pushed for recentralization of authority and imposition of controls on prices and foreign investment.

[f] Still, in 1992 Deng Xaiping led another campaign for acceleration of economic reforms, culminating in the declaration of the 1992 Party Congress that China would build a "socialist market economy.” … Constitution amended in 1993 to acknowledge that China was operating in the "primary stage of socialism", that its immediate goal was to build a "socialist market economy , and that effective reform would require continued "opening to the outside world."

[g] After Deng's death in 1997, Deng's successors declared their continuing allegiances to his pragmatic ideology and policies… today

chief of state:

President Hu Jintao (since 15 March 2003) and

head of government:

Premier Wen Jiabao (since 16 March 2003) • Financial market reform: Banking … Peoples Bank of China at the center (primarily controlled by the Ministry of Finance) => disequilibrium: S m  D m … Interest rates and exchange rates still centrally determined.

… four publicly owned banks under PBOC: Bank of China, Construction Bank, Industrial and Commercial Bank, Agricultural Bank.

… much of Chinese financial reform centers on this system.

• • • • By late 1980’s central authorities recognized the need for developing a private financial system paralleling the state system.

1990 ... Shanghai exchange officially opened.

1991 a stock market was established in Shenzen, adjacent to Hong Kong, trading shares of joint venture companies with foreign participation.

Chinese Securities Regulation Commission created in 1993.

“A”, “B” and “H” shares:

• 1. “A” shares … about 600 companies … denominated in Yuan and can only be traded in domestic equity markets among Chinese nationals (1/2 are SOEs).

2. “B” shares … first issued in 1993 … about 60 companies … denominated in US $ and can only be traded in international equity markets among non-Chinese nationals.

3. “H” shares … denominated in Hong Kong dollars … represents stock of Hong Kong based companies trading in domestic equity markets.

T – bonds and T- bills are important yet private trading only began in 1995. During the Asian financial crisis, 1997, China’s government began to fiscally stimulate the economy. There is not an active secondary bond market so standard western techniques for implementing monetary policy unavailable.

Taxation: • The corporate income tax is theoretically 33%. • In practice, a raft of preferential policies reduce the tax paid by foreign-invested enterprises (FIEs). A 15% rate applies in special economic zones, and a 24% reduced rate applies in 14 coastal open cities.

• There is also a considerable amount of tax evasion that occurs.

• Preferential policies for FIEs is to be phased out and a uniform tax rate for domestic and foreign enterprises applied. • Tax breaks will still be offered for investment in the west and north-east and in high-technology industries.

• • • Current problems & issues: Growing income disparities between rural workers, with declining incomes, and urban workers enjoying rising incomes and standards of living => migration to urban areas with the consequence of a growing number of unemployed city dwellers.

Since the 1990s, leases of 30 years or less have been granted on the tiny plots of land given to rural citizens after the communes were disolved, but peasants have not been able to use the land as collateral for loans or to sell it. Land seizures and low income growth is creating resentment.

The National Development and Reform Commission, China's chief economic planning agency, has said that if growth is 8% this year, China would be able to provide jobs for only 11m out of a total of 25m urban unemployed and new entrants to the urban workforce.

• • • • Needed reduction in number and extent of state owned enterprises (SOEs: public services, construction, defense, steel) … inefficient, over staffed and drain on public funds.

SOEs now account for less than one-third of GDP, against almost all of it in the early 1980s. But that still leaves nearly 140,000 of them, employing 40m people. The state sector still accounts for more than half of all industrial assets, only ten percentage points down on 1998. More than one-third of these SOEs are making no return on their investment and need to be closed down or sold off. Needed improvement of regulatory framework, accounting standards and reduced corruption… The Opacity Index Need for a deep, efficient secondary debt market.

• Most important for the long run: China admitted to the WTO on November 10, 2001: Will demand deeper and more rapid reform at all levels of the economy.

- Will force China to integrate with the global economy.

Is China’s economy overheating today?

• Not a minor point for China has accounted for a quarter of global GDP growth (measured at purchasing power parity) over the past five years. In the first quarter of 2006 growth came in at 10.2%!

• Essentially it will unless the central bank regains control of the money supply. To slow down the economy the PBOC raised the one year lending rates last month for the first time since 2004.

• Important to understand that a sustained 10% growth rate in itself will not cause overheating.

• The issue essentially has to do with asymmetric development and irrational allocation of capital.

• The “Big 4 Banks” allocate 80% of all loans in China.

• Many feel a cleanup of the banking sector is a prerequisite for permitting the yuan to float.

• As a stopgap measure, the government is toughening enforcement of capital controls; such as cracking down on the illegal ways in which banks connive with their customers to dodge restrictions on bringing in speculative capital. • This has allowed the People's Bank to raise interest rates with the hope that it won’t attract additional inflows of capital, but it will only buy then a little extra time.

• Although China may not be seriously overheating, there are signs that it could do so soon. The main risk of excessive growth is not a surge in inflation, but the inability of China's financial system to allocate capital efficiently.

• Excessive borrowing is likely to lead to another wave of bad debts (especially in the consumer loan area). On some estimates, these already amount to 40-50% of all bank loans.

• In a developed economy, the obvious solution would be to raise interest rates. But it is a truism of economics that a country cannot control both its exchange rate and its interest rate simultaneously.

• While the yuan remains pegged to the dollar, the People's Bank can do little about monetary conditions. Huge inflows of capital put upward pressure on the yuan. To hold it down, the central bank must buy foreign currency, which injects new liquidity into the banking system.

• As a result, banks have excess reserves, undermining the impact of a rise in reserve requirements or interest rates.

• The central bank has tried to mop up the extra liquidity by selling bonds. But such “sterilization” is getting harder.

• China's foreign-exchange reserves climbed to $875 billion in the first quarter of 2006 (now highest in the world). • Unless investors are offered higher interest rates, they will be reluctant to buy more bonds. But higher interest rates would attract yet more capital inflows.

• So, China needs to adjust its currency, not because it may be too cheap, but to regain control of monetary policy. In the medium term China needs to allow its exchange rate to float. • That cannot happen, however, until the banking system is in better shape. Three of the four state banks are technically insolvent.

• • • • • If they are unsuccessful, it has been predicted that inflation could be double that by the end of the year (6%). Then the question would not be whether China is growing too quickly, but how fast it will slow down.

Still, for a quarter-century, China has officially enjoyed average annual GDP growth rates of more than 9%. Even allowing for occasional over-and underestimates, average rates have been higher than those achieved by any other Asian country during a similar period of rapid development. China suffered sharp slowdowns in the early 1990s and again later that decade, but quickly recovered. Those who predicted a hard landing for the country's economy two years ago as it applied the brakes have been proved wrong.

Growth in 2006, barring some calamity, looks likely to be only slightly lower than last year's 9.9%. Few expect a protracted slowdown in the remaining years of this decade.

• China's economy has a number of strengths beyond its rapid growth. Government finances appear reasonably healthy, with national revenue growth averaging 18% a year since 1994, a deficit of 1.6% of GDP and public debt of less than a quarter of GDP.

• This gives the government some room to pump up the economy if need be. China has one of the world's highest saving rates, at some 40% of GDP, and foreign-exchange reserves that will breach the $1 trillion US dollars barrier later this year.

• The country is making some headway against its problems, partly by design and partly thanks to rapid growth. • High growth, the party believes, is still vital to its grip on power. And for the foreseeable future this will mainly come from the same sources as it does now: investment and exports.

隔ぇ 沧翴