China - Country economic memorandum : between plan and market

A WORLD BANK COUNTRY STUDY PIR-8440 China Between Plan and Market A WORLD BANK COUNTRY STUDY China Between Plan and Market The World Bank Washington, D.C. Copyright @ 1990 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing September 1990 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the academic, business and financial, and development communities. 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ISSN: 0253-2123 Library of Congress Cataloging-in-Publication Data World Bank. China : between plan and market / World Bank. p. cm. -- (A World Bank country study) ISBN 0-8213-1671-0 1. China--Economic pollcy--1976- 2. Economic stabilization- -China. 3. China--Eccinomic conditions--1976- I. Title. II. Series. HC427.92.W67 1990 338.951--dc2O 90-47320 CIP - iii - This Report was prepared by a mission which visited Beijing, Shanghai and Guangzhou in November 1989. The mission was comprised of Shahid Yusuf (Mission Leader), Peter Harrold (AS3CH), Anthony Pellechio (AS3CO), Barry Naughton and Adrian Wood (Consultants). Tejaswi Raparla (AS3CO) participated in the mission work in Washington. The Report was revised following discussions with the Chinese authorities in April 1990. Statistics for the first half of 1990 were updated in Juy 1990 prior to publication. This Report examines developments in the late 1988 and 1989 and reviews medium-term policies. Detailed information on China's reforms through 1988 can be found in a report, titled Macroeconomic Stability and Industrial Growth under Decentralized Socialism, published in July 1990. - iv - CURRENCY EQUIVALENTS The Chinese currency is called Renminbi (RMB). It is denominated in Yuan (Y). Each Yuan is 1 Yuan = 10 jiao = 100 fen Calendar 1989 January 1990 US$1.00 = Y 3.72 US$1.00 - Y 4.72 Y 1.00 = US$0.27 Y 1.00 = US$0.21 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System LIST OF ACRONYMS BIC - Bank for International Settlements .FDC - Foreign Direct Investment FEAC - Foreign Exchange Adjustment Center FTC - Foreign Trade Corporation GATT - General Agreement for Trade and Tariffs LIBOR - London Interbank Offer Rate MOFERT - Ministry of Foreign Economic Relations and Trade OECD - Organization for Economic Cooperation and Development OEM - Original Equipment Manufacturers PBC - People's Bank of China PCBC - People's Construction Bank of China RCC - Rural Credit Cooperative SAEC - State Administration for Exchange Control SEZs - Special Economic Zones SPC - State Planning Commission TIC - Trust and Investment Corporation TVEs - Township and Village Enterprises - v - ABSTRACT The focus of this report is on economic trends in China since June 1989, the government's policy intentions, likely prospects and creditworthiness in the medium term. China's economy has been subject to cycles of increasing amplitude since the start of the reform program in the late seventies. The third cycle culminated in the inflationary crisis of 1988 which induced the authorities to introduce deflationary measures. These were tightened still further following the Tiananmen Incident. The report briefly describes the economic pressures that surfaced during 1988-89. It details the various steps announced by the government between September 1989 and June 1990 for gradually reflating the economy while maintaining price stability. Finally, the report analyzes future proposals for reforms being advanced by the authorities. It provides a series of suggestions in the areas of price, industrial, and trade reforms calling for change on a wider scale over the medium term which makes full use of the window of opportunity created by favorable price trends in 1989-90 and the consensus on a firm macropolicy stance. - vi - Table of Contents Page No. EXECUTIVE SUMMARY..................................................... xii-xxi Introduction................................................... xii Background..................................................... xii Economic Developments in 1988/89............................... xiv Economic Consequences of the Events of June 1989............... xv The Fifth Plenum of the Thirteenth Party Congress and Medium-Term Plans.......................................... xv Economic Prospects and Creditworthiness........................ xvi Growth and Reform in the Medium Term and Long Tem............. xvii Macropolicy Management..................................... xvi Government Finances........................................ xvii Price and Market Reform.................................... xviii Trade Reform............................................... xviii Private Direct Foreign Investment.......................... xix Industry and Enterprise Refor............................. xix Agriculture................................................ xx Infrastructure............................................. xx I. REFORM CYCLES AND MACROSTABILITY............................... 1 Administrative Decentralization and its Consequences........... 1 Reform Cycles.................................................. 3 The Macroeconomics of 1988..................................... 5 II. MACROECONOMIC DEVELOPMENTS 1988-90............................. 11 Stabilization Measures of 1988/89.............................. 11 Monetary Policy.............................................. 11 Interest Rate Policy....................................... 11 Credit Policy.............................................. 12 Investment Policies.......................................... 16 Price Policies and Developments.............................. 17 Wages and Consumption........................................ 18 Output Trends...... ......................................... 19 Fiscal Policy................................................ 20 Trade........................................................ 21 Assessing Stabilization in 1989................................ 22 Economic Consequences of the Events of June 1989............... 27 The Fifth Plenum's Economic Program............................ 28 Third Session of the Seventh National People's Congress........ 31 - vii - Page No. III. GROWTH AND EQUITY.............................................. 34 A. Determinants of Growth..................................... 34 Investment................................................. 34 Industrial Strategy: Future Leading Subsectors.......... 34 Intersectoral Transfers and Agricultural Development.... 37 Fiscal Revenues.......................................... 40 Total Expenditures....................................... 43 Capital Outlay........................................... 44 Subsidies................................................ 45 Implications of Budgetary Developments................... 46 Bottleneck Sectors......................................... 49 Technological Advances..................................... 52 Direct Foreign Investment................................ 54 B. Distributional Equity...................................... 55 IV. REFORMS AND ECONOMIC EFFICIENCY................................ 59 Price Reform................................................... 59 Recent Developments.......................................... 59 General Guidelines........................................... 62 Specific Commodity Categories................................ 64 Agricultural Procurement Prices.............................. 64 Retail Food Prices........................................... 65 Industrial Materials Prices.................................. 65 Associated Tax, Subsidy and Enterprise Adjustments........... 67 Sources of Inflation and its Management........................ 68 Enterprise Reform.............................................. 72 V. TRADE, FOREIGN EXCHANGE AND CREDITWORTHINESS................... 79 Trade Prospects and Policies Required.......................... 79 Export Composition........................................... 80 Trade Reforms................................................ 82 Trade Organizations.......................................... 84 Reforming the Foreign Trade Contract Responsibility System... 85 Credit for Exporters......................................... 86 Licensing and Tariffs........................................ 87 Export Incentives and Export Promotion....................... 88 Exchange Rate Developments..................................... 89 External Borrowing and Creditworthiness........................ 92 Future Trends in Debt Indicators............................. 92 External Debt Management..................................... 95 Future Actions............................................... 97 - viii - Page No. VI. THE NINETIES: AGENDA AND PROSPECTS............................ 100 Medium-Run Macroeconomic Reforms............................... 101 The Longer-Term Agenda......................................... 102 Decentralization and Enterprise Reform......................... 103 Labor Market................................................... 105 Social Security................................................ 105 Industry....................................................... 106 Resource Mobilization.......................................... 106 TABLES IN THE TEXT 1.1 China: Macro Indicators....................................... 2 2.1 Interest Rates, 1987-89........................................ 12 2.2 Credit Availability............................................ 16 2.3 Price Trends, 1987-89.......................................... 1 2.4 Output and Expenditure Trends.................................. 20 2.5 Fiscal Trends.................................................. 21 2.6 Trade Pattern, 1987-89......................................... Z 3.1 Evolution of Budgetary Revenues................................ 40 3.2 Net Output to Budgetary Revenues from Industry................. 41 3.3 Center-Provincial Revenues and Expenditures.................... 43 4.1 Proportion of Key Materials Allocated by the State............. 61 4.2 Approval Limits for Investment................................. 61 4.3 Financing of Domestic Fixed Investment......................... 61 5.1 China: Creditworthiness Ratios, Base Case..................... 94 5.2 China: Creditworthiness Ratios, Low Case...................... 94 5.3 China: Model Assumptions...................................... 94 CHARTS IN THE TEXT 1.1a Growth, Inflation and output.................................. 6 1.1b Trade and Current Account Balances............................ 7 1.2 Consumer Price Index.......................................... 8 2.1 Growth Rates of M1 and M2 (Annual)............................ 14 3.1 Provincial Output Growth...................................... 57 4.1 Movements in Money and Prices (Quarterly)..................... 70 ANNEX I Statistical Annex.............................................107-177 ANNEX II Alphabetical Notes...........................................178-188 - ix - TABLES IN STATISTICAL ANNEX Page No. 1. National Accounts A1.1 National Accounts (in Current Prices)......................... 107 Al.2 National Accounts (in Constant 1980 Prices)................... 108 A1.3 National Accounts (Implicit Price Deflators 1980=100)......... 109 A1.4 National Accounts (Percentage Growth Rates in Current Deflators)t................... 110 A1.5 National Accounts (Percentage Growth Rate in Constant 1980 Prices).................................................... 11 A1.6 National Accounts (Percentage Growth Rates of Implicit Price Deflators)................................................. 112 A1.7 Sources of Growth (in Constant 1980 Prices)................... 113 A1.8 Growth Rate of Gross Value of Agriculture and Industry Output by Province................................................ 114 A1.9 Savings (as a Percent of GNP)................................. 115 2. Balance of Payments A2.1 Balance of Payments (in Billions of US Dollars)............... 116 A2.2 Balance of Payments (Percentage Growth Rates)................. 117 A2.3 Services (in Millions of US Dollars).......................... 118 A2.4 Transfers (in Millions of US Dollars)......................... 119 3. Exports A3.1 Commodity Composition of Merchandise Exports (US$ Million).... 120 A3.2 Commodity Composition of Merchandise Exports (Percentage Shares)......................................... 121 A3.3 Commodity Composition of Merchandise Exports (Percentage Growth Rates).............................................. 122 A3.4 Exports in Current Prices and Constant (1980) Prices.......... 123 A3.5 Total Exports of Goods and Services (in Million US$ and Yuan). 124 A3.6 Price Indices of Exports of Goods and Services................ 125 A3.7 China Exports and its Relative Share in World Exports......... 126 A3.8 Summary of Composition of Exports (Percentage Growth Rates)... 127 4. Imports A4.1 Imports (CIF) Customs Basis (US$ Million)..................... 128 A4.2 Imports (CIF) Customs Basis (Percentage Shares)............... 129 A4.3 Imports (CIF) Customs Basis (Percentage Growth Rates)......... 130 A4.4 Imports in Current Prices and Constant (1980) Prices.......... 131 A4.5 Total Imports of Goods and Services (in Million US$ and Yuan). 132 A4.6 Price Indices of Imports of Goods and Services................ 133 5. External Debt A5.1 External Debt, Disbursements and Repayments (US$ Million)..... 134 A5.2 External Debt, Interest and Debt Outstanding (US$ Million).... 135 A5.3 Terms of New External Borrowing............................... 136 - x - Page No. 6. Monetary Data A6.1 Monetary Survey, 1984-89...................................... 137 A6.2 Operations of the People's Bank, 1985-89...................... 138 A6.3 Liquidity and Velocity Developments, 1983-89.................. 139 A6.4 Operations of the Specialized and Universal Banks, 1985-89.... 140 A6.5 Balance Sheet of the Rural Credit Cooperatives, 1983-89....... 141 A6.6 Percentage Increase of Credit................................. 142 7. Fiscal Data A7.1 Structure of Consolidated Government Revenue (as a Z of Total Revenue).................................. 143 A7.2 Developments in Government Revenue............................ 144 A7.3 Structure of Government Expenditure........................... 145 A7.4 Developments in Government Expenditures....................... 146 A7.5 Budget and Its Financing...................................... 147 A7.6 Evolution of Expenditures (Percent of GNP).................... 148 A7.7 Central and Local Government Budgets (Billion Yuan and Percent of Outlays)......... . ... ...................... 148 A7.8 Fixed Investment: Central Government Plan and Funding (Percent of GNP)........................................... 149 A7.9 Loss Making Enterprises by Region, 1987....................... 150 A7.10 State Budget 1989-90.......................................... 151 8. Agriculture A8.1 Production of Major Crops (Million Tons)...................... 152 A8.2 Production of Major Crops (Percentage Growth Rates)........... 153 A8.3 Total Sown Area (Million Hectares)............................ 154 A8.4 Total Sown Area (Percentage Growth Rates)..................... 155 A8.5 Average Unit Area Yield of Major Crops (At Sown Area kg/Hectare)................................... 156 A8.6 Average Unit Area Yield of Major Crops (Percentage Growth Rates)................................... 157 9. Industry A9.1 Gross Output Value of Industry (Million Yuan)................. 158 A9.2 Gross Output Value of Industry (in Percentages)............... 158 A9.3 Output of Major Industrial Products........................... 159 A9.4 Percentage Growth Rates of Output of Major Industrial Products 159 A9.5 Shares by Industrial Sectors (in Percentage).................. 160 A9.6 Proportions of Light Industries and Engineering Industries in Manufacturing Gross Output in 1963 and 1980 in Selected Countries (in Percentage).................................. 161 10. Wages A10.1 Total Wage Bill of Staff and Workers.......................... 162 - xi - Page No. 11. Labor All.1 Labor Force by Sector......................................... 163 12. Prices A12.1 General Price Indices (1980=100).............................. 164 Al2.2 Growth Rate of Overall Retail Sales Price Index (Whole Nation) 165 A12.3 Growth Rate of Overall Retail Price Index (Same Month Last Year = 100)........................................... 166 A12.4 Growth Rate of Cost of Living Index of Staff and Workers (Goods and Services)....................................... 167 13. Investment A13.1 Total Investment in Fixed Assets.............................. 168 A13.2 Total Investment in Fixed Assets, State-Owned Enterprises..... 169 A13.3 Investment in Capital Construction by Sector of National Economy, State-Owned Enterprises (in Million Yuan)......... 170 A13.4 Investment in Capital Construction by Sector of National Economy, State-Owned Enterprises (in Percentage)........... 171 A13.5 Investment in Capital Construction by Sector by Branch of Industry, State-Owned Enterprises (in Million Yuan)........ 172 A13.6 Investment in Capital Construction by Sector by Branch of Industry, State-Owned Enterprises (in Percentages)......... 173 A13.7 Sectoral Breakdown of Investment (Percentage Shares).......... 174 Al3.8 Sectoral Allocation of National Capital Construction Investment (Investment as a Percentage of Total State Investment in All Sectors)................................. 17 14. Energy A14.1 Total Production and Consumption of Energy and its Composition 176 A14.2 Share of Fuel Sector in Industrial Investment in 1976-1980 and 1981-85 in Selected Countries.......................... 177 - xii - Executive Summary Introduction i. The purpose of this report is to review recent economic developments, including the progress of the medium-term (1989-91) stabilization program being implemented by the authorities since late 1988, and to discuss options for China's future development strategy. The report also analyzes the eco- nomic reforms initiated in late 1978. Background ii. Over the last decade, China's GDP growth rate has averaged 9.5 per- cent per annum. Investment was high throughout (averaging 31 percent of GDP during the early 1980s and 38 percent of GDP since 1985) and was matched by a strong savings performance, which contained the need for external borrowing. Industrial modernization increased the competitiveness of China's manufactures in the international market and merchandise exports grew from $18.3 billion in 1980 to $52.5 billion in 1989. China's share of international trade rose from 0.97 percent to 1.7 percent during the same period. The average incomes of the 800 million rural population more than doubled and absolute poverty receded nationwide. In 1988, some 13 percent of rural households fell below the poverty line, compared with 17 percent in 1981. Infant and child mortal- ity declined, the rate of population growth was slowed and universal education of five years was achieved. iii. Economic system and management reforms introduced incrementally after a period of regional experimentation have played a major role in these achievements. They have served to magnify the growth impulse derived from China's high rate of capital accumulation based on domestic savings. The major areas of reform can be summarized as follows: * farmers and nonagricultural (industrial, commercial, transport) enterprises now have greater freedom to determine the composition and pricing of output, to retain profits and decide on the disposition of retained earnings; * administrative decentralization has transferred more of the authority to plan and manage economic activity from the central government to provincial and local bodies, better informed about the local situa- tion and strongly motivated to promote development; * central control over the economy has been scaled back by reducing the number of commodities and the volume of production subject to manda- tory plan targets, and the share of key products distributed through state controlled channels; * although China remains ar economy where public ownership is dominant, the government has permitted other forms of ownership (e.g., private, cooperative, foreign joint venture, etc.) and supported these with the necessary regulations and constitutional amendments. - xiii - * resources previously annexed by the state have been transferred to enterprises and rural producers and this, together with a degree of fiscal decentralization, has given provincial authorities more dis- cretion in taxation and expenditures; * product markets have been created, first in the rural areas and then extended to the urban sector, which allow producers to trade their above plan output at freely determined prices; * financial reforms have dismantled the old monobanking system and increased the variety of financial institutions, as well as the vol- ume and scope of financial transactions and instruments. The pro- nounced shift away from budgetary support of investment has rein- forced the importance of the financial sector in mobilizing and allo- cating resources; * external trade, now equivalent to over a quarter of GDP, has opened up the economy significantly, and, in parallel, there has been greater readiness to seek direct foreign investment in a range of manufacturing and service industries. The creation of several Spe- cial Economic Zones, with adequate infrastructure, legislation gov- erning foreign investment and the steady elaboration of laws defining the rights of overseas businesses operating in China, have helped attract a large volume of foreign capital. iv. The attempts at transforming such a complex economy in fairly short span of time have inevitably resulted in macroeconomic as well as institu- tional imbalances. During the course of the 1980s, China experienced three cycles in economic activity of increasing severity. This instability, which appears to be associated with the transition from a centrally planned system to one where plan and market are more evenly balanced, has at least three sources. First, the lag between administrative decentralization and the crea- tion of an institutionalized capacity for macromanagement, gave rise to exces- sive monetary expansion that stoked inflation. Second, multiple pricing, that has evolved with the emergence of free markets alongside the planned system, leads, at times, to additional distortions; it reinforces the propensity towards negotiating prices, taxes, and input allocations; the possibilities for corruption multiply; and enterprises are sheltered from the full force of competition by bureaucratic connections, that provide intermediate goods on terms guaranteeing high returns. Third, because of slow progress towards nationally integrated and competitive markets that would supplement the now attenuated planning mechanism as a source of discipline, decentralized indus- trial management has permitted provincial bureaucracies to push ahead with unsustainable rates of expansion. Only a fraction of enterprises, almost exclusively in the township and village enterprise (TVE) sector, are finan- cially autonomous. As yet China has been unable to enforce financial account- ability on the state and collective enterprises. Closely related to this is the problems posed by the exit of firms through bankruptcy. Closure of state or collectively owned enterprises has been resisted because it leads to unem- ployment and a loss of productive assets. As a consequence, the effects of market forces to rationalize capacity or achieve efficient resource allocation has so far been blunted. A social security system and some separation of ownership from management, that could dissuade local authorities from becoming - xiv - too involved in the operations of the enterprise sector would ameliorate these difficulties. However, the development of national welfare system and of an institution such as joint stock ownership is a slow process. Trials have been conducted but full scale operation is still some years away. Economic Developments in 1988/89 v. It was against this background of partial reforms that demand pres- sures became pronounced in the first half of 1988, pushing the economy to the limits of its productive capacity. When, under these overheated conditions, the authorities announced in June 1988, plans for a major price reform to be implemented in 1989, inflation worsened as consumers switched in some panic from financial into real assets. Prices that had been rising at annualized rates of 10-15 percent in early 1988 soared to rates approaching 80 percent, on an annualized basis, by August. Faced with this crisis, the government postponed further price liberalization and, in late 1988, adopted a series of stabilization measures. vi. First, the authorities introduced administrative guidelines to reduce state investment in 1989 by 20 percent and to cancel or defer a large number of projects in low priority sectors such as services, office construction and processing industries. By the end of 1988, 14,000 construction projects with a planned investment of almost Y 50 billion had been cancelled. While this amounted to only 4 percent of the total volume of construction then in prog- ress, the impact of the controls on investment became more apparent in early 1989. The value of new projects begun in 1989 declined by 80 percent compared to the previous year. vii. Second, a contractionary monetary policy, relying principally on the administrative allocation of credit, was imposed. The Central Bank set a target of 15 percent for the growth of credit in 1989 and began stringently monitoring changes in credit supply on a weekly basis. Conventional monetary instruments reinforced credit controls. Reserve ratios were raised from 12 percent to 13 percent for banks, up to 30 percent for nonbank institutions; rediscount policies were tightened; the redeposit obligations of specialized banks increased; and both deposit as well as lending rates were pushed up by 4 percent and 3 percent respectively, with savings deposits of three years and more being indexed. viii. Third, direct controls on prices and marketing were stiffened begin- ning in late 1988. Numerous regulations, generally ignored during recent years, were applied, albeit with varying degrees of effectiveness in different cities and regions of the country; and local governments were required to notify the central authorities whenever they raised prices for a range of daily necessities and certain raw materials. Finally, the credit squeeze was used to leverage incomes policies with the result that the wage bill of the urban formal sector remained unchanged until the last quarter of 1989, when some wage increases were permitted. ix. These measures have reduced the rate of inflation significantly, from an annualized rate of 26 percent in December 1988 to less than 1 percent (on a monthly annualized basis) in the first quarter of 1990. They have checked the growth of labor earnings and, for the time being at least, alleviated cost - xv - push pressures. In addition, the steps taken plus curbs on imports of con- sumer goods have reversed the trade imbalance. After rising in the first two quarters, the trade deficit stabilized at about $6.7 billion in the third quarter of 1989 and a quickening of exports lowered the deficit to $6.6 bil- lion by the year's end. Exports rose 15.4 percent in the first half of 1990, while imports were 17.7 percent lower. As a result, China registered a trade surplus of $4.54 billion. There was a marked slackening in the rate of industrial growth throughout 1989, which became negative in the last quarter. By the first quarter of 1990, industrial output had regained lost ground and was at about the same level as a year earlier. It rose more rapidly in the second quarter and, for the first six months of 1990, registered a growth of 2.2 percent. Urban unemployment worsened somewhat, rising to 2.7 percent by the end of 1989. Initially, much of the shock was absorbed by the large transient population of rural migrants, many of whom have returned to the countryside. But the persistence of slow growth in the first half of 1990 pushed the unemployment rate to over 3.5 percent. x. The imbalances that developed in 1987/88 and the stabilization mea- sures that have been applied during 1988-90 have brought into sharper focus both the strengths and weaknesses of China's economy. At this juncture, it appears that the latent dynamism of its productive sectors will enable the economy to continue growing during the 1990s at rates (once the contractionary policy is eased) that would be considered very respectable in most other coun- tries. Neither the resource needs for investment nor the prerequisites for external borrowing, are likely to become major constraints. Economic Consequences of the Events of June 1989 xi. The apparent short-term implications of the events of June 1989 are a somewhat slower growth rate; smaller trade and current deficits; greater unem- ployment; the possibility that certain reforms will be postponed for a longer period of time than was apparent in May 1989; partial withdrawal of investors from OECD countries; a fall in tourist traffic from Western countries which has also forced a rescheduling of various hotel loans; and greatly reduced access to the international capital market, which is now compelling China to seek trade and current account surpluses to manage its external transactions. However, there are signs that some of the adverse developments in the period immediately following the events of June 1989 are being reversed: tourist arrivals are on the rise; there is renewed interest on the part of foreign investors; and industrial activity is starting to pick up. The Fifth Plenum of the Thirteenth Party Congress and Medium-Term Plans xii. In November 1989, the Fifth Plenum of the Thirteenth Party Congress declared the government's intention to concentrate during the next two years on stabilization; on restoring growth; and on correcting deficiencies that have become apparent in reform of macromanagement and pricing. xiii. The Fifth Plenum's call for some augmentation of the center's author- ity, particularly in selected areas of macroeconomic management, is a prudent one and could enlarge the role of indirect instruments, that can be employed more flexibly than administrative measures. The decision to abolish dual pricing for major items such as transport and petroleum and move towards a - xvi - unified price system, will also be a positive step, provided that it leads to a more basic liberalization of prices rather than a return to administered prices and central allocation. However, although the Fifth Plenum identified the two major areas of reform, it was not explicit about their content, phas- ing or direction as considerable uncertainty persisted at that time regarding the degree to which macrostability had been regained. Now that inflation has been reduced, the most urgent task facing the government is to prepare an agenda of actions that will establish a sound basis: for strengthening macro- economic policies and institutions to prevent a recurrence of demand and price pressures; and for advancing towards the next stage of price and market liber- alization. xiv. The modernization of China's institutions for macromanagement will require initiatives in the areas of fiscal, monetary and exchange rate poli- cies. For example, budgetary discipline could be enhanced if all current and capital expenditures are matched by clearly defined sources of funds. The focus of monetary control could be shifted more towards controlling base money using reserve ratios, rediscount rates, and open market operations. Interest rates might be used more extensively to regulate aggregate demand within the context of meaningful budget constraints on enterprises. As financial markets are broadened, there may also be greater opportunity for open market opera- tions. Finally, there still is considerable room for introducing market forces into the allocation of foreign exchange. xv. As long as the authorities are able to sustain a macropolicy that will keep inflation at bay, it would be important, during 1990, to resume the selective decontrol of prices. In mid-1989, procurement prices for grain were adjusted, followed by railway and airline fares in the fourth quarter, and freight tariffs in March 1990. As the severity of deflation has brought mar- ket prices of several commodities, such as rubber and cement, very close to state fixed prices, decontrol of some of these could be relatively painless. During the course of 1990, the government intends raising the procurement prices of sugar, cotton and oilseeds. Parallel to price reform, it is equally necessary to proceed with a gradual dismantling of quantitative allocation. In 1989, the list of commodities distributed by the state was augmented slightly and the share of coal output passing though state channels is to be raised. While the chaotic market conditions of 1988 might have made the enhancement of quantitative controls unavoidable, with the return of normalcy, the justification for such measures is less obvious. Economic Prospects and Creditworthiness xvi. To avoid a worsening of open unemployment (disguised unemployment is of course far greater), the government has begun injecting more credit into the economy while remaining within its tight annual credit ceiling of Y 180 billion. Instead of releasing most of the credit in the second half of the year, in conformity with past pattern, more has been provided at an earlier stage so as to pull the economy out of the doldrums. As production acceler- ates by the third quarter (once inventories begin to be run, down), it might be possible to achieve 3-4 percent growth for the year as a whole. This assumes that the austere macroeconomic policy is kept in place. The delayed effects of devaluation and proposed -price adjustments could result in inflation of as - xvii - much as 10 percent but much will depend on the degree to which monetary expan- sion is used to revive the economy in the second half of 1990. China had accumulated a trade surplus of $4.54 billion by mid-1990 and current trends point towards modest trade and current account surpluses for the year as a whole. xvii. The government's intention is to achieve a growth rate of 6 percent per annum growth in the next 2-3 years. At that rate of expansion China should be able to enjoy single digit inflation (depending on the extent of annual price adjustment) and assuming that savings performance is not allowed to flag, modest current account deficits. Of course the management of exter- nal accounts is likely to be guided by conditions prevailing in international capital markets. xviii. The official estimate for the debt outstanding at the end of 1989 is $41.3 billion and the debt service ratio is about 9 percent. Currency and gold reserves were equal to $18.5 billion or about 3.5 months of imports (using customs data). These had risen to nearly $25 billion by end-April 1990 (equal to six months of imports according to trends in 1990). Past trends and the current assessment suggest that the country's growth as well as export potential are substantial and savings behavior is likely to remain stable. Projections based on reasonable assumptions regarding macropolicies and the continuation of reform show creditworthiness remaining secure over the fore- casting period 1990-95. Even the low case scenario, which assumes diminished growth and export prospects but a firm management of imports, does not materi- ally alter the creditworthiness picture. Growth and Reform in the Medium Term and Long Term xix. To raise efficiency and maintain the moderate growth rates that are being sought over the course of the Eighth Five-Year Plan (1991-96) and beyond, policy actions will be needed in several areas, including the follow- ing. Macropolicy Management The ability to conduct effective monetary and fiscal policies will be crucial to the success of future reform efforts, because they will exert a major influence on price stability, domestic savings, the volume of investment and the external balance. Further institutional changes might be needed to enhance the capacity of central agencies to implement policies. The authorities will also need to refine indirect macro instruments, as well as develop financial markets so as to maximize the effects of monetary measures. Government Finances In recent years, the government's capacity to raise revenues from industry (the principal source) has been substantially reduced by enterprise contracting arrangements that have permitted firms to retain more of their profits. As a result, the revenue/GNP ratio has - xviii - fallen below 20 percent; this has been accompanied by an almost par- allel decline in expenditures and the budget deficit (a little over 2 percent of GNP) has been approximately constant for the past few years. Given the high rate of savings in the economy, financing the budget deficit through the issue of bonds should not pose serious difficulty, but eliminating it altogether is a superior remedy. Nev- ertheless, if the government's share of revenues continues sliding, flexibility in financing its development activities, such as educa- tion and transport, might be reduced. Stabilizing revenues over the medium run, through a broadening of indirect taxes and the separation of taxation from enterprise contracting, may be the appropriate step. However, major new taxes, as distinct from a refinement and strength- ening of existing taxes, are probably unnecessary. While the govern- ment must tailor its tax efforts to its long term expenditure needs, and financing of most investment might best be left to the financial markets and enterprises themselves, there remains a major role for the budget, especially for the key infrastructure sectors. Price and Market Reform * Price reform and the creation of competitive markets continues to be fundamental to the improvement of resource allocation in China. As some phasing may be warranted to spare the economy the shock from sudden decontrol, a plan of action, including priorities and a time- table, for price liberalization remains critical for future reforms. Chapter 4 of the report offers suggestions regarding the decontrol of agricultural procurement prices, retail food prices, and prices of industrial materials. While the government is right to be concerned about the effects of inflation, and the distributional consequences for particular population groups, there are reasons to believe that, in an environment, where there is considerable slack, inflation need not gather momentun and there is scope for temporarily ameliorating distributional effects. Trade Reform * The opening of China's economy to the international market is a reform that rivals the transformation of agriculture. In 1989, trade amounted to nearly 28 percent of GNP as against 14 percent in 1981. While industrial modernization and direct foreign, investment have certainly contributed, the effective use of Foreign Trade Corpora- tions (FTCs) to market products, arrangements that allow enterprises to retain a portion of the foreign exchange earned, and Foreign Exchange Adjustment Centers (FEACs) have been as important. External trade remains a vital element in China's development and the reforms already introduced need refinement. For instance, better access to credit for exporters would be a potent stimulus and trading rights should be extended to more producing enterprises, providing the lat- ter are guided by strictly supervised rules so as to avoid the deliv- ery, quality control, pricing and other problems that emerged after the creation of decentralized FTCs in 1988. In addition, there are gains to be had from substituting tariffs for quotas and licensing; - xix - from introducing simplified procedures for providing exporters' draw- backs on indirect taxes; and, last but not least, from an exchange rate policy that maintains China's competitiveness. Private Direct Foreign Investment The pledged value of foreign direct investment amounted to $34 bil- lion at the end of 1989, of which $15.4 billion had actually been disbursed. Although disbursements rose by 4 percent in 1989 to $3.3 billion, the number of applications fell after the events in June and, unless the earlier momentum is regained, could affect flows a few years into the future. Foreign investors have made a major con- tribution to the development of services, oil exploration and export- oriented manufacturing industries. It is important for China's eco- nomic modernization that such capital flows be maintained. To revive interest among overseas investors, the authorities have begun leasing land for development purposes in the "open cities" and Special Eco- nomic Zones. These leases run to 70 years. The government has also modified the law on Sino-foreign equity joint ventures so as to enhance incentives. However, there remain certain areas that still require attention: for instance, the time-consuming negotiations that precede any agreement; the high charges for land use, energy and infrastructure; and difficulties with the enforcement of contracts linked to the state of China's legal system. Industry and Enterprise Reform * The next stage of enterprise reform is to make firms autonomous so that market competition, dynamic entrepreneurship and price-guided allocation can flourish. Much progress has been made, but neither enterprise managers nor their employees closely follow profit and efficiency maximizing rules that firms operating in a market environ- ment would observe. A wider spectrum of ownership could be a solu- tion to the existing difficulties. It would give enterprises the autonomy needed if market discipline, which requires exit as well as entry, is to have its therapeutic effect and it would insulate firms from the demands of local authorities. If enterprise accountability and the prospect of state enterprise being permitted to go bankrupt are to be realized, a dependable social security system will have to be put in place. In the publicly owned sector, joint-stock systems that spread ownership over a number of publicly owned and collective entities, could assist in the separation of management and ownership of these enterprises and promote further efficiency gains. In the foreseeable future, the change in ownership structure and the emer- gence of market competition might be pursued through policies that stimulate the nonpublicly owned sector, specifically township and village enterprises (TVEs), which have provided important momentum to growth over the past six years. Furthermore, efficiency would be enhanced if this sector were permitted to compete freely with the publicly owned sector. * Through a combination of a more neutral policy regime and guidance by market signals, China might shift the emphasis away from expansion - xx - (as distinct from the technological upgrading) of heavy machinery metallurgical and traditional engineering industries towards manufac- turing sectors richer in linkages as well as in technological possi- bilities, for example, transport and electronics. Service industries might also receive more attention because they contribute importantly to overall growth, employment and industrial productivity. Technological improvement is as critical as investment in determining growth. Attention to coordinated and commercially oriented R&D activities should have considerable priority. WI'hile China's own research endeavors may be decisive over the longer term, foreign direct investment, patent licensing and other arrangements might be of greater significance in the medium run. Agriculture * A modern and productive agriculture is both capital and energy inten- sive. China's resources of cultivable land being fully utilized, a steadily rising output will require ever greater farming intensity and significant additional investment in irrigation, as well as the manufacture of fertilizers and farm machinery. This will only be possible if, over time, there is some additional transfer of resources to agriculture; the use of agricultural land and other assets is rendered more efficient through the trading of land leases; there are improvements in the area of distribution; and increased efficiency in the functioning of factor markets. The scale of inter- sectoral resource transfers will depend upon the composition of the agricultural output that is sought and the desired degree of self- sufficiency. China needs a food policy for the long term which sets realistic targets for grain, meat and cash crop production and then backs these with pricing policies to engineer the necessary movement in resources. As the amounts involved will be large and the implica- tions for other sectors far reaching, the food strategy merits close attention. Infrastructure * Water management, energy and transport facilities have long lead times and planning for capacity must occur well in advance of needs. Complaints about inadequate infrastructure facilities have periodic- ally forced the government to attempt to redirect resources to the development of public overhead capital. This is disruptive for other sectors and steps need to be taken to rationalize infrastructure investment planning, to ensure its financing, and to develop more appropriate pricing policies for the public services provided. For intermediate raw materials, by contrast, moderate but stable growth rates in the 6-7 percent range, together with price reforms that gen- erate the needed supply response, would facilitate better resource allocation at all levels; industry will have less reason to complain about input bottlenecks; and government programs to redeploy capital to key industries by administrative fiat can be avoided. - xxi - xx. Priorities for the nineties include strategies for sectoral develop- ment, price liberalization and further progress with ownership reform. The first will have a major influence on growth of the real economy, whereas the latter two will determine the gains in efficiency and stability to be derived from the market system. If the balance between planning and reliance on mar- ket could be shifted towards the latter--this could be done even with assets remaining largely in public hands--the problems arising from decentralized administration could be lessened, and the government would be able to pursue firm macroeconomic policies. - 1 - I. REFORM CYCLES AND MACROSTABILITY 1.1 Reform in socialist economies faces serious obstacles. There is no blueprint to serve as a guide; and, macroeconomic instability can follow when the system of planning is being dismantled. Over the past decade, China has contended with all of these and still achieved impressive economic results. The growth of GDP during the 1980s averaged 9.0 percent per annum with infla- tion emerging as a serious problem only in the final two years. Absolute poverty receded nationwide. In 1981, some 17 percent of rural households fell below the poverty line. Their share had declined to about 13 percent by 1988.1/ Investment remained high throughout and was matched by a strong savings performance, which contained the need for external borrowing. Industrial modernization increased the competitiveness of China's manufactures in the international market. Merchandise exports grew from $18.2 billion in 1980 to $52.5 billion in 1989 and China's share of international trade rose from 0.97 percent of the beginning of the decade to 1.7 percent at its close (Table 1.1 presents major macro-indicators.) 1.2 The scope for continuing modernization in the 1990s remains large but developments during 1988/89 have generated concerns regarding China's ability to exploit available opportunities through an appropriate combination of reforms and stable macropolicies. The purpose of this report is to analyze the economic tensions that surfaced in the late 1980s; to assess the efficacy of the medium-term stabilization program initiated by the authorities in late 1988; and to comment on the direction of future reforms. Chapter 1 provides the backdrop to the three-year (1989-91) economic stabilization program approved by the Fifth Plenum of the Thirteenth Central Committee Meeting in November 1989. Chapter 2 covers the actions taken in 1989 and discusses their initial consequences. The current status of major reforms and suggestions regarding future policies in the area of growth, prices, enterprise reform, trade and external borrowing are covered in Chapters 3, 4 and 5. Chapter 6 sums up the reform agenda and China's future prospects. Administrative Decentralization and its Consequences 1.3 The realization that China's economy is too large to be run efficiently on the basis of commands from the Center, has a long history. Decentralization was first attempted in 1959/60 without much success. It remained on the agenda over the next several years until a second effort was launched in the late sixties. In each case, the government found that powers relinquished by the Center gravitated towards well-entrenched local authori- ties. Producing units did not become more autonomous, which reduced the gains from greater flexibility in resource allocation. Hence, towards the close of the seventies, when the opportunity for a major economic overhaul appeared ripe, the center's principal goal was a credible degree of autonomy for rural and industrial producers alike. Efficiency and rapid modernization called for 1/ The absolute poor in China are those households with per capita annual incomes that fall below a nutrition-based poverty line of Y 259 in 1988 prices. The above statement must be qualified by the observation that the social safety net in the rural areas--i.e., access to education and health services--has become weaker as a result of decentralization. Text Table 1.1 : CHINA: Macro Indicators 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 in Current Prices GNP (US S billion) 298.4 279.9 274.3 294.0 300.1 291.7 281.7 305.0 372.2 412.0 GNP (YUAN billion) 447.0 477.3 519.3 580.9 696.2 856.8 972.6 1135.1 1385.3 1567.7 Exchange rate (Yuan per US$) 1.498 1.705 1.893 1.976 2.32 2.987 3.453 3.722 3.722 3.805 Merchandise exports (US S billion) 18.2 22.0 22.3 22.2 26.1 27.4 30.9 39.4 47.5 52.6 Imports CIF (US I billion) 20.0 22.0 19.3 21.4 27.4 42.3 42.9 43.2 55.3 59.1 Trade balance (US 8 billion) -1.8 -0.0 3.0 0.8 -1.3 -14.9 -12.0 -3.8 -7.7 -6.7 Holdings of Reserves (US$ billion) 17.8 13.2 12.0 16.9 19.1 17.5 Percentage GROWTH RATES in 1980 Prices GNP 6.4 4.9 8.5 10.1 13.6 12.8 7.7 10.4 11.2 3.6 Agriculture -1.8 7.1 11.7 8.5 13.0 1.7 3.7 4.8 3.2 3.3 Industry 10.9 1.7 6.0 9.8 14.9 19.6 9.6 14.3 20.7 8.3 Gross domestic investment -1.8 -4.9 10.2 12.5 20.8 35.3 9.7 10.1 10.4 -2.8 Gross domestic saving -1.0 -2.4 13.3 9.6 18.5 26.2 12.0 14.6 9.2 -2.8 Retail price index 6.0 2.4 1.9 1.5 2.8 8.8 6.0 7.3 18.5 17.8 Percentage SHARE to GNP in 1980 Prices Agriculture 36.0 36.7 37.8 37.3 37.0 33.4 32.1 30.5 28.3 28.2 Industry 48.9 47.4 46.3 46.2 46.7 49.5 50.4 52.2 66.6 59.2 Gross domestic investment 32.2 29.2 29.7 30.3 32.2 38.6 39.3 39.2 38.9 36.5 Gross domestic saving 32.2 29.9 31.3 31.1 82.4 36.3 37.7 39.2 38.4 36.1 Percentage SHARE to GNP in Current Prices Overall budget balance -3.3 -1.2 -1.4 -1.7 -1.6 -0.5 -2.0 -2.2 -2.5 -2.4 Current account balance 0.2 0.9 2.3 1.6 1.0 -3.8 -3.0 -0.1 -1.0 -1.1 Source: Tables 1.1,1.2,2.1, and 7.5; retail prices from CHINA Statistical year book 1988 pp.691, Reserves from IMF RED pp.28 01/17/90. - 3 - autonomous producers responsive to price signals emanating from competitive markets.a/ 1.4 In practice this strategy, conducted within the context of a planned economy, was subject to certain limits. Reformers needed the support of influ- ential provincial governments and local authorities as well as from enter- prises.b/ They found it necessary to accommodate the resilient bureaucratic machinery at the local level and inevitably, reforms evolved along lines of compromise: economic decentralization was achieved to a high degree in the rural sector, but industrial decision-making continues to be strongly influ- enced by the provincial economic bureaucracies. The locus has shifted down from the central ministries and their powers reduced, but the gains achieved by enterprises in areas such as investment, wage setting, product composition and personnel management, are circumscribed. Their dependency on supervisory agencies has lessened but remains substantial. One corollary of this is the persistence of soft budget constraints on enterprises and the weakness of financial discipline. Although a bankruptcy law was introduced in November 1988, it has, in practice, been difficult to enforce, not the least because social security and housing reforms are still incomplete. 1.5 A second corollary of decentralization is that local authorities have become strongly committed to promoting industrialization in their domain, and, especially in the coastal provinces, have displayed entrepreneurship, dynamism and independence all of which have pushed China along the road to moderniza- tion. A negative side to greater provincial autonomy, is the tendency to protect local enterprises against inter and sometimes intraprovincial competi- tion, which interferes with national market integration and the efficient allocation of resources. 1.6 A third corollary of decentralization was that in the absence of compensating institutional development, Beijing's ability to conduct effective monetary and fiscal policy was impaired. The Center retained the capacity to defuse macroeconomic crises but acquiring the institutional capability for routine macromanagement has taken time. Reform Cycles 1.7 As a result of the reforms, the growth potential of the Chinese economy appears to have risen through the 1980s, with the sustainable rate lying in the 6 to 7 percent range. When growth has exceeded these limits, the economy has run afoul of bottlenecks in several critical subsectors--in parti- cular energy, transport and industrial raw materials 2/ --inflationary pressures begin mounting and there is a deterioration in external accounts. These are viewed as signs that reforms are beginning to strain the economy's absorptive capacity and there is a need to pause, reappraise and refine the measures taken. They also help to forge a consensus among policymakers, representing many different viewpoints, around a strategy for stabilizing the 2/ Price rigidities and distortions have slowed efforts at conservation. a! Lettered footnotes are to be found in Annex II. economy. Given that the Government deploys powerful administrative as well as fiscal and monetary instruments to dampen demand, stabilization in China has a significant political dimension as well. To reach agreement on what are often unpopular deflationary policies in a substantially decentralized administra- tive environment, political commitments are needed to ensure that investment projects will be curtailed, credit expansion moderated, wage demands held in check and fiscal contracts honored. Once such a consensus has been reached, the economy is brought towards equilibrium after a relatively short period. There have been three such episodes or reform cycles over the past twelve years--in 1978/79, in 1984/85 and in 1987/88. The apparent precondition for each advance was domestic resource equilibrium, a favorable trade balance, a degree of price stability and the cushion provided by a good harvest. Each round led to a surge in investment, growth rates and imports followed, after a brief lag, with the telltale signs of overheating. As consumer demand tended to moderate the increase in exports, resource imbalances and a worsening external account made it necessary to impose stabilization measures. Invest- ment was balanced by domestic savings in 1977/78, in 1983/84 and in 1987; China enjoyed a trade surplus in these years; inflation was negligible in the two earlier episodes,c/ while it was higher but still well below 10 percent in 1987; finally, harvests in 1978/79, in 1984 and in 1987 were generally satis- factory, the one in 1984 being far above expectations. 1.8 Administrative decentralization over successive cycles has been par- alleled by a progressive decline in the central government's share of fiscal revenues. Tax and enterprise reforms have allowed firms to retain a bigger share of their earnings and the obligations of the rich coastal provinces to the center have also been scaled down so as to speed export-oriented develop- ment in these favorably endowed parts of the country. In 1978, the revenue/ GNP ratio was 34.4 percent; it had fallen to 29.4 percent in 1980, to 25.1 percent by 1986 and to 19.8 percent in 1988, when the third cycle peaked. 1.9 Another noteworthy feature of the reform cycles is the important facilitative role of credit policy. In an economy where sellers' markets and soft budget constraints create a chronic excess demand for investment, an increase in credit promptly fuels capital spending, thereby boosting growth. Broad money expanded at an annual average rate of 33 percent between 1979 and 1980. It then slowed to under 20 percent during the next three years. In 1984, broad money rose again by 35 percent. The pace of increase diminished in the following year, then accelerated in the upswing of the third cycle. 1.10 Each reform cycle has thus seen a progressive decentralization of economic and administrative decision-making authority. This decentralization has certainly had a major impact on the system's flexibility and on its capa- city to respond to economic opportunity. At the same time, it has created conditions which tend to accelerate demand during each upswing. Fiscal reforms have given enterprises and local bodies greater access to resources which fuel investment. Provincial influence over financial institutions as well as the local branches of the People's Bank of China also weakened the central government's ability to regulate credit supply, in a reform propelled, expansionary phase. As budgetary financing of investment has declined and enterprises have become more dependent on banks, the willingness of the finan- cial sector to accommodate crEdit demands has increasingly determined the speed and extent of the upturn. Each bout of feverish growth has been - 5 - followed by a contraction in demand with little change the structure of incen- tives. Thus, each relaxation has seen a progressively sharper response. One explanation for this is that central administrative restraint has yet to be fully supplemented with restraints provided by effective markets, hard budget constraints and independent financial institutions (Charts 1.1a and 1.1b). The Macroeconomics of 1988 1.11 The most recent cycle began gathering momentum in 1987 with the spread of the enterprise contract system,d/ a progressive shift away from fixed prices towards negotiated and free market prices; and a further diminu- tion of the items subject to state mandatory controls. By the first quarter of 1987, broad money was increasing by 34 percent and the rate remained above 30 percent through the third quarter of the year. 1.12 Assuming that expansion was being resumed, enterprises raised their spending, but this time they took advantage of the latitude afforded by newly negotiated tax and profit contracts, and funnelled more of their discretionary funds into wages, bonuses and employee benefits. For the first time since 1981, consumption grew faster than investment and the share of capital spending in GDP fell by two percentage points from 39.3 percent in 1986 to 37.2 percent in 1987. By the second half of 1987, inflation was beginning to quicken and the government slowed monetary growth in the final quarter to 25 percent. But a further tightening of the money supply, and steps to reduce enterprise spending on workers as well as capital projects, were not taken because a sense of crisis did not arise to hold back the advocates of expan- sion. Although the urban cost of living was climbing by 10.7 percent late in 1987, other indicators were reassuring: a grain harvest of 402 million tons, a 27.5 percent increase in exports and a balanced current account. Reformers convinced themselves that if moderate inflation was the only penalty to be paid, then another round of price and industrial reforms could be introduced in 1988. For a number of reasons that appear much clearer in retrospect, the timing was poor. 1.13 A bout of inflation in 1985 and rising prices in 1987 had altered the expectations of urban dwellers. They were less sure that price stability could be easily restored and uncertain about the government's commitment. Furthermore, income gains during 1987, the likelihood of a continuing wage spiral and the spread of consumerism, sharpened their inclination to spend.e/ When statements by senior leaders in the first half of 1988, suggested that double digit inflation was tolerable in exchange for rapid growth and price reforms, urban consumers were convinced that difficult times lay ahead. 1.14 By the third quarter of 1988, people began drawing down their savings and embarked on a buying spree that led to a sharp increase in prices, with annualized rates approaching 80 percent in August (see Chart 1.2). Relatively poor grain harvests and spot shortages of vegetables, fruit and meat, stoked inflationary pressures and added to the sense of panic. The gravity of the situation can be glimpsed from Chart 1.2 and Table A12.2, which show how prices escalated from January through October 1988. Retail price indices for the country as a whole, for individual items and for different cities, all tell the same story, as does the cost of living index for selected cities (Table A12.4). Within a matter of six months, inflation doubled or tripled in several large urban centers. Its seriousness in a country where single digit rates had prevailed for thirty five years can scarcely be exaggerated. Chart 1.la: GROWTH, INFLATION & OUTPUT Percentage Million tons 20~ -500 lo- -300 10- -200 5 - 100 l978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Years , Real GDP Gr. Rate Inflation (Retall) m Grain Production Grain Imports gross Chart 1.1b: TRADE & CURRENT ACCOUNT BALANCES Percentage Billion US$ 3 5 2- 1- 0 04 O'-5 -1 -1 -2 -1 -41 - 15 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Years Trade Balance (bUS$) - Current a/c bal/GDP Chart 1.2: CONSUMER PRICE INDEX CPI Annual Rate of Increase 80 70- 60K- 50 - 40 - 30 -o 20 - 10 - 0 234 678 91011121234586 78910 1988 1989 Month SNational Urban Three month moving average: Annual Rate - 9 - 1.15 The government's response was delayed because consensus building again took time and this complicated the launching of adjustment. Money sup- ply was allowed to grow by 28 percent in the second quarter and by 25 percent in the June-September period. It was only in the final quarter that the effort to stabilize was put into gear with the announcement that price reforms would be deferred until inflationary pressures had been drained from the sys- tem. Monetary expansion was held to 21 percent and administrative steps introduced to curb investment, especially in "unproductive assets." Predicta- bly, these measures were slow to bite. Because decentralization has enhanced the countervailing power of provincial entities, any sudden deceleration in monetary growth or directives requiring provinces to reduce their capital expenditures are resisted. Knowing this and having experienced short-lived bouts of contraction over the preceding three years, enterprises attempted, initially, to "wait out" credit restraint. Retained funds were diverted to bonuses and productive investment in the hope that these could be replenished once credit became more plentiful.3/ Such strategic behavior meant that tighter credit had a disproportionate effect on production (as working capital became scarce) whereas final demand was left largely untouched. Expectations were also revised gradually as inflation remained at a fairly high level through December. Although household demand deposits rose by about Y 9 billion, the scale of withdrawals departed from past patterns in the first two months of 1989 with normalcy returning only in the second quarter. 1.16 Expectations, plus the behavior introduced by enterprise contracting, also affected the responsiveness of employee compensation. The latter climbed sharply in 1988, compounding inflationary pressures by adding cost push to demand pull forces. Enterprises and wage earners resisted the government's attempts to impose an incomes policy and, by the third quarter of 1988, basic wages as well as bonus payments were rising uncontrollably at rates of 27 percent and 40 to 50 percent respectively. 1.17 Once growth soared far above the long-run equilibrium rate, import demand mounted and, in the latter part of 1988, the government allowed the flow of goods from overseas to rise so as to absorb excess demand. At the same time, the domestic market became much more profitable for firms that were responsible for exports. As a result, the trade balance went from a deficit averaging $0.6 billion in the first two quarters in 1988 to one of $4.2 bil- lion in the final quarter. In 1988, merchandise imports exceeded exports by $7.7 billion, almost twice that of 1987, and China incurred a current account deficit of $3.8 billion, equivalent to about 1 percent of GNP (Table 1.1). 1.18 From the perspective of reform, 1988 yielded some valuable clues both as to the efficacy of past measures and the direction that change might take in the future. Some of these lessons are reflected in the policies now in 3/ Regression analysis of data drawn from enterprise surveys suggests that the burden of declining profits falls on the production fund; the welfare fund is spared although its growth may be arrested. Bonuses to workers are linked with productivity and profit growth over the long term. But the increase in bonuses is not affected by short spells of stagnant or declining profits. China: Industrial Policies for an Economy in Transition, World Bank, June 29, 1990, Report No. 8312-CHA. - 10 - place. First, having become accustomed to low rates of inflation, the urban populace seems opposed to reforms that entail substantial movements in the price level. A sizable and vocal portion of the urban workforce receives monetary incomes that are adjusted with a lag.4/ Rising prices put them at a disadvantage to industrial workers as well as rural inhabitants, which is bitterly resented. Undoubtedly, the inflationary consequences of future price reforms will need to be kept within the bounds of political tolerance, which argues in favor of a phased process. 1.19 Second, the forces propelling investment and consumption demand are such that poorly calculated reform measures or incautious credit policies can push growth rates above sustainable levels, aggravating shortages in what remains a tautly run economy. This tendency towards instability and over- heating reflects the working of the soft budget constraint that introduces a fundamental asymmetry in enterprise cost functions. At a deeper level, this can be traced to the thinness of factor markets, the weakness of competition in product markets and the inability of the market system to discipline enter- prises. Thus a firm macroeconomic policy at least through 1990 together with measures to stimulate market competition over the medium term, are desirable. 1.20 Third, in a planned market economy, administrative instruments, what- ever their shortcomings continue to be attractive to policymakers, especially because the nature of decentralization in the absence of strong central insti- tutions makes it difficult to manage aggregate demand. Negotiation was always an intrinsic part of economic life in China. Now it bulks even larger and lengthens lags in implementation. The central government can eventually pre- vail but it is a slow process. Only in an emergency, when negotiation has been temporarily subdued by political consensus, can macropolicies be speedily put into effect. However, as the costs of measures to reduce investment or control the money supply begin to be felt, the consensus wears thin and both administrative checks as well as policy instruments start to lose their edge. Reforms that can widen the influence of competitive market forces, enlarge the autonomy of enterprises and strengthen the institutional basis for centralized macromanagement are the answer. The stabilization program now in force pro- vides an opportunity to push ahead with a process that still has many years to run. 4/ They do, in most cases also receive housing, welfare and in-kind benefits that buffer their living standards. - 11 - II. MACROECONOMIC DEVELOPMENTS 1988-90 Stabilization Measures of 1988/89 2.1 The Government's stabilization program sought to remedy problems in four areas: (a) Monetary Policy. Monetary growth was reduced so as to reinforce administrative directives aimed at cutting investment and to ease the pressure of consumer demand. A tightening of the money supply was also seen as a way of enforcing incomes policies applied with redoubled force to bring the increase in employee earnings closer to trends in industrial productivity. (b) Investment Expansion. Spending on fixed capital had climbed to nearly Y 449 billion (32.4 percent of GDP in 1988), far in excess of plan targets, which called for fixed investment of Y 330 billion (23.8 percent of GDP of 1988). The government decided to bring state investment down by Y 50 billion in 1989 and to cancel or defer a large number of projects in nonpriority sectors, for example, ser- vices, office construction and processing industries. (c) Price Expectations. The authorities moved to allay the fears of the urban public by making clear its intention to discontinue price reforms until such time as inflation had been curbed and to use price regulation and consumer subsidies more forcefully to flatten price trends. (d) Savings. To reverse the depletion of savings balances and the shift to real assets, the interest on three year savings deposits was indexed to the retail price index. This was instituted in September 1988 and did much to stem panic buying. 2.2 These measures were implemented through 1989 and into 1990 so as to "improve the economic environment". Details of the policies, and an assess- ment of their efficacy is discussed below. (i) Monetary Policy 2.3 Interest Rate Policy. To reverse the flight from financial assets, interest rates on deposits were raised by 1 percent with effect from Septem- ber 1, 1988. This was followed by the already noted introduction of price- index-linked interest rates on deposits of three years or longer. The next step was to increase all deposit rates by 3 percent and all lending rates by 2 percent in February 1989. However, as the rate of inflation declined through 1989 and into the first quarter of 1990, indexed savings deposits, while still significant, have become relatively less important in this regard. Correspondingly, the increases in ordinary deposit and lending rates, which were initially modest in the face of double digit inflation, have become sig- nificant as inflation has dropped to levels of less than 1 percent on an annu- alized basis. For the first time since 1984, real, long-term interest rates - 12 - are positive by a significant margin and in March 1990 the government attemp- ted to moderate the growing interest burden on enterprises through a 1.26 per- cent reduction in rates. Table 2.1: INTEREST RATES, 1987-89 1987 1988 1989 Sep I Feb 1 Deposits Rates for Individuals Six months 6.12 6.48 9.00 One year 7.20 8.64 11.34 Three years 8.28 9.72 13.14/a Eight years 10.44 12.42 17.64 Lending Rates Working capital 7.92 9.00 11.34 Fixed assets: 1-3 years 8.64 9.90 12.78 3-5 years 9.36 10.80 14.40 5-10 years 10.08 13.32 19.26 /a Indexation introduced in September 10,1988 added a mark-up (or subsidy rate) to the base deposit rates. These subsidy rates were: 4th Quarter 1989 7.28 percent 1th Quarter 1989 16.13 percent 2nd Quarter 1989 14.13 percent 3rd Quarter 1989 13.84 percent 4th Quarter 1989 8.36 percent Source: People's Bank of China. 2.4 Credit Policy. For 1989, the credit target was set at Y 160 billion, a 15 percent increase over the 1988 level.1/ Furthermore, to minimize slippages that had marred monetary management during 1984-88, the People's Bank placed more emphasis on tried and tested credit ceilings. The compulsory and binding nature of detailed quotas was underlined through repeated affirma- tions of national policy. They were no longer to be treated as points of ref- erence, but a prime instrument of credit control. Banks were assigned explicit sectoral priorities and issued separate quotas for fixed investment lending and total lending. Provincial quotas were firmly established, and provincial branches of the People's Bank were made responsible for controlling the total allocation of credit by the specialized banks, so that their local branches could not use head office (or their own) funds for lending that would exceed total local lending limits. Finally, quarterly credit quotas were pro- mulgated and strictly enforced. 2.5 These regulations, along with new rules requiring all PBC branches to report on a monthly basis to the head office, helped lower the rate of mone- tary increase in 1989. In the first quarter, broad money grew by 18.3 per- cent, falling to 13.5 percent in the third quarter (see Chart 2.1 and Table A6.1). Of the Y 160 billion in credit planned for 1989, Y 60 billion was allocated for the period through September, in accordance with past seasonal 1/ The subceilings were Y 110 billion for working capital, Y 23-28 billion for fixed assets with the balance going to agriculture and the TVEs. - 13 - patterns of demand. In the final quarter, a further Y 125 billion was dis- bursed, Y 25 billion above the target, in response to signs of severe liquid- ity shortages (and M2 grew by 18.3 percent). 2.6 Beginning in September 1989, the central bank began to inject liquid- ity into the system on a gradual basis. Injections of credit, frequently targeted to specific sectors, were made gradually to brake the decline in aggregate demand and assure adequate fund availability for agricultural pro- curement. Thus, in practice, credit was being managed not only on a quar- terly, but on a monthly basis, which has greatly strengthened the macroeco- nomic leverage exerted by the central government. At the same time, this calls for a high standard of information about the economy, and the elabora- tion of a full set of macroeconomic indicators. Such an approach in an overall contractionary environment has placed enterprises on a "lean" credit diet and forced them to orient production decisions to credit availability. Rather than providing credit directly to industry, a significant proportion is being funneled through commercial and foreign trade corporations, whose pur- chasing activity increases effective demand to the industrial sector. (There have been some exceptions in the case of large state-run factories.) By creating, at least in part, a demand-driven environment for state-run facto- ries, it counters the impact of "soft" budget constraints. 2.7 The effects of credit quotas have been reinforced by indirect instru- ments of credit control. Redeposit requirements and a tightening of PBC's rediscounting policy have been effectively used to manage reserve money, as is apparent from the absence of substantial excess reserves. These actions have contributed to the enforcement of credit ceilings because they prevent banks from drawing upon large excess reserves to manipulate lending and thereby meet credit requirements on reporting dates. In the last quarter of 1988, reserve ratios were raised from 12 to 13 percent. At the same time, Y 5 billion of deposits by the Rural Credit Cooperatives (RCCs) in the specialized banks were immobilized, effectively increasing the required reserves of the RCCs. As bank reserves had been depleted by the withdrawal of deposits, the effect on credit supply was unusually severe at a time when demand was at a peak because of the winter harvest. Many farmers had to be paid with IOUs and enterprises holding small liquid balances were subjected to considerable hardship. In addition, reserve ratios of 30 percent were fixed for nonbank financial insti- tutions (trust and investment companies or TICs), and some enterprise bank accounts were reportedly frozen in February 1989 on the initiative of the authorities in certain provinces. 2.8 Banks are thus subject to a dual control system. They must still base lending on fund availability as determined by the deposit base, reserve requirements and central bank rediscounting. But the authorities have carried out a policy of tightening fund availability beneath the credit quotas, so that central bank policy is brought into line with credit quotas and serves to reinforce them. However, this has been achieved through a series of mostly ad hoc measures. On the formal reserve ratio equal to 13 percent of deposits, the central bank has superimposed a requirement that most provinces maintain excess reserves of 5-7 percent. Only a few provinces, which were already man- aging with low levels of excess reserves, have been exempted. In addition, the national specialized banks now require that branches maintain reserves of about 2 percent to facilitate remittances. Hence, different branch banks in different regions may now face informal but nevertheless binding reserve Chart 2.1: GROWTH RATES OF Ml AND M2 (4 th Quarter to 4 th Quarter) Percentage Growth Rate 50 40k- 30 I 1983 1984 1985 1986 1987 1988 1989 Year M1..M2 - 15 - requirements ranging from 13 percent to 22 percent of their deposits. From the standpoint of the local banks, it is the availability of funds that most directly determines their decision-making. But seen from a national level, it appears that fund availability is adjusted to conform with the quotas set on a case by case regional or sectoral basis. 2.9 It was always the intention of government that this should be a selective credit tightening. In particular, given the government's analysis that excessive growth of processing industries had been a major source of excess demand, it was intended that lending to rural industry should not increase (in nominal terms) in 1989. Restrictions were placed on lending to Township and Village Enterprises (TVEs) from the state banking system but similar limits on lending by RCCs were not as rigidly enforced. (see Tables A6.6 and A6.7). 2.10 Rural enterprises also have access to funds from informal credit markets which, by all accounts, have grown rapidly in recent years, particu- larly in rural areas. While no aggregate estimates are available, it appears that credit from the informal market is only slightly less important than state and cooperative financial institutions for rural enterprises in the major coastal provinces. In 1988, of the total fixed investment carried out by rural collective organizations (63 percent of this was for industry), fund- ing came from the following sources: 32 percent from state and cooperative financial institutions; 41 percent from retained funds of the organizations; and 27 percent from "other" sources, which refers predominantly to informal credit market transactions. While bank credit to TVEs for fixed investment is indeed being reduced, these funds amount to only one sixth of total funding sources. 2.11 The government has moved to limit the access to informal credit by TVEs, but no attempt is being made to close these markets. Rural enterprises are forbidden to raise capital publicly until the province in which they are located has fully subscribed its compulsory allotment of government bonds (State Council Document No. 21). However, provinces may permit uninterrupted access to informal markets for TVEs by guaranteeing the subscription of Treasury bonds, and provinces such as Jiangsu and Zhejiang, with the largest concentrations of rural enterprises, have done so. In addition, it is unclear whether the government has the capability or desire to actually choke off informal credit markets. Finally, it should be noted that TVEs are extremely important as a source of revenue to county and township officials. These officials will do their utmost to protect TVE development. 2.12 The result of these offsetting tendencies was a slowing of TVE growth rates to 12.7 percent in 1989, compared with rates of over 30 percent for the past several years.2/ These are higher than the growth rate of state industry (3.7 percent), but it should be noted that price deflation techniques used to compute real growth rates are extremely poor in the TVE sector, and the reported increase could well be smaller in real terms. In the first quarter of 1990, a worsening of the industrial recession and mounting unemployment has 2/ Communique on the Statistics of 1989 Economic and Social Development, State Statistical Bureau, February 20, 1990, p. 3. - 16 - induced the authorities to moderate their position somewhat and raise the supply of credit to TVEs. Table 2.2: CREDIT AVAILABILITY (Y bil ion) 1987 1988 1989 Dec Jun Dec Jun Sep Total Loans Excluding RCCs La 884.2 935.9 1,023.9 1046. 1L8.3 Industrial 221.2 241.3 260.4 275.5 289.4 Commercial 360.0 343.0 409.5 406.5 420.4 Fixed investment 111.9 120.3 138.7 139.0 143.3 Agriculture 65.4 78.5 77.9 82.3 83.6 RCC loans to TVEs 32.9 46.3 45.6 51.2 53.7 La Loans by the specialized banks and the universal banks. Source: People's Bank of China. (ii) Investment Policies 2.13 At first, investment policy was aimed at curtailing certain nonpro- ductive construction projects. Shortly thereafter, localities were instructed to prepare an inventory of all projects being implemented. New administrative limits were promulgated embracing the totality of capital expenditure, includ- ing private and rural collective investment, that had previously been outside planned control. Each locality and ministry was directed to cancel a certain proportion of their projects under construction, especially those in light manufacturing, so that resources could be diverted to energy, transportation and the raw materials sectors.a/ 2.14 The number of projects actually eliminated was not great. By the close of 1988, over 14,000 construction projects had been cancelled, with a planned investment of almost Y 50 billion, but this amounted to only 4 percent of the total volume of construction in progress. The significance of the administrative controls became more apparent at the beginning of 1989, as the value of new projects begun declined by 80 percent compared to the previous year. Total reductions in the budgeted scope of construction eventually amounted to about Y 80 billion, or roughly 7 percent of the total budgeted value of all construction projects.b/ 2.15 During 1989, state-owned capital construction projects numbered 123,000, some 43,000 less than in the preceding year. Preliminary estimates for 1989 indicate that fixed investment amounted to Y 400 billion, which represents an 11 percent reduction over 1988.3/ Several priority sectors increased their share of total investment. State investment in energy overall grew by 5.3 percent, of which investment in coal was 13.3 percent higher while petroleum received 9.5 percent more. Transportation and communications investment, after declining in the first quarter, revived rapidly in the third 3/ Communique on Statistics, op. cit., 1990. a/ Lettered footnotes are to be found in Annex II. - 17 - quarter and posted an increase of 2.8 percent over 1988.4/ In all these cases, however, the growth rates of nominal investment imply decreases in real investment, assuming average rates of inflation of producer goods. There is little doubt that these dramatic changes in the level and structure of invest- ment were brought about overwhelmingly by direct imposition of administrative controls. (iii) Price Policies and Developments 2.16 Direct controls on prices and marketing began to be enforced with renewed determination in late 1988. Price inspectors fanned out to different cities, finding numerous regulations to enforce, which had been generally ignored during the era of liberalization.a/ Regulation of consumer prices is relatively decentralized and the degree to which control was intensified has varied across cities. Tables A12.2-A12.4 offer a glimpse of price dispersion. Local supplies and impediments to interprovincial transport had a hand in price movements. Tianjin was able to hold inflation well below the average in 1988, because administrative regulation is more pervasive. At the other extreme, Guangzhou, which hews to a more liberal line, was considerably above the average, as was Chengdu. After the disturbances in June 1989, the Sichuan authorities were remarkably effective in bringing down the rate of price increase. Guangzhou registered above average rates and Tianjin remained the city with the least inflation in the group. 2.17 The focus of price control efforts after September 1988 was on the range of essential food items, which have traditionally attracted government concern and subsidies. It is estimated that about 20 percent of urban consumer spending is covered by this category. Many of these commodities had already been subject to price controls of varying degrees of effectiveness before September 1988, but the trend had been towards greater liberalization. In some cases--such as staple grains--price controls had never been lifted. In other cases, particularly fresh vegetables, fixed price supply had basic- ally been abandoned, but was quickly reinstated. The effect of price controls and renewed subsidization on the inflation rate has been most apparent in the case of fresh vegetables. At the height of the inflation in August-September 1988, the price of vegetables was 48 percent over that a year previously which accounted for nearly 7 percentage points of the total 30 percent inflation rate estimated for that period. However, the prices of vegetables stabilized almost immediately, and in August 1989, they were only 0.3 percent higher than in the year previous, which cut the overall inflation rate by almost 7 percent (see Table A12.2).51 4/ Additions to production capacity in 1989 included 24.95 million tons of coal; 9.02 million kW of electricity; 1.70 million tons of oil; 760 million m3 of natural gas; 318 km of double-track railways and 229 km of electrified railways; and 48.85 million tons of cargo handling capability in ports. Communique on Statistics, op. cit., 1990, p. 6. 5/ The increase in the (urban) prices of fresh vegetables for 1989 as a whole was 2.1 percent. The rate of change in December 1989 over the previous year was -13.8 percent. Communique on Statistics, op. cit., 1990, p. 8. - 18 - 2.18 There are great differences between regions in the effectiveness of price controls. In Harbin, 383 categories of consumer goods are now subject to strict price controls, whereas only 6-7 basic goods are controlled in some parts of southern China. This depends largely on the policy goals of local authorities, their administrative capacity to regulate prices and the fiscal resources at their disposal from which to finance price subsidies. However, local governments are now required to notify the central government whenever they permit price increases for a range of daily necessities and certain raw materials. Clearly, this is intended to pressure local governments into hold- ing the line on price increases, and it lessens price flexibility. Intensi- fied price supervision was applied to that portion of producers' goods mar- keted directly by enterprises as well, with the establishment of upper limits on prices and restrictions on the marketing of certain commodities. Most indications are that these controls were relatively ineffective until after excess demand for these commodities had been quenched. Table 2.3: PRICE TRENDS, 1987-89 (corresponding month in previous year: 100) Living costs Retail prices Free market goods 1987: June 107.8 107.8 120.1 December 108.9 109.1 120.8 1988: March 111.3 111.6 128.8 June 116.3 116.5 122.4 September 126.4 125.4 137.3 December 127.9 126.7 130.6 1989: March 127.1 126.3 119.2 June 122.8 121.6 115.0 September 111.5 111.4 103.3 December n.a. 106.4 93.4 Source: State Statistical Bureau: Monthly Bulletin of Statistics. (iv) Wages and Consumption 2.19 The total urban wage bill of the formal sector stagnated in nominal terms through the middle of 1989. It amounted to Y 19.9 billion in October 1988, and except for large year-end bonuses, did not substantially increase till the last quarter of 1989, when the authorities acted on a decision taken in late 1988 to adjust the wage structure. For 1989 as a whole, total earn- ings including bonuses, rose by 14 percent, with much of this coming from relatively generous year end bonus payments (23.6 percent greater than in 1988). At the same time, the cutback in investment has resulted in several million casual laborers leaving the cities. While these workers may find employment in the rural areas, their incomes will undoubtedly decline. Third, and finally, sales of consumer goods to organizations (primarily enterprises) which account for over 10 percent of consumer goods sales have been subjected to intensified control, and these declined 5.6 percent in nominal terms between August 1988 and August 1989, or about 19 percent in real terms. Urban per capita incomes were 11.6 percent higher in nominal terms by the end of 1989, although in real terms, they were down by nearly 5 percent over 1988. - 19 - 2.20 This decline in real incomes would, by itself, reduce real household expenditures even if the propensity to consume remained unchanged. In fact, a number of additional factors have depressed the latter: (a) Expectations about the future have shifted. Government economic policy now emphasizes slower growth and strict restraint on consump- tion and household income. In this context, households are revising downwards their expectations of future income growth, and correspon- dingly adjusting their long-term consumption plans. The government has also become critical of conspicuous consumption, thereby inducing households to reconsider purchases of high-quality goods. (b) Households built up stocks of consumer durables during the "panic buying" of 1988. These stocks are above equilibrium levels, allowing buyers to postpone purchases. (c) Relative prices have been manipulated by the government to favor financial saving and discourage the accumulation of durables. Very high taxes on certain consumer durables were enacted in 1989. The tax on color televisions, for example, was set at Y 600-900, and on automobiles at Y 30,000. Such punitive taxes caused prices to more than double.6/ Simultaneously, indexing of savings deposits has greatly enhanced the desirability of financial savings. 2.21 For these reasons, household purchases of consumer goods declined more rapidly than household income. In fact, retail sales of consumer goods fell by 7.6 percent in real terms during 1989, although the amount of sales denominated in nominal terms grew by 8.9 percent to Y 810 billion. (v) Output Trends 2.22 Reducing "excessive" growth was one of the principal aims of stabili- zation efforts. It was the overheated economy that was perceived as being responsible for inflation. At the same time, the government's intention-- paralleling its credit policies--was that the decline in output should be selective. Growth in processing industries was to be restrained allowing output of basic industries, energy and grain to catch up. 2.23 To a significant degree, this target was achieved in 1989. GNP had grown by 11.2 percent in 1988, but by only 3.9 percent in 1989. Moreover, the ratio of the industrial to the agricultural output growth rate had been 6.5 in 1988 (20.7 percent/3.2 percent), and this ratio fell to 2.5 (8.3 percent/3.3 percent). Some success was also achieved in moving towards the perceived bal- ance desired, as the growth rates of both light and heavy industry were more or less the same. The basic industries did not fall as far behind as in the 6/ By November, deflationary measures had largely extinguished the demand for cars. Inventories accumulated and production slowed virtually to a halt at the Volkswagen plant in Shanghai and the Peugeot factory outside Guangzhou, "Running on Empty", China Trade Report, January 1990. In early 1990, the government has attempted to revive the industry by providing various state organizations the funds to purchase cars. - 20 - past, although output growth for energy, steel, cement and timber were still below average growth rates. It should also be noted that output of "big item" consumer durables fell dramatically, notably color TVs (-9.6 percent), washing machines (-21 percent) and refrigerators (-12.6 percent). Thus, there con- tinued to be a strong disparity in growth rates classified by ownership, and despite attempts at a skewed credit policy (see para. 2.9), output of SOEs only grew by 3.7 percent, while TVEs grew by 12.7 percent. Output of the private enterprises grew by 24 percent, even though some 2 million private enterprises (about 14 percent of the total) are estimated to have disappeared in 1989. Table 2.4: OUTPUT AND EXPENDITURE TRENDS 1987 1988 1989 est. Real GNP 10.8 11.2 3.9 Industrial output 14.2 17.7 8.3 Of which: State-owned enterprises 11.3 12.6 3.7 TVEs 42.5 33.4 12.7 Agricultural output 4.8 3.2 3.3 Gross domestic investment/GDP 39.2 38.9 38.5 Source: State Statistical Bureau: "Communique on the Statistics of 1989'. (vi) Fiscal Policy 2.24 Fiscal policy was relatively neutral during 1989, in that increased spending on subsidies was offset by a modest increment in taxes. A broadening of the tax base compensated for the difficulties experienced by recession-hit industries in meeting their tax obligations. During the first half of 1989, profit of in-budget industrial enterprises fell 12 percent, or 4.1 billion yuan. All of this decline was in the profit of central government factories, and the change is largely due to the increased losses in coal and petroleum alluded to above. Local enterprises profits barely increased, growing 1.7 percent. Remittance of profit to the budget decreased by 4.3 billion yuan, so the budget bore the entire burden of decreased profitability.7/ Tax collection from individual enterprises and peddlers was stepped up, including more determined collection of new taxes legislated in 1988 and 1989. Revenue from industrial and commercial taxes increased by 19.3 percent in 1989 or Y 30.4 billion. Tax arrears and taxation of the private sector were important sources.8/ These raised revenues from the individual and private enterprise sectors to around 12 billion yuan, up 35-40 percent from last year. New consumption taxes contributed about 4 billion yuan, and miscellaneous taxes on banquets, local products and Land conversion an additional one billion yuan. By far the largest source of increased revenues in 1989 was the levy on 7/ Digest of Industrial Economics Management, 1989, No. 9, p. 5. 8/ "Tax Men Collect Extra 8.7 Billion", China Daily, January 23, 1990. It should be noted that these measures are not a way of stabilizing or even raising the tax/GNP ratio. For that, it will be necessary to depend on indirect taxes and the taxes levied on state enterprises. - 21 - extrabudgetary funds.9/ In past years, 15 percent of extrabudgetary funds have been drawn back into the budget, rising in 1989 to 25 percent. The additional 10 percent was projected to raise about 12 billion yuan in the course of the year. Thus, new taxes in 1989 are estimated to have brought in about 20 billion yuan, or a little over 1 percent of GNP. These approximately offset the slow growth of budgetary revenues from industry caused by contractionary policies, but the ratio of budgetary revenue to GNP will not increase. Table 2.5: FISCAL TRENDS (as % of ONP) 1987 1988 1989 Budget EstimateL Total revenue 22.6 20.4 19.0 19.2 Tax (20.4) (18.3) (16.6) (16.8) Nontax (2.2) (2.1) (2.4) (2.4) Total expenditure 24.8 22.9 20.8 21.2 Subsidies (5.9) (6.4) (5.6) (6.1) Capital (6.8) (5.8) (4.7) (4.7) Overall deficit (-) -2.2 -2.5 -1.8 -2.0 Foreign financing 0.6 0.8 0.7 0.7 Domestic financing: Bank 0.6 0.6 - 0.3 Nonbanks 1.0 1.1 1.1 1.0 /a See Table A7.10. Source: IMF. (vii) Trade 2.25 By the end of 1987, a strong export performance was bringing the merchandise trade account closer to balance. As exports maintained a growth of nearly 20 percent in the first half of 1988, the government began relaxing import controls to accommodate rising demand. The spike in consumer spending in the third quarter of 1988 resulted in an abrupt reversal in trends. Exports actually declined in that quarter while imports rose by 12 percent so that a trade deficit of $0.5 billion in the second quarter widened to one of $2.3 billion three months later. The strength of internal demand, rising prices and shortages of raw material dampened export growth through the middle of 1989. In sharp contrast to earlier years, overseas sales increased by a mere 7 percent. Meanwhile, imports were rising at an annual rate of 20 percent. 2.26 Although the government moved quickly to staunch spending, the flow of imports was not interrupted, in the interests of demand management. 9/ Extrabudgetary funds can be defined as state-owned financial resources mobilized by line ministries from various units and local governments, which are not subject to state budgetary allocation. They mainly include (a) local surtaxes; (b) various special funds such as for energy, afforestation and road maintenance; and (c) state enterprises' retained depreciation funds, as well as those for bonuses and welfare. - 22 - Imports rose by 34 percent in the fourth quarter and the trade deficit for 1988 amounted to $7.7 billion. While the slowing of the economy diminished the strength of import demand in the first half of 1989, the trade balance remained substantially in deficit. For the twelve-month period ending in June 1989, the trade deficit reached $12.3 billion or 4.3 percent of GDP. By then, the economy had cooled, consumer demand and industrial production were slowing and depleted inventories of raw materials as well as finished products were being replenished. At that point, the authorities reversed their position on trade, imports were tightly restricted and export industries provided with the credit supplies and raw materials needed to boost their flagging performance. These incentives, plus a drying of opportunities on the domestic market, revived export sales, which grew by 18 percent in the third quarter of 1989 over the same quarter in the previous year, whereas imports rose by just 3.8 percent. The trade deficit narrowed to $0.7 billion and as the pattern continued into the final quarter, it dropped to $0.1 billion.10/ Table 2.6: TRADE PATTERN 1987-89 (USS billion) Year Exports Imports Balance 1987 39.4 43.2 -3.8 1988 47.5 55.2 -7.7 1989 52.5 69.1 -6.6 1988 Q1 8.8 9.5 -0.7 Q2 12.1 12.6 -0.5 Q3 11.9 14.2 -2.3 Q4 14.8 19.0 -4.2 1989 Q1 9.7 11.6 -1.9 Q2 12.6 16.5 -3.9 Q3 14.0 14.7 -0.7 Q4 16.2 16.3 -0.1 1990 Q1 10.8 9.9 0.8 Source: China's Customs Statistics. Assessing Stabilization in 1989 2.27 The success of stabilization can be measured against several yard- sticks. For instance: (i) how quickly were inflationary pressures con- trolled; (ii) were inflationary expectations significantly modified; (iii) was it possible to prevent inertial wage-price forces from taking hold; (iv) what was the cost in terms of reduced and/or negative growth rates and unemploy- ment; (v) how large a BOP deficit resulted; (vi) what were the effects on investment levels and savings performance; lastly (vii) was the economy's 10/ China's earnings from tourism rose from $1.8 billion (4.2 percent of exports GNFS) in 1987 to $2.2 billion in 1988. In 1989 they declined by almost 20 percent to $1.81 billion (3.4 percent of exports) but appear to be recovering in 1990. The Asian Games, scheduled for September 1990 in Beijing,, should provide an additional late-season boost. - 23 - growth potential impaired and has stabilization improved the prospects for continued rapid growth without inflation. 2.28 Now that preliminary macroeconomic results for 1989 are in, it is possible to advance some tentative judgments regarding the efficacy of the initial measures employed. In December 1988, the urban cost of living was increasing at an annual average rate of 26 percent. Fourteen months later in February 1990, it had declined to under one percent, having fallen sharply to single digit rates by mid-year. Although the actual increase in the retail price index for calendar 1989 was 17.8 percent (as against 18.5 percent a year earlier) and urban living costs grew by 16.3 percent compared to 20.7 percent in 1988, this was an exceedingly swift reversal of the trends that had appeared in late 1987. Administrative controls and deflationary actions not only arrested the price spiral, but they have also been able to check the growth in labor earnings and, for the moment at least, to alleviate cost push.d/ Expectations that introduce a strong inertial element into wage demands may also have been prevented from taking root by the speed with which inflation has been brought close to historical rates of under 5 percent per annum. 2.29 Under the influence of the contractionary regimen, industrial expan- sion slackened steadily throughout 1989, with the rate becoming negative in the last quarter. Even though agriculture grew by 3.3 percent, the modest--by Chinese standards--6.8 percent increase in industrial output (excluding TVEs) and negative growth of services, brought GNP growth down to 3.9 percent. As a result, many of the symptoms of overheating such as severe shortages of energy and industrial supplies have tended to dissipate. Urban employment worsened somewhat, rising from 2.1 percent to 2.7 percent,11/ but much of the shock was absorbed by the transient population of recent migrants, some of whom have returned to farming.12/ Socialist employment practices have enabled workers in the formal sector to retain their jobs 13/ and the soft budget constraint (i.e. the weakness of financial discipline and the ability to obtain adminis- trative support for the financing of deficits) has allowed most state and collective enterprises to weather the storm. 2.30 After rising in the first two quarters, the trade deficit was stabi- lized at about $6.65 billion in the third quarter of 1989 and improved export performance nudged it to $6.5 billion by the year's end. China has thus 11/ The urban workforce in 1989 numbered 137.4 million, a 1.32 million increase over 1988. 12/ Officials conducting China's latest census have reported a floating population of between 60 and 80 million people, some 30 million of which may have gravitated to the urban areas. The New China News Agency announced in early February 1990 that about 10 million recent migrants to the cities had returned to the rural hinterland. 13/ As long as a cyclical downswing is expected to be of a short duration, even firms in market economies will retain their workers either because they are honoring implicit contracts, or because they want to minimize the costs of hiring and firing. - 24 - managed to cope with its macroeconomic difficulties while holding the BOP current account deficit down to about 1.0 percent of GDP or $4.3 billion. A significant proportion of this has been financed by drawing upon reserves so that net external borrowing was minimized. Total external indebtedness rose from $42 billion in 1988 to $43.9 billion in 1989.14/ 2.31 One of the most unfortunate effects of contraction can be the damage it does to investment incentives China has managed, by and large, to avoid this. Investment as a ratio of GNP was close to 38.9 percent in 1988. It declined in 1989 but remained at a respectable 36.0 percent and seems poised to recover once macropolicies become less contractionary. Likewise, savings have shown considerable resilience. A weakening in the latter part of 1988 has been succeeded by significant buoyancy in 1989. There is little to sug- gest that growth would not climb back to a 6-7 percent level within a year, if the restraints on investment and consumption were relaxed. In fact, the six- teen months breathing space has resulted in a ballooning of inventories and allowed the government to divert more resources to the bottleneck sectors through intensified targeting begun in June 1989.15/ Constraints of energy, steel and other materials should be less troublesome in the future. 2.32 Whether the desirable growth rate can be attained with low rates of price increase will depend in the medium term on the coordinated use of fis- cal, monetary and incomes policies. Unlike many other developing countries confronted with problems of inflation and adjustment, China's budget deficit to GNP has changed little over the last four years in spite of a decline in the tax/GNP ratio. The deficit rose from 2 percent of GNP in 1986 to 2.5 per- cent of GNP in 1988 but dipped back to 2.3 percent in 1989 (see Tables A7.5 and A7.10). Given China's high rate of household and enterprise saving (see Tables A1.1 and Al.9), the budget shortfall can be covered through the issue of bonds without much risk of investment being crowded out (see Chapter 3). Since 1988, the government has been attempting to finance the entire deficit through foreign borrowing and bond issues so as to minimize its borrowing from the People's Bank. Because an adequate volume of bonds could not be placed, some recourse to PBC funding has been necessary--about Y 7.9 billion in 1988 and Y 5 billion in 1989. 2.33 It has taken the People's Bank of China nearly four years, since its designation as a central bank in 1984, to gain a measure of control over credit expansion and deflect the demands of local government authorities on its provincial branches. Earlier episodes of credit tightening in 1985, 1986 14/ This is a World Bank staff estimate--medium- and long-term (MLT) $35.1 billion and short-term (ST) $8.8 billion. The official figures announced on May 4, 1990 were: total DOD $41.3 billion, of which MLT $37.0 billion and ST $4.3 billion. In past years, the discrepancy between Chinese official debt statistics and World Bank estimates is traceable to the classification and evaluation of short-term debt (see footnote 8, Chapter 5). 15/ The State Statistical Bureau estimates that the level of inventories was Y 600 billion at the end of 1989 as against Y 450 billion a year earlier. - 25 - and 1987 could not be sustained in the face of provincial opposition. But the procedures now being applied appear to be effective and the People's Bank is in a position to regulate the money supply when there is a policy consensus at the highest levels of the government. 2.34 Administrative decentralization and rising enterprise autonomy has appreciably weakened the effectiveness of incomes policy but, when used in conjunction with monetary and fiscal policy, it is still capable of producing results. Incomes policies can be applied with considerable force because the Party remains influential in the workplace and, within limits, can moderate wage demands; many of the larger enterprises must still obtain the approval of supervisory agencies before they can proceed with annual wage adjustments; both wage hikes as well as bonuses are subject to penal taxation when they exceed a certain percentage.e/ 2.35 One aspect of stabilization policies that could have implications for the longer term is the significant reliance on administrative means. No doubt the situation at the end of 1988 was very serious, indirect levers were insuf- ficiently developed and in China's "planned market" economy, administrative instruments could be very potent. This is particularly so with regard to credit policy and investment controls, and was recognized explicitly in the World Bank's last Country Economic Memorandum (1989). 2.36 Such reliance on direct control measures has been more widespread and of longer duration than might be desirable. Moreover, their apparent effec- tiveness in the short term may discourage the authorities from proceeding with the difficult but necessary actions required to strengthen longer-term macro- economic management through institutional reforms. The longer these are put off, the more difficult they become. For example, the use of price controls on basic commodities may prevent price rises in the short term, but they fur- ther distort the price system, and make the eventual price adjustment required even greater. Similarly, the use of direct controls over lending decisions by banks may have helped in the short term to direct more resources to bottleneck sectors, but has further reduced the autonomy of institutions. Now that the economy is in the trough of the cycle, administrative controls which were use- ful as an emergency measure, should at least partially, be displaced by shift- ing more of the burden of control onto indirect economic levers. In this fashion, the government would strengthen market based policy instruments and enhance its ability to minimize future fluctuations in economic activity. 2.37 The second negative aspect of the stabilization program has thus been the severity of the recession induced, and the consequent difficulties in the microeconomic situation. Enterprises were slow to accept the determination of the authorities to enforce deflation, and maintained production levels for some months above the current level of demand. As a consequence, excess stocks of both raw materials and finished goods have accumulated, tying up large amounts of finance, and causing cash-flow problems for such factories. These have also led to high levels of inter-enterprise arrears, and arrears in interest and principal payments to banks approaching Y 100 billion (6 percent of GNP). Third, many urban factories have been forced to send workers home for several months, while maintaining basic wages. None of these are surpris- ing, nor are they severe by Western standards, but by not permitting the hardest-hit enterprises to close their doors, three problems have arisen; - 26 - first, the effect of the squeeze is very widespread, and nearly all enter- prises--even the good ones--end up with cash-flow problems; second, keeping debt ridden enterprises afloat consumes disproportionate amounts of credit, and total productivity thus tends to decline more than is necessary; and third the necessary restructuring of capacity is put off. How to revive the economy from this sluggishness without restarting inflation is one of the main issues confronting the government at the present time. 2.38 The administrative measures used also affected the financial system and the patterns of provincial growth and interprovincial relationships. Dur- ing the first three quarters of 1989, interest rate policy tended to undermine the profitability of the banking system, because the indexation of savings deposits was combined with only modest increases in lending rates. This resulted in negative spreads that have lowered the profitability of the banks. Budgetary revenues were reduced as the banking system has contributed substan- tial funds to the budget in recent years. Moreover, increases in deposit rates not matched by adjustments in lending rates were especially onerous for Rural Credit Cooperatives, which already operate as financially independent entities. In 1987, 5 percent of Rural Credit Cooperatives operated at a loss, while in 1988, this increased to over 30 percent, and total losses amounted to 400 million yuan. As inflation has continued declining through early 1990, these problems have tended to become much less acute. 2.39 The manner in which administrative controls were applied to the bank- ing system has also interfered with the developing interbank market, which could serve as a very effective vehicle for exerting Central Bank control.f/ Under current circumstances, few bank branches would be willing to lend funds to another branch, as they would have to reveal to their supervisors that they have "excess" funds which might then be subject to informal blockage. Indeed, the only instance in which an interbank transaction would now occur volunta- rily would be if one bank had a binding lending limit but excess funds, and located a branch with a slack lending limit but insufficient funds, an unlikely event. Hence, the interbank market has shrunk substantially. For example, last year Guangdong province enjoyed a net inflow of capital of 2-3 billion yuan (including the interbank market and direct investment from other provinces), but this inflow ceased in 1989 and was replaced by a small outflow as other provinces liquidated their interests in Guangdong. Further develop- ment of an interbank market is an indispensable part of the creation of a modern banking network in China.16/ 2.40 While lending limits differentiate clearly between different sectors and ownership forms, they seem to be relatively uniform across geographical areas irrespective of its growth rate giving each province a roughly equal percentage growth of credit. The two outliers are Shanghai and Jiangsu. The largest percentage growth of credit in the first three quarters of 1989 (10.9 percent) went to Shanghai, the provincial level unit with the slowest indus- trial growth since 1982; while the lowest credit growth (0.4 percent) went to 16/ Gross interbank transactions rose from Y 30 billion in 1986 to Y 520 billion in 1988. In the first half of 1989, the level of transactions was Y 140 billion, 70 percent of what it was in 1988. - 27 - Jiangsu, the province with the second fastest industrial growth since 1982. The pattern is linked to the relative output shares of state and collective or private ownership in output in these provinces: State ownership and the share of favored basic industries is dominant in Shanghai, and substantially less important in Jiangsu.17/ Overall there is a significant negative correlation between growth of credit in 1989 and growth performance of the preceding six years. The policy of equal percentage increases in credit will, if continued, limit the growth of more efficient provinces without necessarily improving the performance of less efficient provinces. 2.41 Finally, the strict application of administrative controls over capital flows disrupts interprovincial development efforts. These arrange- ments are often based on investment by one province in another in return for guaranteed supplies. Without the assurance that either control over funds or control over the resulting output can be maintained, such cooperation will inevitably decline. There is some evidence of it happening already. Invest- ment from Zhejiang province in other provinces peaked at Y 85 million in 1986. It then declined to Y 52 million in 1987 and Y 31 million in 1988. A confer- ence in March 1988 promoted some 300 cooperative investment projects in China's inland Third Front regions,18/ but in the subsequent year and a half, virtually none of the projects have been undertaken by coastal provinces. In a similar fashion, the intensified control over regulated prices and emphasis on subsidizing crucial commodities interferes with interprovincial trade flows. As localities are increasingly responsible for price subsidies, they will resist the "export" of subsidized products, in order to limit the bene- fits of public subsidization to the local citizenry. Meanwhile, local govern- ments might easily use the current stress on planned management of commodities as a rationale in their efforts to expand control of subsidized goods. Economic Consequences of the Events of June 1989 2.42 The most immediate economic effect of the events of June 1989 was on tourist arrivals and earnings from tourism. The former declined by 23 percent in 1989 to 24.5 million with income falling to $1.86 billion (20 percent less than in the preceding year). The number of tourist arrivals began to pick up in the first half of 1990, but are still below the levels of early 1989. Hotel occupancy rates in Beijing and Shanghai were in the 60 to 70 percent range during January-March 1990, which is 50 percent higher compared to October-December 1989. Applications from foreign investors, which had been on a rising curve, were also affected and, in fact, are estimated to have declined by 75 percent after June 1989. This did not influence disbursements 17/ Shanghai weathered 1989 with less pain because the PBC branch was able to allocate credit quotas more evenly over the course of the year, providing 33 percent of the total during the January-September period as against 12 percent for the nation as a whole and in Jiangsu. 18/ The Third Front program of the sixties and early seventies attempted to build a heavy industry base in China's interior provinces, so as to enhance their autonomy and strengthen the country's defense posture. See China: CEM, 1989, op. cit, Vol. 2, Chapter 8. - 28 - flowing from past investment decisions (which rose by 4 percent to $3.3 bil- lion). 2.43 The June event essentially closed off China's access to medium- and long-term borrowing from the international market and no more than $400 mil- lion were raised in the second half of the year.g/ Particularly affected was the access to bilateral concessional flows. Trade financing, however, was not interrupted. Because the Chinese were unable to tap external sources for capital--or were dissuaded from doing so by substantially higher interest mar- gins--they were forced to run down exchange reserves. These declined from about $19 billion in May 1989 to a low of $15 billion in August before recov- ering to $18.5 billion by end-December 1989. In addition, import controls were hardened in the third and fourth quarters, which quickly reversed the upward trend that was emerging in the first half of 1989. 2.44 Monetary policy had been tightened in the first half of 1989 and both the growth rate of output as well as the increase in prices was slowing by the middle of the year. The events of June 1989, by disrupting industrial produc- tion, accelerated the decline, so that by the fourth quarter, industry was registering negative growth. The government also strengthened its grip on controlled prices and slowed inflation even further. 2.45 In sum, the consequences of the policies that authorities have adopted since June 1989 are a slower growth rate; smaller trade and current deficits; greater unemployment; the possibility that certain reforms will be postponed for a longer period of time than was apparent in May 1989; partial withdrawal of investors from OECD countries; a fall in tourist traffic, which has also forced a rescheduling of various hotel loans; and reduced access to the international capital market, which is now compelling China to seek trade and current account surpluses to manage its external transactions. However, these are signs that some of the adverse developments in the period immedi- ately following the events of June 1989 are being reversed: tourist traffic is on the rise; exchange reserves are increasing rapidly; industrial produc- tion has begun quickening; and more investment applications have started flowing in since early 1990. The Fifth Plenum's Economic Program 2.46 The future course of stabilization policy and options for reform were debated during the Fifth Plenary Session of the Thirteenth Central Committee in November 1989 which was the first occasion on which the authorities turned their attention fully to economic matters after the events of June 1989. Moreover, it was already clear by this time that the three main targets of the "improvement" program--lower irLflation, lower industrial growth, higher grain output--had been achieved. This Plenum adopted the "Decision on Further Improving the Economic Environment, Straightening Out the Economic Order, and Deepening the Reforms" on November 9, 1989, and it is this decision that shaped the government's economic statements to the National People's Congress in April 1990 and is expected to influence economic policy until the end of 1991. 2.47 The program emerging from the Fifth Plenum session has three compo- nents related to: (i) macroeconomic stability; (ii) growth; and (iii) reform. The primary macroeconomic objective, already partially achieved, is single - 29 - digit inflation. Although prices were increasing at an annual average rate of 6-7 percent in the second half of 1989, the government believes that excess demand has not been eliminated and could once again drive up prices if con- trols were relaxed. The demand management strategy being adopted calls for: (i) a regulation of the money supply in line with the desired growth rate; (ii) a slower increase in consumption; (iii) holding fixed investment in 1990 and 1991 at about the level of 1989 in nominal terms; and (iv) an erasing of the budget deficit by 1991. 2.48 Given these austere macroeconomic intentions during the stabilization period, the growth rate being sought is a suitably modest 5-6 percent per annum. Much of this is expected to be derived from a diversion of investible resources to agriculture, primary industries, transport infrastructure and energy. The external sector is also seen as a more significant source of growth than in the recent past. Export diversification towards products with a higher value added will be the guiding aim, although China will continue to capitalize on its strength in processing and assembly industries. The drive for a trade surplus will also be supplemented by measures to discourage the import of luxury consumer items. 2.49 The Fifth Plenum recognized that the "improvement and rectification" program "does not mean to hold up or even relinquish the reform effort".19/ However, China's efforts are directed towards the striking of a better balance between plan and market. Public ownership is to remain dominant but a plural- ity of ownership forms are being sought in the interests of modernization. The Plenum concentrated on "stabilizing, enriching, readjusting and improving the reform measures introduced over the past few years," rather than on the elaboration of major reform initiatives. 2.50 Therefore, the main reform goals of the Plenum were: (a) to restore some of the center's managerial powers while retaining the major benefits of the decentralization to provinces and enterprises; and (b) to establish a framework for macroeconomic control which promotes a stable development of the economy. To achieve them, the Plenum identified broad reform priorities in seven areas: (a) Enterprise Contract Responsibility System. This was to be maintained as the centerpiece of industrial reforms. The responsibility of the factory director for the management of the enterprise and the meeting of contractual targets was confirmed, and it was stated that the fac- tory director would confer with the Party Secretary in the enterprise in making decisions. (b) Fiscal Contract System. The main change to this system is that in the short term some provinces would be asked to give more to the 19/ "Decision on Further Improving the Economic Environment, Straightening Out the Economic Order, and Deepening the Reforms," Article 33. - 30 - center, and the center's grants to the localities would be reduced. (This policy was implemented in the 1990 budget.)20/ (c) Financial System Reform. This reform emphasized the strengthening of the central bank, especially in control of currency issue and autho- rity over its branch network in the provinces. On banking reform, the Plenum emphasized the need for banks to lend in conformity with the government's industrial policy and credit plan, and cautioned against extending too much autonomy to banks in case that again leads to an excess supply of credit. (d) Foreign Trade Contract System. Again, the essential benefits of the system were recognized, but it was considered that decentralization of trading rights and foreign exchange retention had gone too far and needed to be corrected. (e) Materials Management System. The proportion of certain "important" materials subject to state-unified allocation was to be raised "appropriately". (f) Price Reform. The reform of the price structure "should be carried out step by step ... by focusing on the prices of some commodities at a given time on the principle of a strict control of the general price level". Some price control powers would be recentralized while "relaxation of control of the prices of certain commodities will be continued". (g) Planning System Reform. The Plenum envisaged "appropriately enlarg- ing the scope and proportion of products covered by mandatory plans." This was to extend to the investment system, and "power to examine and approve construction projects already delegated to lower levels will be taken back by authorities at higher levels". 2.51 Steps to raise the performance of agriculture was the remaining item on the reform agenda. The Party Committee did not specify in any detail what will be done, but indicated that it was critically important to maintain the growth of grain and other foodstuffs through investment in infrastructure, water control, drainage, soil conservation and the provision of inputs such as fertilizer and plastic sheeting. In the 1990 National Economic and Social Development Plan it was indicated that "guidance planning will be resumed for acreage devoted to certain major items of farm produce". Although the Plenum tended to stress the role of planning, this is more a recognition of the remaining shortcomings in the instruments of macromanagement than a change in attitudes towards the desirability of reform (paras. 6.6-6.8). 20/ The 1990 budget has revenues sent by localities to the center rising by 10.8 percent, but funds distributed to the localities growing by only 3.3 percent. Moreover, funds raised directly by the center are projected to increase by 22.7 percent, while those gathered by provinces are projected to rise only 3.8 percent. - 31 - Third Session of the Seventh National People's Congress 2.52 The agenda of the Fifth Plenum was the point of departure for the Third Session of the National People's Congress which took place in Beijing March 20-April 5, 1990. This was the opportunity for the government to state the operational implications of the agenda discussed at the earlier political forum. As such, the 1990 Budget and Social and Economic Development Plan hold few surprises, but indicate how some of the Fifth Plenum's guidelines will be implemented. 2.53 In the 1990 development plan, the Government is aiming for 5 percent GNP growth, with industrial output rising by 6 percent, and agriculture expanding 4 percent. In the industrial sector, TVEs are projected to increase at 15 percent, well above the average. The GNP growth rate also implies a strong recovery of the services sector after its decline in 1989. In agri- culture, the Government is targeting a 1.2 percent growth in grain (to 412.5 million tons), a 16.1 percent increase in cotton, a 15.4 percent increase in oilseeds, and a 10.5 percent increase in sugar output. To achieve the latter the Government announced that prices for these three crops would be raised. 2.54 Although GNP is projected to expand, the target for fixed investment is Y 410 billion, an increase of only 2.5 percent, and if this is the outcome it will most likely register a further real decline.21/ The growth of non- state investment will be higher than state investment, and within the state- owned sector, investment in technical transformation projects will increase more rapidly than capital construction. Foreign trade could register a sur- plus in 1990, following the devaluation and given the low initial level of demand, but clearly the achievement of the GNP growth target will require a higher level of real consumption. This may be one of the intentions behind the drop in interest rates of 1.26 basis points, along with the desire to "reduce the burden on enterprises". The Government also announced a slight relaxation of the credit policy stance. In the original credit plan, indus- trial and commercial credit in the first half of the year was going to be Y 30 billion, compared to Y 12 billion last year. It was raised to Y 55 billion in early 1990, although it was stated that this did not represent any net increase in the credit plan for the year as a whole, but merely a readjustment of the timing of the credit program. Finally taxes on certain consumer items, such as TV sets, are being scaled down. 2.55 There was little in the way of specific information with regard to reform. Some agricultural prices, freight charges (freight tariffs on water- ways and railways were adjusted on March 15, 1990) and prices of crude oil, will be adjusted, although, in most cases the amounts have yet to be deter- mined. The price of coal will remain unchanged in 1990. The Prime Minister, in his address to the NPC, emphasized the role of the "open areas" in attract- ing foreign direct investment (para. 3.56) as well as the need to continue to proceed with reforms in housing and social security. 21/ It should be noted that the Chinese data relate to fixed investment only, and that investment in stocks rose rapidly in 1989. As these stocks can be expected to be run down somewhat in 1990 if demand picks up, the decline in investment in 1990 will be even larger. - 32 - 2.56 In his speech, the Prime Minister also referred to measures that would strengthen the role of planning, at least during the period of rectifi- cation and improvement. For instance a few "more key and scarce materials will be distributed solely by the state" and the government is prepared to fix ceiling prices on the above plan sales of these items if the need arises. Similarly, the Government will resume control of investment approvals exceed- ing Y 30 million (para. 4.9). The Budget speech, delivered at the same ses- sion of the NPC, expressed the government's intention of moving ahead with experiments in reforms in the areas of separating taxes from enterprises contracts, and to try out alternative forms of tax sharing between the central government and the provinces. Certain revenues would be transferred to the center, including 80 percent of the proceeds from an investment regulatory tax, that is to be introduced in the future. On the expenditure side, the most notable features were that enterprises subsidies are budgeted to rise by 9.6 percent to Y 66 billion (16.5 percent of total expenditures),22/ and price subsidies are set to rise by 9.5 percent to Y 41 billion. This increases the pressure on the authorities to seek price adjustments that will lessen the burden of subsidies on the fiscal system (para. 3.40). 2.57 By most counts, this first phase of stabilization, spanning the fifteen months from late 1988 through the end of 1989, must be judged a quali- fied success. It has surpassed what might reasonably be expected from such a program in the context of a large and complex economy. Specifically, infla- tion has been reduced significantly without the economy's growth potential being impaired and without some of the attendant liabilities associated with a severe deflationary shock in other countries; for example: an enlarged debt burden, capital flight or debilitating industrial strife. 2.58 These immediate gains must, however, be weighed against the concerns listed (in paras. 2.35-2.41) as well as some others. For example, the fre- quency of economic cycles, their amplitude and the disruption they cause is one worry. Approximately four years separated the first two cycles; the third followed hard on the heels of the second. Another concern is that the viru- lence of the urban public's reaction against price increases, corruption and widening income differentials, might lead to an indefinite postponement of reforms, which are needed if China is to surmount the current difficulties and proceed towards its developmental goals. 22/ While this is an increase of 9.6 percent on last year's actual expenditure, it represents a 26 percent increase on last year's budget, which had a 15 percent overrun on this item. - 33 - 2.59 With price stability having been largely restored, the authorities now have an opportunity to move forward with reforms. Some price increases were introduced in October 1989 and March 1990. More should follow with the attention being focused on agricultural commodities, industrial raw materials and industrial products. Institutional changes and strengthening of the financial market should be pursued so as to make indirect instruments the pri- mary means of macromanagement. And it would be highly advantageous to resume, on a wider scale, experiments in the private trading of leases for agricul- tural land, as a prelude to the emergence of full-fledged land markets. - 34 - III. GROWTH AND EQUITY 3.1 As indicated in Chapter 1, past trends and the opportunities created by China's relative technological backwardness strongly endorse the continua- tion of rapid growth. Per capita GDP rose annually by 7.5 percent during the eighties and a doubling of the national product remains a realistic target for the year 2000. Although total factor productivity changed little in the two decades preceding the reform era, it is estimated to have risen by between 3 percent and 5 percent per annum during 1980-85.a/ Whether China can realize its economic ambitions over the next ten years with only a limited recourse to foreign capital, rests on the skillful application of macro and sectoral poli- cies. This chapter will summarize some of the issues and policy options in two areas: (a) growth and (b) distributional equity. Chapter 4 will examine policies influencing efficiency; and Chapter 5 will delve into trade, and external borrowing and creditworthiness. A. Determinants of Growth 3.2 Reform owed its widening acceptability in the eighties to the growth and productivity gains that came with it. A further improvement in living standards will remain the basis of its appeal during this decade. Industry was responsible for about 50 percent of the growth between 1980-85, rising to 86 percent in the latter part of the decade. The contribution of agriculture was large in the earlier years, but some preliminary research (see Table A1.7) suggests that the rate of GNP growth rather than economic reforms is what exerts a greater influence on technical efficiency and hence on factor produc- tivity.b/ Growth has many determinants, major as well as minor. In the Chinese context, three are likely to dominate: (a) the volume and allocation of investible resources; (b) the strategy towards bottleneck sectors; and (c) technological advances. (a) Investment 3.3 The pace of capital accumulation in China far exceeds the level of most low and middle-income countries including other centrally planned econo- mies. Between 1980 and 1989, investment as a ratio to GDP averaged 34.3 per- cent. High rates of investment drive economic expansion, directly by augment- ing productive capacity and indirectly by introducing new technology embodied in capital goods. About one third of the variance in growth rates in a sample of 112 countries is explained by investment spending.c/ While the quantum of capital accumulated is one factor, of equal importance is the pattern of investment across various sectors and regions. A concentration of investment in industry and the adequate provision of infrastructure favor growth. In China, the scale of investment and its implications for growth will be deci- sively influenced by (i) future composition of leading industries; (ii) inter- sectoral resource transfers and agricultural development; and (iii) the gov- ernment's ability to at least sustain the level of fiscal resources currently at its disposal and use a portion of these for the purposes of developing physical and social infrastructure. 3.4 (i) Industrial Strategy: Future Leading Subsectors, The allocation of capital across the various manufacturing subsectors will have important a/ Lettered footnotes are to be found in Annex II. - 35 - implications for trend growth rates. Compared to other developing countries, China's industrial base is both more diversified and accounts for a larger share of GDP--46.1 percent in 1988 (Table A1.1). Machinery is by far the most prominent subsector, with a 28 percent share, followed by textiles and cloth- ing (18 percent), chemicals (12 percent) and metallurgy (8 percent) (Table A9.5). For a developing country, this is an atypical composition and it resembles instead the industrial landscape of Eastern Europe. It bears the imprint of a development strategy whose principal aim has been to create a heavy manufacturing base that would minimize external dependence and satisfy the demands of a large military establishment. For these reasons, machinery and metallurgical industries acquired the leading role. They have kept their lead through all the changes that have transformed China in the eighties. For a few years, in the early part of the decade, heavy industry's share was exceeded by light manufacturing, but since 1986, producer goods industries have regained their dominance (Table A9.2). The weight of machinery and metallurgy in industrial product is responsible, in part, for the high energy and steel intensity of Chinese economy (Table A14.1). Because these indus- tries have remained relatively sheltered from external competition, they have tended to be technologically backward, saddled with obsolete capacity and their levels of productivity do not, on average, bear comparison with foreign manufacturers. Over the years, machinery and metal industries have acquired powerful bureaucratic patrons that have ensured sufficient funding and raw material even in lean times.d/ And the strong interaction between these two subsectors as well as between them and energy producers has maintained demand at a high pitch. 3.5 In effect, China's capacity in these areas may be overbuilt from the perspective of emerging demand patterns and from the perspective of a dynamic industrial strategy for the nineties. The acute problems encountered by some of the engineering enterprises as demand slowed in 1989, underscores the mis- match between need and availability. Heavy industry absorbs far too much capital, provides below-average returns, and its appetite for energy is one of the root causes of chronic shortages. By targeting machinery and metal indus- tries for promotion, China will starve more deserving sectors of capital, per- petuate an artificial shortage of investment funds in a situation of resource availability few countries can rival, and limit its growth potential. 3.6 Future growth calls for some fresh thinking about industrial policy and the reshaping of engineering and basic materials industries to meet the - 36 - demands that will emanate from industry's new leaders. The implications of China's current industrial development pattern for environmental problems of water and air pollution also need to be addressed; namely poor energy efficiency, reliance on coal, and the water-intensive nature of China's often outdated industrial processes, which is a major factor contributing to water shortages and pollution in most of the industrialized provinces.1/ 3.7 By way of illustration, it might be noted that the strongest econo- mies on the international stage, whether developing or industrialized, display certain structural similarities.e/ In each of them, the leading sectors, with the most numerous linkages, the ones that are setting the technological pace and generating the most employment--direct as well as indirect--are drawn from a small group: transport industries and consumer electronics. These two, especially the automobile and aircraft industries, support not just the machine tool, metallurgical and electronics industries but, through forward linkages, a host of service suppliers as well. Growth of these industries and the technological demands they have placed on their suppliers, is perhaps the single most important source of technical progress and productivity increase in the core industries of the modern economy: basic metals, engineering, chemicals, and electronic components. In recent years, the manner in which the leading sectors have evolved their product strategies, has profoundly 1/ Few countries are so dependent on coal as is China. Unlike most countries, electric power generation is not the largest coal consumer. Industrial use of coal is currently much greater. There has been strong growth of coal consumption in the household sector, caused both by urban population growth and increasing coal use in rural areas. Many of the environmental problems in China are related to its heavy and dispersed coal use, for example in industry and households. They occur at every stage of the coal chain: mining and disposal of mine waste, coal washing, transport and handling, processing or combustion, and ultimately ash disposal. Water pollution occurs both in mining regions and in dense urban areas, caused by problems in disposing of coal mining and processing wastes and the coal ash remaining after combustion. In many large cities in China, ambient concentrations of particulates and sulfur dioxide in the air are at very high levels. The concentration of particulates is the most serious problem; it is largely related to the extensive use of coal, the high ash content of some coals (20-30 percent) and often incomplete combustion because of poor matching of coal qualities to boiler designs. The average sulfur content of coal is relatively low (in the range of 1.2-1.7 percent), but the extent of coal use means sulfur emissions are growing; moreover, there are some regions using very high-sulfur coal. The prospects of continued increasing coal use are sobering for their environmental implications and underline the need for better policies and more resources for investments to conserve coal and mitigate its environmental effects. An effective environmental strategy will involve a mixture of pricing incentives, mandatory policies and resources to improve the quality of the coal supply, to raise the efficiency of the large boiler population, to improve the technical efficiency of combustion controls, and to develop better options for household coal use. In addition, greater resources must be committed to fuller exploration and development of cleaner fuels. - 37 - influenced the substitution of other metals, plastics and composites for steel; has lowered energy intensity; and has enlarged the role of electronic components. 3.8 China stands at the crossroads. It can continue for several years to build production capacity in the heavy industry sector with the frequently obsolescent equipment emerging from its engineering enterprises. The input- output relationships would keep the various constituents of the sector employed. But, in time, the country would be faced with the dilemma that Eastern Europe and the Soviet Union will have to resolve: too much antiquated capacity in the wrong places. 3.9 Selecting the leading players for the future industrial strategy is a matter of such complexity that it might be left largely to market forces. For instance, a decision on the automobile industry cannot be taken in isolation from decisions that impinge upon steel production, electronics, petroleum pro- duction and refining, infrastructure building, urban development, trade pol- icy, the provision of supporting services and environmental policy, to name just the most obvious.ft The ramifications are vast but the question cannot be sidestepped. China needs to refine and implement industrial policies announced in March 1989.g/ It needs, in addition, to define a long-term vision that guides the investment process and forces rival ministries each, pushing their own projects, to coordinate their plans with reference to an agreed scenario. The Eighth Five Year Plan, to be introduced in 1991, offers an opportunity for a fresh approach to strategy, which also more fully internalizes the potential inherent in market guidance. 3.10 At one level the scale of investment holds out the hope that China can sustain the growth trends of the recent past. However, the quantum of investment alone is not enough. Unless resources are being put to sound industrial uses and the future of manufacturing linked to dynamic subsectors, the future of growth is not assured. If industry is to receive its due share of capital in the Eighth Plan period, selecting appropriate, forward-looking policies becomes doubly important for growth objectives are to be met. 3.11 (ii) Intersectoral Transfers and Agricultural Development. Although the level of aggregate savings is unlikely to be a constraint on growth, the intersectoral distribution of resources could affect the pace of industrial- ization. China is clearly concerned about food security and seeks a fairly high degree of self-sufficiency.h/ As urbanization is bound to continue encroaching upon the arable acreage, raising output will call for substantial investment, which will divert resources from other uses where the returns are generally higher. 3.12 The beginning of China's reforms and early successes were in the rural sector, whose minimal linkages with the rest of the economy made it easier to introduce as well as manage the process of change. Starting with the poorest regions of the country, reform entailed a progressive diminution of communal agriculture and greater reliance on production contracts with individual households. In 1979, prices paid for both quota and above quota purchase of crops by the State were raised by 20 percent and 50 percent - 38 - respectively. At the same time, costs of inputs were cut by 10-15 percent. Permission to sell surplus grain and produce on free rural markets added to farmers' incentives. Gradually, (luring the early eighties, the stress on grain output was moderated and farmers were given the autonomy to rationalize land use.i/ 3.13 Heavy investment in water management and land reclamation, using labor mobilized through the communes, had steadily enlarged productive poten- tial since the sixties,i/ while the increasing availability of high quality fertilizer from 13 new fertilizer complexes purchased in the mid-seventies, also helped to shift outward the production possibility frontier.k/ By the close of the 1970s, China's agriculture was poised for growth. Reforms pro- vided the needed spur and pushed grain harvests from 283 million tons in 1977 to 407 million in 1984. 3.14 The dramatic increase in grain availability in the early eighties convinced planners that China's food supply problems were under control. Attention shifted to the fiscal costs of food subsidies arising from the state's commitment to acquire, at fairly high prices, all the grain farmers wished to sell above the quota. Worsening rural underemployment was a another concern. A second round of reforms in 1985/86, in effect, reduced grain price supports; raised the cost of items such as diesel and fertilizer; widened farmer's choices with regard to cropping patterns; cut state investment in agriculture; and gave further incentives to rural township and village enter- prises, so that off-farm employment would be enlarged.l/ 3.15 Rural industrialization which had begun gathering momentum in the early eighties, accelerated and by 1988 had absorbed 67 million workers. But as price incentives were reduced, grain production slackened, forcing China to import between 9 and 15 million tons of grain per annum during 1986-89. The declining attractiveness of mainline agriculture induced peasants to put more of their savings into industry or housing construction. State investment, which might have stimulated local effort, also began drying up (Table A13.8). 3.16 Clearly the benefits of past investment in land and infrastructure as well as fertilizer capacity have been fully exploited. If China is to pru- dently limit its net purchases of coarse grains, and wheat on the interna- tional market, production incentives will need to be restored and backed by the needed investment.m/ This is recognized in the program approved by the Fifth Plenum of the Thirteenth Central Party Committee (paras. 2.46 and 2.51). 3.17 A productive, commercially oriented, agriculture that will generate growth rates sufficient to meet China's targets for the nineties will make large demands on investible resources. Between 1955 and 1985, manipulating the rural-urban terms of trade allowed the state to transfer an estimated 600 to 800 billion yuan to other sectors.n/. These flows continue although the amounts involved are now quite small. Agricultural modernization is likely to call for significant net transfers to agriculture by way of (i) higher prices for grain and other products; (ii) expenditure on water management, especially in the poorer provinces; and (iii) investment in manufacturing capacity to - 39 - provide agriculture with fertilizer, pesticides and machinery.2/ As modern agriculture is energy-intensive,oi it will also absorb increasing amounts of China's fuel supplies, either directly for the running of machinery or indirectly through inputs such as fertilizer.3/ 3.18 These measures will call for some redirection of budgetary resources, in the medium-term, towards the rural sector at the expense of urban consumers and state enterprises. As in most advanced countries, the costs will be borne primarily by industry and over a period of time, major industrial adjustments will be necessary to accommodate the transfers. From the perspective of growth, the higher agricultural ICORs and energy intensities are likely, on balance, to slow the increase of GDP. To the extent that China is willing to draw on the international market and finance imports of foodstuffs through the sale of manufactures, the scale of resource transfers and the associated growth effects could be decreased. But the choices p/ are constrained by 2/ The increase in fertilizer use fell from 8.9 percent per annum in 1978-84 to 3.7 percent per annum in 1984-87, in spite of large imports. In future China will need to spend heavily on this subsector. Investment will also be required on transportation and storage facilities to cut losses in threshing, drying, storage and handling, currently estimated at 25 million tons per year. 3/ The challenge to agriculture in the 1990s and beyond is to only to provAde food for the world's most populous nation, but also to achieve that level of production with less environmental damage than is apparent today. This will require attention to technology in three main areas: those that reduce the environmental burden of pesticides and fertilizers (for example, integrated pest control which includes a wide range of techniques--chemical pest control, mechanical manipulation of the soil and many biological strategies--to control pests while minimizing the environmental burden of chemicals and frequent passages of tillage and pest control machinery through fields), those that reduce the demand for irrigation water (for example, lasers can be used to guide machines that level the field precisely making it possible to flood them quickly and uniformly; trickle or drip irrigation systems; and new techniques to reduce salinization problems from traditional irrigation systems by cycling wastewater back into the farm's irrigation system) and those that continue to improve crop production per hectare (for example, multiple cropping which includes crop rotation, intercropping with trees and annual crops sharing the same fields, overseeding legumes into cereals and also double-cropping--growing two or more crops simultaneously in a single field). Creating the policies and institutions that will induce farmers to adopt new technologies and management practices may be the most difficult and challenging task. In this regard, property rights to farmland and reduced subsidies for water and fertilizer may be of prime importance. - 40 - effects could be decreased. But the choices p/ are constrained by China's very size.41 3.19 (iii) Fiscal Revenues. The third item on the list of factors that will influence investment is the fiscal resources at the disposal of the government. China's budgetary revenues were equal to 36 percent of GNP in 1978, far above the level of low income countries. By 1988 the revenue to GNP ratio had declined to 20 percent.5/ This change is closely linked to the sectoral incidence of taxation.q/ China relies overwhelmingly on taxes from the industrial sector, and the direct tax burden on other sectors is quite modest. In 1978, industrial revenues accounted for 75 percent of budgetary revenues (state industrial profits and taxes accounted for 69 percent of total state enterprise profits and taxes).r/ Industrial prices were kept at high levels while those of agricultural products and other raw materials were much lower. This price differential--called the "scissors gap" by socialist econ- omists--earned handsome profits for industry, which were then gathered up by the budget. The weight of direct taxes on agriculture was extremely modest, but the rural sector indirectly bore much of the burden of supporting state financed industrialization. This began changing in the late seventies when reforms shifted the terms of trade in favor of agriculture, shrinking the "scissors gap". Inevitably, the ability of the government to rely on indus- trial profits to fund government programs was weakened. Ordinarily, the concentration of the tax burden on industry should have resulted in a high elasticity of fiscal revenue, as industry has grown substantially faster than GNP. However, because of the systematic shift of the terms of trade against industry, this has not occurred. Table 3.1: EVOLUTION OF BUDGETARY REVENUES (Percent of GNP) 1978 1988 Total Revenues 38.4 19.8 (of which: Subsidies) (6.2) (6.4) Extrabudgetary Revenues 9.7 16.8 Budgetary Plus Extrabudgetary Revenues 46.1 36.6 Source: Ministry of Finance. 3.20 Net industrial output grew 184 percent in real terms between 1978 and 1988, compared to a 142 percent real increase in net material product, but in current prices, industry's share of net material product declined during the period from 49.4 percent to 46.2 percent. These numbers together imply a 20 percent deterioration in the terms of trade against industry. The same shift 4/ These choices are analyzed in a forthcoming study by the World Bank entitled Managing Agricultural Transition, June 1990. China and India are the countries which will most profoundly influence the cereals deficit of developing countries (and hence market prices) through the year 2000. 5/ The ratio of current revenue to GNP for all low-income countries in 1986 was 15.4 percent and 21.4 percent for lower middle-income countries, World Development Report, 1988, World Bank, 1988, p. 268. - 41 - in the terms of trade during 1978-88 is reflected in the net/gross output ratio in industry which fell from 35.1 percent to 30 percent. Within indus- try, the tax base is concentrated on state-run and large-scale collective industry whose net output value declined from 37.9 percent of GNP in 1978 to 30.7 percent in 1988. Again this was a function of relative price changes, as the sector's real growth was slightly faster than GNP overall. 3.21 A change in the distribution of net income resulting from enterprise reform further diminished the revenue potential of industry. Wages, benefits and interest payments have increased their shares, while that of profits and taxes in net output declined. Finally, with reform came programs of profit retention, which reduced the proportion of profits and taxes remitted to the central authorities. These changes are summarized in Table 3.2. Table 3.2: NET OUTPUT TO BUDGETARY REVENUES FROM INDUSTRY (1) (2) (3) (4) NVIO/GNP (p+t)/NVIO R/(p+t) R/GNP (1) x (2) x (3) 1978 0.379 0.67 0.98 0.249 1988 0.307 0.53 0.68 0.094 NVID = Net output value of independent accounting industrial enterprises, township level and above. p+t = Profit and tax of those enterprises. R = Remittances of profit plus tax payments of those enterprises (estimated). 3.22 The mutually reinforcing changes in the distribution of net indus- trial output account for a decline in budgetary revenues equal to 15.5 per- centage points of GNP, compared to a total decline in budgetary revenues of 16.6 percentage points of GNP. Direct tax burdens on other sectors being light, the increase in their shares in net output has contributed little to revenues. The decline in the ratio of net industrial output to GNP has pushed revenues down by 4.7 percent of GNP; that of the share of profit and tax in net output value caused revenues to fall by an additional 5.2 percent of GNP; - 42 - and the lower proportion of remittances accounted for the final 5.6 percent of GNP reduction in revenues.6/ 3.23 The extent to which taxes and remittances have diminished is related to the tax reforms introduced in stages between 1980 and 1986. These reforms were in response to complaints regarding excessive fiscal centralization, the involvement of the central ministries in the budgetary decisions of local governments and the annual ad hoc changes in rates of revenue sharing.s/ They substantially increased the autonomy of provinces in determining expenditures and pegged center-local revenue sharing arrangements to contracts negotiated with each province on a three-year cycle. In the context of these new tax rules, the government also moved to raise the share of revenues directly paid to the central authorities so as to safeguard its fiscal situation. 3.24 While fiscal contracting spurred provincial expenditures they did not have the expected positive effect on provincial tax effort, especially in the richer coastal provinces with high rates of economic growth such as Jiangsu, Heilongjiang and Shanghai. In 3.978, 17 provinces ran budget surpluses and spent 52 percent of the revenues collected. Ten years later, just eight pro- vinces were in surplus and they were spending two-thirds of what they raised.t/ Only three provinces, Zhejiang, Jiangsu and Hubei showed budgetary surpluses in 1987 that were above those registered in the late seventies. 3.25 Partially compensating for the weakening revenue performance of the provinces was the greater independence attained by the center in the sphere of tax collection. Local governments gathered 79 percent of total revenues in 1981 but only 62 percent in 1988 (see Table 3.3). At the start of the decade, 58 percent of central government expenditures were funded by transfers from the provinces, falling to 16 percent in 1985. From 1986, the center began making a net transfer to local governments. The amounts have become steadily larger since and represent a significant transfer of funds from surplus to deficit provinces and is an important facet of the government's regional policy.u/ 6/ A different perspective on the evolution of fiscal receipts is provided by examining changes in budgetary and extrabudgetary funds which together have declined by 9.5 percent of GNP. This change reflects the first two factors giver, in Table 3.2, the declining share of net industrial output and the increased share of labor and interest in net output. In addition, there is a shift of 7.1 percent of GNP from budgetary to extrabudgetary funds. This corresponds appropriately to the diminished share of budgetary revenues in total tax and profit, because by far the largest component of extrabudgetary funds are enterprise retained funds. (Retained earnings accounted for 80 percent of the increase in extrabudgetary funds between 1978 and 1988.) These resources are used largely for fixed investment, the responsibility for which has been shifted from the budget to enterprise-level and other decentralized funding sources. As this analysis makes clear, fiscal revenues are lower because the responsibility for various kinds of outlays has been reapportioned. - 43 - Table 3.3: CENTER-PROVINCIAL REVENUES AND EXPENDITURES (billion yuan) Sum of provin- Sum of provin- cial revenues Consolidated cil expenditures Consolidated and percent of national and percent of national total revenues revenues total expenditures expenditures 1981 86.15 108.96 50.89 111.50 (79%) (46%) 1985 117.72 186.64 103.62 184.48 (63%) (66%) 1988 180.64 258.78 184.34 266.83 (62%) (62%) Sources: 1988 data is from 1989 Economic Yearbook. 1981-85 data is from China Fiscal Statis- tics, 1950-85. 3.26 Changed relative prices, enterprise reforms and fiscal decentraliza- tion have greatly altered the fiscal picture. Whether this shrinkage of bud- getary resources has any major developmental or macroeconomic consequences can only be gauged by examining the trends in expenditure. 3.27 Total Expenditures. Lower revenues have been matched by a reduced budgetary outlay in three areas. Capital expenditures (capital construction, renovation of existing assets, and new product expenditures) fell from 14.4 percent of GNP in 1978 to 5.4 percent in 1988. Allocations for working capital (primarily the finance of initial inventories for new enterprises) amounted to 1.9 percent of GNP in 1978, but for only 0.1 percent of GNP in 1988. Third, military spending has declined from 4.7 percent of GNP in 1978 to only 1.6 percent in 1988 (Table A7.6).7/ These three components together account for a reduction in budgetary outlays from 21 percent to 7.1 percent of GNP, or a net reduction of 12.9 percentage points. Current civilian expenditure, net of subsidies, declined quite modestly from 10.4 percent to 9.3 percent of GNP. Among current expenses, the share of health and education grew from 3.1 percent of GNP to 3.4 percent of GNP and subsidies rose slightly from 5.2 percent of GNP to 5.4 percent of GNP. 3.28 By 1987, overall spending by local governments exceeded central government expenditures by 23 percent, and were budgeted to exceed them by 50 percent in 1989. Because all of the budget deficit is accounted for at the central level, the difference is greater on the revenue side: local govern- ment revenues in 1989 are budgeted at 70 percent more than central government revenues. It is possible to apportion budgetary expenditures to central and local government levels according to three broad categories: capital (fixed investment only); current; and subsidies. These figures are provided in Table 7/ Budgeted expenditure on defense increased by 15 percent in 1990, but as a percent of budgetary outlay it has risen marginally from 8.3 percent in 1989 to 8.4 percent in 1990 (Table A7.10). Of course, not all expenditures on the defense establishment are included in this category. R&D and military pensions, for example, appear under other headings. -44 - A7.7. As nearly all military expenses are borne by the central government, local governments account for 75-80 percent of current civilian expenditures. Similarly, they were responsible for 73 percent of all subsidies in 1989, a substantial increase over past years. By contrast, the central government carried out two-thirds of capital outlay in 1987, and its budgeted share rose to 72 percent in 1989. Nearly 40 percent of central government spending in the late 1980s was on investment, while local government capital expenditures were only 18 percent of total outlay in 1987, declining to 10 percent in the 1989 budget. Thus, by the Late 1980s, the division of responsibilities between the central and local government levels was such that the central government had primary responsibility for capital spending and defense, while local government undertook most of the current civilian expenditure and sub- sidies. 3.29 Capital Outlay. Besides shouldering the expenditure on fixed invest- ment financed from the budget, the central government also has a fixed invest- ment plan which determines a major proportion of such investment in the economy. By contrast, local government investment from budgetary funds is modest. While decentralized investment as a whole is quite substantial, most of this is in the domain of enterprises and households, and the role of local government investment funding and local investment plans is correspondingly limited. Because of this relationship, the dramatic decline in budgetary funding of fixed investment, documented above, primarily reflects the changed role of the central budget in the economy. 3.30 It is possible to quantify the changing relationship between the central government investment plan and central government financing of invest- ment so as to derive the central government borrowing requirements for its investment plan. In 1978, 31.2 billion yuan of completed investment (9.0 percent of GNP) was undertaken as part of the central plan, while the budget included 44.4 billion yuan for fixed investment purposes 8/ (see Table A7.8). Assuming that the division of responsibility over budgetary outlays for such fixed investment was the same in 1978 as in 1987/88, the central government investment plan corresponds almost exactly to central government outlay for fixed investment. In other words, in 1978, not only was the budget balanced (in that fiscal revenues equaled expenditures), but in addition the central government investment plan was fully funded from the budget. 8/ It should be noted that the juxtaposition of these figures is not exact. Investment refers to investment actually carried out (bricks laid and machines installed), while the budgetary figures refer to funds allocated. Budgetary allocations thus reflect both the setting aside of funds not yet expended, and the purchase of materials and equipment not yet installed. In a growing economy, allocations will generally be larger than the equivalent amount of investment actually completed in a given year. The calculation in Table A7.8 is based on the investment actually completed in a given year, and on the assumption that the ratio between funding and completed investment is the same for central and local governments. In addition, Table A7.8 understates the central government funding requirements to the extent that funding is also required for the preparatory stages of investment. - 45 - 3.31 Completed investment within the central plan amounted to 104.1 bil- lion yuan (7.5 percent of GNP, down slightly from 1978) in 1988, while funding from budgetary sources was only 47 billion. Of budgetary expenditures for fixed investment, the central government accounted for 68 percent; if the same proportions applied to completed investment funded from the budget, the central government accounted for 32 billion yuan, or only 2.3 percent of GNP. In order to complete its investment plan, the central government had an addi- tional funding requirement equal to 5.2 percent of GNP. Table A7.8 shows the evolution of this funding requirement. From 1978 through 1981/82, while central government funding of investment diminished, the central investment plan also declined as a proportion of GNP. From 1983, however, the central investment plan expanded as a proportion of GNP, while central government funding continued to slip. The result has been a substantial increase in the central government borrowing for investment by state enterprises, which is financed through the banking system and the profits of the People's Bank of China. 3.32 Subsidies. Total subsidies in 1981 are estimated at 9 percent of GNP, and the urban food subsidy alone was 6 percent of GNP.9/ Subsequently, 9/ Chinese statistics on subsidies are divided in price subsidies and subsidies to loss-making enterprises, and are complete from 1986. The category of price subsidies is well-defined, and has been included in budgetary expenditures and revenues since 1986. However, the category of subsidies to loss-making enterprises is very heterogeneous; moreover, it has never been included in budgetary outlays in Chinese statistics. In practice, subsidies to loss-making enterprises include primarily enterprises in the commercial, industrial and foreign trade sectors, although loss-making enterprises can be found to some degree in every sector. Most crucially, subsidies to urban food supplies are included both in price subsidies and in subsidies to loss-making enterprises. Although practice is not entirely uniform across provinces, the most common pattern is that the central government provides a fixed amount of "price subsidy" that covers the differences between purchases of grain at the relatively low quota price and sales to the urban population at even lower prices. In addition to quota purchases, local governments also procure grain at higher above-quota prices, and the additional losses incurred in selling this grain to the urban population are considered to be "enterprise losses" borne by the local government on a separate account. In the above discussion, subsidies refers to the aggregate of price subsidies and subsidies to loss-making enterprises. Precise breakdowns of aggregate subsidies are not available, but those going to urban food supplies are by far the largest single portion, accounting for perhaps 60 percent of the total volume of subsidies. In 1978, subsidies to loss-making factories were quite significant, amounting to more than 1 percent of GNP. Subsidies to commerce (predominantly urban food supplies) were already important, amounting to more than 2 percent of GNP. In the following years, industrial subsidies were reduced, primarily by closing inefficient small industries, while commercial subsidies skyrocketed. The total subsidy burden reached its zenith in 1981, because of extensive commercial subsidization combined with temporarily inflated industrial losses caused by a short-term retrenchment program. -46 - with economic growth and reform of nonstaple food prices, total subsidies declined significantly. From 1986 through 1988 they have remained in the range of 5 to 6 percent of GNP, with urban food subsidies amounting to about 4 percent of GNP. Urban food subsidies were brought down through 1985, but in subsequent years have stubbornly resisted further reduction. Moreover, there are preliminary indications of an increase in urban food subsidies in 1989. Subsidies for command plan imports and mandatory exports comprise a second major category. 3.33 Subsidies to industry are much smaller overall than subsidies to the commercial sector, and probably a little smaller than foreign trade subsidies. Industrial subsidies were lowered by the mid-1980s, but have tended to rise in the latter half of the 1980s. From 0.56 percent of GNP in 1986, industrial subsidies crept up to 0.59 percent in 1988, and are estimated to surpass 1 percent of GNP in 1989. About a fifth of all state enterprises incurred defi- cits in 1989. Industrial losses are overwhelmingly concentrated in energy and raw material industries (see Table A7.9). Coal and petroleum, accounted for half of all industrial losses. In coal, attempts to restrain costs through the contract responsibility system, that allows mines to keep all of any cost reduction, has failed to solve the problem. In each successive year from 1985 through 1988, losses exceeded the contracted figure, and in 1988 losses were more than double the contracted figure. For 1989, they are estimated at 6 billion yuan, almost twice those of 1988. In petroleum, extraction costs have been increasing at annual rates of 15 percent for several years, while output prices have remained unchanged, As a result, this sector, which was once a major contributor of revenues to the budget, now makes virtually no net finan- cial contribution. Profit has been reduced by a billion yuan annually, and losses over 1 billion were incurred for the first time in 1988. Losses for 1989 are estimated at 2-3 billion. Because they are concentrated in primary energy production, industrial losses are borne primarily by the central gov- ernment, which manages the large-scale energy producers. The burden is thus quite different from that of commercial subsidies, most of which are now managed by local governments.v/ 3.34 Implications of Budgetary Developments. From this overview a number of points can be distilled. Raising the tax/GNP ratio would involve partially reversing some of the reforms introduced and its redistributive effects would be widely resisted.w/ Having just emerged from one long drawn-out campaign of tax reform, the attractions for the center of immediately embarking on another are far from obvious. Repeated tax changes interfere with decision-making for the longer term because they generate expectations of further reforms to come. The advantages of increasing as distinct from stabilizing the ratio around 20-21 percent of GNP, must be carefully scrutinized in the context of future expenditure needs. A significantly higher level of taxation would blunt incentives and rob the economy of some of its dynamism. A number of studies have found that heavier taxation, by diminishing incentives, and reducing the marginal productivity of labor as well as capital, is associated with sluggish economic performance.x/ With a savings rate approaching 36 percent of GIDP, financing the deficit in a noninflationary manner should not pose serious problems over the medium term. - 47 - 3.35 In the majority of developing and industrialized economies, resources are transferred from the household sector to government.y/ There are instances when such transfers have resulted in some crowding out of other claims on these resources and have generated inflationary pressures. Large household savings diminish the likelihood of this happening. For example Japan, Italy and Malaysia have all incurred significant fiscal deficits in the eighties. However, the government's efforts at financing, generally through the issue of bonds, have caused minimal macroeconomic stress because these countries have household savings rates that are among the world's highest.10/ 3.36 Longer-run efforts at narrowing the fiscal gap in China might approach the problem from the side of expenditures by reducing subsidies or administrative costs, for instance. Furthermore, there is no compelling reason to finance a bigger share of infrastructure investment through the budget. In most other countries where the supply of financial savings is abundant, it would be more appropriate use the capital markets to finance and discipline most types of spending on infrastructure. From a small beginning in 1981, bond sales, principally by the state, are on the rise. A broadening and deepening of the bond market would multiply the options for making good budgetary shortfalls and financing projects that currently rely on banks or 10/ Average fiscal deficit, Average household savings % of GNP, 1979-84 rate as Z of GNP, 1979-84 Japan 4.5 16.5 Italy 13.08 (1981-84) 19.0 Malaysia 15.2 (1980-84) 15.2 (1980-84) Source: Japan: Facing Economic Maturity, by E. J. Lincoln, Brookings Institution, 1988, pp. 76-77, 93; World Bank, Economic and Social Data Base. - 48- the public purse.1l/ There remain certain types of expenditures such as education,12/ health and funding for development in the poorer provinces, which may require the direct fiscal support of the government but, except for these, it is not desirable that the state should seek to enlarge its budgetary presence in investment after having deliberately withdrawn just a few years ago. 3.37 Stabilizing the ratio of revenues to GNP does have definite attrac- tions because it would facilitate long-term planning of expenditures and help sustain interprovincial resource flows. To achieve this, a revenue elasti- city, higher than what has been attained in recent years is essential. Three avenues might be explored. First, there are extensions of the VAT so as to augment its revenue generating capacity.z/ Higher rates and broader coverage would provide the revenues streams needed by the state. Refinements of the 11/ Placement of Treasury bonds was begun in 1981 and has grown since. To increase their initially limited attractiveness for individuals and enterprises, the principal holders, maturities were shortened after 1985 from nine years to five years and to two years in 1988. Coupon rates were raised and when inflation accelerated, rates were indexed. Active trading of bonds was permitted and their use as collateral was allowed for the purposes of enterprise borrowing. The menu of offerings was lengthened after 1987 with the sale of key construction bonds by the MOF; key enterprise bonds of PCBC and capital construction bonds by the State Planning Commission. Because of the maturity structure of recent flotations, MOF is faced with having to refinance an average of 22 billion yuan worth of bonds per annum during 1990-92. This will be in addition to the financing of any deficits the government might incur. The refinancing amount is equivalent to about 1 percent of GNP. At a time when other investment spending is likely to be low and only a handful of state agencies are active in the bond market, refinancing ought not to be a major hurdle, especially given the powers of mandatory placement. But for the 1990 fiscal year, the government has decided to minimize its efforts at raising funds through bond placement and instead will not redeem bonds held by banks, enterprises and government institutions that will be maturing in the course of the year. Future financing needs could be facilitated by requiring (i) specialized banks to hold a portion of their excess cash requirement in the form of treasury bonds; (ii) achieving a balance of maturities; (iii) strengthening the secondary market for government debt; and (iv) tailoring these instruments so that they suit the preferences of households. These and other proposals are discussed at length in China: Financial Sector Review, World Bank, June 29, 1990, Report No. 8415-CHA. 12/ Although China allots a smaller percentage of the GDP to education than other developing countries in equivalent income brackets (2.2 percent as against an average of 3.0 percent in 1986) high teacher-student ratios, underused facilities, inefficient use of funds and low teacher salaries, all suggest that much more output can be obtained without additional budgetary commitments. There remains a problem in the very poor districts, but that calls for targeted expenditures covering all services, not just education. - 49- enterprise contracting system, which separate tax payments from other remit- tances and loan servicing, would also strengthen the center's finances. This has been experimented with in Chungching and will now be extended to several other cities. Second, problems of evasion and compliance could be lessened by improving the capabilities of the central tax administration. Effective auditing, firmly enforced penalties for nonpayment, a system for reviewing and adjudicating appeals, and inducements to tax payers to maintain accurate accounts, would diminish the hemorrhage that afflicts China's tax network.aa/ 3.38 Third, rather than attempting to recentralize much more, the center should encourage the provincial authorities to redouble their efforts to raise revenue. Perhaps the greatest disincentive to tax effort is the fear that any sizable gains will be appropriated by the center through special levies or through borrowing. A province whose performance is above par also runs the risk of having to surrender more resources when its three year tax contract is renewed. Surplus provinces have responded to the uncertainty by allowing their tax revenues to stagnate while, in certain cases, enlarging their con- trol over extrabudgetary resources. 3.39 This has created a vicious cycle. The slow growth of revenues from the surplus provinces forces the center to employ ad hoc tactics that sharpen the suspicions of provincial governments regarding the center's intention and result in even more expenditure and even less tax effort. A firm commitment to tax contracts (if contracting is retained over the medium term) which restores mutual trust, and greater reliance by the center on broad-based taxes with the requisite elasticity, may be the route to stronger tax effort in the provinces. The government is currently considering various schemes for tax- sharing. Over the longer term, these will help resolve many of the existing difficulties. 3.40 In sum, major new tax initiatives, as distinct from a refinement and strengthening of existing arrangements, may be neither desirable nor feasible. Stabilizing revenues in the short run and a modest increase over the medium term might best be sought through the changes in contracting referred to above. By adopting a low-key approach that works through many small initia- tives, including the improvement of tax administration, the government is less likely to provoke resistance.ab/ Improving the efficiency of the tax system might well take precedence over efforts to substantially enlarge the fiscal resources at the center's disposal or strain the economic consensus. These themes are echoed in the 1990 budget which calls for a reasonable adjustment of business tax rates, somewhat higher contributions by localities to the center; and the imposition of an investment regulatory tax if spending shows signs of rising too rapidly. However, higher outlay on subsidies is likely to prevent a narrowing of the deficit. It is expected to remain at close to 2.3 percent of GNP, but it is an objective the government must continue pursuing over the medium run. (see Table A7.10). (b) Bottleneck Sectors 3.41 Both the Sixth as well as the Seventh Five-Year Plans sought to raise national product annually by 7.5 percent. This served to determine the level of investment in long-gestation projects to supply the economy with energy, - 50 - steel, timber, cement, petrochemicals and transport capacity to mention only the most important inputs. Actual growth rates exceeded the target by an average of 2.5 percent per annum between 1980 and 1988 and investment levels were far above those built into the Plan. More significantly, during cyclical peaks, GDP increased by an average of 12 percent per annum. It is scarcely surprising that industry has complained about shortages. These complaints take on a particular urgency, when growth accelerates and the pinch of con- straints, together with the associated pressure on prices, are felt most severely. Surprisingly, these bottlenecks, that have been widely noted in other socialist countries ac/ as well, have not been linked with the failure of macroeconomic policy to restrain demand but are blamed instead on inade- quate investment. Every few years, the government has been moved to try and shift more resources into the bottleneck sectors only to be caught short when the next surge in growth, by triggering capacity expansion in the processing industries, pierces planned ceilings for basic industries and infrastructure. 3.42 While there is no doubt that industry and consumers had to cope with troublesome energy, material and transport constraints in 1987/88, production trends and investment shares for the "bottleneck sectors" belie some of the concerns that have been expressed. It is not apparent that administrative intervention by the state should be redoubled, so as to divert more resources from other uses to these sectors or to restrain consumption in the interests of even higher growth rates for heavy industry. First, from Table A9.2, it can be seen that over the past four years, heavy industry has either kept abreast or grown somewhat faster than light industry. Second, again at the aggregate level, the share of energy in capital construction has risen sub- stantially since 1985 and is almost a quarter of the total (Table A13.7). Third, disaggregated data on capital construction for state enterprises indi- cates, that metallurgical, power, petroleum and chemical industries have increased their shares since 1985. Coal and machine-building have suffered an erosion, but in the former case it has been counterbalanced by collective investment. Fourth, production statistics show that growth rates during 1986-88 have ranged between 2.8 percent and 3.4 percent for coal, crude oil and natural gas. Rates for rolled steel, cement, railway freight cars and electricity were between 6.6 percent and 9.5 percent, while building materi- als, machinery and chemicals rose by between 13.6 percent and 18 percent (Table A9.4). 3.43 Coal and petroleum are the two critical commodities that seem to have lagged behind. In the case of petroleum, production has stagnated in spite of heavy expenditures because China's major fields, Daqing and Shengli, have entered late maturity and new finds have failed to keep production on earlier trends.ad/ In 1989 coal production passed a billion tons.ae/ This in itself was a considerable achievement in view of the difficulties both the US and the USSR have encountered in pushing production to that level.af/ Although the Chinese have invested heavily in commissioning new mechanized coal faces,a,g/ it would be unrealistic to expect growth rates much above 3-4 percent per annum. Instead of trying to raise output, improving the quality of coal through appropriate washing techniques, concentrating production in a smaller - 51 - number of mines and, most importantly, conserving the use of fuel, are worth- ier goals.ahl Returns on energy-saving efforts can be extremely high.ail 3.44 At growth rates of 6-7 percent per annum, it may not be necessary to increase coal's share of investible resources, especially if more can be done to conserve energy. China has pushed the energy consumption/GDP ratio down from 1.5 in 1978 to 1.0 in 1988, a decline of over 27 percent. This is still almost twice the OECD average for 1987 (see Table A14.1).aj/ The scope for additional savings is large, for instance, in the steel industry, where the coke rate (kg of coke/ton of pig iron) is 550, whereas in Japan the rate for modern plants is 400-450.ak/ Indirectly, coal consumption could also be reduced by conserving on electricity use. More efficient lighting, sophisti- cated electronic controls for industrial processes, motors incorporating the latest electronic advances, could yield enormous energy savings.al/ Not only is there substantial room for conserving fuels, but also China's high rates of investment make possible a rapid renewal of industrial and transport equip- ment. 3.45 Steel is another industry where significant capacity expansion needs to be viewed with caution. China produced 61.2 million tons in 1989 (48.6 million tons of rolled steel), only a fifth of which was suitable for the manufacture of modern machinery, autos and consumer durables. Imports of rolled steel made up the shortfall. During 1986-89, these have averaged 12 million tons per annum, mostly from Japan. Increasing the ratio of quality steel is definitely a matter of some urgency. But how far China should go in enlarging its steel capacity and whether steel should gain resources at the expense of another sector, needs deeper analysis. In most advanced countries, steel is a sunset industry because the change in the pattern of final demand and the substitution of other materials for steel are steadily reducing its importance. There is no indication that these inexorable trends will be reversed. In which case, the aim should be to tailor steel capacity to long- run steady state needs and to meet a hump in demand for building infrastruc- ture or other purposes from imports. 3.46 Temporary sectoral imbalances, that result in bottlenecks, are inevi- table in an economy developing at a high speed. Every country voices these complaints. In spite of such hindrances, China has grown at 10 percent per annum through much of the eighties and industrial capacity utilization has averaged 70 percent to 75 percent, which is probably reasonable, as the sector is saddled with much outdated and inefficient equipment. These rates suggest that the imbalances are by no means crippling and, except in years of extraor- dinary growth, constraints are "normal". 3.47 Marginal changes in investment allocation are surely desirable, for instance to transport, where investment as a ratio to GNP (1.5 percent during 1980-88) has lagged behind such comparators as the USSR 2.8 percent of GNP, 1980-87) and India (2.1 percent of GNP, 1980-87). But it is not obvious that a major effort to redirect resources towards metallurgical industries, heavy machinery and energy are necessary. Such a move, by draining funds from other uses, and consumption, could perpetuate China's dependence on its backward heavy industries and drag down the growth rate. - 52 - (c) Technological Advances 3.48 Technological progress closely rivals capital as a determinant of growth. In fact, it is difficult to separate the contribution of one from that of the other, as investment is one of the principal vehicles for intro- ducing new technology. China's deficiencies in many spheres of technology means that there is a large backlog to be exploited. By absorbing this know- ledge, China can magnify the expansionary effects of capital accumulation. In its pursuit of modernization, the country enjoys certain conspicuous advant- ages. After three decades of breakneck industrialization, there is a sizable pool of skilled labor. Engineering talent is abundant, and especially in the defense sector, of a high order. Many of China's senior policymakers are engineers with careers in heavy industry and deeply committed to technological advancement. Having developed a broad industrial base, mostly through their own efforts, the Chinese are also well along the learning curve in areas such as basic research, design and plant engineering. There is a fund of experi- ence which makes it easier to assimilate new ideas. Last but not least, the sophistication of the science establishment and specialized engineering faci- lities is fully up to the task of devising advanced, customized technologies. 3.49 Rising productivity in the eighties, the diversification of manufac- tured exports and qualitative evidence of technological gains in a broad range of fields, all suggest that China is benefiting from the traffic in ideas and an active player in the market for technology. Nevertheless, given the scale of opportunities, the extent to which China has profited from an infusion of new technology and the degree to which it has been able to enlarge the share of productivity in GDP growth, does not compare too favorably with East Asia's leading economies. A more systematic technology policy would allow moderniza- tion to pick up speed in the nineties and, more importantly, it would lessen the costs of development in terms of resources. 3.50 Acquiring technology and harnessing it to industrial purposes requires a many-pronged approach. For instance, the import of capital equip- ment and associated technical assistance from suppliers is a channel that China is now using. The importance of skilled workers, technicians and scien- tists is recognized and the authorities are working to create the institu- tional framework that, suitably primed with resources, will provide industry with the human capital it needs.13/ Technological trends are now oriented towards the saving of energy and materials through the intensive use of infor- mation rather than the displacement of labor by capital. Generating informa- tion calls for trained workers, which the educational system is being groomed to produce. Bit by bit, the barriers between China's vertical ministerial hierarchies are being chipped away. Horizontal contacts between enterprises drawn from different subsectors are multiplying as are the links between enterprises, research institutes and universities. Defense industries, backed by the sector's elaborate scientific infrastructure, are producing for the civilian market.am/ All of these tendencies facilitate the flow of ideas and 13/ Fully utilizing the trained manpower now available calls for greater job mobility, an area where China lags badly. About a third of the country's scientists still lack suitable work. - 53 - will make possible, eventually, the interindustrial coordination of effort that is becoming the hallmark of an enlightened industrial strategy. 3.51 Education, cooperative R&D, a more commercial bent to the scientific pursuits of universities and research establishments, will raise the tempo of technological progress over the long run. In the medium term, China can enlarge its technology gains by heightened efforts in five areas. (a) Uniform industrial standards and protocols would add to quality, performance, utilization and scale economies in a range of indus- tries, most notably electronics.an/ (b) Korean and Japanese experience suggests that determined efforts at gaining close familiarity with all aspects of a particular industrial process steepens the learning curve.ao/ In steel, petrochemicals and electronics, buying equipment is one step. Exposing significant numbers of the staff, who will be working with the machinery, to the best operating practices in use abroad is essential to obtain the most from the new capital goods. Otherwise, lessons must be acquired through trial and error, which constrains productivity. The reluctance to invest in disembodied knowledge has a cost in terms of breakdowns, low utilization rates and impaired quality. A deliberate policy is needed to encourage enterprises to actively seek the transfer of experience through training, when purchasing major pieces of equipment. (c) Much information is available freely through scientific, government and trade publications, conferences and factory visits. But to gather and utilize these technological leads necessitates a syste- matic effort at scanning written materials, attending seminars, work- ing at overseas institutes and touring factories.ap/ This requires a sizable budget and staff to collect, screen and disseminate within the local industrial establishment. Although China's attempts at scanning have increased, it is vital that recent developments do not result in a resurgence of the insular attitudes which can only lead back to technological stagnancy. (d) Low product quality is a shortcoming that inflicts major costs on the economy. Oversized equipment used in underground mining, for instance, raises costs. Equipment breakdowns necessitating frequent repair and entailing loss of output; machinery that does not operate to specifications and the difficulty in correcting malfunctions because of poor design, are some of the consequences of inattention to quality. Technological upgrading not only relates to the intro- duction of more advanced products and processes, but also the refine- ment of existing products so that they are cheaper to produce, give better performance and are relatively trouble-free. (e) Foreign direct investment has been the source of new technology for a number of East and Southeast Asian nations, including China. Its - 54 - effects are felt initially by the export sector but over time, the knowledge and skills acquired diffuse through the entire economy. It is likely that China's export performance through the mid-nineties will continue to be influenced powerfully by foreign investment. Hence, policies that assure the flow of overseas capital and the technology it brings contribute importantly to the growth process. This point is treated at greater length below. 3.52 Direct Foreign Investment. The pledged value of foreign investment was $9 billion in 1984. By end-1989, 20,000 projects worth nearly $34 billion had been approved with $15.4 billion of investment actually in place. Hotels and service industries have attracted a third of the funds actually disbursed. Oil exploration and electricity generation, together with assembly-type indus- tries, are other areas in which foreign investors have evinced strong inter- est. Commitments in 1989 totaled $5.6 billion, a 5.6 percent increase over the previous year. Actual disbursements amounted to $3.3 billion, a 4 percent improvement over 1988. However, there was a drop in applications, particu- larly after the events of June 1989, which if it persists, could affect the flow of capital 2-3 years in the future. Anecdotal evidence points to some revival of foreign entrepreneurial interest in the coastal provinces since the beginning of 1990, but the number of projects approved during the first half of 1990 decreased by 8 percent to 2,784 and the contracted amount was $2.35 billion, or 22 percent less than in 1989. 3.53 Foreign investment has plummeted in the past as well--in 1979 and again in 1986--but in each case growth was soon resumed. However, in the earlier years, investors were drawn by the desire to establish business con- nections with China so as to gain eventual access to its vast domestic market. Others came because large proEits were to be made by servicing tourists flock- ing to China. Still others invested because their competitors had decided to do so. Investors have learned some lessons; their earlier enthusiasm has been tempered and the events of mid-1989 have sharpened fears of future political instability, that is a fundamental consideration with foreign companies. Small firms based in Hong Kong and Macau (China), that have been establishing contractual joint ventures averaging $1 million per investment in southern China, are unlikely to be discouraged. Language, proximity, labor costs, social ties with producing villages and an understanding of the bureaucratic ropes, draw them to China. Other Southeast Asian countries seem far less inviting and language is a formidable barrier for the small producer. 3.54 The larger investors from East Asia as well as the industrial count- ries, who have other choices and are being attracted by opportunities in East Europe, might need more encouragement than is currently provided by China's favorable tax laws. There are several areas which merit attention. In many of them, the government has been prepared to yield a little in the past, but it is far from having satisfied foreign investors. For example, time-consum- ing negotiations precede the signing of a contract and central government agencies can add another epicycle by entering discussions at an advanced stage. On the average, a joint-venture contract can take two years to nego- tiate. 3.55 Foreign direct investment (FDI) is conducted in a competitive envi- ronment, where production costs are decisive. Basic wages in China are low - 55 - but bonuses and subsidies can double the outlay. Land use fees, costs of energy and of infrastructure can be high q/ and are subject to arbitrary escalation. Chinese partners to a joint venture are reluctant to assume risks and have a tendency to enter into agreement with several foreign parties bidding for the same project.ar/ Even after a contract has been signed, its performance can be affected by the existence or promulgation of rules and internal guidelines unknown to the foreign partner. Furthermore, because legislation concerning FDI has a fairly short history, there remain gaps that can complicate the enforcement of contracts. As courts are relatively inexperienced and their independence has yet to be defined with any precision, contractual uncertainty can be troublesome.as/ 3.56 To revive foreign investment, the government took a major step in April 1990, which involves leasing land in the "open cities" and Special Economic Zones for up to 70 years. Among the most recent actions in this regard was the decision to proceed with the Yangpu harbor project in Hainan Province, involving a long lease to the Hong Kong subsidiary of a major Japanese corporation. The central government is also supporting the development of Shanghai's Pudong district as an "open economic zone". A similar project was launched in 1989 with the leasing of a tract of land in Tianjin to the MGM Corporation of the United States for the development of an industrial park oriented towards high-technology enterprises. A related move, currently under review, is to allow foreign banks to establish branches in selected cities and compete with domestic banks for local business.at/ 3.57 A modification of the law on Sino-foreign equity joint ventures, announced on April 4, 1990, affecting nine of the articles, should also be welcome news for foreign investors. The changes introduced allow foreign partners to chair the board of directors; protect equity joint ventures against expropriation by the state; and abolish fixed periods for income tax exemption. B. Distributional Equity 3.58 One of China's achievements over the decades preceding 1980 has been the equitable manner in which the fruits of progress have been distributed. In decentralizing the economy and mixing in market forces with planning, gov- ernment took a step away from its earlier position and embraced a modicum of inequality for the sake of rapid modernization. For much of the eighties this was accepted, especially in the rural areas, with considerable enthusiasm. As per capita incomes were rising by over 8 percent per annum in real terms, and provincial growth rates tightly clustered together, the modest deviations from earlier standards of distribution caused little discontent. People saw a few of their neighbors doing conspicuously better and took that as a sign that, in future, their own condition would improve even more rapidly.au/ 3.59 A greater sensitivity to inequality became apparent when reforms spread to the cities in the mid-eighties. A large segment of the urban popu- lace, possibly a third, is on fixed incomes. Many of them belong to the urban elite--government employees, Party cadres, university teachers and their stu- dents. These groups had long occupied the pinnacles of status and incomes. - 56 - Their earnings began falling behind those of industrial and construction work- ers; of people who flocked to the expanding services sector; and of the farm- ers in the periurban areas who supplied produce to the burgeoning free markets. 3.60 These emerging differentials did not arouse serious resentment in 1985/86 because, in the reform milieu, they were viewed as legitimate gains. A widening of the gap in 1987/88 was less acceptable av/ as the dispersion of incomes became associated with rising inflation and the spread of corrupt practices, which arrived with the decentralized administration of dual price regimes.aw/ 3.61 There is little evidence of a serious shift in inter- or intraprovin- cial income distribution. In fact, the growth performance of the poorer prov- inces has been close to the average (Chart 3.1). Intraprovincial rural dis- tribution has been altered marginally, although data are scarce.ax/ Township and village enterprises have enriched some of the more entrepreneurial pea- sants, but at the same time rural industry has provided off-farm employment for poorer households, bringing them nearer the mean. China entered the reform era with Gini coefficients in the 0.26-0.28 range. A steep reduction in the number of people living in poverty may have reduced the dispersion in incomes (see Chapter 1, para. 1.1). Offsetting this trend is the emergence of the new rich among specialized farmers living near the cities, industrial entrepreneurs, distributors and those responsible for developing the country's nascent service sector businesses. Overall, the gains have been evenly dis- tributed. That said, it is evident that intraurban shifts, even though they involve relative deprivation for a minority, have led to mounting alienation and a feeling that a long-standing social compact is endangered. The uneasi- ness extends to urban workers whose incomes have risen both relatively and absolutely. This privileged group that has long enjoyed tenurial status, is now threatened by the spread of contract employment and competition from migrants that have found their way to cities. By end-1989, about 11.75 mil- lion workers of an urban workforce numbering 137.4 million were on contract with state-owned factories and some 20 million or more temporary migrants had found jobs, mostly in construction and services. A more flexible labor market that accommodates much greater geographical and interfirm mobility could result in a restructuring of urban wages. Quite possibly, the wages of unskilled and semiskilled workers might fall and skill differentials widen. Fewer labor market rigidities would be a net plus for economic growth but their distributional consequences may not be negligible. 3.62 Rapid growth in the eighties has raised living standards across the board. At the same time, reforms have led to a reshuffling of income shares, particularly in the urban areas., Fixed-income groups have lost in relative terms. Industrial labor, although it has been richly rewarded, is worried over the changing intersectoral terms of trade, migration to the cities and the gradual elimination of tenurial status. In a society used to a rigid income hierarchy and narrow income differentials, the shock administered by reforms has been deeply unsettling. Higher real incomes have not been able to banish growing concerns over relative standing and some twisting of the income distribution, however modest. it may have been. Chart 3.1: PROVINCIAL OUTPUT GROWTH AVERAGE 84-87 % Growth Rates 20 18 - 16 - 21 389 1111122222 Provinces --- National Income See Annex Table 1.8 for Province names. - 58 - 3.63 If future growth is linked with reforms that will enlarge the role of the market, alter relative prices and introduce fluidity into the income shares of individual groups, then it is likely to face considerable opposition from the very people whose welfare it is supposed to enhance. Reforms will, therefore, have to balance growth with equity, which may constrain the flexi- bility of product and factor markets and limit the options for institutional reform (Chapter 4). 3.64 Resource mobilization, technology and industrial strategy may be the prime movers, but growth will only follow the planned trajectory if the emerg- ing distribution conforms to the people's notion of fairness. Perceptions have begun changing, more can be done to modify people's outlook with regard to tenured employment, job mobility and income differentials for instance. It may be a slow process and permit less growth than the economy is capable of. - 59 - IV. REFORMS AND ECONOMIC EFFICIENCY 4.1 The quest for noninflationary growth is tightly interrelated with reforms calculated to promote efficiency. Virtually all socialist countries have now learned that central planning of a complex economy will be unable to achieve either allocative efficiency or the full utilization of resources. For these purposes the market is conspicuously more effective. 4.2 Alongside decentralization, the steadily expanding role of the market has constituted a second major strand of the reform program. It has three components: the relaxation of controls over prices, so that they can better reflect opportunity costs; a dismantling of the state's administrative infra- structure for allocating commodities; and greater autonomy for enterprises to operate with reference to market forces. (a) Price Reform 4.3 Recent Developments. Under the planned system prices were fixed by the authorities using an average cost plus mark-up rule. They were altered infrequently. In 1979 came the first break with tradition. Enterprises pro- ducing four major electronics products were given a price range, instead of a single price, at which they could be sold. The use of these so-called "range" or "floating" prices was extended to other heavy industry products in June 1981. By August 1982, range pricing was being applied to virtually all pro- ducts. At this stage, central or provincial bodies defined the band within which prices could fluctuate. Starting in September 1982, the prices of 160 commodities were fully liberalized, that is, they were henceforth determined by market forces. A year later, another 350 were given the same treatment, so that about 5-6 percent of retail sales nationwide became the province of the free market.a/ 4.4 The next push came in January 1985 when a large number of agricul- tural and light manufactures were subjected to market pricing. In addition, range prices were abolished on above plan sales of commodities by enterprises. By this time, what the Chinese describe as the "dual track pricing system," was beginning to gel. It covered three modes of price setting: prices that were fixed by the state as was done in the past; prices that floated within limits prescribed by central, provincial or local agencies; and prices that were under the influence of the market. 4.5 Between 1985 and 1988 the dual track system became firmly estab- lished. Liberalization raised the ratio of market prices to nearly 50 percent (from 30 percent in 1985) and prices fixed by the state were reduced to about a quarter (from 40-50 percent two years earlier) with the balance being float- ing prices. As the enforcement of controls slackened, floating prices tended to approach their ceilings bringing many within close proximity of market prices. Data for December 1988 indicates that market prices for a cross-sec- tion of industrial products were 40-50 percent more than state fixed prices. The gap between state and market prices of consumer goods was far narrower.b/ a/ Lettered footnotes are to be found in Annex II. - 60 - 4.6 By late 1988, price reform had made substantial headway in terms of the sheer number of items whose prices had been liberalized. More impor- tantly, the majority of decisions, on the margin, were being made with reference to market prices, indicating that allocative efficiency is on the rise.c/ Planned production at fixed prices then constitutes a lump sum tax or a lump sum profit transfer--depending on relative prices between inputs and outputs--but does not affect production and investment decisions.d/ There are still many instances where enterprises obtain a percentage of their inputs or energy supplies at fixed prices, which brings average prices below those pre- vailing on the market. But the marginal choices are frequently made at market prices because most enterprises sell a portion of their products on the market and depend on market transactions to purchase the marginal units of energy or raw materials. 4.7 The waning of price controls was paralleled by the reduced incidence of planned direct allocation by the state. For example, as early as 1985 a major enterprise survey showed that only 20 percent of the output was deter- mined by the state's mandatory plan and 27 percent by the guidance plan.e/ The trend since has been downwards. The share of four important industrial materials under state distribution has fallen continuously since 1979 and even in the case of steel and coal was below 50 percent in 1988 (Table 4.1). State enterprises sell most producer goods on the market including nearly three- fourths of all metal cutting tools. The distribution of some 256 of materials was a state monopoly in 1979.f/ Their numbers had been reduced to 27 in 1988. A consistent downward trend is also noticeable in the proportion of capital goods embraced by the state mandatory plan: from 80 percent to between 20 percent and 30 percent. The narrowing compass of central planning is also evidenced in the raising of project approval limits for provincial authorities (partially reversed in early 1990) (Table 4.2). The easing of clearance requirements for investment goes all the way down to the enterprise, which is now empowered to embark on small-scale, technical updating outlay without seeking a string of approvals. As indicated in Chapter 3 (iii), enterprises can meaningfully exploit their new powers because close to 30 percent of all fixed investment is financed from retained funds. Another 25 percent of funding is from local governments, profits accruing to ministries and from individual investors (Table 4.3). 4.8 Price liberalization has not yet run its course but the reforms introduced have had far-reaching effects on decision-making. On the margin, which is where it counts, resource allocation is subject to prices reflecting scarcities. In aggregate terms, the scope of mandatory planning of state monopoly and of the material supply system is much reduced. Discretion on matters pertaining to production as well as distribution has been passed down to local agencies and some of it has trickled to enterprises (but see paras. 4.48-4.50). 4.9 The exigencies of stabilization led to a postponement of attempts at price decontrol and adjustment between the last quarter of 1988 and mid 1989. In fact, during this period. fixed prices were monitored with greater vigilance - 61 - Table 4.1: PROPORTION OF KEY MATERIALS ALLOCATED BY THE STATE (In percent) 1979 1984 1988 Steel 77.0 66.0 46.8 Timber 85.0 40.0 25.9 Coal 58.9 50.0 43.5 Cement 35.7 25.0 13.6 Source: State Planning Commission. Table 4.2: APPROVAL LIMITS FOR INVESTMENT (Million yuan) State Planning Date Commission Provincial authorities Before 1984 Over 10 Below 10 Beginning 1985 Over 30 Below 30 March 1987 Over 50 Below 30 March 1987 Over 50 Below 50 (power, transportation and raw materials) January 1990 Over 30 Below 30 Note: Since January 1990, projects worth more than Y 30 million are submitted by the State Plan- ning Commission to the State Council for approval. In a few industries, such as chemicals, provincial authorities can approve projects valued at up to Y 50 million. Municipal governments and local authorities can only approve projects valued at less than Y 5 mil- lion. Those in the Y 5 million to Y 30 million range need the approval of the provincial government. This involves a significant tightening and centralization of the investment decision process. Source: State Planning Commission. Table 4.3: FINANCING OF DOMESTIC FIXED INVESTMENT (Percent of total) 1981 1982 1983 1984 1985 1986 1987 1988 Fixed asset investment 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Of which state fixed inv. 69.5 68.7 66.6 64.7 66.1 66.5 63.1 62.5 Financing of fixed inv. Budget 28.1 22.7 23.7 23.0 16.0 14.6 13.1 9.0 Bank loans 12.7 14.3 12.3 14.1 20.1 21.1 23.0 20.3 Foreign loans 3.7 4.9 4.7 3.9 3.6 4.4 4.8 5.7 Retained earnings and extrabudgetary funds 55.5 58.1 59.4 59.1 60.3 59.9 59.2 65.0 Source: Statistical Yearbook of China, 1988, p. 493. Total domestic fixed-asset Investment includes investment by SOEs, collectives and individuals. - 62 - as was the maintenance of floating prices between prescribed bands. However, there is no evidence as yet of prices having been reclassified from the market category to that of fixed or floating prices (See Chapter 2). Price adjust- ments were resumed in the second half of 1989 with an 18 percent increase in grain procurement prices followed, in October 1989, by a 120 percent adjust- ment in railway passenger fares along with higher charges for airline travel. On March 15, 1990, freight tariffs for rail and water transport, as well as port handling charges, were raised by between 25 and 35 percent. The govern- ment also announced plans to enlarge its control over the distribution of a few commodities, so as to lessen the incidence of profiteering associated with dual pricing schemes. Centralized allocation of caustic soda and rare metals has been increased and in the future a larger share of the coal produced will be distributed through state channels. A desire to resume more control over the allocation of investment induced the government, in early 1990, to scale down provincial approval limits to the levels prevailing prior to March 1987 (see Table 4.2). General Guidelines 4.10 Stabilization measures that had slowed growth to a crawl by the first quarter of 1990 (industrial output grew by 1 percent in March 1990 after registering negative rates in January and February), brought the annualized rate of inflation to 0.6 percent in January-February 1990, and narrowed the gap between market and fixed prices for several items permitting price unifi- cation with the minimum of risk. Aside from these developments, a bumper harvest and significant industrial slack also decrease the likelihood that moves to adjust or liberalize prices will reignite inflationary pressures. 4.11 The design of future reform will need to take account of the following: (a) The dual track pricing, which seems to have been an unavoidable way- station on the gradualist road to reform, is the source of much remaining distortion. Perhaps half of all prices are subject to some degree of administrative regulation by central and local agen- cies. The presence of such discretion keeps alive the strong strain of negotiation in economic activities. Instead of striving after efficiency, many enterprises find that the desired profitability can be more easily assured through negotiations with supervisory bodies with the power to provide inputs at lower prices or to permit sales of products to be made at more attractive rates. The negotiation of price bands, decentralized price fixing and the existence of multiple prices for many commodities undermines the parametric function of market rates. By permitting influential officials to profit from their ability to set prices and allocate resources, dual track pric- ing has also begun discrediting price reform. The authorities have announced their intention to eliminate dual pricing, but the precise modus operandi and a schedule have not been revealed. Within a decentralized administrative milieu any attempt at securing uniform prices is freighted with difficulty. Under the prevailing institutional circumstances, decontrol has to be handled - 63 - delicately but firmly so that it does not degenerate into endless negotiations between center and local bodies and between enterprises and their supervisors (Chapter 1). Dual track pricing comes in the way of efficiency and breeds corruption, but there is no simple way of consigning it to oblivion in a system where state ownership is to be the dominant mode and lower level provincial agencies will remain influential. (b) In any economy a subset of prices are always subject to regulation by the authorities for political or strategic reasons or to neutralize the danger from monopolies. But in all market economies, the major- ity of transactions are of an arms length type, orchestrated by the Invisible Hand. In China, price reform is incomplete, as the Visible Hand of administrative directives and of negotiation continues to intervene in many transactions.g/ Meaningful price liberalization, which is required if the full efficiency gains are to be extracted from markets, is closely linked to the volume of arms-length trading. It excludes the constant negotiation of prices and taxes with administrative authorities, who represent the state's ownership rights over the goods being transacted. Efforts at creating a multiplicity of ownership forms and dispersing rights among institu- tions and individuals, would give more freedom to the Invisible Hand of the market. (c) Price reforms are already well advanced in the rural sector. Product prices have been freed and in recent years liberalization has extend- ed to factor prices as well. Rural labor markets have come into existence. Workers can sell their labor at the going wage to farmers and rural factories. They have de facto rights. Similarly, 15- and 30-year leaseholds have extended a measure of ownership rights, which could potentially be traded in land markets. These were on the verge of materializing in a few selected areas when the events of 1989 reduced the tempo of experiments with such institutions. Informal rural capital markets are flourishing, fed by the savings of rural households and managed by local financiers. Once again, make- shift institutional arrangements based on kin and village relation- ships extending far into the past, have helped establish individual property rights over capital, and brought the risks of transactions down to the point where market functioning is possible. 4.12 The way ahead for China might entail pursuing price reform quite rapidly in the rural sector where much progress has already been made, whereas a more measured pace and a somewhat different approach to liberalization may be warranted in the industrial sector. Because ownership rights over produc- tion factors are gradually coming into focus and putting out institutional roots, their formalization presents less of a hurdle. It is possible, therefore, in the next few years to complete the work begun over a decade ago and place the rural economy on a base of efficient markets. 4.13 Proceeding with rural price reform insofar as it affects farming and rural industry would generate additional momentum for industrial changes, as was true in the early eighties. It would, in addition, offer guidance on how ownership of assets might be diffused and the consequences of advancing beyond - 64 - the current framework, a possibLlity that was considered in the early eighties. The mechanics of decontrolling some key prices are sketched below. 4.14 Specific Commodity Categories. The advantages and disadvantages of pursuing price decontrol vary among specific commodity categories. Most straightforward are those in whLch there is excess supply or an approximate balance between supply and demand at existing fixed prices. China's policy since 1980 has been to decontrol prices in such circumstances, and the govern- ment is now considering how this might be extended on a permanent basis to the many additional commodities in which buyers' markets are emerging in the course of the present macroeconomic slowdown. The prices of some of the goods concerned may not fall much--downward flexibility of manufactured goods prices is limited in all countries by the need to cover material and wage costs. In the cases of some primary products subject to large fluctuations, the govern- ment may even wish to cushion the falling prices by purchasing for stock. More generally, some of these markets may tighten in the future, and hence prices may rise. But provided that macroeconomic control is maintained, these price changes will be reasonably smooth and will help to maintain microeco- nomic balance. 4.15 Less straightforward are those categories of commodities for which there is substantial excess demand at existing controlled prices--reflected usually in a large gap between the official and the second-track or free market price. In these instances price decontrol would raise the price of those transactions currently made at official prices. Whether the unified decontrolled price would be above or below the existing second-track price is less certain. In some cases, especially where the second-track price is it- self now held within a band, the unified decontrolled price might be higher. In other cases, where the elimination of the low official price stimulated production or reduced consumption, the unified decontrolled price might be lower. But it would probably be reasonable to assume, that in most cases unified decontrolled prices would not be far from current second-track prices. 4.16 There are three main categories of prices where there are at present large gaps between the two tracks: the procurement prices of major agricul- tural products; the retail prices of some foods; and some basic industrial intermediate goods--mainly energy, metals and chemicals. The economic and social implications of price decontrol vary among these three categories, so each needs to be considered separately. 4.17 Agricultural Procurement Prices. A phased adjustment of procurement prices for major agricultural products (and of the retail price of fertilizer and other agricultural inputs) to bring them closer to market rates is cur- rently being debated. The first round of adjustments scheduled for 1990 will affect prices of oilseeds, sugar and cotton. Subsequent rounds proposed during the Eighth Five Plan (1991-96) are expected to complete the process. 4.18 The eventual goal is the abolition of direct control over most agri- cultural procurement prices, while retaining import barriers for some food products, and using indirect intervention to damp short-term price fluctua- tions. This stage needs to be approached in steps over two or three years-- the main ones being the need for considerable additional investment in alter- native marketing channels and for the authorities to learn more about indirect - 65 - regulation of agricultural markets. At first the official procurement price will have to be brought to levels somewhat below current free market prices, while maintaining a two-track system, and adjusting contracts so that almost all farmers are making some sales at free market prices. The second step will be to put in place the desired system of import restrictions and stabilization schemes (in conjunction with a realistic exchange rate). This would cause free market prices to move in directions consistent with the government's agricultural development and trade strategy. If these price changes are large, a further adjustment of official prices and agricultural taxes will probably be made prior to complete decontrol. (This could then be supported by a phased decontrol of retail food prices, as outlined in the next section.) 4.19 Retail Food Prices. The eventual target for retail food prices should be comprehensive price decontrol and abolition of rationing, with mone- tary compensation for ration recipients. Several successful moves in this direction have already been made, the most recent being increases in nonstaple food prices in 1988, and one option now would be to attain the eventual target in a single step. There are, however, three reasons why it might be better to continue to proceed gradually. 4.20 The first is that the economic gains from immediate decontrol are probably not large. As explained earlier, most consumers are now effectively trading at free market prices, so the waste caused by irrational official prices is limited. It is important, however, that the unofficial market in ration coupons which makes this possible should be modified in the interests of stability and consumer welfare, by assigning expiration dates to all out- standing coupons--which are effectively monetized--and by targeting eligibi- lity to receive new coupons on the urban poor and low-income consumers. And, to the extent that compensation is provided, eliminating food subsidies would yield no immediate financial gains, though the burden might be transferred from the state budget to local sources, and the volume of subsidizaton might be made more obvious. 4.21 The second is that the necessary reform of agricultural procurement prices should probably precede decontrol of retail food prices. Otherwise, it would be difficult to determine accurately how much compensation should be given to ration recipients. For example, procurement price reforms might reduce the free retail market price of grain, in which case compensation for loss of grain coupons based on the current difference between the official and the free market price would be too generous to ration recipients, and disad- vantageous to the budget. 4.22 The third reason for gradualism is that urban households are still nervous about inflation. Their fixed-price food rations (though quite small in monetary value) make them feel more secure, and for this reason should be maintained--as should indexed saving deposits--during the transitional period in which other price reforms are being implemented. Moreover, retail food price reform itself should be implemented in stages: the first step would be to complete the decontrol of nonstaple food prices (which has already occurred in most places); the second step would be to do the same for grain. 4.23 Industrial Materials Prices. The government is concerned that large increases in official materials prices, either through decontrol or through - 66 - adjustment, would substantially push up the average retail price of industrial consumer goods. This concern is based on the assumption that enterprises (in some cases after seeking approval from price bureaus) would raise their output prices to cover fully any increase in their average costs. This assumption is probably not generally correct in China's present economic circumstances. In theory, profit-maximizing enterprises choose their output prices on the basis of marginal rather than average costs; and in practice marginal costs are usually governed by second-track rather than official prices. In other words, unification of input prices at the existing second-track level would not cause a profit-maximizing enterprise to raise an output price that it had previously been free to set, even though the unification would reduce its profits. Hence insofar as China's enterprises are now profit-maximizers, and insofar as second-track prices and the prices of industrial consumer goods are market- determined, decontrol of official industrial materials prices will not affect the prices that consumers pay, although it will redistribute profits (and losses) among enterprises. 4.24 The extent to which price liberalization has progressed suggests that the true impact on consumers would be much closer to this optimistic assess- ment than to the government's present pessimistic one. Nonetheless, the optimism must be qualified. Some second-track and industrial consumer goods prices are subject to direct control, and price bureaus, in giving permission for controlled price adjustments, pay attention to average rather than marginal costs. As a result, there would be a tendency for price increases to be passed on from enterprise to enterprise and eventually to consumers. This problem may not be serious, for two reasons. One is that as long as excess supply of many industrial consumer goods persists, enterprises would be dis- couraged from seeking price increases. The other is that, as explained below, some of the average cost increases inflicted on particular enterprises would be offset by reductions in their tax and profit remittance obligations. 4.25 The redistribution of profits and losses among enterprises caused by decontrol of industrial materials prices would require action by the govern- ment even where price increases were not likely to be passed on. This is because the present state enterprise tax and profit remittance system is not standardized, but tailored to each enterprise's recent profitability. The simplest and least contentious immediate response would. be to adjust the terms of each enterprise's current contract in such a way as to leave its profit retention prospects approximately unaltered--increasing the remittance obliga- tions of enterprises whose profits gained from the price adjustments, and vice versa. For most nonstate enterprises, which are subject tc more standardized taxes, no such special action would be necessary. 4.26 An important objective of these immediate contractual adjustments, which should probably also cover the revenue-sharing contracts between central and local governments, would be to ensure that the state (and particularly the central government) budget was not adversely affected. This would require keeping the revenue/GNP ratio constant, while controlling the outlay on subsi- dies (paras. 3.34-3.40). The most important such items are key investment projects, which already account for 2-3 percent of GNP, and now obtain most of their supplies at low official prices. To ensure that these projects were unaffected it would probably be desirable to maintain mandatory allocation of supplies to them. In most other cases, price decontrol could and probably - 67 - should be accompanied by the ending of mandatory output and input quotas for the goods concerned. 4.27 Plans for adjusting the prices of basic materials, transport and energy are at a fairly advanced stage. Prices of crude oil, railway freight and electricity are to be adjusted in 1990 with coal prices to be revised in 1991. Rubber will shortly be traded at a single market linked price as a part of the attempt to dismantle dual pricing regime. Cement could follow. The government expects these changes plus the ones proposed for the agricultural sector to add up to 8 percentage points to inflation in 1990. In all, taking into account the price ripples emanating from devaluation in December 1989, the anticipated rate of price increase during the year is projected by the authorities to be in the 10-12 percent range. However, as suggested in paras. 4.24-4.25, the increase in the price level may not be as high as is currently projected, allowing the authorities greater room for maneuver. 4.28 Associated Tax, Subsidy and Enterprise Adjustments. Decontrol of industrial materials prices with neutralizing adjustment of profit and tax contracts would pave the way for subsequent reforms of state enterprise taxa- tion and management. The three next steps needed, all of which are either under experimentation or the topics of active negotiation between the center and the provinces are: to move to after-tax contracting, to introduce a stan- dard rate of profits tax; and to make indirect taxes on enterprises more uniform (at present the rates vary partly to offset price irrationalities). Ideally these steps ought to be taken simultaneously, but under the circum- stances a start is likely to be made with exclusive-of-tax contracting with the others following. 4.29 The difficult question would then arise of how to handle cases in which enterprises made losses (after paying indirect taxes), or where their post-standard-rate-of-tax profits were less than their previous expenditure out of retained profits on bonuses and other worker benefits. With the most glaring price distortions eliminated, these cases would be ones in which there was a clear economic need for basic adjustments. These might involve changes of product mix or production technology, reductions in worker remuneration or employment, mergers, and in the limit, complete enterprise closure. The gov- ernment should not subsidize the continuation of loss-making activities. But it should subsidize the process of adjustment, both for enterprises with a realistic prospect of future profit, and for workers who have to leave their present jobs. Adjustment subsidies should cover nonstate as well as state enterprises and workers. 4.30 The introduction of standard taxation and after-tax contracting would in turn pave the way for other reforms of state enterprise management of the sort discussed below. These reforms should probably include alterations in the organization and exercise of the state's ownership over industrial assets and extend more generally to include property rights over factors. Until effective capital and labor markets are created, direct control of worker remuneration and investment in state enterprises will have to be maintained. But once ownership and price reforms succeed in creating stronger internal - 68 - incentives for enterprises to restrain wages and invest economically, these direct controls could be relaxed or replaced by indirect controls. (b) Sources of Inflation and its Management 4.31 Price reforms of recent years and others to be introduced in the future are altering relative -prices and setting in motion an extensive reallo- cation of resources as well as substantial intergroup and intersectoral trans- fers. The economy is being required to move from a production function inhe- rited from years of centralized planning to a production surface that reflects "true scarcities" and modern technology. In spite of reforms, the price structure inherited from the past remains tilted towards capital goods and such distortions will gradually have to be smoothed over. While the nation as a whole stands to benefit, there are bound to be winners as well as losers. 4.32 Inevitably, the losers are resisting and because the earlier national consensus on objectives no longer serves, their opposition has macroeconomic repercussions.h/ As the economy moves towards the market, it is becoming clear that significant inter- and intrasectoral resource transfers are inevi- table. The intersectoral transfers will be from industry to agriculture. Intrasectoral transfers will 'be mainly from China's overbuilt and inefficient heavy industries, parts of which might need to be closed down, to other manu- facturing subsectors and services. In effect, the urban, heavy industry bias of past policies, that buttressed the economic position of the industrial and administrative workforce, is being succeeded by market-directed flows to other groups. As reforms proceed, the old industrial elites will only be able to maintain their position on the income scale through a determined effort at raising productivity. Relative price advantages and subsidies will continue to be shaded bit by bit. 4.33 These changes have sparked rivalrous relationships on several fronts: between urban and rural interests; between the old urban industries and the emerging upstarts in the township and village enterprise sector, that have risen from an insignificance to annex 20 percent of industrial output in 1988; and between fixed income groups in the cities and those others enriched by the recent dynamism of the urban economy. Complicating this picture are the rivalries between provinces, each of which is trying to acquire resources to further its own development. Lastly, there is the friction between the central government pursuing broad national objectives and provinces, whose concern is their own parochial interests. These rivalries are responsible for the demand and cost push pressures that have driven inflation. Rising agri- cultural prices, that improve the lot of farmers, are resisted by demands from urban workers for higher wages and a continuation of food subsidies. Higher labor costs, in conjunction with mark-up pricing rules, have led to a wage price spiral, which became an increasingly obtrusive element in the inflation picture during 1987-88. Rising production costs in heavy industries and the budgetary claims imposed by consumer subsidies squeeze the state's revenues from enterprise taxes and profit remittances. Subsidies have driven up expen- ditures. Hence the budget deficits which, though not large in comparative terms, have contributed to the increase in broad money. 4.34 Investment hunger and the excess aggregate demand it generates, is usually ascribed to sellers' markets, soft budget constraints and the general - 69 - environment of tautness which pushes firms to seek all the capacity they can. This is a part of the explanation. The apparently insatiable appetite for capital is also linked to industrial and provincial claims. Aware that their future dominance is less secure, heavy industries are struggling to secure resources that will guarantee long-run income streams, and possible subsidies. Distributional concerns also underlie the opposition to the bankruptcy law and other institutional changes that would stimulate meaningful competition. Meanwhile, manufacturers of consumer goods in the collective and TVE sectors see opportunities for profit in the unfolding of demand. Both are motivated to spend on capital. In this, they are abetted by provincial and local authorities seeking higher rates of income growth, larger employment and expanding revenues. Small projects in light industry have a quicker pay-off; major heavy industry projects often bring with them resources from the central government as well as inputs at low fixed prices. Provincial authorities, therefore, have little interest in restraining expenditures. To the extent that they can, provinces with fiscal surpluses attempt to minimize transfers to Beijing and more provinces are trying to obtain net revenue flows from the center. Credit expansion is another avenue for acquiring real resources; and provincial governments have every incentive to exert all their influence to extract credit from the financial system. Which is why the local branches of the People's Bank were induced during 1984-88 to extend temporary credit in excess of the planned amounts. Not just the coastal provinces, but all pro- vinces, have sought after bank financing to enlarge their command over real resources. 4.35 There is a correlation between the increase in broad money and prices, but that relationship is only a part of the explanation (Chart 4.1). China experienced rising prices not just because the central government's monetary policy tended to be expansionary. This undoubtedly accommodated demand pressures. But monetary controls were allowed to slip and aggregate demand became excessive because of the struggle for shares that has erupted as reforms breach old price structures, threaten inefficient industries and begin transforming the rules for allocating resources. 4.36 Each time the central authorities have arrived at a consensus on the need to stabilize demand, they have been able to empower the People's Bank to restrict credit. This was done in 1980/81 and in 1986 and a most effective credit squeeze is currently in effect. The central bank is as strong as the central government's resolve with regard to a particular variant of macro- economic policy. It has the instruments needed to tighten credit and enforce its directives. These are canted towards the administrative but they are, nevertheless, successful in controlling liquidity. The forces unleashed by reforms gave rise to political imperatives, which at certain times militated against the application of firm credit policies. They, rather than the insti- tutional shortcomings of the PBC, must bear much of the responsibility for the procyclical behavior of credit. 4.37 If the tempo of reforms accelerates, intergroup struggles, tempora- rily in abeyance, will resume and China will again be exposed to inflationary pressures. To preserve the hard-won price stability will require political action, institution building and economic reform, along with firm macroeco- nomic policies. Chart 4.1: MOVEMENTS IN MONEY & PRICES (Quarterly) Percentage Growth Rate 60 50 - 40 -. 30 . 0 0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1986 1 1987 1 1988 1989 Quarter/Year M1 M2 CPI CPI for Nation (Three month Moving Avg.) - 71 - 4.38 (i) A national consensus on economic goals and the virtues of stable prices is a starting point. Countries that have at various times been con- spicuously effective in holding inflation at bay, anchor macropolicy to such a consensus. Japan, Sweden, Korea (in the eighties) are examples. All of these countries depended upon an understanding between government, business and labor, on basic parameters, to coordinate macroeconomic policies, corporate pricing strategies and wage demands. The macroeconomic efficacy of political consensus has been repeatedly tested and proven in China itself. Center and provinces; urban workers and farmers; all the parties engaged in a zero sum game over income shares, must be persuaded to participate in an economic con- sensus entailing sacrifices, but with long-term welfare gains for all. 4.39 (ii) Expectations, behavior and demands are formed by the prevailing model of economic functioning. Enterprise managers in China can still believe that, while they might be chastised for poor decisions and losses, the state or local authorities will accommodate the deficits. In an extreme situation, a loss-making enterprise might be merged with a successful one, but for all intents, a socialist firm, especially if it is one of the larger state enter- prises, is immortal. This guarantee also determines the attitudes of workers. For the vast majority, lifetime tenure is still guaranteed. Only in rare circumstances can a worker be laid off and that too for gross dereliction for which his comrades can find no mitigating factors. Having functioned for years in sellers' markets, enterprises assume that cost increases can even- tually be passed on. The coming of floating and free market prices has provided further encouragement, especially because the state has been forth- coming with monetary accommodation. With administrative decentralization having stripped away some of the inhibitions on enterprise behavior and urban workers sensing that their relative income status is in jeopardy, a wage-price spiral is almost unavoidable. 4.40 Incomes policies can serve temporarily to stem the tide, but over the longer term only a change in the guiding economic model can assure stability. Enterprises and their employees are reaping some of the benefits of a market environment, without having to shoulder more of the risks--in effect, the gains are pocketed by the enterprise, losses are passed on to the government. Until reforms revise these expectations, price stability will remain an uphill battle. 4.41 Clearly the safety net, that shelters enterprises from accountability and prevents market forces from moderating wage demands, needs to be modified. Market discipline cannot be imposed administratively in a system where owner- ship rests with the state or a collectivity. So long as individuals do not run the risk of losing capital or losing employment, with consequences for their future livelihood, market forces are blunted. Understandably the authorities would like to avoid dramatic shifts, but on the margin, expecta- tions must be changed. In a word, the state must begin transferring risk to enterprise owners, managers and employees. A more porous safety net, that vests ownership of some industrial assets in individuals or groups and, with it transfers full accountability, would make market discipline into a reality. Likewise, the share of tenured employment should shrink, enterprises be enabled to shed their surplus staff, and as need arises, to hire at competi- tive wages from a large urban labor pool. A lesson painfully learned by most industrial countries is that wage price spirals are only broken when workers - 72 - are convinced that the state will not deflect market tendencies and underwrite wage demands. China may also have to bring its protected industrial workers to accept limits of state responsibility for employment and the inevitability of market guidance in wage determination. 4.42 (iii) Among the industrial countries, Japan has endured cyclical fluctuations with the smallest amplitude and has shown the most speed in adjusting to shocks. Among the factors believed to be responsible, are the so-called "flexible rigidities" in the labor market.i/ Wages are subject to political consensus attuned to the prevailing economic realities; annual syn- chronized wage negotiations take account of shocks and decide rates of increase for the bulk of the workforce; and tenurial arrangements for a core of industrial workers allow for a trade-off between job security and wage increases, helping diffuse price shocks when the need arises. As the wage contracts with the core workforce set the tone for other wage deals, market flexibility is enhanced. 4.43 Tenured employment for industrial workers already exists in China and annual wage adjustments are the norm. However, the system needs reconfiguring and fresh institutional arrangements must be sought to arrive at a political consensus on the division of the economic pie. For Chinese industrial workers, lifetime employment is a right assured by the state, whereas in Japan it is a contract involving reciprocal obligations: workers realize that their welfare is linked indissolubly to the success of the company in an intensely competitive marketplace. In addition, labor allocation in China is still largely an administrative process divorced from market pressures, which it is not in Japan. As indicated above, wage moderation and flexibility, is in part an outgrowth of consensus about the tolerable rate of price increase, which is ultimately an agreement on distribution. Equally important is the worker's realization, that his future income will in large measure be decided by his own effort and is not an administratively ordained right. This calls for a labor market wherein a worker trades his services and which sharpens his motivation, by juxtaposing rewards with the pain of search as well as jobless- ness. 4.44 Lastly, tenure is a benefit assigned to the worker. Job security is not traded off against wage adjustment because the risk of unemployment does not seriously impinge on behavior or wage demands. It could be made a factor supporting wage moderation, but the labor market backdrop against which it is viewed, will need and in fact has begun receiving the attention of reformers. Labor contracting is on the rise and serious thought is being given to the monetization of benefits received in kind so that ties of housing and welfare binding workers to enterprises can be severed and job mobility increased. (c) Enterprise Reform 4.45 The future of enterprise reforms is closely associated with the manner in which price liberalization is tackled. After all, the functioning of markets and the efficiency of price signals depends on the nature of market participants and characteristics of their interaction. Arms-length trading, competition, freedom of entry and exit for firms, ease of contracting which lead to optimal prices, assume that the market is populated with large numbers of enterprises with substantial production and trading autonomy, the capacity - 73 - to enter and exit markets and so on. Efficient markets require a particular set of rules and a certain kind of player. 4.46 Diversification of ownership and increased enterprise autonomy are central tenets of economic reform in China, though the government has consis- tently maintained that public ownership must remain the dominant form. The key long-term issues in the area of enterprise reform are how state enter- prises should be managed, what is the appropriate balance within the public sector between state and nonstate enterprises, and how best to harness the potential of the private sector. 4.47 From its beginnings in the early eighties, enterprise reform has been steered by the cautious but widespread desire to move in stages from mandatory to guidance planning with small increments in enterprise autonomy.j/ This system assumes that enterprises will produce with reference to "suggested" targets individually assigned. While the targets can be modified depending on market conditions, the changes are "vetted" or negotiated with the relevant supervisory agency. Guidance planning enhances the choices enterprises are allowed and it displaces administrative directives with a different set of instruments for managing the economy, e.g., interest rates, taxes, exchange rates, etc. But the state retains ownership and has the potential for inter- vening, for instance, in the setting of prices and in personnel decisions. 4.48 Mandatory planning has not been terminated but it has come to be overshadowed by "guidance". The latter, which in the decentralized milieu is exercised by local bodies, is variously interpreted. Some planning and finance departments are less interventionist than others. This ambiguity over the operational meaning of "guidance"--and the extent to which guidance shades into compulsion--leaves the initiative to interfere with agencies of the state, who retain the right to exercise the state's prerogatives of ownership and are inclined to exercise it fully. 4.49 Guidance planning has made enterprises more autonomous, but it is a weak unstable autonomy. With independence thus circumscribed and ownership unchanged, it is inevitable that the issue of financial accountability is unsettled. The budget constraint was soft under mandatory planning; it remains soft under the guidance variety. Losses may earn bureaucratic dis- favor but they do not lead to closure. As the assets of loss-making enter- prises belong to the state and it is the state's responsibility to guarantee employment for the workforce, forcing enterprises to close their doors is less than meaningful. It is the state that suffers most of the pain. The absence of financial accountability in the strict market sense also means that indirect economic instruments lose some of their effectiveness. Higher interest rates, higher prices of imports or tighter credit do have an effect, but the enterprise escapes much of the pain. If its losses rise, they can be negotiated with the supervisory agencies; if credit for working capital is scarce, production is allowed to fall and the funds available used to cover overheads. No one is laid off. 4.50 The appearance of markets and the freeing of prices have begun impinging on production as well as resource allocation by enterprises. But the benefits in terms of efficiency have not been fully realized because some segments of the state sector are still sheltered from market forces. As a - 74 - rough rule of thumb, the township and village enterprises, accounting for 20 percent (1988) of industrial output, have the greatest independence and most responsive to market forces. By the same token, they are also the most likely to go under when the economy runs into a squall. At the other extreme are the medium and large state enterprises, some 8,000 in all, responsible for 57 percent (1988) of industrial production. Their budget constraints are soft but the guidance they receive can be heavy-handed. Collectives occupy an intermediate position. The largest ones are no different from the state enterprises. Smaller ones enjoy the fruits of autonomy to a greater measure, but must cope with the risks. 4.51 Improving the efficiency and innovativeness of state enterprises is widely agreed to be crucial. This will not be possible without changes in their external environment, including price reform and more competition, but it also requires changes in their internal motivation and management. The contract management responsibility system has made state enterprises more profit-oriented, but only in a short-term sense, with long-term success and survival still dependent mainly on good relations with administrative superiors, and with retained profits channeled mainly into workers' pockets. More generally, this system has not resolved a basic dilemma, which is that in China, relaxation of undesirable administrative control over state enterprises has usually led to an equally undesirable increase in worker control. It is of course essential that employees should be interested and involved in the management of the enterprises in which they work. On the other hand, however, a state enterprise should operate for the benefit of the whole society, not simply for the benefit of its workers as they will naturally favor high wages, restricted employment and low work effort. 4.52 Although they have one foot in the market economy, state enterprises are by and large socialist organisms and their inner workings diverge greatly from those of Western firms. A manager cannot afford to neglect supervisory agencies, whose intervention can be decisive in obtaining scarce inputs or a favorable decision with regard to prices. Bureaucratic signals are no less important than those of the market. These can reinforce each other but as frequently they pull in different directions. 4.53 The manager must pay close heed to the messages relayed by the verti- cal bureaucratic hierarchy. He is equally susceptible to pressures from two other sources: the Party secretary and the enterprise workforce. The former wields great influence because of his political connections beyond the firm; his role in approving appointments, links with employees, and capacity to secure materials using Party channels. The enterprise's labor force has a powerful say in what the manager decides by virtue of their monopoly power to provide or withhold work effort. Except in extreme circumstances, workers cannot be dismissed or laid off. They are inseparably associated with the firm during their active life and when in retirement. There is no labor market beyond the gates of the factory into which a discontented worker can escape and, for this reason also, the lazy and incompetent must be carried on the books. To win active cooperation, the manager must be sensitive to the workers' demands.k/ 4.54 Even where decentralization has enlarged enterprise autonomy, this does not translate automatically into discretion for the manager to rationally - 75 - pursue the most attractive economic goals. He can only do so to the extent that sociopolitical pressures internal to the firm allow him. His success is likely to be related to what he can provide the workers in the way of wages, bonuses, housing and benefits; his skill at negotiating with the supervisory organs; and the support he can gain from the Party hierarchy.l/ 4.55 It is not surprising that for a typical state enterprise, profit or growth maximization is unlikely to be the principal aim. In fact, large pro- fits can invite additional fees and higher guidance targets for the next period--what the Chinese refer to as "whipping the fast ox".m/ Maximizing "organizational slack" n/ so that the enterprise does not have to strain to meet its targets, and satisfactory profits, are what the manager seeks. The more fat a firm accumulates in terms of resources, the easier is the manager's job. 4.56 Freeing prices means that the market is potentially in a position to transmit signals. They will lead to efficient production if managers and workers act as maximizers. This is beginning to happen but there remain several institutional impediments to the full participation of firms in the market process. The ability of the Party to intervene in the management of a firm through its representatives in the enterprise certainly reinforces central administrative directives in a planned socialist economy, but are seriously distracting for managers, who are being called upon to respond to market signals. During 1987/88 the government was coming to accept the view that the Party should adopt a lower profile in the workplace, leaving the running of the enterprise to professional managers. Since early in 1989, Party channels have seen increased use in the center's effort to enforce its deflationary policies. If the advantages of industrial reform are not to be diluted, a return to the earlier trend is definitely called for. 4.57 Tenured employment can flourish in market economies but the institu- tional context is different. Both labor and management have choices. Workers have the right to leave and managers determine the employment practices to be followed. It is the boundedness of choice that is a brake on efficiency in China's enterprise sector. The worker's right to leave is narrowly constrain- ed by institutional and practical considerations, as is the manager's ability to fire one group of workers or compete for another. Resource mobility is reduced as is the efficiency with which labor can be utilized by the enter- prise. The development of an urban labor market and a redefining of the choices available to workers as well as enterprises are needed to loosen the bonds that currently bind employees to their assigned workplace. This will enhance the efficiency of labor use. But the full advantages of a system guided by market prices can only be realized by the eventual large-scale reform of public ownership and management policies. 4.58 The role of the government as owner, interested in the long-term growth of each enterprise's profits and averse to losses, has somehow to be maintained but separated from its role as an economic regulator with a range of other objectives. This point has been recognized in China, with the crea- tion of the National Administrative Bureau of State-Owned Property (NABSOP), although its ownership rights and activities are as yet undefined. State enterprise ownership rights might also be exercised by holding companies and - 76 - other public financial institutions, including investment banks, insurance companies and pension funds. If public ownership were to be organized in these ways, it might be advantageous to reconstitute state enterprises as joint stock companies with boards of directors.o/ This would permit larger enterprises to be owned jointly by several different public entities including provincial agencies, insurance companies and pension funds, thereby avoiding the problems of conflicting objectives that now arise because most enterprises are exclusively owned by a ministry or local government. Experiments with joint stock ownership have been underway for some years. They are the subject of intense debate and, since late 1989, have begun receiving renewed attention from policymakers in cities such as Shanghai. International experience makes clear, however, that there are no simple or ready-made answers in the field of state enterprise management reform and the above suggestions might only be interim solutions.p/ 4.59 So long as the vast majority of enterprises in the market are state- owned, as is the financial system, meaningful competition between firms will be restrained.q/ There will be nothing resembling the entry and exit associa- ted with functioning free-market economies. And without the hardening of bud- get constraints for banks, the financial system may not be able to discipline companies as it does in the industrial countries.r/ 4.60 Competition between independent enterprises requires that state ownership be fragmented into parts, each of which is on its own. In effect, the state adopts the role of a passive beneficiary, who defines market rules but then also plays by these rules and, in practice, this means leaving firms severely alone. Any intermediate position which allows the enterprise partial autonomy; that transfers only a. part of the usufruct, custodial and alienation rights; that blurs state ownership and prerogatives as in Yugoslavia, may fail in the above respects and may also fail to give entrepreneurship the free rein it needs. Entrepreneurial initiative assumes ownership rights, rewards from the success of a venture and the acceptance of risks.s/ The experience of China and other East European economies in the agriculture sector shows that entrepreneurship is sparked by long-term contracts or private leasehold over land, backed by dependable legal guarantees. This is still a halfway house because these rights are not necessarily portable. Leasehold rights cannot yet be sold in China and the capital used for some other industrial activity. 4.61 State ownership provides a direct command over resources, which defi- nitely facilitates planning, the raising of revenues and the management of income distribution. But production, fiscal and distributional goals can be achieved without undue difficulty, even if state ownership, while remaining dominant, is reduced in scale. In fact, such a division of shares promises additional advantages: higher efficiency and growth for the whole economy. 4.62 Ownership questions might first be tackled on the fringes of the formal industrial sector: in agriculture; township and village enterprises; and service industries. In all these cases, the ground has been prepared with a multitude of private or quasi-private enterprises in existence. These firms must be encouraged to compete with state enterprises. Progressively, as the infrastructure of legal rules and regulatory institutions is introduced, the latter could shift increasingly to joint stock forms of ownership except the - 77 - ones in core sectors which, for reasons of natural monopoly or strategic interest, must remain directly under state control. 4.63 Township and village enterprises, clustered mainly in the Eastern provinces, have rapidly increased their share of industrial output. (see Table A9.1). They have broadened the spectrum of ownership forms. Their absorption of surplus agricultural labor and contribution to raising rural living stan- dards is much appreciated, but they are also seen as technologically backward, and as inefficient users of agricultural land and valuable raw materials.t] This has led to periodic attempts by the central authorities to curb their expansion, the latest of which occurred in 1989. It is true that some of these enterprises are of little or no economic value to society, being profit- able only because of price distortions or market imperfections. Administra- tive weeding, however, is a crude and ineffectual approach to this problem, for which the only efficient and lasting solution is price reform and other actions to make markets work better. Administrative improvements are also needed, but mainly to ensure that nonstate enterprises pay their due taxes and comply with the safety and environmental regulations to which state enter- prises are subject.u/ 4.64 More generally, it is not possible as yet to judge reliably whether township and village enterprises are more or less efficient and technologi- cally progressive than state enterprises.v/ Not only has there been little scientific study of this issue, but also the comparison is inherently diffi- cult. This is partly because of the manifest diversity of performance within both enterprise categories, and partly because township and village enter- prises do not have equal access to skilled manpower and advanced equipment-- though this has improved in recent years. In certain respects, township enterprises are similar to small state enterprises. But they are free of some of the causes of state enterprise inefficiency: they have much less access to subsidies and soft loans; their owners cannot protect them as easily from outside competition; and their employment and wage decisions generally involve a better balance between the interests of their workers and those of the whole local community. In some sectors, they are also a valuable source of competition which has improved the performance by state enterprises. So although the issue merits further study, it seems likely that continued expansion of rural and other nonstate public enterprises, albeit at a more moderate pace, would be to China's long-term economic advantage. 4.65 Private enterprises and individual self-employment are permitted and protected by China's constitution, and have been governed since 1988 by well- defined State Council regulations.w/ The number of privately owned businesses at the end of 1989 was 12.4 million down from 14.5 million a year earlier, and they provided employment to over 19 million people. Private businesses are most heavily represented in repair activities, small scale construction, retailing, food and beverages production, agricultural sideline production, light manufacturing and in services. But there remains disagreement about their future role, scale and scope in China's socialist economy. Moreover, criticisms of the private sector have recently been intensified as part of the rectification campaign. This has arisen, because some private enterprises did engage in illegal activities and tax evasion, and it is essential that private enterprises should comply with laws and regulations. However, these justified criticisms should not be exaggerated, and ought not to obscure an objective - 78 - assessment of the advantages and disadvantages of legitimate private enterprise in China's economic development. 4.66 On the basis of recent Chinese as well as all foreign experience, there can be no doubting the power of private enterprise to harness the effort and initiative of individuals and families. In most countries family businesses account for the overwhelming majority of small and medium-sized nonagricultural enterprises. For this reason, it may be advantageous to pro- mote such businesses in China, while retaining public ownership of all large enterprises. Such extension of private ownership, starting in the rural sector, would not make it any harder to plan and manage the economy than if it consisted entirely of autonomous public enterprises, because either way, regu- lation would have to be indirect. The real problem with an extension of pri- vate ownership in China instead appears to be its effect on income inequality. The very high incomes that a few successful entrepreneurs earn, even after paying progressive personal income tax, provide a valuable incentive for all the others to work and to take the large risk of financial failure. But the social justification for very high incomes is only gradually becoming accepted in China. - 79 - V. TRADE, FOREIGN EXCHANGE AND CREDITWORTHINESS 5.1 "Open door" policies have transformed China's trade relations with the rest of the world. In a little over ten years, the ratio of trade to GDP tripled, approaching nearly 28 percent in 1989 and trade now exercises a strong direct influence on growth and a profound indirect effect on the moder- nization of the economy through the impact of technology, marketing skills, as well as the contacts with other nations. The rising importance of trade in economic calculations has spurred efforts to change the composition of exports along with those of imports, so that China can maximize the growth impulse imparted to the economy. Manufactured exports have displaced raw materials and accounted for 70 percent of the total in 1988. Among them, garments, consumer electronics, office and telecommunications equipment, toys and machi- nery have risen to prominence, while the share of foodstuffs has diminished. Raw materials and intermediates still comprise a somewhat incompressible third of China's imports, but the proportion of capital goods rose to 34 percent in 1988 from 19 percent ten years ago. Since the mid-eighties, merchandise exports have increased at an average rate of 15.2 percent per annum, reaching $52.5 billion in 1989 (Table A3.3). With respect to the growth of world trade, this represents an elasticity of 1.3 (Table A3.7). Imports, which grew explosively in 1985 coinciding with the second round of reforms, were restrained in 1986/87. As a part of the government's stabilization policy, the flow of imports expanded rapidly in 1988 and the first half of 1989, but slowed down in the second half. Imports for 1989 reached $59 billion, a 18.2 percent per annum increase since the middle of the decade (see Table A4.3). 5.2 After agriculture, trade is the area where reforms have been most successfully introduced. They have contributed significantly to industrial progress and bolstered creditworthiness. The role of trade during the nineties promises to be even larger, as a source of growth and technology. It will also remain the principal bulwark of China's credit standing. The momen- tum certainly is there. By building on past reforms, it can be sustained, assuming that world trade expands at 4-6 percent per annum as it has done in 1985-89.1/ This section reviews trade prospects and the policies required; the following one examines trends in external borrowing and creditworthiness. Trade Prospects and Policies Required 5.3 In the pre-reform era, China, much like other socialist countries, relied on imports to make good domestic shortages of materials and the unavai- lability of various kinds of capital goods. These were financed by exporting items for which surpluses could be generated such as rice, petroleum, process- ed food and other minerals. After decentralization transferred some of the initiatives to provincial bodies, market opportunities, the chances to earn profits, have introduced new dimensions into trade strategy. Where once a handful of centrally controlled, foreign trade corporations (FTCs) were responsible for all transactions, the numbers had risen to over 6,000 in 1989. Furthermore, the trade responsibility system, allied with guidance planning, 1/ The volume of international trade grew by 7 percent per annum during 1987-89. World Economic Outlook, IMF, April 1989, p.11. - 80 - vastly improved the attractions of exporting for enterprises and local govern- ments. Exporters can retain 25 percent of the foreign exchange earned for quota sales assigned by the center and 75 percent of above-target business, the balance being transferred to the central government. Of the retained amount, they share half with the provincial government. All parties have a stake in the growth of trade. 5.4 Aside from the reforms that led to trade contracting on a decentra- lized basis, the other important step was the creation of Special Economic Zones, which have attracted direct foreign investment in processing and assem- bly industries. In 1989 these Zones, led by Shenzhen, accounted for $3.8 bil- lion (7.2 percent) of China's merchandise exports.a/ 5.5 The future of trade will be decided by industrial strategy alluded to in Chapter 3 as well as by trade and exchange rate policies. Some of the more important ones are discussed. below. 5.6 Export Composition. It is quite probable that the share of raw materials in exports will shrink even more. Petroleum production is stagnat- ing in the face of rising domestic consumption, and the need to satisfy grain targets holds down the output of cotton. Petroleum accounted for 26 percent of China's exports in 1985 and 6 percent in 1988. Manufactures, initially labor-intensive ones, but increasingly producer goods, that capitalize on China's substantial experience in this field, will emerge as leading exports, as they have done in the case of South Korea. 5.7 There are several commodities which have shown growth rates consis- tently above the average rate for the last few years: silk piece goods; embroidered articles; other garments, especially of cotton; carpets; and "pro- ducts exported after inward processing of imported materials," which are, in particular, soft toys, electronic items, such as radios and cassette players, and garments. Typically, these are being exported out of Guangdong and Fujian, as described above. All of these products have one thing in common: they rely on a large supply of cheap, but semiskilled labor. 5.8 Many countries can claim such a resource, but China has been able to put it to better use for two reasons. First, China is benefiting enormously from its relationship with overseas Chinese in Hong Kong, Taiwan, China, and Singapore. Contacts between overseas Chinese and their relatives or simply their villages of origin are very important, and seem to be the reason--along with the sound underlying business rationale--why there has been so much small scale, export-oriented foreign investment in these two provinces. Moreover, this development is in the interest of the other East Asian countries who are faced with rising labor costs. 5.9 Second, China's producers have encountered few difficulties in adapt- ing to the quality standards demanded of exports. Certainly, labor needs vigilant supervision in Chinese factories, but, in the case of the Guangdong enterprises for example, the rates of productivity have been close to those of the Hong Kong enterprises, with any shortfalls fully compensated by the very large wage differential. Part of this is explained by the common language and culture of most of the quality and production supervisors sent to the Chinese enterprises; part of it may also be that there are real incentives for the a/ Lettered footnotes are to be found in Annex II. - 81 - Chinese entrepreneurs and enterprise managers to achieve the standards requir- ed; and part, it must be said, may be the apparent natural tendency to high productivity of the people and cultures of East Asia, when offered appropriate rewards. 5.10 What this suggests is that garments, toys and footwear, that are already among China's major exports, will continue to perform strongly for years as they have done in the case of South Korea and Taiwan, China. What China lacks is design, production and marketing technology. This will develop with time as a natural process, as it has in Hong Kong, and, indeed, is already doing in China's silk goods. At present, China is facing growing protectionism, and already has limits to growth with the US and EEC markets. Following the pattern of Hong Kong, it will need to diversify its markets and establish niches in the dynamic economies of East Asia. 5.11 Among the emerging export industries, electronics assembly is one which is the most promising. It is entrenched in the Special Economic Zones and the Economic Development Areas. The OEM (original equipment manufacture) route is the one China is now following by assembling or producing items for large foreign companies. But it has the option of developing and marketing its own brand names as both South Korea and Taiwan, China have begun doing. There appears to be scope for both strategies in China, but whichever is followed, it appears certain that there will be strong comparative advantage in China in the coming years for consumer electronics, including TVs, radios (which are already quite strong), microwave ovens and computers. Just as these exports have moved from the USA to Japan and then to South Korea and Taiwan, China, so they will also move to the mainland. It is quite likely that this sector would be a particularly relevant one to target for greater foreign investment--to follow the first strategy--which could be attracted by access to the Chinese domestic market. As the internal market is now adequa- tely supplied with many basic consumer durables, the export market should become increasingly interesting for producers of commodities such as refri- gerators and bicycles.2/ 5.12 There also appear to be two other industries that can be groomed for a larger export role in the near term. The pharmaceutical sector has perform- ed creditably in the last few years, as a result of a growing interest in Chinese traditional medicine, but also because of the increasing availability of fine chemicals. This beachhead can be expanded by drawing on the strength of the domestic market. Similarly, China has seen growth in its exports of hand tools and small machine tools, which its vast engineering sector is equipped to produce in quantity. China is by far the world's largest producer of machine tools and can mount a strong push in the export market if problems of quality and technology can be overcome. 2/ It is estimated that 2 million bicycles, half a million more than in 1988, were exported in 1989, from a total output of 38 million. Production capacity, spread across 78 factories, is 50 million. There are eight bicycle exporting "bases" in Shanghai, Tianjin, Jiangsu and Guangdong. "Nearly 2 Million Bicycles Exported," China Daily, December 23, 1989. - 82 - 5.13 Much of the recent growth in exports of light manufactures has come from small producers in the south of the country, working to orders provided by buyers in Hong Kong. This suggests that two elements of general policy are critical: a moderately supportive policy towards township and village enter- prises, which already account for $10 billion in exports, or about one-third of all manufactured exports, so that they can fulfill export orders; and a maintenance of the Hong Kong/Taiwan, China special relationships, which will continue to be the main real source of export growth. 5.14 Trade Reforms. The last two years have seen two phases of trade reform, followed by the present phase of rectification. The first phase, in September 1987, selected three sectors where price distortions were relatively absent: garments, light industrial products (including electrical and electronic goods) and arts and handicrafts. The reform offered a carrot and a stick: (a) for these sectors, rates of foreign exchange retention were raised to between 60 percent (garments) and 100 percent (electronic components). If the enterprises/localities did not wish to use this foreign exchange for imports, they were permitted to sell excess foreign exchange in the newly created foreign exchange adjustment centers, where rates have on average been 75 percent above the official rate (see Section D for more details on these centers); and (b) the stick was the complete removal of subsidies and of official allocation of foreign exchange, so that the industries were by and large fully independent. 5.15 The second phase came at the beginning of 1988 with the introduction of the trade responsibility system. MOFERT devised and signed contracts with all the provinces, municipalities and major cities (i.e. those with separate planning), each for a three year period. These contracts are actually rather simple documents, and they have three essential components: (a) they define an annual export earnings target for the contracted period; (b) they define the rates for the sharing of foreign exchange between the center and the con- tractor, with one rate (usually 75-80 percent) for above target earnings; and (c) the contracts specify the "economic results" of the export activity. This means that the contracts fix the level of subsidy (if any) that the central government will provide over the life of the contract. In general, targets and subsidies were based simply on their 1987 levels. As far as is known, there was no nominal increase in subsidies provided over the three-year period. 5.16 These reforms were accompanied by administrative decentralization. This was in two respects. First, the authority to approve the creation of new foreign trade corporations and to grant direct trading rights to enterprises was decentralized to the local bureaus of foreign economic relations and trade. It fostered a major growth in the number of the FTCs operating at the local level. Excluding Guangdong province, the number of FTCs rose in 1988 alone to well over 5,000 from about 4,000, and in Guangdong the number of companies increased by almost one third to over 1,000 from under 800. In all, about 2,000 new foreign trade enterprises emerged in 1988. The trend was halted in July 1988, when the approval of new FTCs was suspended. 5.17 A second related reform was the delegation by MOFERT of some aspects of trade administration to the newly created Special Commissioners' Offices, and the creation of quasi-governmental Chambers of Commerce for Import and - 83 - Export, to act as information exchanges, provide consultancy, and market advice. In short, this involved a division of responsibility for business and administration in the large FTCs, and for policy formulation and administra- tion in MOFERT. 5.18 More recently, MOFERT has launched a third phase of reform, in line with the macropolicy of improvement and rectification. The Government's view is that too many new FTCs were created, and that they have contributed to inflation by bidding up procurement prices, and through their own administra- tive costs.3/ All FTCs are to be screened, and "illegal and unqualified ones will be dissolved, merged or deprived of import and export rights." Over 80 percent of the trading enterprises created in 1988 were pure trading com- panies, with under 20 percent being producing enterprises granted trading rights. It has been stated that rectification will concentrate on these pure trading companies, and that there will continue to be progress in granting direct trading rights to producing enterprises. 5.19 A prelude to this effort was the government's response to the so- called "silk war" in the summer of 1988. Silk is (or was) among the most profitable of all China's exports, being a high-value export with relatively low production costs. The freedom to create new FTCs led to a situation where many new FTCs signed silk export contracts prior to securing a source of sup- ply and then competed for the limited supply of silk cocoons.4/ Fierce interprovincial competition to secure raw material supplies erupted. Two consequences alarmed MOFERT: first, cocoon prices were bid up sharply and export profit margins cut (which was a good thing, but affected seriously the profitability of the National Silk Import and Export Corporation); and the second was the breaking of large numbers of export contracts, which was rightly perceived by MOFERT as damaging to China's market reputation. MOFERT responded by unifying control of the silk trade under the National Silk Import and Export Corporation. 5.20 In its attempts to correct the mistakes made earlier, MOFERT has no intention of reneging on or renegotiating the three-year trade contracts. Thus, the reforms of the trade planning system will remain intact. Further- more, the September 1987 reforms, which liberalized trade in selected sectors, will also be preserved, although not necessarily extended to other sectors. Within the three components of the recent reforms--the foreign trade contract system, higher retention ratios coupled with the abolition of subsidies and 3/ Since pricing for many commodities in China is based on a simple cost- plus pricing rule, there is a generalized belief among Chinese policymakers that additional agents in the distribution field must automatically increase total production costs and thus raise prices. There is no concept of competition spreading rents wider, or of the generation of efficiency gains in distribution via increased competition. 4/ This also reflects remaining price distortions, in that large profits were generated in exporting, but under the prior system, this profitability had not been adequately transmitted to the silk cocoon production level. Thus, while export demand was growing rapidly in 1988, cocoon output actually fell. - 84 - decentralization of administration--it is only the right to approve new FTCs that has been reversed. 5.21 There are two comments to be made with respect to the current reassessment of foreign trade policies. It is indeed important to ensure that trading companies (FTCs) abide by laws and regulations and that they do not damage China's market reputation, either by reneging on contracts or by exporting substandard products. It is, therefore, appropriate to strengthen export certification capacity and to clarify rules and regulations for the qualification of trading companies. To the extent that this is the motivation and rationale behind the recent changes it is to be supported. However, there is also an element of judgment by government that there are simply "too many" FTCs, although it is by no means clear that the central administration--as opposed to the market--can determine the appropriate number of trading compan- ies. The creation of more FTCs, and especially of more enterprises with direct trading rights can ultimately only be good for the efficiency of exporting, provided, of course, it is done within an appropriate regulatory framework. Overall, therefore, consolidation should be pursued with caution, and some of the energy and effort being expended upon it could be better allo- cated to improving the regulatory framework. 5.22 With respect to the two continuing elements of reform, they both clearly represent progress in the bringing to bear market forces in the area of trade and the reduction of micro planning. However: (a) the trade respon- sibility system leaves major power in the hands of local governments, rather than enterprises. Local governments tend to take the broad export targets of the contract system and convert them into mandatory targets for their FTCs, just as they used to do with central guidance plans; and (b) the use of high retention ratios and parallel exchange rates are of course powerful export incentives, but also a major distortion in the trading environment. There- fore, these two measures should be regarded as transitional mechanisms, rather than as final goals. 5.23 While macroeconomic restraint is being observed. over the next two years, there are several issues that could be taken up. They fall into five areas: trade organizations; reform of the present foreign trade responsibi- lity system; treatment of credit allocation; licensing and tariffs; and export promotion policies. 5.24 Trade Organizations. The most notable feature of trade reform in China has been the explosive growth of foreign trade corporations since 1984. This has injected vigor into exporting, creating competition for export sup- ply, and generally "raising the enthusiasm" for exporting. Over the years, a number of deficiencies have been noted in this approach, but the authorities have usually reacted by tightening administrative controls, as is occurring at the present time. Three problems require attention: (a) While many new foreign trade corporations have been created, rela- tively few direct trading rights have been granted to producing enterprises. These would raise the efficiency of the export drive and enlarge benefits in the realm of technology transfer and product upgrading. - 85 - (b) The new trade corporations have suffered from the same drawbacks as the ones in the prereform era, in that they purchase goods and export on their own account. As a consequence, they fail to pass on fully to exporters changes in world market prices. This has been compound- ed by the fact that the new FTCs are frequently the product of pro- vincial government initiative, committed more to quantitative export targets than the economic efficiency of such exports. (c) The creation of new FTCs has occurred in spurts during periods of decentralization. This has had two consequences: some of them lack experience and qualifications, making it difficult for them to satis- factorily deliver on export contracts.b/ The usual reaction has been to place artificial limits on growth of FTCs, recentralization of trade rights granting authority, and, as now, administrative closures of new FTCs. 5.25 Clearly, there is a need for policy action with respect to trading organizations. They should be directed towards three main areas: (a) A vigorous program of granting direct trading rights to qualified producing enterprises, together with the development of assistance to these enterprises so they can enter world markets. (b) The strict application of hard budget constraints on foreign trade enterprises, and the replacement of trading for their own account with the export agency system, as has been done successfully in the area of imports. (c) The development of clear rules, regulations (including audit provi- sions) and qualification requirements for foreign trade corporations. 5.26 Chinese trading corporations, like their counterparts in South Korea and Japan, have a vital role to play for many years.c/ There are many produc- tion enterprises that will not wish to export directly, nor would they find it economic to do so. Many importers from China also find the FTCs essential in their role of identifying export producers, supervising production, and guid- ing the importer through the bureaucratic maze. The same goes for the exporter to China. Moreover, many of the FTCs such as ChinaTex have now developed expert knowledge of overseas markets, as well as a network of con- tacts, and this expertise should not be lost. What the above proposals would do is heighten their efficiency and enable them to contribute more fully to the diversification of China's trade. 5.27 Reforming the Foreign Trade Contract Responsibility System. The existing set of foreign trade contracts will need to be renewed at the end of 1990. The system is to be retained, but three options are under active consi- deration: (a) A widening of the current system of provincial contracts; (b) A replacement of the provincial contracts with "commodity contracts" negotiated between MOFERT and the FTCs; - 86 - (c) An extension of the September 1987 reforms, which generated higher retention ratios to certain sectors (as described in para. 5.14). While the power of the September L987 reforms is recognized by the government, there are concerns that its broader application could cause shortages of foreign exchange at the central level. 5.28 There should be scope for each of these three elements to be incor- porated into a revised trade contract system. The present system has encour- aged provincial initiative, and reduced the subsidy burden on the center, and thus elements of this framework need to be retained. However, there remain some features of the old mandatory trade plan for certain raw materials, which could be superceded by some form of commodity contract system. For the pro- vincial contracts to be replaced by commodity contracts would seem, however, to be a regressive step, as it: would involve a greater level of central planning. 5.29 Finally, the third option would have considerable benefits, as it would both enhance export incentives and foster the further development of the foreign exchange market. With regard to the question of whether it would cause shortfalls in central access to foreign exchange, the answer would be that the government could always purchase foreign exchange in the adjustment centers through the People's Bank to meet any such needs. It would have to pay the market price, but this would be a further encouragement to continue to move towards the unification of the official and parallel rates. 5.30 Credit for Exporters. In a time of credit restraint it is very important to ensure that export enterprises have the ability to finance their export production. As long as there continues to be a very significant ele- ment of administrative allocation of credit in China, provisions will need to be made to ensure that exporters have access to pre- and post-shipment financ- ing. 5.31 Without such provisions, there is a danger that either the banks may be unable to provide adequate levels of credit, given competing demands in the face of an overall shortage, or they may be able to force the People's Bank to create excessive levels of credit in order to fulfill the policy, as has occurred in the past--for example in 1988--in the area of credit for agri- cultural procurement. In such circumstances, the correct approach is for the PBC to set aside part of the annual credit plan, and of PBC credit creation in particular, to meet the pre- and post-shipment needs of exporters. In this way, credit for exporters can be accommodated within the overall credit plan, but banks would not feel restrained in granting credit for export production. 5.32 What must be stressed is that credit allocation for exporters should be at regular interest rates. The issue is access to credit, not the cost of credit. Indeed, to subsidize credit would be exactly the same as directly subsidizing exports. But ensuring access to credit in the current framework of credit restraint through the suggested mechanism would be a powerful instrument that the government could institute to accompany the foreign exchange rate policy in encouraging the rapid growth of exports. - 87 - 5.33 Licensing and Tariffs. In the last ten years, China has moved a long way from its old, highly centralized system. Now, the exchange rate and the tariff system do play a major role in the level and composition of exports and imports. But China continues to direct both its imports and exports to a considerable degree through an extensive system of licensing, and further progress towards an indirect system of trade control seems warranted. A tigh- tening of import licensing contributed to the reduced growth of imports in mid-1989 and it is the export licensing of raw materials which has been a critical determinant in domestic availability. 5.34 On the import side, there is great reluctance to move from this quan- titative system to one which relies more on the price mechanism via tariffs. There are two reasons for this reluctance: the government believes that so long as enterprise budget constraints remain soft, the demand for imports in the absence of such controls will be excessive; and, second, that tariffs would be very hard to collect and could be a further source of corruption in the system. (In many other countries, it is the fear of corruption or its existence that moves governments to replace quotas with tariffs.) Indeed, the current degree of domestic price distortion means that tariffs would have to rise to very high levels for some commodities--if they were to replace import quotas at an equivalent level of protection--that collection would pose serious administrative difficulties. Nevertheless, the medium-term goal should remain the replacement of import quotas by tariffs, holding the level of protection constant. Over the longer run, the degree of protection should be reduced. 5.35 In the meantime, the ground can be prepared by the gradual elimina- tion of exemptions on tariffs. The effective rate of tariff collection is only 4.6 percent of imports, whereas the tariff rates would imply a taxable level at least ten times higher. This can only be attributed to widespread exemption of tariffs and duties. It is a practice that should be ended, both in order to boost revenues--for these taxes are a way for the government to capture the rents associated with actual imports in the face of excess demand for imports--and to develop the administrative mechanisms, together with the trained personnel needed to administer a system, that will eventually rely on tariffs rather than on licenses. 5.36 But these same considerations do not apply to the export side. The reasons for quantitative controls at the present time fall into three types: (a) On commodities in which China has a dominant supplier and in a posi- tion to extract monopoly rents. The frequently quoted example is China's food exports to Hong Kong, which are administered very strictly. (b) On commodities where China is facing quota restrictions in the market, as in the case of garment exports to the United States and the European Economic Community. (c) Where the domestic price for the commodity is very low, but the com- modity is in short supply at home. Here, China is applying export controls in order to prevent the emergence of domestic scarcity. - 88 - For the first two situations, there are theoretical economic solutions (not- ably export taxes and auctioning of quotas) that would have the same result in terms of the volume of exports, but it must be recognized that such solutions may be difficult to design and implement. Moreover, it appears that the cur- rent arrangements are operated rather well. While there is little immediate need for reforms in these areas, experiments with the auctioning of garment export quotas could be broadened if they prove workable. 5.37 It is in the third area that more immediate actions seem to be warranted. The purpose of the quota is to compensate for the differential between fixed domestic and world market prices. This is a classic case where the application of appropriate export taxes would be more efficient than the current approach. China may be missing out on useful export opportunities because of the imperfections of planning, and because of the difficulties of accurately forecasting domestic demand and supply of these commodities. For example, it could easily prove to be the case that as demand patterns change, domestic supply of certain types of steel move into surplus, while there remains a shortage of other types. In such cases, it is more efficient to export the surplus type and import the shortage type, than to attempt to force the domestic market to accept what is available. A policy of replacing many or most of the 173 export quotas, now in place, with export taxes at a level that covers the difference between the domestic price and the world market price would be highly appropriate. As price reform progresses, these taxes can be gradually removed, in line with the application of world market prices in the domestic economy. 5.38 Export Incentives and Export Promotion. China has made progress in the last few years with the application of a system of tax drawbacks and exemptions, so that export producers can obtain their imported inputs at world market prices. This system should be maintained and perfected. Less pro- gress, if any, has been achieved in the drawback of domestic indirect taxes on inputs to exports. This applies in particular to the industrial and commer- cial taxes levied on domestically produced inputs for exports. The principles are exactly the same as for the drawback of import duties, except inasmuch as many of these exemptions take place at the time that imports actually occur, and duties have to be paid if the imported inputs are not used in export pro- duction. However, action on this front is constrained by the inclusion of such taxes within the enterprise contract responsibility system. Therefore, this factor should be incorporated into the current tax reform efforts and experiments, so that an eventual indirect tax drawback scheme could be built into a reformed tax system. 5.39 The government already makes fairly strong efforts in the area of general export promotion, by mounting trade fairs, and arranging for partici- pation of producers and FTCs in overseas trade fairs. This effort should not be minimized, and has certainly assisted in export growth. In addition, some of the FTCs, such as Chinatex, have proved to be very adept in identifying overseas markets, and in searching out potential buyers and contractors. Both of these activities should be maintained. However, the relationship between the FTCs and the export producers is essentially a contractual one, and while the exporters may learn quite a lot about export standards, they learn little about the actual marketing of exports. - 89 - 5.40 Steps are being taken to change this situation, with the gradual separation of market information and consulting services from the FTCs into the newly created Chambers of Commerce for Import and Export. This is a pro- cess that should be accelerated and supported financially. The FTCs will always regard themselves as competitors with the export producers for the available supply of exports, and so long as they retain the dual roles of being trading companies as well as being responsible for technical assistance to exporters, the latter function will be short-changed. Thus the creation of specialized institutions to assist the exporters is a useful step that should be pursued with vigor. Exchange Rate Developments 5.41 The last two years have seen major developments in the exchange rate system in China. First, the introduction of the foreign exchange adjustment centers (FEACs), which led initially to the development of a wide differential between the official and parallel exchange rates; second, the tightening of domestic credit and import licensing, which led to a narrowing of the two rates; and third, of course, the devaluation of the official rate of exchange by 21 percent on December 15, 1989, from Y 3.72 = $1 to Y 4.72 = $1, which substantially closed the gap between the official and parallel rates. 5.42 The official exchange rate in China is theoretically linked to a basket of currencies, with the US dollar as the currency of intervention. In practice, this has tied the rate for the renminbi yuan to the US dollar, and the effective rate of exchange has moved in line with the US dollar against other currencies. As most of China's exports are traded in US dollars, this policy has merits, provided that periodic adjustments are made to the inter- vention rate. Since the beginning of 1988, the US dollar has been appreciat- ing against other currencies--notably the Japanese Yen--and causing the nominal rate of exchange for the Yuan to appreciate also. Taking 1980 as 100, the nominal effective exchange rate index fell to a low of 51 in December 1987--following several official devaluations, notably that of July 1986--but with the appreciation of the US dollar, the nominal effective rate had risen to about 6 percent by December 1989.5/ The devaluation of December 1989 restores the nominal rate to its most competitive level. The real effective exchange rate index had, of course, moved even faster, and from a low of 38.5 in December 1987, it had appreciated by 26.8 percent by December 1989. The devaluation helped to correct the recent appreciation, but did not compensate for it entirely. Very low rates of inflation in the first half of 1990 has, however, narrowed the gap still further. 5.43 Until the beginning of 1988, the FEACs had only been available to joint ventures, for whom it was a major development, as it virtually eliminat- ed the difficulties previously imposed by the "foreign exchange balance" policy that had been in effect up to that time. The recent trade reforms 5/ The nominal effective exchange rate measures the exchange rate by weighting the actual rate against other currencies according to the shares of those currencies in China's trade. Thus, in the case of China, major weights are assigned to the US dollar (which includes the Hong Kong dollar, as this is also tied to the US dollar) the Yen and the Deutschmark. The real effective exchange rate adds the impact of differential rates of inflation to the calculation. - 90 - raised retention rates for a range of commodities, and opened the FEACs to domestic enterprises, both those which now had a surplus of foreign exchange to sell given their higher retention rights, and those which had been unable to obtain foreign exchange at the official rate to meet their import purchase requirements. From only a few hundred millions in transactions among joint ventures in 1987 6/ the level of transactions rose to $6.5 billions in 1988, and to about $7.5 billions in 1989, or about 15 percent of total export earnings. The average rate moved from about Y 6 = $1 at the beginning of 1988, to a peak of Y 7 = $1 in September 1988, and again in February 1989. It then began a steady decline because of tighter credit and control over import licensing, falling sharply to a level of only Y 5 = $1 in November. 5.44 The conduct of foreign exchange policy can be judged to be an area of some success in the overall reform effort of the last few years. It is no coincidence that garments and light manufactures, which have the highest rates of retention, have continued to show strong growth even when the official rate has been appreciating. Moreover, the government is to be applauded for taking the opportunity of the narrowing of the differential to devalue the official rate. It can be assumed that it. was the pressure from the existence of a parallel rate, that caused the authorities to pay attention to the competi- tiveness of the official rate, and to move at an ideal time to adjust the official rate. With the gap between the two rates at its lowest ever level, and with domestic demand sluggish and inflation falling, this was indeed an opportune moment at which to ad`just the official rate. It is very clear that the real appreciation of the official rate of exchange during 1989 caused a strong reduction in the interest of producers to export, and in the ability of the FTCs to offer competitive procurement prices. Furthermore, the trade responsibility system, offering as it did only limited subsidies to exporting, made the exchange rate much more relevant to the level of exports achieved, as it constrained to a much greater degree than before the ability of the FTCs to export at unprofitable prices. Thus, to a very significant degree, it was the developments in trade policy in the last two years that forced the government to move on the exchange rate.7/ 6/ At this time, transactions were also permitted between joint ventures outside the confines of the FEACs, which were seen as a facilitating institution at the time, and thus the total volume of transactions was undoubtedly higher. It was also possible for Chinese enterprises to sell foreign exchange between each other, but the lower rates of retention made this a relatively rare occurrence. 7/ It should be recalled that an exchange rate change in China is not neutral for the budget. The devaluation will have major expenditure implications in three respects: first, it raises the cost of import subsidies on essential raw materials (and hopefully exerts more pressure for domestic price adjustments, but this remains to be seen), and these are not covered by the provisions of the trade contracts; second, it raises the cost of external debt servicing; and third, it has no impact on the costs of export subsidies, as these were fixed by the trade contracts. It should therefore be obvious that while MOFERT and the provincial authorities were pushing strongly for a devaluation, the Ministry of Finance was reluctant. This devaluation may well have been part of the price for extracting the agreement of the provincial authorities at the Fifth Plenum for the continuation of the austerity policies. - 91 - 5.45 The devaluation in no way reduces the usefulness of the role of the FEACs, and it is strongly recommended that they be maintained for the present. There are three main reasons for saying this: (a) The FEACs have indicated to the authorities, the direction in which the official rate should be moving, and in a much more powerful way than, for example, real exchange rate calculations. (b) The FEACs are a true market, being a forum where willing buyers and sellers meet to negotiate freely. The allocation system for official foreign exchange remains an administrative system, where officials decide between competing applications on the basis of the govern- ment's industrial policy. Therefore, without the FEACs, many importers with the ability to pay would be unable to obtain foreign exchange, and as the official allocation system has a natural ten- dency to favor the state-owned enterprises, the FEACs have served to allocate significant amounts of foreign exchange to the more effi- cient and dynamic sectors of the economy. (c) The parallel rate has helped to provide a significant export incen- tive, and has undoubtedly helped to generate export growth, especially in 1988, and has averted a further decline in the rate of growth of exports in 1989. Given the need, and the stated policy aim of maintaining a rate of growth of exports above that of GDP, removal of this incentive would seem to be premature at the present time. 5.46 But there are certain drawbacks in the FEAC system at the present time, and the government should use the opportunity created by the official devaluation to address these: (a) It is only selected sectors that have higher rates of retention, and this arbitrary discrimination leads to the thinness--and volatility --of the market at the present time. It would thus be appropriate to consider widening the number of sectors with the higher retention rights, and raising the general level of retention. This could be accompanied, as it was in the reform experiment of September 1987, by an elimination of export subsidies. At the same time, restrictions on eligible import transactions for which foreign exchange can be purchased at the FEACs could be broadened. (b) The market is not a national one, and provincial authorities have been permitted to exercise provincial protectionism over "their" foreign exchange. The efficiency of the market would be enhanced if the SAEC could devise rules and exert supervision to ensure that foreign exchange could flow between different FEACs to reflect the pattern of regional demand. 5.47 While the role of the parallel market is useful in the short term, it should be noted that all such markets--as with the two-tier price system in general--create distortions and incentives for corruption. Therefore, in moving to refine and improve the functions of the parallel market in the short term, this should always be in the context of a goal of moving to a unified, - 92 - market-based exchange rate determination system. Further, recent experience in China demonstrates clearly that the economic system is responsive to exchange rate movements, and it is the effective exchange rate which is the most important of all export incentives, even in China. The maintenance of a competitive exchange rate is an issue of critical importance to the achieve- ment of China's export targets, and, as the Minister of MOFERT put it, "to the scale and program for (China's) domestic economic construction". External Borrowing and Creditworthiness 5.48 Future Trends in Debt Indicators. China's trade performance has contributed significantly to the country's creditworthiness. Other factors that have helped maintain access to international capital markets are the country's impressive growth rate that has kept the ratio of debt outstanding and disbursed to GDP to a modest 10.6 percent ($43.9 billion or 10 percent if the DOD is assumed to be $41.3 billion) in 1989;8/ and the high rate of national savings that holds down the current account deficit, insulates the economy from external shocks and supports the expansion of exports. In the medium term, the economy is projected to grow by between 3 and 6 percent with 8/ A major discrepancy exists between the amount of China's external debt reported in the World Debt Tables (WDT) and the OECD. The amount of total debt reported by OECD is $49.6 billion for 1988 as against $42.0 million in the WDT. The bulk of the discrepancy lies in the estimation of short-term debt. OECD supplements the short-term debt figures from the creditor reporting system with aggregate figures from Bank of International Settlements (BIS) surveys. As a result, the short-term debt items included in OECD's estimate differ from the calculation by China's government, specifically SAEC. OECD's estimate may overstate China's short-term debt because it includes debt with a maturity of less than 90 days and debt for which an agreement has been signed but has not been disbursed, while SAEC does not include these items. SAEC's exclusion of undisbursed loans rests on the opinion that a loan agreement does not become debt until is is disbursed. Other differences are: OECD includes debt incurred by branches of Chinese companies not resident in China; OECD includes all guaranteed debt while SAEC only includes such debt when obligations are assumed; SAEC values debt at the exchange rate at a particular time and OECD uses the exchange rate at the time the transaction takes place. Data are not available for calculating the specific influence of each difference between OECD's and SAEC's definitions of short-term debt but these differences can easily account for the discrepancy in short-term debt figures from OECD and SAEC. For example, substantial financing of trade with credit of less than 90 days could account for a large part of the discrepancy. In Shanghai it was reported that over 90 percent of short-term debt is :Less than 90 days. Also, the source of funds is important in the calculation of external debt by Chinese officials. For example, if the funds borrowed from the branch of Citibank in Shanghai emanate from local enterprises' foreign exchange deposits, they are not considered external borrowing. Consequently, the discrepancy raises questions about the definition and coverage of short-term debt. They do not relate to the actual level or accuracy of reporting. - 93 - longer-term growth falling in the 6.0-7.0 percent range. The increasing share of manufactures in exports will also help to sustain export trends. Exports are projected to rise by about 7 percent in the first half of the 1990s, with manufactures growing by 8-9.0 percent per annum. As savings propensities are likely to remain strong and the share of investment in GDP should decline somewhat (counterbalanced by increased efficiency as reforms unfold), the resource gap should remain fairly small, moderating China's net borrowing needs. The continuation of relatively contractionary policies during the first half of 1990 and modest reflation in the second half of the year will limit the growth rate to 2.5-3.5 percent (paras. 2.53 and 6.3). The current account deficit is projected to remain at well below 1 percent of GDP through 1995. 5.49 This pattern of growth and external borrowing will keep the debt servicing burden down to manageable levels and sustain China's creditworthi- ness. Table 5.1 present the external accounts and the various indicators which measure the burden of indebtedness under the base scenario which is pre- dicated on continuing reforms and openness. The principal assumptions under- lying these projections are given in Table 5.3. The ratio of debt outstanding and disbursed to GDP in 1990 will be under 8.5 percent and the total debt ser- vice ratio 9.2 percent (see para. 2.30).d/ Total repayments of public and publicly guaranteed medium- and long-term debt (including interest) will rise through 1992 and then decline somewhat by 1994, followed by another upturn in 1995. The debt service ratio, however, should fall steadily to 5.7 percent in 1995 with total debt outstanding and disbursed to GDP reaching 6.3 percent. 5.50 To realize the export growth rates and finance even the relatively modest external borrowing requirements projected in the base scenario, China will need a hospitable international environment. Furthermore, an unwilling- ness on the part of the international banking system to meet China's needs for term financing, on terms commensurate with its credit standing, could curtail China's growth prospects and may necessitate protective policies inimical to further reform. 5.51 A possible outcome of an unfavorable external environment is spelled out in the low case scenario. There would be less growth, resources would be utilized inefficiently (because measures to secure economic self-sufficiency and central control would take precedence over market oriented reforms) exports would grow at a lower rate and there would be a marked tendency to control imports for the sake of balancing the current account, thereby mini- mizing reliance on the international capital market. In the low case sce- nario, China's creditworthiness, on the basis of modest external borrowing, is not impaired. Indeed, by some indications, it improved in the medium term, but it must be recognized that insular policies and an increased reliance on planning and control would undoubtedly hurt the country's long-term develop- ment prospects and lead to stagnation. Table 5.1: CHINA: Creditworthiness Ratios: BASE CASE 1988 1989 1990 1991 1992 1993 1994 1995 Interest Payments/XGS 3.0 3.9 3.8 3.3 3.0 2.6 2.3 2.1 Total debt service/XGS 6.9 7.6 9.2 8.6 8.4 7.1 6.8 5.7 DOD/XGS 60.3 59.1 53.9 50.0 45.1 41.4 39.3 38.6 DOD/GDP 8.6 8.1 8.5 7.9 7.3 6.9 6.5 6.3 Table 5.2: CHINA: Creditworthiness Ratios: LOW CASE 1988 1989 1990 1991 1992 1993 1994 1995 Interest Payments/XGS 3.0 3.9 3.7 3.1 2.7 2.2 1.9 1.6 Total debt service/XGS 6.9 7.6 8.9 8.1 7.9 6.6 5.3 5.0 DOD/XGS 60.3 59.i 51.1 44.7 39.2 34.8 31.1 27.5 DOD/GDP 8.6 8.1 8.3 7.4 6.6 6.1 5.5 4.9 NOTE: XGS: Exports of goods and services. DOD: MLT Debt outstanding and disbursed. Table 6.3: CHINA: Model ASSUMPTIONS Base Case Low Case 1988 1989 AVERAGE AVERAGE 1990-5 1990-5 EXOGENOUS Export Growth Rates (%) XGNFS GR Total GNFS (endogenous) 17.46 8.95 6.71 6.87 of which XMANUF_GR Manufacture 17.79 13.53 8.50 8.60 Import Growth Rates (%) Total cif Imports growth rate (MGNFS) 18.98 8.19 5.77 3.96 (endogenous) Other Ratios & Growth Rates () AlO Investment/GDP 37.59 36.50 38.92 33.92 ENDOGENOUS GDPGR GDP growth rate (%) 11.20 3.89 5.84 4.68 Current account balance/GDPCUR (%) -1.02 -1.08 -0.46 0.82 - 95 - 5.52 External Debt Management. As the opening of the economy multiplied the range and complexity of foreign contacts, earlier regulatory procedures were found to be inadequate. Since the mid-eighties, the government has moved to centralize and systematize external borrowing in order to contain the risks inherent in economic liberalization. The State Planning Commission formulates the overall borrowing plan, in consultation with the People's Bank and the Ministry of Finance, but ratification is still required by the State Council. Bilateral lending is managed by MOFERT and the MOF is responsible for borrow- ing from the World Bank. However, the activity of data gathering, and the supervision of commercial borrowing is the task of the State Administration for Exchange Control (SAEC). Created in 1985 as an entity within the People's Bank with branches throughout the country, the SAEC has, after an uncertain start, improved its administrative capacity and technical skills. These qual- ities, which seemed somewhat tentative in 1988, were put to the test in late 1988 and 1989, when the authorities acted first to increase the scale of imports to dampen domestic demand pressures, and followed this up with a pol- icy of tight restraint on all commercial foreign transactions, starting in the third quarter of 1989. By and large, the framework for assigning quotas, reporting, cross-checking and enforcing that has been put in place, appears serviceable although more experience and the accumulation of trained manpower, will certainly improve matters. The situation that prevailed during 1984-88, when not just the ten officially designated borrowing windows 9/ but also a few hundred provincial financial entities, were raising funds overseas has been checked for the most part, through the rigorous use of administrative pressure. No doubt the lack of receptivity in international capital markets, during the latter part of 1989, has eased the SAEC's task, but as an organiza- tion it has apparently gained in strength and credibility. 5.53 Administrative capability to manage external borrowing is one facet of creditworthiness and the changes introduced, seem to be bearing fruits. The reporting net is still far from watertight--some borrowing by Chinese entities with operations in Hong Kong is probably not captured by the statis- tics--but the leaks are few. Another equally important facet is the composi- tion and management of the existing debt portfolio. 5.54 China has shown considerable bargaining skill in overseas markets, fully exploiting the attractions of its market, its low exposure and the strength of its economic performance, to extract the most favorable possible terms from lenders--especially Japanese banks. Borrowing from Japanese insti- tutions has been at 15 points below LIBOR and from others, the rates have averaged 25 points over LIBOR. Concessional funds have been sought where possible. From 1.1 percent of the total in 1981, concessional borrowing rose to a peak of 22.7 percent in 1985 before settling at just under 20 percent in 1988. Average interest paid on such borrowing has declined from 5.9 percent in 1984 to 4.3 percent in 1988. For the entire portfolio, average interest charges were 7.1 percent in 1988, close to par for the eighties although maturity on both concessional and overall borrowing is down to 22.7 years and 12.7 years, respectively. About 40 percent of the borrowing is at variable 9/ These are: The Bank of China, the Communication Bank of China, the China Investment Bank, the China International Trust and Investment Company, and the Guangdong, Fujian, Hainan, Shanghai, Tianjin, Dalian international trust and investment companies. - 96 - rates which is close to the norm under current market conditions and does not expose China to unusual risks (Table A5.3). 5.55 The ratio of short-term to total debt is another index of portfolio quality. When China was a newcomer to the international capital market, much of its borrowing was for purposes of trade and tended to be of short maturi- ties--41 percent in 1983. Such lopsidedness, that would be highly unwelcome in the event of a crisis, has been quickly corrected. The share of short--term borrowing was under 26 percent in 1986 and down to 21 percent in 1988--about normal for an economy with a trade to GNP ratio of nearly 28 percent. 5.56 As Japan has been the principal net supplier of capital in the inter- national market and Japanese banks have sought close relations with China, much of the borrowing in the mid-eighties was Yen-denominated and at quite low rates. The appreciation of the Yen in 1986/87 triggered a change in portfolio composition, the percentage of dollars being increased to 40 percent by 1989 and the Yen share brought down to 34.3 percent. In hindsight, the shift may not have been wisely timed given the strength of the dollar during 1987-89, but future trends for the dollar and the proportion of China's trade denomina- ted in that currency favor the maintenance of the current ratios. 5.57 A third determinant of credit standing is the size of a country's liquid reserves that can enable it to ride out an emergency. Reserves equiva- lent to three months of imports are generally considered adequate. China has allowed itself a more comfortable margin: reserves amounted to $12 billion in 1986 (4 months of imports), rising to $19.1 billion (5.3 months) in 1988 (Table 1.1).10/ The need to finance debt servicing obligations and other claims in 1989, when MLT credit became unavailable, forced China to dip into its reserves which fell to a low of $15.0 billion at the end of August. How- ever, the recovery of trade brought about some relief and at the end of 1989, total reserves were estimated at $18.5 billion--about a third with PBC and the balance held by the Bank of China. These were equivalent to 3.5 months of imports. Trade surpluses and capital flows pushed reserves close to $25 bil- lion (nearly six months of imports) at the end of April 1990. In actual fact, China's reserve position may be stronger than the published statistics indi- cate. The country may now be the sixth largest producer of gold. In 1988 output was estimated to be over 90 tons, rising close to 100 tons in 1989.e/ This could be used to augment gold reserves that have remained constant at 12.67 million ounces for several years. It is believed that substantial sales and forward transactions in gold during June-August 1989 were a source of additional liquidity at a time when overseas branches of the Bank of China were faced with mounting withdrawals. 5.58 By economic indices, China's credit standing looks firm and the coun- try compares very favorably with, other developing countries in South and 10/ Includes gold, SDRs and reserve position at the IMF. - 97 - Southeast Asia, not to mention the Latin American region.ll/ However, the problems that arose in mid-1989 have aroused fears regarding future political stability. These concerns, that have been stilled somewhat with the return of normality, have led credit rating agencies such as Moody's to mark China's creditworthiness from A3 to BAA. They have also induced lenders to reexamine their exposure in China and future plans for acquiring Chinese paper. 5.59 Future Actions. Some improvements in debt management merit attention in the coming years. External borrowing decisions still remain dispersed over several agencies. The SAEC has begun filling its role in a fairly short space of time, but there are gaps in its coverage and lingering uncertainties about the volume of debt contracted in the 1984-86 period, before reporting rules were tightened. The amounts involved are probably a few hundred million dollars. Nevertheless, these must be made precise and the obligations of the state specified. Essentially, this is a matter of perfecting the information feedback system and verifying what is received. The regulatory powers of the SAEC might also be put on a more formal basis so that it is able to police borrowing and impose order among borrowers, when rectification imperatives are succeeded by normal times. 5.60 There remains some confusion over what is China's sovereign debt, and what rests on the creditworthiness of the borrower alone. Sovereign liabili- ties include, potentially, all borrowing and guarantees by Chinese borrowers and obligations of joint ventures and borrowing by overseas Chinese enter- prises. Creditors' behavior suggests that they consider the bulk of China's 111 China's record in servicing its debt has been good but certainly not flawless and in recent months problems have been reported, particularly in connection with lending in the mid-1980s. At that time, foreign banks were aggressive in seeking business, skimped on documentation and did not look too closely at the guarantees mobilized by the many provincial agencies that trawled East Asian financial markets for funds. Now some of these guarantees are being called, there is a concern that a few of these might have been "improper" and may not be eligible for repayment. In the past twelve months, cases have been brought against Chinese entities by First Chicago Bank, Lloyds Bank, the Hong Kong and Shanghai Banking Corporation, and Security Pacific. The latter concerns bankers acceptances guaranteed by the PCBC branch in Shenzhen (this appears to be nearing resolution). Lloyds Bank sued the CITIC Industrial Bank branch of Shenzhen for nonpayment of $1 million in letters of credit, but this case was settled in March 1990. The Hong Kong and Shanghai bank is involved in lawsuits with three Chinese guarantors for a total sum of $81.3 million. Finally, the First National Bank of Chicago has brought a suit against the China National Machinery and Equipment Corporation to claim $14.65 million that were guaranteed by its Guangdong branch on behalf of Carroway Enterprises, Ltd., registered in Hong Kong. The decline of tourism in 1989 has clouded the future of hotel projects in Shanghai, Beijing, Xian and Guilin, and many of these are being rescheduled or restructured. Other complaints refer to small delays in the repayment of loans and trade credit, which in the current atmosphere are causing irritation. But Hong Kong bankers, who are among the most sensitive, admit that, by and large, Chinese borrowers have been quite scrupulous in servicing their loans at least thus far and that delays may affect 3-5 percent of loans. - 98 - external debt to be sovereign. The Chinese authorities argue that this is not so, and that even the BOC borrowing on behalf of the government is only an organ of the state, not the state itself. As a practical matter, however, it appears that most debt in the event of difficulties, would come to be sover- eign if China places a high premium on its future credit standing. Thus, BOC's borrowing must be considered sovereign debt; in addition, any borrowing by the nine other institutions is also fairly clearly sovereign borrowing. 5.61 The distinction between sovereign and nonsovereign debt, and between sovereign and debt and guarantees and nonsovereign debt and guarantees, could be accomplished by the dissemination of a State Council pronouncement expressly, forcefully, and publicly disclaiming responsibility, legally and in fact, for the debt of all but a narrowly defined (preferably expressly named) group of borrowers. This disclaimer could be made by a carefully drafted letter, delivered to, say, the 500 largest foreign commercial and investment banks. In addition to the general disclaimer, the letter should specifically state that any "comfort letters" or other representations made by any ministry or other organ of government are without effect. 5.62 This approach is consistent with the effort to decentralize enter- prise accountability and management, since it would make clear that enter- prises must be financed on their own merits. It will make it difficult or impossible for foreign banks to justify credits to these enterprises on the basis of implicit sovereign guarantee and can be expected to dramatically reduce the availability, and raise the cost, of foreign credit to these enter- prises. Meanwhile, with expressly guaranteed borrowers enjoying substantially cheaper access to foreign borrowing, they will become the most attractive source of foreign exchange for enterprises, thus providing an incentive for the development of a viable internal intermediation system. 5.63 It is quite likely that, for borrowing activities in 1990, terms may be harder and lenders less inclined to shave margins for the sake of future business with China.f/ In these circumstances, the borrowing strategy might have to be better orchestrated so as to keep costs down. This will require using China's most creditworthy institutions in the proper sequence; avoiding market saturation through appropriate spacing and dispersion of markets; and choosing the borrowing instrument, e.g., syndicated loans or bonds, with an - 99 - eye to receptivity.121 There is, at the moment, no problems of excess but neither is there much of a secondary market for Chinese paper that would serve to enhance absorptivity. 5.64 It would be useful for China to consider advice given to Korea a few years ago, which is to develop correlations between China's terms of trade and various exchange rates and use these expected exchange rates to guide the choice of currency in future borrowing.h/ China's pattern of external trade is an important determinant of the currency composition of its foreign exchange. External liabilities and assets should be managed in an integrated fashion because what really needs to be managed are net liabilities, that is, external liabilities minus external assets such as foreign exchange reserves. 121 The increase in bond issuance is one of the most prominent current trends in international capital markets. Gross issues of international bonds have increased from $75.5 billion in 1982 to almost $252.1 billion in 1989. Although OECD countries and international organizations dominate the market, China has increased its activity in this market. A recent World Bank report describes a number of trends in this market having implications for future external financing in Korea--implications that apply to China as well. These trends are: (a) the resurgence of fixed-interest bonds after a substantial decline in their popularity following the high inflation and high interest rates in the late 1970s and early 1980s. With low inflation in key industrial countries in the foreseeable future, investors have been drawn back to fixed-interest bonds. Longer maturities, together with the option to issue callable debt, which prevents issuers being locked into high interest rates, are attractive to borrowers who need to reduce their exposure to future high interest rates while at the same time reducing their use of short-term debt; (b) the easing of regulations in a number of countries, including Japan and Germany, which should improve the prospects of currency diversification in this market; (c) the increasing popularity of equity-related bond instruments such as convertible debentures and warrant issues. Issuing equity-related debt can be an attractive option for certain types of enterprises, such as joint ventures. It can be a cheap form of finance for an enterprise with high earnings potential. - 100 - VI. THE NINETIES: AGENDA AND PROSPECTS 6.1 The Chinese economy emerged from the first quarter of 1990 with growth at a virtual standstill, unemployment approaching 3.5 percent, infla- tion running at 3.9 percent over the same quarter of 1989 and a trade surplus amounting to $0.82 billion, as a result of an 11.6 percent increase in exports while imports fell by 13.7 percent (Table 2.6). Aside from the trade sector, there were, at that stage, no other sources of growth pulling the economy with investment stagnating, household saving inching upwards and the government's own spending decisions constrained by a tight revenue situation as well as the intention voiced during the Fifth Plenum of eliminating the budget deficit within the coming 2-3 years. A large overhang of inventories accumulated over the course of 1989, and during the first five months of 1990, means that the responsiveness of production to reflationary stimuli will be subject to a lag and excess capacity in many manufacturing subsectors will dampen investment for a few quarters.l/ 6.2 Concerned over the economy's sharp slide into recession in the final quarter of 1989, the authorities injected an additional Y 25 billion of credit. This was counterbalanced. to a degree by reducing currency in circu- lation by Y 20 billion in January-February 1990 to about the level prevailing at the end of 1988. In the first half of 1990, credit expansion has been eased somewhat and more funds made available to priority industries, the export sectors and for the purposes of institutional consumption. To stimu- late labor absorption and promote China's trade in manufactures (paras. 2.12, 2.53, 4.63 and 5.13), the credit supply to TVEs was eased in early 1990, a move the Bank has recommended. In provinces such as Jiangsu, the TVEs are being actively encouraged to step up exports by establishing direct links with foreign buyers and entering into new joint venture arrangements. The govern- ment has also marginally reduced lending rates and is considering the possi.- bility of stimulating consumption a notch or two by shaving deposit rates. In the first quarter, M2 rose by 22.5 percent and total credit supply grew by Y 55 billion. 6.3 The government's guarded efforts at reflation began producing results in the second quarter, helped along by a bumper summer grain harvest of 98 million tons. By the end of June, industrial production was growing by 5.9 percent and the rate for the first six months averaged out to 2.2 percent. Meanwhile, GNP rose by 1.6 percent, well short of the annual target but a dis- tinct improvement over the first quarter. Prices remained stable with infla- tion through June amounting to 3.2 percent (over 1989) as against 4.1 percent at the end of January. The trend in external balances persisted, in fact steepened in the second quarter of 1990. In the first half of the year, China's merchandise exports rose 15.4 percent to $25.65 billion, while imports declined 17.7 percent to $23.09 billion. The overall trade surplus was $4.54 billion, with the current account showing a surplus as well. 1/ Devaluation and price adjustments are additional sources of deflationary pressure. - 101 - 6.4 The actions thus far are cautious ones and very much in the spirit of the austerity program, that has mandated single digit inflation but also calls for 4-5 percent growth per annum. A second year of very low growth would be politically unpalatable and painful in economic terms even under conditions of zero inflation. If the government tailors reflationary policy with reference to program announced by the Fifth Plenum--and this was reaffirmed in speeches by senior leaders at the National People's Congress in March--credit expansion should remain within planned limits (15 percent over 1989, see para. 2.54). GDP growth, for the year as whole, is likely to be in the region of 3-4 per- cent (as against the government's target of 5 percent) and core inflation-- with the benefit of a good harvest--might be held to the low single digit range. However, when the effects of price adjustments proposed later in 1990 and the ripples from the devaluation in December 1989 are factored in, infla- tion might edge close to the double digit range. At the projected rates of growth, with household savings behavior largely unchanged and import controls on consumer goods sustained, a sizable trade surplus and a smaller one on the current account appear likely.2/ 6.5 The outlook for 1991 depends on how the austerity program evolves; on international relations; and on access to capital markets. If core inflation shows no signs of reviving and the external environment is favorable, growth could be faster and there may be less need to strive for balance (or a sur- plus) on external account. On the other hand a deterioration in either of these areas might necessitate a continuation of the current policy stance favoring retrenchment. 6.6 So much for the short-term macroeconomic picture. Of possibly greater importance is the manner in which reforms are introduced to enable China to meet its medium and longer run goals of modernization. Some of the critical issues were identified by the Fifth Plenum, including centralizing macromanagement, the abolishing of dual prices, and enterprise reform. How- ever, the explicit content, phasing and direction of these reforms as well as reforms in other important areas still remain to be explicated. Preparing such an agenda so that it can guide development in the Eighth Five Year Plan, should have the highest priority. Medium-Run Macroeconomic Reforms 6.7 A particular issue raised by the Plenum's economic policies is the analysis underlying them. The implication of the decision is that the pro- blems that emerged in 1988 were the result of haste in pushing forward reforms in the past and the fact that this haste was accompanied by a pursuit of an excessively high growth rate. Thus, the program would, essentially, do two things: strengthen macroeconomic management controls to prevent excessive growth rates from reemerging; and utilize the planning system to overcome the difficulties that have arisen in the course of reform. 2/ A normalization of China's external relations which permitted a more liberal trade policy could lead to the contrary results reflected in the Base Scenario (para. 5.49). - 102 - 6.8 It is at this point that a serious dilemma emerges. The reform pro- gram is, at heart, an attempt to correct the mistakes of the old central plan- ning system, and to introduce mechanisms in the economy that permit economic agents to take rational resource allocation decisions, instead of leaving such decisions to the planners. The program adopted at the Fifth Plenum suggests that the problems that have emerged during the course of the reform can now be solved by the very same mechanisms--price control, unified materials distribu- tion, central investment approvals--responsible for the distortions that the reform was designed to correct. The emphasis on planning does not reflect a change in the predispositions of policymakers towards reforms, but a recogni- tion of weaknesses in the instruments for macroeconomic control. 6.9 The strengthening of China's institutions responsible for macroman- agement will require improvements in its budgetary, monetary and trade poli- cies. The central budget, for example, should be a programming framework for all government current and capital expenditures, matched by tax revenues and other clearly defined sources of funds. Control of base money supply, through the lending and reserve ratio policies of the central bank, should gradually substitute for the use of credit controls. Interest rates should be employed more flexibly to manage savings and investment, within the framework of mean- ingful budget constraints on enterprises. Finally, ways should be sought to make the allocation of foreign exchange more market-determined. 6.10 Regarding pricing and marketing, it is important that the government reaffirm its commitment to moving towards market-determined prices. Recently imposed price controls should be removed as soon as possible and a plan of action specifying priorities for future price reform developed. The prices of key agricultural commodities and of several basic inputs for industry are can- didates for early action. Parallel to price reforms, it is equally important that impediments to the free interprovincial flow of commodities be removed and that the list of goods still subject to quantitative allocation be reduced further. 6.11 During the period when macroeconomic and price reforms are being con- ducted any significant easing of the monetary policy could jeopardize the sta- bility that has been so painfully achieved. The time to relax austerity measures should be after fundamental macromanagement problems and price dis- tortions have been removed. As indicated in earlier chapters, the current downturn in the economy and the consensus regarding the macro framework pre- sent an excellent opportunity for proceeding with price adjustments. The Longer-Term Agenda 6.12 China has brought plan and market together under one roof but the rblationship is proving more stressful than was anticipated. Simulating mar- kets within a framework of planning and collective ownership has yielded mixed results;a/ and seeking enterprise autonomy through administrative decentrali- zation has proven to be problematic. In this respect, China's experience rep- licates that of countries like Hungary, with an even longer history of reform. One fact is emblematic. Between 1968 and 1980, bankruptcy was practically unknown in Hungary. Instead of being liquidated, virtually all the loss- makers were rescued by the state.b/ Much the same can be said for China. a/ Lettered footnotes are to be found in Annex II. - 103 - Competitive forces have not been allowed to weed out the weak, only two enter- prises having been consigned to bankruptcy. Market and plan pull in different directions and when efficiency collides with employment security, and the imperatives of annual production targets, the market is the one made to yield.c/ 6.13 In the early stages of reform, the difficulties of coordinating plan with the market tends to be obscured. When controls are slipped and material incentives enhanced, resource utilization long held at suboptimal levels, improves markedly, resulting in high rates of growth. Once the economy approaches the production frontier and its expansion slows, the contradictions are more apparent. If a transition from a planned to a more market-centered system is intended, the time to do this is when the economy is still in the catching-up phase and growth momentum is high. Many of the costs in terms of dislocation and unemployment can be minimized when the economy is at full stretch. China's development prospects in the nineties will depend on speci- fic economic policies and the continuation of institutional reforms, some of which were outlined in Chapters 3-5. After a series of reform cycles, the sources of systemic instability can be identified. It is also possible to make some educated guesses as to the path China must tread in its pursuit of efficiency and technological dynamism, the wellsprings of growth in a modern economy. Decentralization and Enterprise Reform 6.14 Administrative decentralization, as currently practiced, may not be the recipe for the longer term. From the very outset, the People's Republic has been ambivalent about bureaucratic formalization. In the late fifties and again ten years later, the center transferred power to provincial authorities and sought to minimize the role of the government bureaucracy (Chapter 1). Instead of managing the economy using mainly bureaucratic machinery, the state drew heavily on its capacity for political mobilization to achieve its ends.d/ This approach gave added impetus to historical tendencies towards localism. It also detracted from the institutionalization of the center's administrative powers and the creation of a system geared for routine management of economic activities. While local administration became increasingly better articula- ted, the central government's ability to intervene at the microlevel was modest, except when the full political energies were brought to bear through periodic rectification campaigns. To compensate for its administrative weak- ness and assure at least the fiscal responsiveness of the coastal provinces - 104 - with surplus revenues, the center relied upon the nomenklatura system.3/ Provincial governors and city mayors were usually not from the provinces to which they were appointed and the senior leaders of the key provinces were often drawn from central economic ministries.e/ 6.15 When the push to decentralize commenced in the late seventies, it was difficult for the reformers to do what was needed, which was to greatly enhance the central government's capacity for routine macroeconomic manage- ment, while freeing enterprises from the coils of local agencies and giving them a meaningful degree of autonomy (Chapter 1). Decentralization made local authorities more independent and brought about a decline in the center's abil- ity to direct the evolution of a market system, to stimulate competition and to introduce rules that would promote orderliness and check abuses. The rise to mayoral positions of men, many of whom are from the cities they now manage, has increased the pull of local interests.f/ It has also complicated the cen- ter's efforts at preserving macroeconomic stability and introducing further reforms. 6.16 Attempting to reverse decentralization would most likely incur very high economic costs and might not restore the central government's control. By the same token, a loss of local initiative at this stage could lead to stagnation without stemming the steady erosion of central discretionary power. It is vital that the central government use the breathing space afforded by the political consensus underlying the current rectification program to make decentralization work on an economic plane as it was originally intended to do. Instead of strong local governments and dependent enterprises, each linked to its supervisory agency by the umbilical cord of a soft budget con- straint, there is a need for autonomous enterprises, disciplined by the market and subject to general rules defined by central regulatory agencies. It is only by freeing enterprises from the grasp of local governments that the cen- ter can circumscribe local political influence and continue with the work of developing an integrated as well as an efficient national economy. This is an essential part of enterprise reform (Chapter 4). 6.17 A more durable political consensus on future goals and how they are to be reached must reverse the trend towards localism, protectionism and zero- sum gamesmanship (Chapter 4). As worries regarding the distribution of income and wealth are at the core of the problem, both political and market processes 3/ The zhiwu mingcheng hiao (nomenklatura) system comprises lists of leading positions over which Party committees have powers of appointment. These extend from the central government all the way down to the 2,000 county- level units, and are the main vehicle through which Party control is exercised. In November 1987, the Thirteenth Party Congress endorsed further decentralization of appointments and the gradual dissolution of the Party core groups found in all central and local organizations. While some attempts were made to implement this in 1988 and work was begun on the creation of a professional civil service, the status of reforms in this area is uncertain. "China's Nomenklatura System," John P. Burns, Problems of Communism, September/October 1987, pp. 36-38, 50-51; and "China's Civil Service Reforms: The 13th Party Congress Proposals," by John P. Burns, China Quarterly, No. 120, December 1989. - 105 - will have to be employed: market avenues to promote factor mobility, which will multiply employment opportunities and the prospects for earnings higher returns on labor and capital; and, political understandings that accommodate some fluidity in income distribution, so that market signals can produce actual results. The two mechanisms must work side by side. Arms-length mar- ket arrangements to loosen the hold of local networks, to lessen the incidence of negotiation, and to render decisions regarding prices, wages and resource use as impersonal transactions. Thus, the market can erode parochialism and diffuse interprovincial rivalry, making room for the national political con- sciousness that will underwrite a dynamic economic strategy. For people to frame their decisions with reference to the national interest, impersonal mar- ket forces that are viewed as basically fair should dislodge localism. Fur- thermore, the center must subsume local into national interests by redefining the fundamentals of its long-term reform strategy and show that it has both the resolve and the institutional ability to see it through. 6.18 In this context, a continuing support for a wider spectrum of owner- ship which provides a secure legal basis for TVEs, and private business would greatly enhance the robustness of the market system and introduce a pattern of financial accountability, that enterprises in the dominant state sector could be induced to emulate.R/ Labor Market 6.19 Employment and wage-setting practices will have a profound influence on cost-push and on productivity growth. Tenurial arrangements can moderate wage demands but only in the context of a functioning labor market that per- mits mobility and the right of firms to employ and dismiss workers. Present rigidities, by binding workers and enterprises, breed inefficiency and make it difficult to resist the demands of employees. Progress with labor contracting and experimental social security reforms that transfer pension and health obligations from enterprises to the government, and that privatize housing could remove major barriers to market functioning.h/ In many countries, profit-sharing within enterprises has a measurable effect on productivity, especially when it partially substitutes for wages. Bonus payments to Chinese workers might be restructured so that the link with profits and productivity is made tighter and bonuses are not simply add-ons to wages.i/ Again, this is something that may require price and ownership reforms before it can be intro- duced in an efficient fashion. Social Security 6.20 A social security system that is enterprise based not only impairs labor mobility, but also limits enterprise autonomy and efficiency. Social security reforms that transfer the financial responsibility for pensions from enterprises to provincial or central authorities would facilitate reforms of prices and taxes which are, at times, manipulated to subsidize firms burdened with heavy pension payments. This would also allow the government to tackle, in a comprehensive manner, the financial implications arising from a growing number of retirees and lengthening life spans. - 106 - Industry 6.21 A major goal should be institutional developments that facilitate entry and exit of industrial firms, not just those in the township and village sector, but state and collective enterprises as well. These should be com- bined with policies that help modify the composition of the manufacturing system. As China moves towards production and demand patterns observed in other industrial economies, subsectors producing consumer durables, electron- ics and transport equipment might be best positioned to play the leading role. The claims of heavy industry on resources will have to be moderated and increased volume of investment allowed to flow to industries favored by income elasticities as well as technology. 6.22 Investment allocation and the absorption of technology made available through R&D, direct foreign investment and licensing will strongly influence trends in productivity and China's success as an exporter. Industrial produc- tivity, by defining the scope for a transfer of resources to agriculture, will also affect supplies of foodstuffs along with the degree of self-sufficiency. Resource Mobilization 6.23 Savings is the remaining key element in the long-run growth equation. High savings yields inestimable benefits: without it, China could not afford the levels of investment that have underwritten growth. It permits the coun- try to absorb external shocks without undue hardship and reduces reliance on foreign capital. And it gives the government flexibility with respect to expenditure policies, because modest deficits can be financed in a noninfla- tionary manner without excessive crowding out. Growth and savings follow each other in a virtuous circle.[/ Private financial savings can also, to an extent, be buoyed by interest rate policy.k/ Demographic and other factors are likely to sustain Chinas saving performance with some help from financial policy.l/ If resource mobilization of a high order can be combined with flex- ible, market-directed allocation, China would be well placed to realize its growth potential. 6.24 How China's economy fares during the nineties depends, substantially, on the institutional changes that are put in train and on the steady implemen- tation of reforms already identified. But the willingness as well as the ability to institute these changes is likely to be significantly influenced by the nature of the international environment. Limitations on access to capital markets; emergence of trade barriers; and a declining flow of foreign direct investment may inhibit a further opening of the Chinese economy and slow the process of integration with the world economy which the authorities have pur- sued over the last decade. These developments could lead the government to reverse some of the reform measures being adopted or planned and to seek eco- nomic security through greater planning. The longer term costs of such unfav- orable developments could be high. ANNEX I STATISTICAL ANNEX Table 1.1 : CHINA: National Accounts (in billions of yuan in Current prices) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 ORIGIN AND USE OF RESOURCES A.1. GDP at market prices 368.81 399.87 447.15 477.61 518.58 578.46 692.44 854.06 971.99 1135.71 1385.77 1573.11 2. Net indirect taxes .. .. .. .. .. *- .. .. .. 3. GDP at factor cost .. .. .. .. .. .. .. .. -- 4. Agriculture 117.55 146.35 180.75 182.89 209.72 234.91 275.94 302.88 335.24 384.32 449.54 5. Industry 177.25 194.34 218.66 223.00 237.10 261.23 308.34 384.16 440.31 519.36 639.53 6. Services, etc. 64.01 69.18 67.74 71.63 71.77 82.32 108.16 167.23 196.44 232.03 296.69 8.1. Resource balance -0.63 -1.29 -0.12 3.88 10.04 6.26 2.86 -36.11 -30.99 -1.06 -12.45 -11.26 2. Exports of GNFS 17.70 23.07 29.77 41.41 46.54 48.52 66.25 87.98 117.15 159.79 193.20 213.80 8. Imports of GNFS 18.34 24.87 29.89 37.53 38.50 42.27 63.59 124.09 148.15 160.86 206.64 225.06 C.1. Domestic absorption 359.46 401.16 447.27 473.63 508.54 572.21 689.78 890.17 1002.99 1136.77 1398.22 1584.37 D.1. Total consumption, etc 239.65 261.81 303.29 334.19 354.52 396.20 466.61 669.45 620.75 691.81 859.34 1012.18 2. Private, etc 188.84 215.41 251.17 279.33 304.08 332.93 383.11 478.50 544.05 621.85 781.67 3. General government 50.81 46.20 52.12 54.87 50.45 63.27 82.50 80.96 76.70 69.96 77.67 .. E.1. Cross domestic investment 119.80 139.55 143.98 139.43 154.02 176.01 224.18 330.72 382.23 444.96 538.88 572.21 C 2. Fixed investment 96.28 100.69 107.39 96.10 123.04 143.01 183.29 254.32 301.96 364.09 449.65 400.00 3. Increase in stocks 23.52 38.87 36.60 43.33 30.98 33.01 40.89 76.41 80.27 80.87 89.23 172.21 Memorandum Items: 0.1. Net factor income -0.01 -0.07 -0.15 -0.21 0.72 2.44 3.76 2.74 0.61 -0.61 -0.47 -5.41 2. Net current transfers 1.01 1.02 0.96 0.79 1.00 0.86 0.71 0.50 0.88 0.93 -1.23 -0.80 3. Gross national product 358.80 899.80 447.00 477.30 519.30 580.90 896.20 858.80 972.60 1135.10 1385.30 1667.70 H.1. Cross domestic saving 119.17 138.26 143.86 143.32 164.06 182.26 226.84 294.61 361.24 443.90 526.43 560.95 2. Gross national saving 120.16 139.21 144.67 143.90 166.78 185.56 231.30 297.86 352.73 444.21 524.73 554.74 J.1. IFS conversion factor 1.684 1.655 1.498 1.706 1.893 1.976 2.320 2.937 3.463 3.722 3.722 3.805 K.1. GODP at mp (curr. mill. USS) 213072 267151 298498 280065 273948 292745 298486 290794 281492 305134 372318 413395 Source: CHINA Statistical year book 1988 pp.26, 44, 493, and 643 and IMF Recent Economic Developments 01/17/90. Exports and Imports of goods and non-factor services are from customs statistics. See Table 2.1 for explanation. For 1989 average exchange rate allowing for devaluation in December. Table 1.2 : CHINA : National Accounts (in billions of yuan in Constant 1980 prices) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 ORIGIN AND USE OF RESOURCES A.1. GDP at market prices 392.76 420.25 447.15 469.06 507.99 557.78 633.08 716.01 773.29 854.48 950.19 987.24 2. Net indirect taxes .. .. .. .. .. .. .. .. .. 3. GDP at factor cost .. .. .. .. .. .. .. .. .. 4. Agriculture 153.85 163.70 160.75 172.18 192.31 208.65 235.78 239.79 248.66 280.59 268.93 277.81 5. Industry 182.39 197.17 218.66 222.37 235.72 258.82 297.38 355.67 389.81 445.55 537.78 582.42 6. Services, etc. 568.52 59.39 87.74 74.52 79.97 90.31 99.92 120.56 134.82 148.34 143.47 127.02 B.1. Resourc . -0.12 3.3 9.12 8.01 7.8 -7.14 3.36 13.18 13.27 8.44 2. Exports of GNFS 19.38 24.25 29.77 36.61 38.87 39.08 46.74 50.16 61.92 73.46 86.12 90.05 3. Imports of GNFS 20.07 25.61 29.89 33.22 29.75 31.07 38.05 57.29 58=56 60131 72.86 81.61 C.1. Domestic absorption 393.46 421.61 447.27 465.67 498.87 549.76 626.39 723.15 769.93 841.33 936.92 978.80 D.1. Total consumption, etc 262.33 274.94 303.29 328.71 348.00 380.05 420.46 445.91 465.84 506.55 567.42 619.68 2. Private, etc 215.11 226.45 251.17 259.02 274.22 299.48 331.31 351.38 367.08 399.16 447.13 488.30 3. General government 47.22 49.49 52.12 69.69 73.78 80.67 89.13 94.53 98.76 107.39 120.29 131.37 E.1. Gross domestic investment 131.13 146.67 143.98 136.97 150.87 169.72 204.95 277.24 304.09 334.78 369.50 359.12 2. Fixed investment 105.38 105.82 107.39 94.40 120.63 137.89 167.57 213.21 240.23 273.93 308.32 251.03 > 3. Increase in stocks 25.75 40.85 36.60 42.57 30.35 31.82 37.37 64.03 63.85 60.85 61.18 108.09 oa Memorandum Items: 0.1. Net factor income -0.01 -0.07 -0.15 -0.21 0.70 2.34 3.41 2.22 0.47 -0.45 -0.31 -3.34 2. Net current transfers 1.10 1.07 0.96 0.78 0.98 0.83 0.64 0.41 0.68 0.69 -0.83 -0.50 3. Gross national product 392.75 420.18 447.00 468.86 508.69 560.12 636.48 718.23 773.76 854.03 949.87 983.90 H.1. Gross domestic saving 130.44 145.31 143.88 140.40 159=06 174.31 206.54 260.57 291.83 334.38 385.09 355.04 2. Gross national saving 131.52 146.31 144.67 140.97 160.74 177.48 210.59 263.20 292.98 334.62 363.96 361.20 1.1. Capacity to import 19.38 24.25 29.77 36.65 37.93 35.87 39.86 40.62 46.31 59.91 68.44 77.53 2. Terms of trade adjustment -0.00 0.00 0.00 0.06 -0.94 -3.42 -6.09 -9.63 -15.61 -13.55 -17.68 -12.53 3. Gross domestic income 392.76 420.25 447.16 469.11 607.05 554.36 626.99 706.47 757.68 840.93 932.51 974.72 4. Gross national income 392.75 420.18 447.00 488.90 507.78 556.70 6830.39 708.70 758.14 840.48 932.20 971.38 J.1. GDP at current mp 358.81 399.87 447.15 477.51 518.58 578.46 692.44 854.06 971.99 1135.71 1385.77 1573.11 Source: CHINA Statistical Year Book 1988, and Statistical Abstract 1989. Table 1.3 : CHINA: National Accounts (Implicit price deflators 1980=100) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 ORIGIN AND USE OF RESOURCES A.1. GDP at market prices 91.4 95.1 100.0 101.8 102.1 103.7 109.4 119.3 125.7 132.9 145.8 159.3 2. Net indirect taxes .. .. .. . 3. GDP at factor cost .. .. .. .. .. .. .. .. .. 4. Agriculture 78.4 89.4 100.0 106.2 109.1 112.6 117.0 126.2 134.8 147.5 167.2. 5. Industry 97.2 98.6 100.0 100.3 100.6 100.9 103.7 108.0 113.0 116.6 118.9 6. Services, etc. 113.3 99.8 100.0 98.1 89.7 91.2 108.2 138.7 146.7 156.4 206.8 8.1. Terms of Trade (Px/Pm) 100.0 100.0 100.0 100.1 97.6 91.3 86.7 81.0 74.8 81.6 79.5 86.1 2. Exports of GNFS 91.4 95.1 100.0 113.1 119.7 124.1 144.9 175.4 189.2 217.6 224.3 237.4 3. Imports of GNFS 91.4 95.1 100.0 113.0 122.7 136.0 167.1 216.6 253.0 266.7 282.3 275.8 C.1. Domestic absorption 91.4 95.1 100.0 101.7 101.9 104.1 110.3 123.1 130.3 135.1 149.2 161.9 D.1. Total consumption, etc 91.4 95.1 100.0 101.7 101.9 104.2 110.7 125.5 133.3 136.6 151.4 163.3 2. Private, etc 87.8 95.5 100.0 107.8 110.9 111.2 115.6 136.2 148.2 155.8 174.8 3. General government 107.6 93.3 100.0 78.7 68.4 78.5 92.6 85.6 77.7 65.1 64.6 E.1. Gross domestic investment 91.4 95.1 100.0 101.8 102.1 103.7 109.4 119.3 125.7 132.9 145.8 159.3 2. Fixed investment 91.4 95.1 100.0 101.8 102.1 103.7 109.4 119.3 125.7 132.9 145.8 159.3 3. Increase in stocks 91.4 95.1 100.0 101.8 102.1 103.7 109.4 119.3 125.7 132.9 145.8 159.3 0 Memorandum Items: F.1. Net factor income 91.4 95.1 100.0 101.7 101.9 104.1 110.3 123.1 130.3 135.1 149.2 181.9 2. Net current transfers 91.4 95.1 100.0 101.7 101.9 104.1 110.3 123.1 130.3 135.1 149.2 161.9 3. Gross national product 91.4 95.1 100.0 101.8 102.1 103.7 109.4 119.3 125.7 132.9 145.8 169.3 G.1. Gross domestic saving 91.4 95.1 100.0 102.1 103.1 104.6 109.8 113.1 120.4 132.8 144.2 158.0 2. Gross national saving 91.4 96.1 100.0 102.1 103.1 104.6 109.8 113.2 120.4 132.8 144.2 158.0 Source: Table 1.1 divided by Table 1.2. Table 1.4 : CHINA : National Accounts (Percentage GROWTH RATES in Current prices) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 ORIGIN AND USE OF RESOURCES A.1. GDP at market prices 11.4 11.8 6.8 8.6 11.5 19.7 23.3 13.8 16.8 22.0 13.5 2. Net indirect taxes .. .. .. .. .. 3. GDP at factor cost .. .. .. .. .. 4. Agriculture 24.5 9.8 13.8 14.7 12.0 17.5 9.7 10.8 14.6 17.0 S. Industry 9.6 12.5 2.0 6.3 10.2 18.0 24.6 14.6 18.0 23.1 6. Services, etc. -7 - 14.5 5.7 0.2 14.7 31.4 54.6 17.5 18.1 27.9 B.1. Resource balance .. .. .. .. .. .. 2. Exports of GNFS 30.3 29.0 39.1 12.4 4.3 36.5 32.8 33.2 36.4 20.9 10.7 3. Imports of GNFS 32.9 22.6 25.6 -2.8 15.8 50.4 95.1 19.4 8.6 27.8 9.4 C.1. Domestic absorption 11.6 11.5 5.9 7.4 12.5 20.5 29.1 12.7 13.3 23.0 13.3 0.1. Total consumption, etc 9.2 15.9 10.2 6.1 11.8 17.5 20.2 11.0 11.4 24.2 17.8 2. Private, etc 14.1 16.6 11.2 8.9 9.5 15.1 24.9 13.7 14.3 25.7 3. General government -9.1 12.8 5.3 -8.1 25.4 30.4 -1.9 -5.2 -8.8 11.0 E.1. Gross domestic investment 18.5 3.2 -3.2 10.5 14.3 27.4 47.5 15.6 16.4 21.1 6.2 2. Fixed investment .. .. .. 28.0 16.2 28.2 38.8 18.7 20.6 23.5 -11.0 3. Increase in stocks .. .. .. -28.6 6.5 23.9 86.9 5.1 0.8 10.3 93.0 1 0 Memorandum Items: G.1a Net factor income .. .. .. .. .. 2. Net current transfers .. .. .. .. .. 8. Gross national product 11.4 11.8 6.8 8.8 11.9 19.8 23.1 13,5 16.7 22.0 13.2 H.1. Gross domestic saving 16.0 4.1 -0.4 14.5 11.1 24.5 29.9 19.2 26.4 18.6 6.6 2. Gross national saving 16.9 3.9 -0.5 16.2 11.9 24.6 28.8 18.4 25.9 18.1 5.7 J.1. IFS conversion factor -7.7 -3.7 13.8 11.0 4.4 17.4 26.6 17.6 7.8 0.0 2.2 K.1. GDP at mp (curr. mill. USS) 20.7 16.1 -6.2 -2.2 6.9 2.0 -2.6 -3.2 8.4 22.0 11.0 Source: Table 1.1. Table 1.5 : CHINA: National Accounts (Percentage GROWTH RATES in Constant 1990 prices) 1978 1979 1990 1981 1982 1988 1964 1985 1986 1987 1988 1989 -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - - -- - - - - - - -- - - - - - - -- - - - - - ---- - - - - - - ORIGIN AM USE OF RESOURCES A.1. GDP at market prices 7.0 8.4 4.9 8.8 9.3 13.6 13.1 8.0 10.5 11.2 3.9 2. N*t Indirect taxes a. GDP at factor cost .7 .. ** *** * 3 ** 4. Agriculture 6.4 -1.8 7.1 11.7 8.5 18.0 1.7 8.7 4.8 3.2 3.8 5. Industry 8.1 10.9 1.7 6.0 9.8 14.9 19.8 9.6 14.3 20.7 8.3 S. Services, etc. 5.1 14.1 10.0 7.8 12.9 10.8 20.7 11.8 10.0 -3.3 -11.5 8.1. Resource balance .. ** *. ** .* ** ** ** 2. Exports of QNFS 25.1 22.7 23.0 6.2 0.6 17.0 9.7 23.5 18.6 17.2 4.8 3. Imports of NS 27.6 18.7 11.1 -10.4 4.5 22.5 50.8 2.2 3.0 20.8 12.0 C.1. Domestic absorption 7.2 6.1 4.1 7.1 10.2 13.8 15.6 8.5 9.3 11.4 4.5 0.1. Total consumption, tec 4.8 10.3 8.4 5.9 9.2 10.6 6.1 4.6 8.7 12.0 9.2 2. Private, etc 4.8 11.4 3.1 5.9 9.2 10.6 6.1 4.5 8.7 12.0 9.2 3. General government 4.8 5.3 83.7 5.9 9.2 10.6 8.1 4.5 8.7 12.0 9.2 E.1. Gross domestic investment 11.8 -1.8 -4.9 10.2 12.6 20.8 35.3 9.7 10.1 10.4 -2.8 2. Fixed investment .. .. .. 27.7 14.4 21.5 27.2 12.7 14.0 12.8 -18.6 3. Increase in stocks .. .. .. -28.7 4.9 17.4 71.3 -0.3 -4.7 0.5 78.7 Memorandum Items: 0.1. Net factor income .. .. .. -. ** ** ** -* 2. Net current transfers .. .. .. .. .. ** ** ** S. Gross national product 7.0 6.4 4.9 8.5 10.1 13.6 12.8 7.7 10.4 11.2 3.6 H.1. Gross domestic saving 11.4 -1.0 -2.4 18.3 9.6 18.5 26.2 12.0 14.6 9.2 -2.8 2. Gross national saving 11.2 -1.1 -2.6 14.0 10.4 18.7 25.0 11.3 14.2 8.8 -3.5 1.1. Capacity to import .. .. .. ** .* -- ** * 2. Terms of trade adjustment .. .. .. -- ** ** ** * 3. Gross domestic income 7.0 6.4 4.9 8.1 9.3 18.1 12.7 7.2 11.0 10.9 4.5 4. Gross national income 7.0 6.4 4.9 8.8 9.0 18.2 12.4 7.0 10.9 10.9 4.2 J.1. GDP at current mp 11.4 11.8 6.8 8.8 11.5 19.7 23.3 13.8 16.8 22.0 13.5 Source: Table 1.2. Table 1.6 : CHINA: National Accounts (Percentage GROWTH RATES of Implicit price deflators) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 ORIGIN AND USE OF RESOURCES A.1. GDP at market prices 4.2 5.1 1.8 0.3 1.6 5.5 9.1 5.4 5.7 9.7 9.3 2. Net indirect taxes .. .. .. .. .* 3. GDP at factor cost 4. Agriculture 17.0 11.9 6.2 2.7 3.2 3.9 7.9 6.8 9.4 13.3 S. Industry 1.4 1.5 0.3 0.3 0.8 2.7 4.2 4.6 3.2 2.0 a. Services, etc. -12.0 0.4 -3.. -.e 1.6 18.! 28.1 5.0 4 B.1. Terms of Trade (Px/Pm) 0.0 0.0 0.1 -2.5 -6.5 -5.0 -6.6 -7.7 9.0 -2.5 8.3 2. Exports of OWNS 4.2 5.1 13.1 5.8 3.7 16.7 21.1 7.9 15.0 3.1 5.8 8. Imports of GFS 4.2 5.1 13.0 8.8 10.9 22.8 29.8 16.8 5.4 5.8 -2.3 C.1. Domestic absorption 4.2 5.1 1.7 0.2 2.1 6.0 11.6 5.8 3.7 10.4 8.5 D.1. Total consumption, etc 4.2 5.1 1.7 0.2 2.3 6.2 13.3 6.2 2.5 10.9 7.9 2. Private, etc 8.8 4.7 7.8 2.8 0.3 4.0 17.8 8.8 5.1 12.2 3. General government -13.2 7.1 -21.3 -13.1 14.8 17.9 -7.5 -9.3 -16.1 -0.9 E.1. Gross domestic investment 4.1 5.1 1.8 0.3 1.8 5.6 9.1 5.4 5.7 9.7 9.3 2. Fixed investment .. .. .. 0.3 1.6 5.5 9.1 5.4 6.7 9.7 9.3 g. Increase in stocks .. .. .. 0.3 1.6 5.5 9.1 5.3 5.7 9.7 9.2 Memorandum Items: F.1. Net factor income 4.2 5.1 1.7 0.2 2.1 6.0 11.6 5.8 3.7 10.4 8.5 2. Net current transfers .. .. 1.7 0.2 2.1 6.0 11.6 5.8 3.7 10.4 8.5 8. Cross national product 4.2 5.1 1.8 0.3 1.6 5.6 9.1 6.4 5.7 9.7 9-1 0.1. Gross domestic saving 4.1 5.1 2.1 1.0 1.4 5.0 3.0 6.4 10.3 8.6 9.8 2. Cross national saving 4.1 6.1 2.1 1.0 1.4 5.1 3.0 6.4 10.3 8.6 9.6 Source: Table 1.8. Table 1.7: CHINA: Sources of Growth (in Constant 1980 Prices) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 GDP growth rate (actual) .. 7.00 6.40 4.90 8.30 9.80 13.50 13.10 8.00 10.50 11.20 3.90 SUPPLY SIDE Agriculture growth rate .. 6.40 -1.80 7.10 11.70 8.50 13.00 1.70 3.70 4.80 3.20 3.30 Industry growth rate .. 8.10 10.90 1.70 6.00 9.80 14.90 19.60 9.60 14.30 20.70 8.30 Services growth rate .. 5.08 14.06 10.01 7.31 12.93 10.64 20.66 11.83 10.03 -3.28 -11.47 Agriculture Share into GDP 39.17 38.95 35.95 36.70 37.86 37.41 37.24 33.49 32.16 30.50 28.30 28.14 Industry Share into GDP 46.44 48.92 48.90 47.41 46.40 46.40 46.97 49.67 50.41 52.14 56.60 68.99 Services Share into GDP 14.39 14.13 15.15 16.89 15.74 16.19 15.78 16.84 17.43 17.36 15.10 12.87 Total Share 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Agr. Share of last year * Weight .. 2.51 -0.70 2.66 4.29 3.22 4.86 0.63 1.24 1.54 0.98 0.93 Ind. Share of last year * Weight .. 3.76 5.11 0.83 2.84 4.66 6.91 9.21 4.77 7.21 10.79 4.70 Ser. Share of last year * Weight .. 0.73 1.99 1.62 1.16 2.03 1.72 3.26 1.99 1.76 -0.57 -1.73 Weighted Average Growth rate .. 7.00 6.40 4.90 8.30 9.80 13.60 13.10 8.00 10.50 11.20 3.90 DEMAND SIDE Total Consumption growth rate .. 4.81 10.31 8.38 5.87 9.21 10.63 6.06 4.47 8.74 12.02 9.21 Gross Domestic Investment gr. rate .. 11.85 -1.83 -4.87 10.15 12.49 20.76 35.27 9.68 10.09 10.37 -2.81 Exports of goods & NFS growth rate .. 25.13 22.75 22.98 6.18 0.55 17.02 9.67 23.46 18.64 17.23 4.57 Imports of goods A NFS growth rate .. 27.57 16.70 11.16 -10.44 4.46 22.47 50.66 2.21 2.98 20.80 12.02 C Share into GODP 66.79 65.42 67.83 70.08 68.50 88.14 66.41 62.28 60.24 59.28 59.72 62.77 GDI Share into GDP 33.89 34.90 32.20 29.20 29.70 30.43 32.37 38.72 39.32 39.18 38.89 36.38 EXPONFS Share into GDP 4.93 6.77 6.66 7.80 7.85 7.01 7.22 7.00 8.01 8.80 9.08 9.12 IMPGNFS Share into GDP -5.11 -6.09 -6.68 -7.08 -5.86 -6.57 -6.01 -8.00 -7.67 -7.06 -7.67 -8.27 Total Share 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 C Share(-1) * Weight .. 3.21 6.74 5.68 4.11 6.31 7.24 4.02 2.78 6.26 7.12 5.50 GDI Share(-1)* Weight .. 3.98 -0.84 -1.57 2.97 3.71 6.32 11.42 3.75 3.97 4.08 -1.09 EXPGNFS Share(-1) * Weight .. 1.24 1.31 1.53 0.48 0.04 1.19 0.70 1.84 1.49 1.48 0.41 IMPGNFS Share(-1) * Weight .. -1.41 -1.02 -0.74 0.74 -0.26 -1.25 -3.04 -0.18 -0.23 -1.47 -0.92 Weighted Average Growth rate .. 7.00 8.40 4.90 8.30 9.80 13.50 13.10 8.00 10.50 11.20 3.9 SUPPLY SIDE Contribution to GDP growth in percent Agriculture .. 36.81 -10.96 52.09 61.74 32.83 36.02 4.83 16.49 14.70 8.71 23.95 Industry .. 53.74 79.90 18.97 34.27 48.40 51.21 70.28 59.61 68.65 96.37 120.45 Services .. 10.45 31.05 30.94 13.99 20.76 12.76 24.89 24.90 18.65 -5.08 -44.40 Total .. 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 DEMAND SIDE Total consumption .. 45.90 105.38 116.01 49.55 84.38 53.65 30.70 34.80 50.13 63.61 141.01 Gross domestic investment .. 68.52 -9.99 -32.02 35.72 37.85 46.79 87.17 46.87 37.80 38.28 -28.00 Exports of goods A NFS .. 17.71 20.51 31.22 5.82 0.43 8.83 6.33 20.64 14.21 13.23 10.61 Imports of goods & NFS .. -20.13 -16.90 -15.20 8.91 -2.66 -9.27 -23.20 -2.21 -2.15 -13.11 -23.63 Total .. 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Source: Table 1.2. Table 1.8: CHINA: GROWTH RATES of Provincial Output (in Constant Prices) 1982 1983 1984 1985 1986 1987 Avg. 84-8 Coeff. Variation 1 Beijing 6.2 11.2 16.2 15.0 1.6 8.2 10.3 1.8 2 Tianjing 6.9 8.2 11.9 16.0 5.1 7.2 10.1 2.4 3 Hebel 10.0 12.6 15.4 13.3 5.2 10. 11.0 2.9 4 Shanxi 14.6 11.0 21.1 8.1 4.1 3.1 9.1 1.3 6 Mongolia 14.8 8.7 15.5 14.1 1.6 6.3 9.4 1.6 6 Liaoning 5.9 10.6 15.8 12.3 7.9 9.9 11.5 3.9 7 Jilin 7.1 18.4 12.1 7.5 6.6 16.3 10.6 2.7 8 Heilongliang 6.8 10.0 8.5 4.7 8.4 7.9 7.4 4.7 9 Shanghai 5.2 6.5 13.2 13.2 3.6 7.0 9.3 2.2 10 Jiangsu 9.4 11.9 19.6 16.9 10.2 10.4 14.3 3.5 11 Zhejiang 11.8 11.2 23.1 25.3 13.5 12.7 18.7 3.3 12 AnhuL 9.8 8.6 19.7 16.2 10.3 8.2 13.6 3.0 13 Fujian 7.1 8.4 17.8 17.9 5.9 12.1 i34 2.7 14 Jiangxi 9.7 6.1 11.5 14.5 6.2 9.8 10.5 3.5 15 Shandong 9.3 12.3 18.7 10.2 7.6 16.8 13.3 2.9 16 Henan 5.1 13.9 11.1 12.6 4.9 15.4 11.0 2.9 17 Hubel 13.8 10.6 20.5 18.6 4.8 7.8 12.4 2.0 18 Hunan 10.6 6.7 9.7 11.5 7.8 9.2 9.5 7.2 19 Guangdong 12.2 9.7 15.6 18.7 9.0 16.1 14.9 4.2 20 Guangxi 12.9 3.8 4.5 10.4 8.2 9.6 8.2 3.6 21 Sichuan 14.5 11.0 14.2 14.1 6.8 9.3 10.9 3.1 22 Guizhou 19.9 12.1 13.6 7.7 7.6 10.4 9.8 4.0 23 Yunnan 11.6 9.5 13.5 11.5 3.6 11.7 10.1 2.6 24 Tibet 0.3 -5.4 62.2 11.8 -9.2 11.4 19.1 0.7 25 Shaanxi 13.7 9.3 17.1 16.5 6.3 9.0 12.0 2.7 26 Gansu 10.5 10.2 13.3 15.1 12.4 6.2 11.8 3.5 27 Qinghai 14.5 1.8 15.3 20.8 7.6 6.4 12.5 2.1 28 Ninghai 9.4 14.1 15.5 16.4 9.8 6.1 11.7 2.9 29 Xinjiang 11.1 12.8 12.9 14.8 9.1 9.1 11.4 4.9 Average growth rate of all Provinces 10.1 9.4 16.5 13.8 6.4 9.8 Coefficient of Variation 2.6 2.2 1.7 3.3 1.6 3.0 Source: CHINA: Statistical Year Book 1989 (Chins) pp.34 for 1987; 1988 pp.48 for 1986; 1987 pp.42 for 1985; 1986 pp.48 for 1984; 1984 pp.28 for 1983; 1988 pp.28 for 1962; 1981 pp.19 for 1981. NOTE: Used growth rates of OVAIO in Constant 1980 Prices for 1982-88; and growth rates of National Income for 1984-88. Table 1.9: CHINA: Savings (As a Percent of GNP) 1980 1981 1982 1983 1984 1985 1986 1987 1988 Gross National Savings .. 30.1 31.0 31.3 36.5 36.0 37.8 39.3 37.9 State budget (Current Account Surplus) .. 7.0 5.6 6.8 6.5 7.0 5.8 4.5 3.1 Enterprises and other .. .. 14.1 14.3 15.7 15.6 17.6 18.5 18.0 Household .. .. 11.4 11.2 14.3 13.4 14.4 16.3 16.8 of which: Financial Savings .. 3.7 7.8 5.5 8.5 7.2 7.7 9.2 9.5 Source: IMF Recent Economic Developments 01/17/90 pp.41 for 1983-88, 01/30/89 pp.81 for 1983, 01/29/88 pp.6 for 1982, 10/21/86 pp.8 for 1981. I- Table 2.1 : CHINA : Balance of Payments (billions of US dollars) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 A.1. Exports of GNFS 10.513 14.838 19.952 24.290 24.574 24.554 28.567 29.967 33.926 42.934 51.905 56.183 2. Merchandise (FOB) 9.750 13.660 18.270 22.010 22.320 22.230 26.140 27.350 30.940 39.440 47.540 52.486 3. Non-factor services 0.763 1.178 1.682 2.280 2.254 2.324 2.427 2.607 2.986 3.494 4.365 3.697 B.1. Imports of GNFS 10.890 15.670 19.550 22.010 19.280 21.390 27.410 42.250 42.910 43.210 55.250 59.142 2. Merchandise (FOB) 9.986 14.369 17.927 20.183 17.680 19.615 25.135 38.743 39.348 39.624 50.664 54.233 3. Non-factor services 0.904 1.301 1.623 1.827 1.600 1.775 2.275 3.507 3.562 3.586 4.586 4.909 C.1. Resource balance -0.377 -0.832 0.402 2.280 5.294 3.164 1.157 -12.293 -8.984 -0.276 -3.345 -2.959 D.1. Net factor income -0.008 -0.045 -0.100 -0.124 0.378 1.233 1.620 0.932 0.176 -0.164 -0.126 -1.421 2. Factor receipts 0.236 0.305 0.512 0.697 1.017 1.528 2.008 1.478 1.100 1.027 1.504 1.876 a. of which labor income .. .. .. .. 0.075 0.086 0.091 0.199 0.051 0.035 0.044 3. Factor payments 0.44- 0.350 0.612 0.821 0.689 0.295 0.388 0.546 0.924 1.191 1.630 3.097 a. of wh. LT interest (DRS) .. .. 0.317 0.519 0.543 0.525 0.611 0.588 0.646 1.117 1.593 2.267 E.1. Net current transfers (pry) 0.597 0.856 0.640 0.464 0.530 0.4386 0.305 0.171 0.255 0.249 -0.331 -0.211 2. Transfer receipts .. .. 0.640 0.484 0.543 0.446 0.317 0.180 0.266 0.260 0.200 0.214 a. of wh. workers remit. .. .. .. .. 0.541 0.446 0.317 0.180 0.208 0.166 0.129 0.138 3. Transfer payments .. .. .. .. 0.013 0.010 0.012 0.009 0.011 0.011 0.531 0.425 F.1. Curr.Acct.Bal exc.off.trans 0.212 -0.221 0.942 2.820 6.202 4.833 3.082 -11.190 -8.553 -0.191 -3.802 -4.591 - G.1. Long-term capital inflow -0.830 0.822 1.760 0.631 0.409 1.172 1.808 4.337 7.058 5.790 7.056 3.383 2. Net direct investment .. .. 0.057 0.265 0.430 0.636 1.124 1.030 1.426 1.669 2.344 1.400 3. Net official transfers -0.069 -0.030 -0.070 0.108 -0.044 0.075 0.137 0.072 0.124 -0.026 0.042 0.042 4. Net LT loans (DRS) .. .. 1.926 0.596 0.536 0.986 1.070 4.005 4.851 6.238 6.771 0.771 a. disbursements .. .. 2.539 1.800 1.837 2.376 2.357 5.302 6.725 8.152 8.868 2.908 b. repayments .. .. 0.613 1.204 1.302 1.389 1.287 1.297 1.874 1.914 2.097 2.137 5. Other LT inflows (net) .. .. -0.153 -0.338 -0.512 -0.525 -0.723 -0.770 0.658 -2.092 -2.101 1.170 H.1. Other items (Net) -0.130 0.002 -2.330 -1.326 -0.336 -1.912 -2.874 2.215 -0.496 -0.747 -1.018 -0.412 2. Net short-term capital -1.231 -0.452 -4.001 -2.088 -0.821 -1.362 -1.942 1.650 -1.076 0.703 0.076 -0.010 3. Capital flows n.e.i. 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 4. Errors and omissions 1.101 0.454 1.671 0.762 0.485 -0.550 -0.932 0.565 0.580 -1.450 -1.094 -0.402 I.1. Changes in net reserves 0.748 -0.603 -0.372 -1.925 -6.275 -4.093 -1.816 4.638 1.991 -4.852 -2.236 1.620 2. Use of IMF credit 0.000 0.000 0.000 0.524 -0.027 -0.496 0.000 0.000 0.731 0.000 0.000 0.079 3. Other reserve changes 0.748 -0.603 -0.372 -2.449 -6.248 -3.597 -1.816 4.6838 1.260 -4.852 -2.236 1.541 Source: CHINA Statistical year book 1988 pp.643 and IMF. Merchandise exports (fob), and merchandise imports (cif) are from Statistical year book of 1988 pp.643 (which are identical to customs statistics). Exports of non-factor services are from IMF recent economic developments 01/30/89. Merchandise fob imports are calculated by multiplying cif imports by a constant factor 0.917 (from IFS). Imports of non-factor services are calculated as the difference between CIF and FOB imports. Table 2.2 : CHINA : Balance of Payments (Percentage GROWTH RATES) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 A.1. Exports of GNFS 41.1 33.9 22.2 1.2 -0.1 16.3 4.9 13.3 26.5 20.9 8.2 2. Merchandise (FOB) 40.1 33.1 21.0 1.5 -0.4 17.5 4.7 13.1 27.6 20.5 10.4 3. Non-factor services 54.4 42.8 35.6 -1.1 3.1 4.4 7.4 14.5 17.0 24.9 -16.3 B.1. Imports of GNFS 43.9 27.3 10.3 -12.4 10.9 28.1 54.1 1.5 0.7 27.8 7.0 2. Merchandise (FOB) 43.9 27.3 10.3 -12.4 10.9 28.1 54.1 1.5 0.7 27.8 7.0 3. Non-factor services 43.9 27.3 10.3 -12.4 10.9 28.1 54.1 1.5 0.7 27.8 7.0 C.1. Resource balance .. .. .. .. .. .. .. .. D.1. N*t factor income .. .. .. .. .. .. .. .. 2. Factor receipts 29.2 67.9 36.1 45.9 60.2 31.4 -26.4 -25.6 -6.6 46.4 11.5 a. of which labor income .. .. .. .. .. 14.7 5.8 118.7 -74.4 -31.4 25.0 3. Factor payments 43.4 74.9 34.2 -22.2 -53.8 31.6 40.7 69.2 28.9 36.8 90.0 a. of wh. LT interest (DRS) .. .. 63.7 4.6 -3.3 16.4 -3.8 9.9 72.9 42.6 41.1 E.1. Net current transfers (pry) .. .. .. .. .. .. .. .. 2. Transfer receipts .. .. .. .. .. .. .. .. a. of wh. workers remit. .. .. .. .. .. .. .. .. 3. Transfer payments .. .. .. .. .. .. .. .. .. .. F.1. Curr.Acet.Bal exc.off.trans .. .. .. .. .. .. .. .. .. .. .. G.1. Long-term capital inflow .. 114.1 -84.1 -35.2 186.6 37.2 169.7 62.7 -18.0 21.9 -52.1 2. Net direct investment .. .. 364.9 62.3 47.9 78.7 -8.4 38.3 17.1 40.4 -40.3 3. Net official transfers .. .. .. .. .. .. .. .. 4. Net LT loans (DRS) .. .. -69.1 -10.2 84.3 8.5 274.3 21.1 28.6 8.6 -51.6 a. disbursements .. .. -29.1 2.1 29.3 -0.8 124.9 26.8 21.2 8.8 -38.9 b. repayments .. .. 96.4 8.1 6.7 -7.3 0.8 44.5 2.1 9.5 1.9 6. Other LT inflows (net) .. .. .. .. .. .. .. .. H.1. Other items (Net) .. .. .. .. .. .. .. .. 2. Net short-term capital .. .. .. .. .. .. .. .. .. 3. Capital flows n.ed. .. .. .. .. .. .. .. .. . 4. Errors and omissions .. .. .. .. .. .. .. .. .. I.1. Changes in not reserves .. .. .. .. .. .. .. .. .. .. 2. Use of IMF credit .. .. .. .. .. .. .. .. .. .. 3. Other reserve changes .. .. .. .. .. .. .. .. .. .. Source: Table 2.1. Table 2.3: CHINA : Services (In millions of U.S. Dollars) 1979 1980 1981 1982 1983 1984 1986 1986 1987 1988 1989 A. Shipment of freight Credit 348 553 848 785 786 668 671 705 904 1308 1313 Debit -906 -1187 -1181 -635 -739 -761 -1224 -850 -1186 -1387 -2493 B. Insurance Credit 68 127 225 202 203 224 196 229 252 345 180 Debit -32 -66 176 89 110 -121 -69 -82 -142 -214 -195 C. Other transportation Credit 38 106 113 140 174 209 271 304 152 169 160 Debit -12...........-**- D. Port expenses Credit 318 385 422 388 381 376 360 306 289 304 298 Debit -376 -5686 -710 -612 -614 -560 -300 -670 -456 -889 -835 E. Travel receipts Credit 413 511 672 703 767 922 979 1227 1693 2078 2016 Debit .. .. -69 -68 -53 -150 -314 -308 -387 -633 -572 F. Profits Credit .. .. .. 20 31 2 8 .. 10 Debit .. .. .. 1 .. .. -14 -16 -2 -8 -4 0. Interest Credit .. .. .. 6 707 925 484 216 177 427 906 Debit .. .. .. -16 -41 -92 -68 -298 -457 -644 -1762 H. Bank interest and charges Credit 305 512 697 992 715 996 897 685 789 1042 2086 Debit -350 -612 -821 -624 -254 -296 -464 -611 -732 -978 -1969 oa I. Posts Credit .. .. .. .. .. .. .. .. .. 24 24 Debit .. . . . . . .. .11 4 J. Interofficial Credit .. .. .. 36 13 28 130 215 204 137 141 Debit .. .. .. -169 -154 -223 -263 -251 -150 -277 -418 K. Labor income Credit .. .. .. .. 76 86 91 199 51 35 44 Debit . ** ** ** ** ** L. Other services Credit 210 215 123 482 423 384 448 841 892 458 852 Debit -318 -272 -376 -643 -544 -5683 -354 -115 -164 -193 -136 M. Total services Credit 1693 2409 3100 3753 4275 4819 4533 4927 5413 6327 7819 Debit -1992 -2703 -2981 -2685 -2289 -2766 -3070 -3200 -3676 -5211 -8379 N. Factor Services (F+G+H+K) Receipts (Credit) 305 512 697 1017 1528 2008 1478 1100 1027 1504 3035 Payments (Debit) -360 -612 -821 -639 -295 -388 -646 -924 -1191 -1630 -3735 0. Non-Factor Services (M-N-L) Receipts (Credit) 1178 1882 2280 2254 2324 2427 2807 2986 3494 4365 4132 Payments (Debit) (IMF def.) -1326 -1819 -1784 -1383 -1450 -1815 -2170 -2161 -2321 -3389 -4508 Payments (Debit) (IFS def.) -1301 -1623 -1827 -1600 -1776 -2275 -3507 -3562 -3586 -4586 -4686 (Imports cif customs basis * 0.083) Source: IMF Recent Economic Developments 01/17/90 pp.69 for 1984-89, 10/24/85 pp.115 for 1981-83, 11/03/83 pp.100 for 1979-80; and BESD data base file IMFBOPFC (which is identical to the data in IMF Recent Developments). Table 2.4: CHINA : Transfers (In millions of U.S. Dollars) 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Private unrequited transfers (net) 856 640 464 530 438 305 171 265 249 416 279 Credit .. .. .. 180 266 260 428 293 Debit ... ... ... -9 -11 -11 -12 -15 Nonresident remittances Credit .. .. .. .. .. .. 180 208 166 129 66 Debit .. .. .. .. .. .. -3 -3 -3 -4 -3 Migrants' transfers Credit .. .. .. .. .. .. .. 58 94 299 227 Debit .. .. .. .. -6 -8 -8 -8 -12 Public unrequited transfers (net) -30 -70 108 -44 75 137 73 124 -25 3 171 International organizations Credit .. .. .. .. .. .. 63 140 58 61 181 Debit .. .. .. .. .. -42 -44 -34 -19 -24 Grants and aid Credit .. .. .. .. .. 197 110 71 79 121 Debit .. .. .. .. .. .. -145 -82 -120 -118 -107 Source: IMF Recent Economic Developments 01/17/90 pp.70 for 1985-9,01/30/89 pp.89 for 84,10/24/85 pp.116 for 1981-3, 11/03/88 pp.100 for 1979-80. Table 3.1 : CHINA : Commodity Composition of Merchandise Exports (US 3 million) 1980 1981 1982 1983 1984 1985 1986 1987 1988 19b PRIMARY GOODS SO+S1+S2+S3+S4 9137 10251 10033 9623 11934 13828 11272 13231 14430 15026 FOOD so 2999 2925 2909 2854 3232 3803 4448 4781 5891 6145 of which Live animals chiefly for food DOO .. .. .. .. 326 304 338 348 386 395 Meat and meat products DO1 .. .. .. .. 466 448 483 620 585 657 Fishes,shell-fish,molluscs etc. D03 .. .. .. .. 306 283 491 721 969 1039 Grain and grain products D04 .. .. .. .. 444 1065 898 579 682 719 Vegetables and fruits DO5 .. .. .. .. 829 825 1092 1290 1674 1623 Coffee, tea,cocoa etc. D07 .. .. .. .. 449 435 466 488 524 668 NON-FOOD S2 1728 2098 1810 2102 2421 2653 2908 3650 4257 4211 of which Oil seeds & oil-containing fruits D22 .. .. .. .. 506 487 580 674 684 645 Textile fibers etc. D26 .. .. .. .. 929 1146 1160 1608 1672 1546 Animal and vegetable raw materials D29 60 89 78 105 442 398 486 645 724 844 MINERAL FUELS SS 427A 5228 5314 467 6027 7132 3683 4544 3972 4270 of which Coal, coke and briquettes D32 .. .. .. .. 322 349 456 536 694 680 Petroleum,petroleum products etc. D33 .. .. .. .. 5701 6777 3224 4003 3372 3581 0 OTHER S1+S4 139 0 0 0 254 240 233 256 310 400 MANUFACTURED GOODS S5+S6+S7+S8+S9 9051 11759 12297 12607 14196 13522 19670 26206 33111 37460 CHEMICALS & RELATED PRODUCTS Ss 1125 1342 1196 1251 1364 1358 1733 2236 2897 3201 of which Organic DS1 .. .. .. .. 294 309 411 500 575 690 Inorganic D52 .. .. .. .. 283 287 379 553 762 794 LIGHT INDUSTRY SO 4019 4706 4302 4366 5054 4493 5886 8670 10491 10897 of which Yarn,fabrics,manuf. goods etc. D65 .. .. .. .. 3093 3243 4220 5790 6458 6994 Non-metallic minerals D86 .. .. .. .. 280 227 317 439 579 793 Metal products D67 .. .. .. .. 477 425 797 1006 709 MACHINERY & TRANSPORT EQUIPMENT S7 846 1087 1263 1220 1493 772 1094 1741 2769 3874 OTHER S8 2850 3725 3702 3806 4687 3486 4948 6273 8268 10755 Clothing and garments D84 .. .. .. .. 2653 2050 2913 3749 4872 8130 PRODUCTS NOT CLASSIFIED ELSEWHERE S9 210 899 1834 1966 1597 3413 6009 7387 8685 8734 TOTAL 18188 22010 22330 22230 26129 27350 30942 39437 47641 52486 Source: CHINA Customs Statistics 1990.1 pp.13 for 1989; 1989.1 pp.17 for 1988; CHINA Statistical Year Book 1988 pp.644 for 1987, 1986; 1987 pp.620 for 1985; 1986 pp.482 for 1984; 1985 pp.494 for 1983; 1984 pp.381 for 1982; 1983 pp.405 for 1981; 1981 pp.73 for 1980. Table 3.2 : CHINA : Commodity Composition of Merchandise Exports (Percentage Shares) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 PRIMARY GOODS SO*S1+S2+SB+S4 50.2 46.6 44.9 43.3 45.7 50.6 36.4 33.5 30.4 28.6 FOOD so 16.5 13.3 13.0 12.8 12.4 13.9 14.4 12.1 12.4 11.7 of which Live animals chiefly for food 000 .. .. .. .. 1.2 1.1 1.1 0.9 0.8 0.8 Meat and meat products 001 .. .. .. .. 1.7 1.8 1.6 1.3 1.2 1.3 Fishes,shell-fish,molluscs etc. D03 .. .. .. .. 1.2 1.0 1.6 1.8 2.0 2.0 Grain and grain products D04 .. .. .. .. 1.7 3.9 2.9 1.5 1.4 1.4 Vegetables and fruits DOS .. .. .. .. 3.2 3.0 3.5 3.3 3.5 3.1 Coffee, tea,cocoa etc. D07 .. .. .. .. 1.7 1.6 1.5 1.2 1.1 1.1 NON-FOOD S2 9.6 9.5 8.1 9.5 9.3 9.7 9.4 9.3 9.0 8.0 of which Oil seeds & oil-containing fruits D22 .. .. .. .. 1.9 1.8 1.9 1.7 1.4 1.2 Textile fibers etc. D28 .. .. .. .. 3.8 4.2 3.7 3.8 3.5 2.9 Animal and vegetable raw materials 029 0.3 0.4 0.3 0.6 1.7 1.5 1.6 1.6 1.5 1.6 MINERAL FUELS S3 23.5 23.8 23.8 21.0 23.1 26.1 11.9 11.6 8.4 8.1 of which Coal, coke and briquettes D32 .. .. .. .. 1.2 1.3 1.5 1.4 1.2 1.3 Petroleum,petroleum products etc. D33 .. .. .. .. 21.8 24.8 10.4 10.2 7.1 6.8 OTHER S1+S4 0.8 0.0 0.0 0.0 1.0 0.9 0.8 0.6 0.7 0.8 MANUFACTURED GOODS S5+S6+S7+S8+S9 49.8 53.4 65.1 568.7 54.3 49.4 63.6 86.5 69.6 71.4 CHEMICALS A RELATED PRODUCTS SS 8.2 6.1 5.4 5.6 5.2 5.0 6.6 6.7 8.1 6.1 of which Organic 051 .. .. .. .. 1.1 1.1 1.3 1.3 1.2 1.3 Inorganic D52 .. .. .. .. 1.1 1.0 1.2 1.4 1.6 1.5 LIGHT INDUSTRY S8 22.1 21.4 19.3 19.6 19.3 16.4 19.0 21.7 22.1 20.8 of which Yarn,fabrics,manuf. goods etc. DOS .. .. .. .. 11.8 11.9 13.6 14.7 13.6 13.3 Mon-ferrous metals 088 .. .. .. .. 1.0 0.8 1.0 1.1 1.2 1.6 Metal products D67 .. .. .. .. 1.8 1.6 1.8 2.0 2.1 1.4 MACHINERY A TRANSPORT EQUIPMENT S7 4.7 4.9 5.7 6.6 5.7 2.8 3.5 4.4 5.8 7.4 OTHER S8 16.7 16.9 18.6 17.1 17.9 12.7 16.0 15.9 17.4 20.5 Clothing and garments 084 .. .. .. .. 10.2 7.5 9.4 9.6 10.2 11.7 PRODUCTS NOT CLASSIFIED ELSEWERE S9 1.2 4.1 8.2 8.8 6.1 12.6 19.4 18.7 18.3 16.6 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Table 8.1. Table 3.3 : CHINA : Commodity Composition of Merchandise Exports (Percentage Growth Rates) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 PRIMARY GOODS SO+S1+S2+S3+S4 .. 12.2 -2.1 -4.1 24.0 15.9 -18.5 17.4 9.1 4.1 FOOD SO .. -2.6 -0.5 -1.9 13.2 17.7 17.0 7.5 23.2 4.3 of which Live animals chiefly for food 000 .. .. .. .. .. -6.7 11.2 3.0 11.0 2.3 Meat and meat products DO1 .. .. .. .. .. -1.8 7.8 7.7 12.5 12.2 Fishes,shell-fish,molluscs etc. DOS .. .. .. .. .. -7.2 73.5 46.8 34.3 7.3 Grain and grain products D04 .. .. .. .. .. 139.9 -15.7 -35.5 17.7 5.6 Vegetables and fruits DOS .. .. .. .. .. -0.5 32.4 18.1 29.8 -3.0 Coffee, tea,cocoa etc. D07 .. .. .. .. .. -3.1 7.1 4.7 7.4 8.3 NON-FOOD S2 .. 21.5 -13.7 16.1 15.2 9.6 9.6 25.5 16.8 -1.1 of which Oil seeds A oil-containing fruits D22 .. .. .. .. .. -3.6 19.1 16.2 1.4 -5.6 Textile fibers etc. D26 .. .. .. .. .. 23.3 1.3 30.0 10.9 -7.5 A a and vegetable raw aatrials D29 . 21.0 -10.0 22.1 . . MINERAL FUELS S3 .. 22.4 1.6 -12.2 29.1 18.3 -48.4 23.4 -12.6 7.5 of which Coal, coke and briquettes D32 .. .. .. .. .. 8.4 30.4 17.8 10.8 14.6 Petroleum,petroleum products etc. D3 .. .. .. .. .. 18.9 -52.4 24.2 -15.8 6.2 t OTHER S1+S4 .. .. .. .. .. -5.6 -2.9 9.9 21.3 28.8 MANUFACTURED GOODS S6+S8+S7+S8+S9 .. 29.9 4.6 2.5 12.6 -4.7 45.5 33.2 26.3 13.1 CHEMICALS A RELATED PRODUCTS S6 .. 19.3 -10.9 4.6 9.0 -0.4 27.6 29.0 29.8 10.5 of which Organic D61 .. .. .. .. .. 5.1 33.0 21.7 15.1 19.9 Inorganic D52 .. .. .. .. .. 1.4 32.1 45.9 37.8 4.2 LIGHT INDUSTRY s6 .. 17.1 -8.6 1.5 15.8 -11.1 31.0 45.6 22.4 3.9 of which Yarn,fabrics,manuf. gooda etc. D85 .. .. .. .. .. 4.8 30.1 F7.2 11.6 8.3 Non-ferrous metals 088 .. .. .. .. .. -12.7 39.8 38.5 31.9 36.8 Metal products D87 .. .. .. .. .. -10.7 29.8 44.1 26.2 -29.5 MACHINERY A TRANSPORT EQUIPMENT S7 .. 28.4 18.2 -3.4 22.4 -48.3 41.7 59.1 59.1 39.9 OTHER s8 .. 30.7 -0.8 2.8 23.2 -25.6 41.9 26.8 31.8 30.1 Clothing and garments D84 .. .. .. .. .. -22.7 42.1 28.7 PRODUCTS NOT CLASSIFIED ELSEWHERE S9 .. .. 104.0 7.1 -18.7 113.7 76.1 22.9 17.6 0.6 TOTAL .. 21.0 1.5 -0.4 17.5 4.7 13.1 27.5 20.6 10.4 Source: Table 3.1. Table 3.4: CHINA: Exports in Current Prices and Constant (1980) Prices Merchandise Exports in Current Prices (US$ million) 1980 1981 1982 1983 1984 1986 1986 1987 1988 1989 Food (SO+S1+S4) 3138 2925 2909 2854 3486 4043 4681 5037 6201 6544 Petroleum (S3) 4273 5228 5314 4667 6027 7132 3683 4544 3972 4270 Manufacturing (SS+S6+S7+S8+S9) 9051 11759 12297 12607 14195 13522 19670 26206 33111 37460 Other (S2) 1726 2098 1810 2102 2421 2653 2908 3650 4257 4211 Total 18188 22010 22330 22230 26129 27350 30942 39437 47541 52486 Source: Table 3.1. Price Indices (in US dollars) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Food (SO+S1+S4) food 100.00 86.91 77.86 84.70 91.82 79.88 72.18 55.34 61.02 57.36 Petroleum (S3) petroleum 100.00 111.81 102.44 95.41 95.03 91.28 39.36 45.74 33.65 40.77 Manufacturing (S5+S6+S7+S8+S9) muv 100.00 100.53 99.14 96.66 94.87 95.87 112.53 123.41 132.37 131.91 Other (S2) non-food 100.00 86.37 77.16 88.91 84.30 70.11 54.23 61.47 59.02 59.87 ) Source: World Bank Commodity Projections; IECCM 02/08/90 Merchandise Exports in 1980 Constant Prices (US$ million) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Food (SO+S1+S4) 3138 3366 3736 3370 3797 5061 6485 9102 10162 11409 Petroleum (Sa) 4273 4676 5188 4892 6342 7813 9357 9935 11805 10473 Manufacturing (S5S8.S7+S8+S9) 9051 11897 12404 13058 14962 14105 17480 21235 25013 28398 Other (S2) 1726 2429 2346 2364 2872 3784 5362 5938 7212 7035 Total 18188 22168 23673 23883 27973 30763 38684 46210 54193 57314 Table 3.5: CHINA: Total Exports of Goods and Services (in million USS and Yuan) Total Exports (USS million) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 MERCHANDISE Current Prices 18188 22010 22330 22230 26129 27350 30942 39437 47541 52486 Constant Prices 18188 22168 23873 23883 27973 30783 38884 46210 54193 57314 SERVICES Current Prices 1882 2280 2254 2324 2427 2607 2986 3494 4365 3697 Constant Prices (use auv index) 1882 2268 2274 2407 2558 2719 2654 2831 3297 2803 Tota I Current Prices 19870 24290 24584 24554 285568 29957 33928 42931 51906 se183 Constant Prices 19870 24436 26947 28090 30531 33482 41337 49041 57490 60116 Source: Table 8.4. Exchange Rate 1.498 1.705 1.893 1.976 2.320 2.937 3.453 3.722 3.722 3.805 I Total Exports (Yuan million) 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 - ------ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 000DS in Curent Prices 27248 37527 42271 43928 80619 80327 108843 146785 176946 199728 in Constant Prices 27246 38207 35463 35477 41903 48083 57948 89223 81181 85856 SERVICES in Curent Prices 2520 3887 4287 4592 56831 7857 10311 13005 18247 14068 in Constant Prices 2520 3398 3406 3606 3832 4074 3976 4241 4940 4198 Total Current Prices 29786 41414 46538 48519 68250 87984 117153 159789 193193 213796 Constant Prices 29768 38606 38869 39083 45735 50158 61923 73464 86121 90054 Source: Table above. Table 3.6: CHINA: Price Indices of Exports of Goods and Services (1980.100) in US dollars 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 MERCHANDISE 100.0 99.3 94.3 93.9 93.4 88.9 80.0 86.3 87.7 91.6 SERVICES 100.0 100.6 99.1 96.6 94.9 95.9 112.5 123.4 132.4 131.9 TOTAL 100.0 99.4 94.7 94.1 93.6 89.5 82.1 87.5 90.3 93.6 in Yuan ...------- - --------------------------------------------------------------------------------------- ------------------------------- 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 MERCHANDISE 100.0 113.0 119.2 123.8 144.7 174.8 184.4 212.0 218.0 232.8 SERVICES 100.0 114.4 126.3 127.4 146.9 188.0 259.4 306.6 328.9 335.1 TOTAL 100.0 118.1 119.7 124.1 144.9 175.4 189.2 217.5 224.3 237.4 Source: Table 8.4. Table 3.7 : CHINA: Total Exports and its Relative Share in the World Exports 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 (million US$ in Current Prices) China Exports 9750 13660 18188 22010 22330 22230 26129 27350 30942 39437 47541 52486 World Exports 1227170 15668610 1892520 1861440 1724730 1674810 1775830 1800080 1981390 2333200 2679560 3090000 (Growth Rate) China Exports .. 40.1 33.2 21.0 1.5 -0.4 17.5 4.7 13.1 7.5 20.5 10.4 World Exports .. 27.7 20.8 -1.6 -7.3 -2.9 6.0 1.4 10.1 17.8 14.8 15.3 (Percentage Share) China Exports into World Exports 0.8 0.9 1.0 1.2 1.3 1.3 1.5 1.5 1.6 1.7 1.8 1.7 China Exports into China GDP 4.6 6.3 6.1 7.9 8.2 7.6 8.8 9.4 11.0 12.9 12.8 12.7 Memo Items: China GDP in Current Prices (million Yuan) 358810 399870 447150 477510 518580 578480 692440 854060 971990 1135710 1385770 1573110 Exchage Rate (Yuan per USS) 1.684 1.555 1.498 1.705 1.893 1.976 2.320 2.937 3.453 3.722 3.722 3.805 China GDP in Current Prices (USS million) 213070 257151 298498 280065 273946 292743 298466 290793 281491 305134 372319 413396 Source: CHINA Statistical Year Book 1988 pp.643 for 1978-87 and Statistical Abstract 1989 pp.82 for 1988. International Financial Statistics for World Exports and Exchange rate. Table 3.8: CHINA: Summary of Composition of Exports (Percentage Growth Rates) 1988 1989 1986 1987 1988 Q 1-2 Q 3-4 Q 1-2 Q 3 PRIMARY GOODS SO+S1+S2+S3+S4 -18.5 17.4 9.1 11.8 6.7 -0.7 13.0 FOOD So 17.0 7.5 23.2 21.2 24.8 5.9 4.4 NON-FOOD (Crude materials) S2 9.6 25.5 16.6 13.8 19.3 -3.9 14.0 MINERAL FUELS S3 -48.4 23.4 -12.6 0.3 -22.8 -8.9 27.4 MANUFACTURED GOODS SS+S6+S7+S8+S9 45.5 33.2 28.3 34.5 20.8 9.7 21.8 CHEMICALS A RELATED PRODUCTS S6 27.6 29.0 29.6 36.1 25.2 16.0 17.3 LIGHT INDUSTRY Se 31.0 46.8 22.4 26.9 19.3 4.9 7.9 MACHINERY A TRANSPORT EQUIPMENT S7 41.7 69.1 59.0 75.0 48.9 38.8 81.6 OTHER so 41.9 26.8 31.8 30.1 32.6 23.8 38.8 I- PRODUCTS NOT CLASSIFIED ELSEWHERE S9 78.1 22.9 17.6 37.9 4.8 -6.4 11.1 TOTAL 18.1 27.5 20.5 26.3 16.3 6.4 19.5 Source: CHINA Customs Statistics 1988 and 1989; and Table 3.3. Table 4.1: CHINA : Imports (CIF) Customs basis (US 8 million) 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 FOOD SO*S1+S4 3211 3932 4437 3238 2627 1881 2002 3055 4191 5269 Food SO 2934 3620 4200 3122 2331 1663 1625 2443 3476 4193 Beverages Si 36 213 130 46 116 206 172 263 346 201 Animal fat S4 241 99 107 70 80 122 205 349 369 875 PETROLEUM (Mineral Fuels) S3 203 83 183 111 139 172 504 539 787 1650 INTERMEDIATE S5+S2 +D61+D68+D65 to D68 10639 10980 10091 12047 13856 19175 17552 16789 23392 23415 Chemicals and related products S5 2899 2617 2936 3183 4237 4469 3771 5008 9139 7556 Crude materials (non-food) S2 3574 4328 3250 2576 2542 3236 3143 3321 5090 4835 Leather+Cork=06i+D68=Light In.-064 to DOS 4165 4036 3906 6289 415 770 861 728 842 747 Leather D81 .. .. .. .. .. .. .. 184 224 280 Cork DOS .. .. .. .. .. .. .. 544 618 467 Textile Yarn (yarn, fabrics etc.) D65 .. .. .. .. 953 1607 1632 1848 2388 2845 Non meballic minerals 068 .. .. .. .. 225 325 363 342 430 520 Iron and Steel D67 .. .. .. .. 4361 7120 6741 4787 4625 5797 Non-ferrous metals 068 .. .. .. .. 1123 1648 1051 735 878 1114 CONSUMER GOODS D84+D62+D82 to D89 544 557 486 782 1423 2330 2431 1743 1767 1866 Paper (Paper and related products) D64 .. .. .. .. 241 428 554 727 610 634 D82+D82+D83+D84+D85 544 667 486 782 1182 1902 1877 108 150 166 Rubber D62 .. .. .. .. .. .. .. 45 51 50 Furniture D82 .. .. .. .. .. .. .. 42 61 68 on Travel goods 083 .. .. .. .. .. .. .. 3 8 6 Clothing D84 .. .. .. .. .. .. .. 17 28 38 Footwear D86 .. .. .. .. .. .. .. 1 2 3 Photo supplies 088 .. .. .. .. .. .. .. 432 365 398 Miscellaneous D89 .. .- .. .. .. .. 476 632 669 MANUFACTURED (Residual) 5353 6461 4083 5213 9465 18694 20415 21110 25125 28942 Total 19950 22012 19280 21391 27410 42252 42904 43216 55251 59142 Source: CHINA Customs Statistics 1990.1 PP.13 FOR 1989; 1989.1 pp.17 for 1988; CHINA Statistical Year Book 1988 pp.645 for 1987,1986; 1987 pp.521 for 1985; 1986 pp.483 for 1984; 1985 pp.495 for 1983; 1984 pp.382 for 1982; 1988 pp.406 for 1981; 1981 pp.73 for 1980 (in yuan). Table 4.2: CHINA : Imports (CIF) Customs basis (Percentage Shares) 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 FOOD SG+S1+S4 18.1 17.9 23.0 16.1 9.2 4.5 4.7 7.1 7.6 8.9 Food SO 14.7 18.4 21.8 14.8 8.5 3.7 3.8 5.7 6.3 7.1 Beverages Sl 0.2 1.0 0.7 0.2 0.4 0.5 0.4 0.6 0.8 0.3 Animal fat S4 1.2 0.4 0.8 0.3 0.3 0.3 0.5 0.8 0.7 1.5 PETROLEUM (Mineral Fuels) S3 1.0 0.4 0.9 0.5 0.5 0.4 1.2 1.2 1.4 2.8 INTERMEDIATE SS+S2 +Dl6+D83+D65 to DOS 53.3 49.9 52.3 568.3 50.8 45.4 40.9 38.8 42.3 39.8 Chemicals and related products SS 14.5 11.9 15.2 14.9 15.5 10.6 8.8 11.6 18.5 12.8 Crude materials (non-food) S2 17.9 19.7 18.9 12.0 9.3 7.7 7.3 7.7 9.2 8.2 Leather+Cork=D8l+D68=Light In.-D84 to D8 20.9 18.3 20.3 29.4 1.5 1.8 2.0 1.7 1.5 1.3 Leather D61 .. .. .. .. .. .. .. 0.4 0.4 0.5 Cork D3 .. .. .. .. .. .. .. 1.3 1.1 0.8 Textile Yarn (yarn, fabrics etc.) DOS .. .. .. .. 3.5 3.8 3.8 4.3 4.3 4.8 Non metallic minerals D86 .. .. .. .. 0.8 0.8 0.8 0.8 0.8 0.9 Iron and Steel D67 .. .. .. .. 15.9 18.9 15.7 11.1 8.4 9.8 Non-ferrous metals DOS .. .. .. .. 4.1 3.9 2.4 1.7 1.8 1.9 CONSUMER GOODS D84+D82+082 to D89 2.7 2.5 2.5 3.7 5.2 5.5 5.7 4.0 3.2 3.2 Paper (Paper and related products) D64 .. .. .. .. 0.9 1.0 1.3 1.7 1.1 1.1 D82+D82+D83+DB4+D85 2.7 2.5 2.5 3.7 4.3 4.5 4.4 0.2 0.3 0.3 Rubber D62 .. .. .. .. .. .. .. 0.1 0.1 0.1 t Furniture D82 .. .. .. .. .. .. .. 0.1 0.1 0.1 Travel goods D8 .. .. .. .. .. .. .. 0.0 0.0 0.0 Clothing D84 .. .. .. .. .. .. .. 0.0 0.1 0.1 Footwear D85 .. .. .. .. .. .. .. 0.0 0.0 0.0 Photo supplies DB8 .. .. .. .. .. .. .. 1.0 0.7 0.7 Miscellaneous D89 .. .. .. .. .. .. .. 1.1 1.1 1.1 MANUFACTURED (Residual) 28.8 29.3 21.2 24.4 34.5 44.2 47.6 48.8 45.5 45.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Table 4.1. Table 4.3: CHINA : Imports (CIF) Customs basis (Percentage Growth Rates) 1980 1981 1982 1983 1984 1986 1986 1987 1988 1989 FOOD SOS1+S4 .. 22.4 12.9 -27.0 -21.9 -25.6 6.4 52.6 37.2 25.7 Food SO .. 23.4 16.0 -25.7 -25.3 -33.4 4.6 50.3 42.3 20.6 Beverages Si .. 488.3 -38.8 -64.9 154.4 77.6 -16.5 52.9 31.6 -41.8 Animal fat S4 .. -58.9 8.1 -34.6 14.3 52.5 68.0 70.2 5.7 137.2 PETROLEUM (Mineral Fuels) S3 .. -59.0 120.5 -39.3 25.2 23.7 193.0 6.9 46.0 109.8 INTERMEDIATE S6+S2 +D61+D83+D65 to D68 .. 3.2 -8.1 19.4 15.0 38.4 -8.5 -4.5 39.5 0.1 Chemicals and related products Ss .. -9.7 12.2 8.4 33.1 5.5 -15.6 32.8 82.5 -17.3 Crude materials (non-food) S2 .. 21.1 -24.9 -20.8 -1.3 27.3 -2.9 5.7 53.3 -5.0 Leather+CorkrD61+D63=L-ight In.-De4 toDC8 .. -3.1 -3.2 61.0 -93.4 85.6 10.5 -14.5 15.7 -11.3 Leather D61 .. .. .. .. .. .. .. .. 21.7 25.1 Cork D63 .Q'.. .. .. .. .. -. 13.6 -24.4 Textiie Yarn (yarn, fabrics etc.) D65 .. .. .. .. .. 68.6 1.6 13.2 29.2 19.1 Non metallic minerals D66 .. .. .. .. .. 44.4 11.7 -5.8 25.7 21.0 Iron and Steel D67 .. .. .. .. .. 63.3 -5.3 -29.0 -3.4 25.3 Non-ferrous metals D68 .. .. .. .. .. 48.7 -36.2 -30.1 19.4 26.9 CONSUMER GOODS D64+D62+D82 to D89 .. 2.5 -12.7 60.9 82.0 63.7 4.3 -28.3 0.8 6.2 Paper (Paper and related products) D84 .. .. .. .. .. 77.6 29.4 31.2 -16.1 4.0 D62+D82+D83+D84+D85 .. 2.5 -12.7 80.9 51.2 60.9 -1.3 -94.2 38.9 9.8 Rubber D62 .. .. .. .. .. .. .. .. 13.3 -2.9 Furniture D82 .. .. .. .. .. .. .. .. 45.2 10.8 Travel goods D83 .. .. .. .. .. .. .. .. 186.7 -27.2 Clothing D84 .. .. .. .. .. .. .. .. 64.7 37.0 Footwear D85 .. .. .. .. .. .. .. .. 100.0 68.0 Photo supplies D88 .. .. .. .. .. .. .. .. -15.5 9.1 Miscellaneous 089 .. .. .. .. .. .. .. .. 32.8 5.8 MANUFACTURED (Residual) .. 20.7 -36.8 27.7 81.6 97.6 9.2 3.4 19.0 7.2 Total .. 10.3 -12.4 10.9 28.1 64.1 1.5 0.7 27.8 7.0 Source: Table 4.1. Table 4.4: CHINA: Imports in Current Prices and Constant (1980) Prices Imports (CIF) in Current Prices (US 5 million) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 FOOD SG+S1+S4 3211 3932 4437 3238 2527 1881 2002 3055 4191 5269 PETROLEUM (Mineral Fuels) S3 203 83 183 111 139 172 504 539 787 1650 INTERMEDIATE S5+S2 +D61+D63+D66 to D68 10639 10980 10091 12047 13856 19175 17552 16769 23392 23415 CONSUMER GOODS D64+D62+D82 to D89 544 557 486 782 1423 2330 2431 1743 1757 1866 MANUFACTURED (Residual) 5353 6461 4083 5213 9465 18694 20415 21110 25126 26942 Total 19950 22012 19280 21391 27410 42252 42904 43216 55251 59142 Source: Table 4.1. Price Indices (in US dollars) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 FOOD 100.00 86.91 77.86 84.70 91.82 79.88 72.18 55.34 61.02 57.36 PETROLEUM 100.00 111.81 102.44 95.41 96.03 91.28 39.36 45.74 33.65 40.77 w INTERMEDIATE (Imports MUV) 100.00 102.40 104.86 107.37 109.95 112.59 116.29 118.06 127.50 126.61 CONSUMER GOODS (Imports MUV) 100.00 102.40 104.86 107.37 109.95 112.59 115.29 118.06 127.50 126.61 MANUFACTURED (Imports MUV) 100.00 102.40 104.86 107.37 109.95 112.59 115.29 118.06 127.50 126.61 Source: World Bank Commodity Projections; IECCM 02/08/90 Imports (CIF) in 1980 Constant Prices (US S million) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 FOOD S0+S1+S4 3211 4524 5698 3823 2752 2355 2773 5520 6868 9186 PETROLEUM (Mineral Fuels) S3 203 74 179 116 146 188 1280 1179 2338 4048 INTERMEDIATE S6+S2 +D61+D63+DS5 to D68 10639 10723 9624 11220 12602 17031 15224 14204 18346 18493 CONSUMER GOODS D64+D62+D82 to D89 644 544 463 728 1294 2089 2109 1476 1378 1474 MANUFACTURED (Residual) 5353 6309 3894 4855 8608 18604 17707 17881 19705 21279 Total 19950 22174 19858 20742 25403 38247 39094 40260 48635 54480 Table 4.5: CHINA: Total Imports of Goods and Services (in million USS and Yuan) Total Imports (US$ million) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 MERCHAMISE (91.7% of Total) Current Prices 18294 20185 17680 19616 25135 38745 39343 39629 50665 54233 Constant Prices 18294 2083 18210 19021 23295 35072 36849 36918 44598 49958 SERVICES (8.3% of Total) Current Prices 1658 1827 1600 1775 2276 3507 3561 3587 4586 4909 Constant Prices 1656 1840 1648 1722 2108 3174 3245 3342 4037 4522 1ftTALA Current Prices 19950 22012 19280 21391 27410 42252 42904 43216 55251 59142 Constant Prices 19950 22174 19858 20742 25403 38247 39094 4020 48635 54480 Source: Table 4.4. Exchange Rate 1.498 1.705 1.893 1.976 2.320 2.937 3.453 3.722 3.722 3.805 I.- Total Imports (Yuan million) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 MERCHANDISE Current Prices 27405 34415 33468 38760 58313 113794 135851 147499 188675 206374 Constant Prices 27405 30459 27278 28493 34895 52539 53701 55304 66808 74837 SERVICES Current Prices 2480 3115 3029 3508 5278 10300 12296 13351 17068 18679 Constant Prices 2480 2757 2469 2579 3158 4755 4861 5006 6047 6774 TOTAL Current Prices 29886 37530 36497 42269 63591 124094 148148 160850 205643 225054 Constant Prices 29885 33216 29747 31072 38054 57294 58582 80309 72855 81611 Source: Table above. Table 4.6: CHINA: Price Indices of Imports of Goods and Services (1980=100) in US dollars 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 MERCHANDISE 100.0 99.3 97.1 103.1 107.9 110.5 109.7 107.3 113.8 108.6 SERVICES 100.0 99.3 97.1 103.1 107.9 110.5 109.7 107.3 113.6 108.6 TOTAL 100.0 99.3 97.1 103.1 107.9 110.5 109.7 107.3 113.6 108.6 in Yuan 1980 1981 1982 1988 1984 1985 1988 1987 1988 1989 MERCHANDISE 100.0 113.0 122.7 136.0 167.1 216.6 253.0 266.7 282.3 275.8 SERVICES 100.0 113.0 122.7 136.0 187.1 216.6 253.0 266.7 282.3 275.8 TOTAL 100.0 113.0 122.7 136.0 187.1 216.6 253.0 266.7 282.3 275.8 Source: Table 4.5. Table 5.1 : CHINA: External Debt Disbursements and Repayments (in US$ million) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 DISBURSEMENTS A. Public & Publicly Guar. LT 583 1779 2540 1800 1837 2375 2357 5302 6725 8104 888 1. Official Creditors 27 199 244 573 685 609 844 1132 1437 1193 1922 a. Multilateral 0 0 0 0 1 78 208 599 620 722 1122 aa of which IBRD 0 0 0 0 0 4 73 354 324 308 553 ab of which IDA 0 0 0 0 1 67 124 212 282 394 557 b. Bilateral 27 199 244 573 684 531 638 533 817 471 800 2. Private Creditors 556 1580 2295 1227 1173 1766 1513 4171 5288 6911 8946 a. Suppliers 77 531 671 560 664 10386 882 486 370 215 637 b. Commercial Banks 480 985 159 97 90 269 303 610 1439 4563 4308 c. Other Private 0 83 1465 571 419 462 328 3076 3479 2133 2001 3. Private Non-Guaranteed LT 0 0 0 0 0 0 0 0 0 0 0 C. Total LT Disbursements (A+B) 583 1779 2540 1800 1837 2375 2357 5302 6725 8104 8868 D. IMF Purchases 0 0 0 890 0 0 0 701 0 0 E. Net Short-Term Capital .. .. .. .. .. .. .. .. F. Total Disbursements (C+D+E) .. .. .. .. .. .. .. .. REPAYMENTS A. Public A Publicly Guar. LT 0 0 613 1205 1302 1389 1287 1297 1874 1894 2097 1 1. Official Creditors 0 0 50 78 77 58 57 43 263 475 478 a. Multilateral 0 0 0 0 0 0 0 0 2 99 41 LJ a of which IBRD 0 0 0 0 0 0 0 0 0 97 39 4 ab of which IDA 0 0 0 0 0 0 0 0 0 0 0 1 b. Bilateral 0 0 50 78 77 56 57 43 261 376 437 2. Private Creditors 0 0 563 1127 1226 1334 1230 1253 1611 1419 1619 a. Suppliers 0 0 294 475 399 475 585 696 323 459 320 b. Commercial Banks 0 0 161 333 313 168 125 77 105 275 481 c. Other Private 0 0 107 318 513 691 619 480 1184 685 817 B. Private Non-Guranteed LT 0 0 0 0 0 0 0 0 0 0 0 C. Total LT Repayments (A+B) 0 0 618 1205 1302 1389 1287 1297 1874 1894 2097 D. IMF Repurchases 0 0 0 0 0 481 0 0 36 80 83 E. Total LT Reav * IMF Repur. 0 0 613 1205 1302 1870 1287 1297 1910 1974 2180 Memorandum Item: Arrears (Principal) .. .. .. .. .. .. .. . .. COMMITMENTS IBRD commitments 0 0 0 100 165 299 616 680 672 892 8568 of which fast Disbursing 0 0 0 0 0 0 0 0 0 0 200 IDA commitments 0 0 0 96 165 139 343 433 448 606 576 of which fast Disbursing 0 0 0 0 0 0 0 0 0 0 97 Source: World Bank Debt and International Finance division. IECDI 01/17/90 Table 5.2 : CHINA: External Debt Interest and Debt outstanding (in USS million) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 INTEREST A. Public A Publicly Guar. LT 0 81 318 s18 541 523 610 586 644 1116 1593 1. Official Creditors 0 5 17 55 78 98 122 164 275 387 421 a. Multilateral 0 0 0 0 0 8 9 30 76 126 143 as of which IBRD 0 0 0 0 0 3 6 26 66 111 126 ab of which IDA 0 0 0 0 0 1 4 4 8 12 15 b. Bilateral 0 5 17 56 78 95 113 134 199 281 278 2. Private Creditors 0 56 301 4683 4683 425 487 423 370 729 1172 a. Suppliers 0 0 82 118 140 170 209 208 96 113 110 b. Commercial Banks 0 56 140 110 72 47 40 54 45 146 455 c. Other Private 0 0 79 235 260 208 239 161 229 470 606 B. Private Non-Guaranteed LT 0 0 0 0 0 0 0 0 0 0 0 C. Total LT Interest (A+B) 0 61 318 518 541 523 810 588 644 1116 1593 D. IMF Service Charges 0 0 0 21 34 21 2 2 2 49 51 E. Interest Paid on ST Debt 0 0 0 0 248 277 388 594 417 640 534 F. Total Interest Paid (C+D+E) 0 61 318 539 823 821 998 1182 1063 1805 2178 Memorandum Item: Arrears (Interest) .. .. .. .. .. .. .. .. DEBT OUTSTANDING & DISB. (DOD) Cn A. Public A Publicly Guar. LT 623 2183 4504 4913 5221 5301 6179 9968 16598 26051 32196 1. Official Creditors 27 228 446 919 1453 2028 2627 4478 6753 9275 10406 a. Multilateral 0 0 0 0 1 77 271 984 1810 2860 3758 aa of which IBRD 0 0 0 0 0 4 73 498 985 1427 1832 ab of which IDA 0 0 0 0 1 87 181 431 774 1330 1819 b. Bilateral 27 226 446 919 1452 1951 2356 3495 4943 6415 6648 2. Private Creditors 596 1957 4058 3994 3768 3273 3552 5485 9845 16777 21790 a. Suppliers 82 572 1037 1041 1580 1700 1817 1303 1587 1615 1849 b. Commercial Banks 514 131 1514 832 389 406 546 444 1843 8338 10061 c. Other Private 0 84 1506 2321 1820 118 1189 3738 6416 8824 9880 B. Private Non-Guaranteed LT 0 0 0 0 0 0 0 0 0 0 0 C. Total LT DOD (A+B) 623 2183 4504 4913 5221 5301 6179 99683 16598 26051 32196 D. Use of IMF Credit 0 0 0 884 838 324 303 340 1072 1155 1013 E. Short-Term Debt 0 0 0 0 2300 3984 5600 6419 6076 8221 8808 F. Total External Debt (C+D+E) 623 2183 4504 5798 8359 9609 12082 16722 23746 35428 42015 G. Principal Reduction Due to: 1. Debt-Equity Swaps*Buybacks .. .. .. .. .. .. .. .. 2. Debt Exchanges .. .. .. .. .. .. .. .. 3. Debt Forgiveness .. .. .. .. .. .. .. .. Memorandum Item: % Debt on Concessional Terms 0 0 1 1 8 15 21 23 21 20 19 % Debt at Variable Int. Rates 83 60 59 54 38 28 22 28 28 36 39 Source: World Bank Debt and International Finance division. IECDI 01/17/90 Table 5.3 : CHINA: Terms of External Borrowing 1981 1982 1983 1984 1985 1988 1987 1988 Concessional loans as % of 1.1 8.1 15.1 20.5 22.7 20.8 19.5 19.4 long-term debt Variable-rate loans as S of 53.8 37.7 27.8 21.7 27.8 27.8 36.0 38.7 long-term debt Average terms of new borrowing All Creditors Interest (S) 8.2 6.9 7.2 7.5 7.5 6.4 6.6 7.1 Maturity (years) 18.0 16.5 16.8 18.2 12.0 13.8 14.7 12.7 Grace Period (years) 3.6 6.5 4.3 4.7 8.9 5.0 4.0 3.7 Official Creditors Interest (%) 5.2 4.3 5.7 5.9 5.8 5.5 4.7 4.3 Maturity (years) 22.8 28.1 26.4 28.3 26.6 27.1 28.3 22.7 Grace Period (years) 7.0 8.5 7.1 7.1 6.8 6.6 6.8 7.1 Private Creditors Interest (X) 9.9 10.1 8.7 8.9 8.1 6.7 7.0 8.0 cN Maturity (years) 7.5 7.0 7.8 9.1 7.2 9.8 11.5 9.7 1 Grace Period (years) 1.7 2.0 1.6 2.6 8.0 4.6 3.4 2.7 Source: World Debt Tables 1989. Table 6.1: CHINA : Monetary Survey, 1984-89 1/ 1984 1985 1988 1987 1988 1989 1990 March June Sept. Dec. March June Sept. Dec. March (in billions of yuan; end of period) Net foreign assets 35.1 20.8 3.9 23.0 32.0 34.2 31.3 30.3 27.5 23.0 24.0 37.7 57.0 Net domestic assets 408.9 499.3 668.3 812.0 835.0 891.3 940.1 979.7 991.8 1033.8 1075.9 1157.3 1191.9 Loans to enterprises and individuals 509.9 628.9 814.5 980.3 1003.2 1057.6 1102.8 1141.8 1151.4 1180.2 1223.2 1347.0 1378.8 Budget (net) 2/ 9.5 -9.3 5.8 20.8 9.6 10.3 17.1 30.5 24.3 30.2 23.7 30.6 26.0 Other assets (net) 3/ -110.4 -120.4 -152.1 -189.1 -177.8 -178.4 -179.6 -192.7 -183.9 -176.7 -170.9 -220.2 -213.3 Money and quasi-money 444.0 520.0 872.2 835.0 867.0 925.5 971.3 1009.9 1019.2 1058.8 1099.9 1194.9 1248.9 Money 340.0 374.0 474.1 568.5 575.3 823.8 869.9 695.0 668.5 672.0 676.5 744.2 714.3 Currency in circulation 79.2 98.8 121.8 145.4 144.2 154.2 184.9 213.3 209.7 207.9 208.1 234.4 215.2 Household demand deposits 31.4 39.7 50.6 70.8 75.8 80.8 86.5 94.8 91.5 93.3 92.9 Enterprise deposits 197.0 203.0 282.1 307.3 315.9 348.9 359.2 347.7 329.4 832.0 333.5 Official institutions & Org. 32.4 32.6 39.8 44.9 39.8 39.9 89.4 39.3 37.9 38.8 42.0 .. .. Quasi-money 104.1 145.9 198.0 2868.5 291.8 301.7 301.4 314.9 350.7 384.7 423.5 450.7 534.6 Capital construction deposits 14.0 23.5 25.1 30.9 33.0 34.3 34.5 31.2 31.9 35.1 38.0 41.1 58.0 4 Household term deposits 90.1 122.4 172.9 235.8 258.7 287.4 267.0 283.7 318.8 349.8 385.4 409.6 481.7 (Percent change from same period of the proceeding year) Net domestic assets 31.1 22.1 33.9 21.5 22.2 28.0 23.8 20.7 18.8 18.0 14.4 18.2 20.2 Of which: Loans to enterprises and individuals 33.5 22.3 29.5 20.3 22.7 23.8 21.1 16.5 14.8 11.6 10.9 18.0 19.7 Money and quasi-money .. 17.1 29.3 24.2 25.7 28.4 25.5 21.0 17.8 14.2 13.2 18.3 22.5 Of which: Currency .. 24.7 23.3 19.4 28.8 35.8 45.8 48.6 45.4 34.8 12.5 9.8 2.8 Memorandum Item: Currency/deposit ratio (percent) 21.9 23.5 22.1 21.1 20.0 20.0 23.5 26.8 25.9 24.5 23.3 52.0 40.8 (seasonally adjusted) 20.4 21.8 20.5 19.5 20.1 21.4 23.8 24.7 26.1 26.2 23.6 Source:IMF Recent Economic Developments 01/17/90 pp.17. 1/ Covers operations of the People's Bank, four specialized banks,two universal banks, and rural credit cooperatives. 2/ Claims related to state budget operations less government deposits, which include extrabudgetary deposits of local governments. 3/ Includes financial bonds issued by banks. Table 6.2: CHINA : Operations of the People's Bank, 1985-89 1/ (in billions of yuan; end of period) 1985 1986 1987 1988 1989 March June Sept. Dec. March June Sept. Net foreign assets 12.4 3.7 15.0 23.9 23.9 22.5 20.9 22.9 24.7 31.1 Claims on financial institutions 224.9 269.4 277.4 270.3 270.3 292.0 338.8 332.9 331.6 348.5 Other domestic assets (net) -8.7 9.6 29.9 16.8 16.8 39.0 45.8 46.9 51.2 46.4 Loans 8.6 13.0 22.7 23.3 23.8 26.4 q0R 30.2 31.4 33.0 Budgetary borrowing, not 2/ -9.3 5.8 20.8 9.6 9.6 17.1 30.5 24.3 30.2 23.7 Other items, net -7.9 -9.3 -13.6 -18.1 -16.1 -4.5 -15.3 -7.6 -10.4 -10.3 Reserve Money 228.6 282.7 322.3 311.0 311.0 353.5 405.5 402.7 407.5 426.0 Liabilities to banks 96.4 120.1 127.4 121.3 121.3 122.1 145.4 147.0 152.8 167.1 Required deposits 42.0 56.5 67.0 70.8 70.8 85.6 84.1 87.2 92.0 96.8 Other deposits 47.0 55.8 62.8 43.5 43.5 27.4 50.9 47.8 49.0 58.9 Cash in vault 7.3 7.8 7.6 7.0 7.0 9.1 10.4 11.9 11.8 11.4 Liabilities to nonbanks 132.2 162.6 194.8 189.7 189.7 231.3 280.1 255.7 254.7 258.9 Currency in circulation 98.8 121.8 145.4 144.2 144.2 184.9 213.3 209.7 207.9 208.1 Deposits 33.4 40.8 49.4 45.5 45.5 46.4 46.9 48.0 46.8 50.8 Total Liabilities 228.6 282.7 322.2 311.0 311.0 353.4 405.5 402.7 407.5 426.0 Memorandum Item: Money multiplier 3/ 2.27 2.38 2.59 2.79 2.82 2.75 2.49 2.53 2.59 2.58 (seasonally adjusted) 2.40 2.51 2.73 2.76 2.76 2.70 2.63 2.50 2.54 2.53 Excess reserves to deposit (percent) 12.1 11.0 8.2 6.4 6.0 3.7 6.8 6.3 6.1 7.0 (seasonally adjusted) 4/ 11.1 10.0 7.5 6.6 8.0 4.1 6.2 6.4 6.0 7.8 Source:IMF Recent Economic Developments 01/17/90 pp.21. 1/ Balance sheet data on the People's Bank as a separate central bank are available from June 1985. 2/ Claims related to state budget operations less government deposits, which include extrabudgetary deposits of local governments. 3/ The ratio of money and quasi-money to reserve money. 4/ Deposits exclude deposits with PBC. Table 6.3: CHINA : Monetary and Velocity Developments, 1984-1989 (Percentage fourth quarter to fourth quarter) 1984 1985 1986 1987 1988 1989 Money and quasi-money 42.4 17.1 29.3 24.2 21.0 18.3 Currency 49.4 24.7 23.3 19.4 46.6 5.7 Household deposits 32.8 33.4 38.0 37.4 23.7 36.3 Demand 44.0 26.4 28.1 41.0 34.5 7.6 Time 29.1 36.9 41.3 36.3 20.4 44.4 Enterprise deposits 1/ 62.9 7.3 29.2 17.2 13.1 -7.2 Other deposits 2/ -14.3 0.8 21.5 13.4 -12.6 6.7 Velocity (ratio) 3/ 1.52 1.60 1.41 1.34 1.39 1.38 /4 (percent change) -16.5 5.3 -11.9 -5.0 3.7 -0.7 Memorandum item: Augmented money and quasi-money 5/ .. .. 32.8 26.8 23.2 14.8 /6 Source:IMF Recent Economic Developments 01/17/90 pp.19. 1/ Includes deposits with the People's Construction Bank of China (PCBC). 2/ Deposits of official institutions. 3/ Ratio of GNP to the end-year money and quasi-money. 4/ Adjusted for seasonal factors. 5/ Includes deposits held at trust and investment companies and urban credit cooperatives. 8/ June 1989 over June 1988. Table 6.4: CHINA : Specialized and Universal Banks' Domestic Currency Assets and Liabilities,1986-89 (billions of yuan; end of period) 1986 1987 1988 1989 Dec. Dec. March June Sept. Dec. March June Sept. Total deposits 463.5 573.9 595.9 636.9 650.2 688.6 672.7 706.8 742.1 Enterprises 223.9 268.8 273.7 303.7 311.3 293.2 281.1 286.8 289.7 Sight 198.8 237.9 240.7 269.4 276.9 262.0 249.2 261.6 251.7 Term 25.1 30.9 33.0 34.3 34.4 31.2 31.9 35.0 38.0 Saving 146.4 202.8 220.8 233.2 239.9 258.9 284.0 312.3 340.1 Sight 28.0 41.0 44.7 49.6 54.2 59.7 58.8 61.3 61.1 Term 118.4 161.8 17.1 183.6 1.7 199.2 225.2 251.0 279.0 Township enterprises 4.6 5.6 4.9 6.4 6.6 6.2 5.4 5.4 5.2 Agricultural collectives 1.1 1.2 1.4 1.8 1.8 1.8 1.4 1.4 1.4 Rural credit cooperatives 50.2 56.3 47.6 44.8 43.1 58.8 50.7 51.3 53.9 Other deposits 37.3 39.2 47.5 47.2 47.5 49.7 50.1 49.8 51.8 Liabilities to the PBC 268.4 275.0 266.8 265.3 289.1 336.1 329.8 328.7 344.4 Self-owned funds of banks 74.1 81.5 81.5 81.5 81.5 91.4 91.4 91.4 91.4 Other liabilities, not 51.6 62.7 51.7 61.8 61.8 56.7 57.5 52.8 51.9 Total Liabilities 857.6 993.1 995.9 1046.5 1082.6 1152.8 1151.4 1179.7 1229.8 0 Loans 749.0 884.3 889.8 936.0 974.2 1023.7 1022.7 1045.0 1082.4 Industrial 189.4 221.2 226.7 241.3 248.8 260.4 264.7 275.5 289.4 Commercial 308.4 350.0 336.2 343.0 362.0 409.5 405.0 406.5 420.4 Construction 36.9 46.7 50.4 54.9 50.0 49.5 48.1 50.4 53.0 Urban collectives 41.5 63.6 57.0 62.9 65.7 683.6 64.0 65.2 65.8 Business loans to individuals 1.1 1.5 1.9 2.4 2.7 1.9 1.9 1.9 1.9 Agricultural loans 52.8 65.4 71.1 78.5 81.7 77.9 79.1 82.3 83.6 Loans to rural credit coops. 4.3 3.8 4.7 5.7 5.2 3as 3.7 4.4 4.1 Fixed investment loans 88.6 111.9 111.5 120.3 131.2 138.7 137.1 139.0 143.3 Other loans 26.0 30.2 30.3 27.0 26.9 18.7 19.1 19.8 20.9 Cash in vault 7.8 7.8 7.0 7.8 9.1 10.4 11.9 11.8 11.4 Required deposits 56.3 65.8 69.3 73.8 82.8 80.9 84.0 88.7 93.3 Other deposits at the PBC 47.5 40.5 29.8 28.2 16.8 37.6 32.9 34.3 42.6 Total Assets 860.6 998.2 995.9 1045.8 1082.7 1152.6 1151.5 1179.8 1229.7 Source: IMF Recent Economic Developments 01/17/90 pp.58. Table 8.5: CHINA : Rural Credit Cooperatives, 1988-89 (in billions of yuan; end of period) 1988 1987 1988 1989 Dec. Dec. March June Sept. Dec. March June Sept. Deposits 75.5 103.9 129.0 132.5 132.7 140.0 141.5 146.4 153.0 Rural collective enterprises 5.8 7.1 7.8 8.3 8.6 9.8 7.8 7.8 7.3 Township enterprises 5.9 8.1 9.5 11.5 12.8 12.8 10.4 10.8 10.6 Individual deposits 82.0 86.7 109.3 110.1 108.8 114.3 120.5 124.8 131.8 Sight 17.8 24.5 30.9 31.2 32.3 35.1 32.7 32.0 31.8 Term 44.2 62.2 78.4 78.9 78.3 79.2 87.8 92.8 100.0 Other deposits 1.8 2.0 2.4 2.8 2.9 3.1 2.8 3.0 3.3 Loans from banks 4.1 5.4 4.7 5.9 5.5 3.6 4.0 4.8 4.5 Other liabilities, not 5.2 8.8 11.8 14.7 14.4 5.3 5.5 6.2 6.8 Total liabilities 84.8 118.1 145.5 153.1 152.6 148.9 151.0 157.4 164.3 Domestic credit 49.1 75.8 94.8 105.8 107.3 90.8 102.1 108.2 112.0 X- Loans to collective enterprises 4.1 5.5 8.8 8.4 8.8 8.0 8.8 9.2 9.8 Loans to township enterprises 19.9 32.9 41.1 48.3 47.4 45.6 49.4 51.2 53.7 Loans to individuals 25.1 37.2 44.9 50.9 51.1 37.2 44.1 47.8 48.5 Redeposits at banks 35.7 42.4 50.7 47.8 45.5 58.0 48.8 49.1 52.4 Total assets 84.8 118.0 145.6 153.2 152.8 148.8 150.9 157.3 164.4 Source: IMF Recent Economic Developments 01/17/90 pp.59. Table 6.6: CHINA : Percentage Increase of Credit 1988 1989 Entire Jan-Sept. Total Credit 15.8 5.7 Agriculture 20.2 16.3 State Induptry 17.7 11.1 of which: Large Enterprises 19.3 14.9 Foreign trade Vt.7 11.4 Rural Enterprises 21.6 5.9 Urban Collectives 18.8 3.4 Fixed Investment 24.0 3.3 Table 6.7: CHINA : Credit to Rural Enterprises 1988 1989 End September Increment State Banks 41.1 38.0 -3.1 Rural Credit Cooperatives 45.6 53.7 8.1 Total 86.7 91.7 5.0 -- - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Table 7.1: CHINA: Structure of Consolidated Government Revenue, 1978-88 (as a % of Total Revenue) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Tax Revenue 42.2 42.6 43.5 45.5 49.8 54.5 58.2 95.8 92.0 90.4 89.9 Taxes on income and profits 6.9 6.1 6.7 5.5 5.8 7.4 8.4 32.4 30.2 27.9 25.4 Profit tax 4.4 3.6 3.4 3.2 3.4 3.8 5.1 30.5 28.4 24.0 23.6 Agricultural tax 2.5 2.3 2.1 2.0 2.1 2.1 1.9 1.8 1.8 2.0 1.8 Other 0.0 0.2 0.2 0.3 0.4 1.8 1.4 0.0 0.0 2.0 0.0 Taxes on goods and services 32.9 34.4 35.2 36.1 39.4 35.7 37.0 42.2 43.0 42.6 44.4 Product tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 26.0 22.4 20.9 16.8 VAT 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.5 9.5 9.8 13.4 Business tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.2 10.7 11.7 13.9 Taxes on international trade 2.4 2.1 2.6 3.9 3.3 3.4 5.6 9.0 6.2 5.9 5.4 Other taxes 0.0 0.0 0.0 0.1 1.0 8.0 7.2 12.3 12.6 14.1 14.6 Nontax revenue 57.8 57.4 56.5 54.5 50.4 45.5 41.8 4.2 8.0 9.8 10.1 of which: Profit remittances 55.6 54.6 53.9 62.2 47.3 41.8 37.4 1.9 1.7 1.6 1.8 Memorandum items: Revenue from enterprises 60.0 58.1 57.3 55.3 50.7 45.5 42.5 32.5 30.1 25.6 25.4 Profit tax 4.4 3.6 3.4 3.2 3.4 3.8 5.1 30.5 28.4 24.0 23.8 Profit remittances 55.6 54.6 53.9 52.2 47.3 41.8 37.4 1.9 1.7 1.6 1.8 Extrabudgetary receipts 0.0 0.0 0.0 0.0 0.0 1.0 1.0 0.9 0.8 0.7 0.5 Total Revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Ministry of Finance. Table 7.2: CHINA: Developments in Government Revenue 1978-88 (as a % of GNP) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Total Revenue 34.4 31.6 29.4 29.0 27.2 27.4 28.4 26.6 25.1 22.6 20.7 Taxes on income and profits 2.4 1.9 1.7 1.6 1.8 2.0 2.2 8.6 7.6 6.3 5.3 Profit tax 1.5 1.1 1.0 0.9 0.9 1.0 1.3 8.1 7.1 5.4 4.9 Agricultural tax 0.9 0.7 0.6 0.8 0.8 0.8 0.5 0.5 0.5 0.4 0.4 Other 0.0 0.1 0.0 0.1 0.1 0.4 0.4 0.0 0.0 0.4 0.0 Taxes on goods and services 11.3 10.9 10.4 10.5 10.7 9.8 9.8 11.2 10.8 9.6 9.2 Product tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.9 5.8 4.7 3.5 VAT 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.7 2.4 2.2 2.8 Business tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.5 2.7 2.7 2.9 Taxes on international trade 0.8 0.7 0.8 1.1 0.9 0.9 1.5 2.4 1.6 1.3 1.1 Other taxes 0.0 0.0 0.0 0.0 0.3 2.2 1.9 3.3 3.2 3.2 3.0 Nontax revenue 19.9 18.1 16.6 15.8 13.7 12.5 11.0 1.1 2.0 2.2 2.1 of which: Profit remittances 19.1 17.2 15.9 15.1 12.9 11.5 9.9 0.5 0.4 0.4 0.4 Memorandum items: Revenue from enterprises 20.6 18.4 16.9 16.1 13.8 12.5 11.2 8.6 7.8 5.8 5.2 Profit tax 1.5 1.1 1.0 0.9 0.9 10 1-3 8.1 7.1 5.4 4.9 Profit remittances 19.1 17.2 15.9 15.1 12.9 11.5 9.9 0.5 0.4 0.4 0.4 Extrabudgetary receipts 0.0 0.0 0.0 0.0 0.0 0.3 0.3 0.2 0.2 0.2 0.1 Source: Ministry of Finance. Table 7.3: CHINA: Structure of Government Expenditure, 1978-88 (In percent of total expenditure) 1978 1979 1980 1981 1982 1988 1984 1985 1986 1987 1988 Total Expenditure and not lending 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Current expenditure 58.5 58.7 87.7 74.2 76.3 74.8 71.2 72.3 71.4 72.6 74.6 Administrative 4.0 3.9 4.8 4.9 5.5 8.0 7.1 6.2 6.4 8.4 6.9 Defense 13.7 15.2 18.8 11.6 11.9 10.5 9.3 8.8 7.6 7.5 6.8 Culture, education , public health 9.2 9.0 10.7 11.8 13.3 13.2 13.6 18.6 14.4 14.3 15.1 Economic services 14.6 12.7 13.1 11.6 11.9 11.1 10.5 9.6 9.6 9.3 9.0 Subsidies 9.8 13.8 18.7 25.5 25.1 25.2 21.1 21.8 22.1 23.9 23.7 Daily necessities 6.4 10.9 16.4 21.1 20.2 18.3 16.2 13.5 9.8 10.5 9.9 Agricultural inputs 0.0 0.0 0.0 1.5 1.4 0.8 0.5 0.6 0.0 0.0 0.0 Enterprise losses 2.9 2.4 2.3 2.9 3.5 6.1 4.4 7.7 12.3 13.3 13.9 Ln Other 5.6 4.6 7.3 8.7 8.6 8.9 9.6 12.8 11.3 11.2 13.1 Developmental expenditure 43.5 41.3 32.3 25.8 23.7 25.2 28.8 27.7 28.6 27.4 25.4 SM o .------------ ---------- Source: Ministry of Finance. Table 7.4: CHINA: Developments in Government Expenditure, 1978-88 (In percent of GNP) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Total Expenditure and net lending 34.1 36.7 32.8 30.2 28.6 29.1 27.9 27.1 27.1 24.7 23.2 Current expenditure 19.3 21.6 22.2 22.4 21.8 21.8 19.8 19.6 19.3 18.0 17.3 Administrative 1.4 1.4 1.5 1.5 1.6 1.7 2.0 1.7 1.7 1.6 1.6 Defense 4.7 5.6 4.4 3.5 3.4 3.1 2.6 2.2 2.1 1.9 1.6 Culture, education , public health 3.1 3.3 3.5 3.6 3.8 3.8 3.8 3.7 3.9 3.6 3.5 Economic services 5.0 4.7 4.3 3.5 3.4 3.2 2.9 2.6 2.6 2.3 2.1 Subsidies 3.2 4.9 6.1 7.7 7.2 7.3 6.9 5.9 6.0 5.9 5.5 Daily necessities 2.2 4.0 5.4 6.4 5.8 5.3 4.5 3.7 2.6 2.6 2.3 Agricultural inputs 0.0 0.0 0.0 0.5 0.4 0.2 0.1 0.2 0.0 0.0 0.0 Enterprise losses 1.0 0.9 0.8 0.9 1.0 1.8 1.2 2.1 3.3 3.3 3.2 Other 1.9 1.7 2.4 2.6 2.5 2.6 2.7 3.5 3.1 2.8 3.0 Developmental expenditure 14.9 15.2 10.6 7.8 6.8 7.3 8.0 7.5 7.7 6.8 6.9 GNP in Current Prices (billion yuan) 358.8 399.8 447.0 477.3 519.3 580.9 696.2 856.8 972.6 1135.1 1385.3 Source: Ministry of Finance. Table 7.5: CHINA: Budget and Its Financing 1978-88 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 (In billions of yuan) Revenue 123.3 126.3 131.6 138.6 141.2 159.4 183.5 228.3 244.3 2568.2 286.7 Expenditure 122.4 146.9 146.4 144.3 148.3 169.2 193.9 232.4 263.3 280.9 321.3 Deficit 0.9 -20.6 -14.8 -5.7 -7.1 -9.8 -10.4 -4.1 -19.0 -24.7 -34.6 Financing -0.9 20.6 14.8 5.7 7.1 9.8 10.4 4.1 19.0 24.7 34.6 Domestic -1.2 17.0 12.6 2.5 7.3 8.7 8.6 4.0 13.4 17.8 23.2 PBC -1.2 17.0 12.6 -2.2 2.9 4.4 4.5 -2.1 7.5 6.4 7.8 Nonbank 0.0 0.0 0.0 4.8 4.4 4.3 4.2 6.1 5.8 11.4 15.4 Foreign 0.2 3.6 2.2 3.1 -0.2 1.1 1.8 0.1 5.6 6.9 11.4 (In percent of GNP) Revenue 34.4 31.6 29.4 29.0 27.2 27.4 26.4 26.6 25.1 22.6 20.7 Expenditure 34.1 36.7 32.8 30.2 28.6 29.1 27.9 27.1 27.1 24.7 23.2 Deficit 0.3 -5.2 -3.3 -1.2 -1.4 -1.7 -1.5 -0.5 -2.0 -2.2 -2.5 Financing -0.3 5.2 3.3 1.2 1.4 1.7 1.5 0.5 2.0 2.2 2.6 Domestic -0.3 4.3 2.8 0.5 1.4 1.6 1.2 0.5 1.4 1.6 1.7 PBC -0.3 4.3 2.8 -0.6 0.6 0.8 0.8 -0.2 0.8 0.6 0.6 Nonbank 0.0 0.0 0.0 1.0 0.8 0.7 0.6 0.7 0.6 1.0 1.1 Foreign 0.1 0.9 0.5 0.7 -0.0 0.2 0.3 0.0 0.6 0.6 0.8 (As a percent of total deficit) Financing 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Domestic 125.0 82.5 84.9 44.8 102.8 88.6 82.9 97.6 70.4 72.0 67.1 PBC 125.0 82.5 84.9 -39.7 40.8 44.8 42.9 -51.2 39.7 28.0 22.6 Nonbank 0.0 0.0 0.0 84.5 62.0 43.8 40.0 148.8 30.7 46.0 44.5 Foreign -25.0 17.5 15.1 55.2 -2.8 11.4 17.1 2.4 29.6 28.0 32.9 Source: Ministry of Finance. Table 7.6: CHINA : Evolution of Expenditures (Percent of ONP) 1978 1988 Capital 14.4 5.4 Working Capital 1.9 0.1 MiIitary * 4.7 1.6 Civilian, Current 10.4 9.2 Subsidies 5.2 5.4 Total Outlays 86.6 21.7 Deficit 0.0 1.9 Table 7.7: CHINA : Central and Local Government Budgets (Billion Yuan and Percent of Outlays) 1987 5 1989 (Budget) X oa Central Government - ---*-*.------ Total Revenue 95.5 114.7 Total Expenditure 126.0 100 138.1 100 of which Capital outlay 51.9 41 54.3 39 Current outlay 47.8 38 58.3 42 Subsidies 28.3 21 25.5 18 Local Governments Total Revenue 181.1 195.5 Total Expenditure 156.4 100 207.1 100 of which Capital outlay 27.9 18 21.1 10 Current outlay 87.7 56 118.8 57 Subsidies 40.8 26 67.7 33 Table 7.8: CHINA : Fixed Investment: Central Government Plan and Funding (Percent of GNP) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Total Fixed Investment in State Units 19.2 18.0 17.2 14.4 16.8 18.9 17.5 20.2 20.9 20.8 19.5 of which In Central Plan 9.0 8.3 7.9 6.6 7.2 7.8 7.6 8.2 8.3 8.5 7.5 Funded by Central Budget (estimate) 8.7 8.0 5.6 4.1 4.2 4.7 4.6 3.7 3.5 3.2 2.3 Central Govt. Borrowing Requirements 0.3 0.3 2.3 2.4 3.0 3.0 3.0 4.4 4.8 5.4 5.2 - e' Table 7.9: CHINA : Loss Making Enterprises by Region in 1987 EAST MIDDLE WEST Propor- Loss Loss Propor- Loss Loss Propor- Loss Loss -tion (milli- as a -tion (milli- as a -tion (mill- as a of loss -on) Propor- of loss -on) Propor- of loss -on) Propor- making -tion making -tion making -tion enterpr- of not enterpr- of not enterpr- of not -ises income -ises income -ises income Coal 24.50 9.15 33.40 29.50 9.73 17.60 27.90 7.35 38.80 Food 14.70 3.32 2.10 16.00 3.74 2.80 16.70 1.54 2.00 Machine Building 9.10 2.87 1.20 11.30 3.05 3.30 10.20 2.20 4.20 Mining and preparation of 15.40 building materials 2.78 2.30 14.90 2.23 3.40 19.90 1.64 5.80 Textiles 16.70 2.73 1.30 17.60 1.67 2.30 14.40 0.44 1.20 Chemicals 13.50 1.44 1.00 16.20 1.21 2.00 18.60 0.64 2.20 in 0 Transport equipment 10.20 1.09 1.90 15.30 0.73 1.70 15.80 0.71 4.20 Power generation 12.30 0.89 0.01 9.20 1.48 2.70 15.20 0.53 1.60 Electronics 13.00 1.31 2.00 17.00 0.58 4.80 12.80 0.41 3.50 Petrol and gas 25.00 1.74 2.50 37.50 0.05 .. 7.70 0.20 0.01 Electrical equipment 14.10 1.17 1.30 14.30 0.49 0.02 13.50 0.19 1.30 Total LOSS for the Product group 28.29 24.96 15.85 Loss as a proportion of not 1.34 2.30 3.13 industrial income in region Source: CHINA: Industrial Yearbook 1988. Table 7.10: CHINA : State Budget 1989-90 (billion Yuan) 1989 Actual 89 1990 Budget 90 Budget Actual Budget 89 Budget Actual 89 REVENUE Total 285.680 294.800 3.2 323.653 9.8 Domestic 289.180 280.000 4.0 307.210 9.7 Tax 255.714 273.059 6.8 299.899 9.8 Bonds 11.100 14.010 28.2 17.000 21.3 Construction/Energy tax 20.500 19.812 -3.4 21.500 8.5 Other 12.730 17.402 36.7 17.180 -1.4 Enterprise revenue 4.004 8.099 52.3 4.909 -19.5 Enterprise losses 52.148 59.976 15.0 65.758 9.8 Foreign exchange loans 16.500 14.000 -15.2 16.443 17.5 Special Projects 5.280 .. Regulatory fund 12.000 8.094 -32.8 12.500 54.4 EXPENDITURE Total 293.080 304.000 3.7 332.545 9.4 n Capital construction 82.792 61.258 -2.4 65.945 7.7 Technology transfer 12.583 15.005 19.2 14.912 -0.6 Agriculture/Rural support 17.396 19.907 14.4 21.481 7.9 Urban construction 10.300 11.880 15.1 11.856 -0.0 Culture, Education & Health 51.388 55.868 8.7 59.745 6.9 Defence 24.550 25.146 2.4 28.970 15.2 Administration 22.664 26.708 17.8 27.234 2.0 Price Subsidies 40.989 37.043 -9.8 40.558 9.5 Domestic debt 2.548 2.873 4.9 12.400 363.9 Foreign exchange debt 7.020 4.583 -34.7 7.000 52.7 Other 40.870 41.404 1.3 42.444 2.5 DEFICIT Chinese definition -7.400 -9.200 -8.892 X of GNP -0.530 -0.586 -0.500 IMF definition -35.000 -36.665 -42.336 % of GNP -2.230 2.340 -2.390 Source: Ministry of Finance, and China daily 06/26/90. Table 8.1 : CHINA : Production of Major Crops (million tons) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Total Food Grains 305 332 321 325 355 387 407 379 392 403 394 407 Rice 137 144 140 144 162 189 178 189 172 174 ig Wheat 54 63 55 70 68 81 88 86 90 86 85 Corn 56 60 68 59 61 68 73 64 71 79 77 Soybeans 8 7 8 9 9 10 10 11 12 12 12 Tuber 32 28 29 26 27 29 28 26 25 28 27 Total Oil Seeds 5 8 8 10 12 11 12 16 15 15 13 13 Peanuts 2 3 4 4 4 4 5 7 6 6 6 Rapeseed 2 2 2 4 6 4 4 6 6 7 5 5 Cotton 2 2 3 3 4 5 6 4 4 4 4 4 Sugarcane 21 22 23 30 37 31 40 62 50 47 49 49 Beetroots 3 3 6 6 7 9 8 9 8 8 13 9 Cured Tobacco 1 1 1 1 2 1 2 2 1 2 2 2 Fruits 7 7 7 8 8 9 10 12 13 17 17 18 Apples 2 8 2 3 2 4 8 4 3 4 4 Citrus 0 1 1 1 1 1 1 2 3 3 3 Pears 2 1 1 2 2 2 2 2 2 2 3 Bananas 0 0 0 0 0 0 0 1 1 2 2 Source: CHINA Statistical Year Book 1989 (Chinese) pp.198-201 and 1988 pp.212-3 for 1978-87. Table 8.2 : CHINA : Production of Major Crops (Percentage GROWTH RATES) - ---------- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Total Food Grains .. 9.0 -3.5 1.4 9.1 9.2 6.2 -6.9 3.3 2.9 -2.2 3.4 Rice .. 5.0 -2.7 2.9 12.3 4.5 5.6 -5.4 2.2 1.2 -3.0 Wheat .. 18.5 -12.0 28.1 -1.7 18.9 7.9 -2.3 4.9 -4.8 -0.5 Corn .. 7.3 4.3 -5.4 2.3 12.6 7.6 -13.0 10.9 11.8 -2.4 Soybeans .. -1.5 6.4 17.5 -3.2 8.1 -0.6 8.2 10.6 7.4 -6.6 Tuber .. -10.3 0.9 -9.6 4.2 8.1 -2.6 -8.8 -2.7 11.3 -4.4 Total Oil Seeds .. 23.3 19.5 32.7 15.8 -10.7 12.9 32.5 -6.8 3.7 -13.6 -2.2 Peanuts .. 18.7 27.6 6.3 2.4 0.9 21.9 38.4 -11.7 4.9 -7.7 Rapeseed .. 28.6 -0.7 70.5 39.1 -24.2 -1.9 33.3 4.9 12.3 -23.6 7.9 Cotton .. 1.8 22.7 9.6 21.2 28.9 35.0 -33.7 -14.6 19.9 -2.3 -8.7 I- Sugarcane .. .9 6.0 80.1 24.3 -15.6 26.9 30.4 -2.6 -5.7 3.6 -1.0 Beetroots .. 15.0 103.0 0.9 5.5 36.8 -9.8 7.7 -6.9 -2.0 57.4 -26.9 Cured Tobacco .. -23.4 -11.0 78.4 44.5 -37.7 34.1 34.5 -33.8 19.1 42.8 3.1 Fruits .. 8.8 -3.2 14.8 -1.1 23.0 3.8 18.2 15.8 23.8 -0.1 10.3 Apples .. 28.1 -17.8 27.2 -19.2 45.7 -16.9 22.9 -7.7 27.8 1.9 Citrus .. 44.9 28.5 11.9 17.7 88.0 15.7 20.6 40.9 26.5 -20.6 Pears .. -5.2 1.9 8.7 10.2 2.3 17.0 1.8 9.9 6.0 9.3 Bananas .. -12.9 -17.6 106.6 59.5 3.0 44.9 110.3 98.3 82.2 -9.8 Source: Table 8.1. Table 8.3 : CHINA : Total Sown Area (million hectares) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Total Food Grains 121 119 117 115 114 114 113 109 111 111 110 of which Rice 34 34 34 33 33 33 33 32 32 32 32 Wheat 29 29 29 28 28 29 30 29 30 29 29 Corn 20 20 20 19 19 19 19 18 19 20 20 Soybeans 7 7 7 8 8 8 7 8 8 8 8 Tuber 12 11 10 10 9 9 9 9 9 9 9 Peanuts 2 2 2 2 2 2 2 3 3 3 3 Rapeseed 3 3 3 4 4 4 3 4 6 5 5 Cotton 5 5 5 5 6 6 7 6 4 5 6 Sugarcane 1 1 0 1 1 1 1 1 1 1 1 Beetroots 0 0 0 0 0 1 1 1 1 0 1 Cured Tobacco 1 1 0 1 1 1 1 1 1 1 1 Fruits .. .. .. .. .. .. .. 3 4 5 5 of which n Apples .. .. .. .. .. .. .. 1 1 1 2 Citrus ... .. .. .1 1 1 1 Pears .. .. .. .. .. .. .. 0 0 0 0 Bananas .. .. .. .. .. 0 0 0 0 Total Sown Area 150 149 146 145 146 144 144 144 144 145 145 Total irriga6ed Area 45 45 45 44 45 44 44 44 44 44 45 Percentage to Total Sown Area Grain Crops 80.3 80.3 80.1 79.2 78.4 79.2 79.8 75.8 76.9 76.8 76.0 Total Industrial Crops 9.8 10.0 10.9 12.1 13.0 12.3 13.4 15.6 14.1 14.3 14.8 Source: CHINA Statistical Year Book 1989 (Chinese) pp.183, 192, and 197 for 1988; 1988 pp.197, 206 and 211 for 1978-87. (converted into hectares with 1 mu=0.0667 ha). Table 8.4 : CHINA : Total Sown Area (Percentage GROWTH RATES) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Total Food Grains .. -1.1 -1.7 -1.9 -1.3 0.5 -1.0 -3.6 1.9 0.3 -1.0 of which Rice .. -1.6 0.0 -1.7 -0.7 0.2 0.1 -3.3 0.6 -0.2 -0.6 Wheat .. 0.6 -0.4 -3.2 -1.2 3.9 1.8 -1.2 1.4 -2.8 -0.0 Corn .. 0.9 1.1 -4.6 -4.6 1.5 -1.5 -4.5 8.1 5.7 -2.8 Soybeans .. 1.4 -0.3 11.0 4.9 -10.1 -3.7 6.9 7.5 1.8 -3.8 Tuber .. -7.2 -7.3 -5.2 -2.6 0.3 -4.4 -4.6 1.8 2.1 2.1 Peanuts .. 17.3 12.8 5.7 -2.3 -8.9 10.0 37.1 -2.0 -7.1 -1.5 Rapeseed .. 7.0 3.0 33.6 8.5 -11.0 -7.0 31.7 9.4 7.1 -6.3 Cotton .. -7.3 9.0 5.4 12.4 4.3 13.9 -25.7 -16.2 12.5 14.3 Sugarcane .. -6.7 -6.4 15.0 18.5 0.1 11.3 32.5 -1.5 -9.6 7.6 Beetroots .. -1.6 36.1 -1.5 6.0 17.7 -7.7 11.7 -7.1 -4.4 49.5 Cured Tobacco .. -17.0 -22.0 47.9 51.6 -35.6 25.1 50.6 -17.0 2.1 42.8 Fruits .. .. .. .. .. .. .. .. 34.2 22.8 12.4 of which Ln Apples .. .. .. .. .. .. .. .. 35.6 22.8 15.2 kA Citrus .. .. .. .. .. .. .. .. 32.6 28.5 10.6 Pears .. .. .. .. .. .. .. .. 18.7 11.9 10.4 Bananas .. .. .. .. .. .. .. .. 51.3 113.2 -7.1 Total Sown Area .. -1.1 -1.4 -0.8 -0.3 -0.5 0.2 -0.4 0.4 0.5 -0.1 Total Irrigated Area .. .. -0.3 -0.7 -0.9 1.1 -0.4 -0.9 0.4 0.4 -0.1 0.8 GROWTH RATE of Percentage to Total Sown Area Grain Crops .. 0.0 -0.2 -1.1 -1.0 1.0 0.1 -4.4 1.5 -0.1 -1.0 Total Industrial Crops .. 4.2 9.0 11.0 7.4 -5.4 8.9 16.4 -9.6 1.4 3.5 Source: Table 8.3. Table 8.5 : CHINA : Average Unit Area Yield of Major Crops (At sown area kg/hectare) 1978 1979 1980 1981 1982 1983 1984 1986 1986 1987 1988 Total Food Grains 264 2834 2744 2834 3133 3403 3613 3478 3523 3613 3583 Rice 3973 4243 4138 4318 4888 5097 5367 5247 5337 5412 5277 Wheat 1844 2144 1889 2114 2444 2804 2969 2939 3043 2984 2969 Core 2804 2984 3078 3043 3268 3628 3958 3598 3703 3913 3928 Soybeans 1064 1084 1094 1169 1079 1289 1334 13864 1394 1489 1439 Tuber 2699 2594 2834 2699 2894 3118 3163 3028 2909 3178 2984 Peanuts 1349 1384 1544 1544 1619 1799 1799 2009 1814 2039 1904 Rapeseed 720 870 840 1079 1379 1169 1229 1244 1199 1259 1019 Cotton 450 495 555 570 615 765 915 810 825 870 750 Sugarcane 38488 42009 47541 53793 56432 47586 54258 68403 52834 55112 53088 Beetroots 8171 9550 14243 14588 14513 16882 16492 15907 15952 16342 17181 Cured Tobacco 1724 1589 1814 2189 2084 2009 2159 1919 1529 1784 1799 Source: CHINA Statistical Year Book 1989 (Chinese) pp.205 for 1988 and 1988 pp.217 for 1978-87. (converted into hectares with I mu=0.0667 ha). Table 8.8 : CHINA : Average Unit Area Yield of Major Crops (Percentage GROWTH RATES) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Total Food Grains .. 11.8 -3.2 3.3 10.6 8.6 8.2 -3.7 1.3 2.6 -0.8 Rice .. 6.8 -2.5 4.3 18.2 4.3 5.3 -2.2 1.7 1.4 -2.5 Wheat .. 18.3 -11.9 11.9 16.6 14.7 5.9 -1.0 3.8 -2.0 -0.6 Corn .. 6.4 8.0 -1.0 7.4 11.0 9.1 -9.1 2.9 5.7 0.4 Soybeans .. -2.8 5.8 6.8 -7.7 19.4 3.5 2.2 2.2 5.4 -2.0 Tuber .. -3.9 9.2 -4.8 7.2 7.8 1.4 -4.3 -4.0 9.3 -6.1 Peanuts .. 1.1 13.2 0.0 4.9 11.1 0.0 11.7 -9.7 12.4 -6.6 Rapeseed .. 20.8 -3.4 28.6 27.8 -15.2 5.1 1.2 -3.6 5.0 -19.0 Cotton .. 10.0 12.1 2.7 7.9 24.4 19.8 -11.5 1.9 5.5 -13.8 Sugarcane .. 9.2 18.2 13.2 4.9 -15.7 14.0 -1.6 -1.1 4.3 -3.7 Ln Beetroots .. 16.9 49.1 2.4 -0.5 18.3 -2.3 -3.5 0.3 2.4 6.1 Cured Tobacco .. -7.8 14.2 20.7 -4.8 -3.8 7.5 -11.1 -20.3 16.7 0.8 ----- T 8.5. Source: Table 8.6. Table 9.1: CHINA: Gross Output Value of Industry (million yuan) 1985 1986 1987 1988 1989 Total 971647 1119426 1381299 1822458 2188000 By Type of ownership State-owned 630212 697112 825009 1035128 1824200 Collective-owned 311719 376154 478174 658749 of which: Township 76055 98108 128419 184669 Village 66272 83849 116535 170363 Individual 17975 30854 50239 79049 Urban 3339 2913 5027 6848 Rural 14636 27941 45212 72200 Other 11741 16306 27877 49532 By Type of industry Light 457532 533035 665643 897924 1070000 Heavy 514115 586391 715656 92454 1118000 Source: CHINA Statistical Year book 1989 pp. 263 for 1988 and 1988 pp.267 for 1985-7. 00 Table 9.2: CHINA: Gross Output Value of Industry (in percentages) 1985 1986 1987 1988 1989 Total 100.0 100.0 100.0 100.0 100.0 By Type of ownership State-owned 64.9 62.3 59.7 58.8 83.4 Collective-owned 32.1 33.5 34.6 36.1 of which: Township 7.8 8.8 9.3 10.1 Village 6.8 7.5 8.4 9.3 Individual 1.8 2.8 3.6 4.3 Urban 0.3 0.3 0.4 0.4 Rural 1.5 2.5 3.3 4.0 Other 1.2 1.5 2.0 2.7 By Type of industry Light 47.1 47.6 48.2 49.3 48.9 Heavy 52.9 52.4 51.8 50.7 51.1 Source: Table 9.1 Table 9.3: CHINA: Output of Major Industrial Products Product Unit 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Coal million tons 835 620 822 86 715 789 872 894 928 947 1040 Crude Oil million tons 106 106 101 102 106 115 126 131 134 137 137 Natural Gas billion cu m 15 14 13 12 12 12 13 13 14 14 Electricity billion kWh 282 301 309 328 351 377 411 450 497 539 582 Hydro power billion kWh 50 58 68 74 88 87 92 95 100 107 118 Steel million tons 34 37 38 87 40 48 47 52 56 59 61 Rolled Steel million tons 25 27 37 29 31 34 37 41 44 47 49 Cement million tons 74 80 83 95 108 123 146 188 186 203 207 Timber aillion cu m 54 54 49 50 52 64 83 85 64 62 61 Railway Freight Cars 1000 units 18 11 9 11 16 18 19 21 22 23 Source: CHINA Statistical Abstract 1989 pp.42-4. Table 9.4: CHINA: Percentage Growth Rates of Output of Major Industrial Products Product 1980 1981 1982 1983 1984 1985 1986 1987 1988 1988 1980-5 1986-9 1980-9 Coal -2.4 0.3 7.1 7.4 10.8 10.5 2.5 3.8 2.0 9.8 5.5 4.5 5.1 n Crude Oil -0.2 -4.5 0.9 3.9 8.1 9.0 4.6 2.6 2.0 0.1 2.9 2.4 2.7 Natural Gas -1.7 -10.7 -6.4 2.3 1.8 4.0 3.5 3.8 2.9 .. -1.8 3.4 -0.0 Electricity 6.6 2.9 5.9 7.2 7.8 8.9 9.4 10.8 8.4 8.0 6.5 9.1 7.6 Hydro power 16.2 12.5 13.6 16.1 0.5 6.5 2.5 5.6 6.7 10.8 10.9 6.4 9.1 Steel 7.7 -4.1 4.4 7.7 8.6 7.6 11.6 7.8 5.2 3.5 5.3 7.0 6.0 Rolled Steel 8.8 36.1 -20.9 5.9 9.8 9.5 9.9 8.1 7.1 3.6 8.0 7.2 7.7 Cement 8.1 3.8 14.8 13.7 13.6 18.6 13.8 12.2 9.2 1.8 12.1 9.2 11.0 Timber -1.6 -7.8 2.0 3.8 22.0 -1.0 2.8 -1.4 -3.0 -1.8 2.9 -0.9 1.4 Railway Freight Cars -33.8 -17.0 20.6 49.1 14.8 6.8 8.7 4.9 7.9 .. 6.7 6.5 8.8 Source: Table 9.3. Table 9.5: CHINA: Shares by Industrial Sectors (in Percent) Shares of Gross Outputs Shares of Employment Shares of Investment 1971 1978 1981 1987 1978 1981 1984 1987 1981 1984 1987 Metallurgy 11.1 8.7 8.8 8.0 7.1 6.4 8.3 6.3 11.5 11.9 12.2 Power 3.7 3.8 3.8 3.1 1.7 1.8 1.8 2.0 12.0 12.9 15.3 Coal and Coke 3.3 2.8 2.8 2.2 8.8 8.2 8.2 7.4 10.3 12.5 7.2 Petroleum 4.8 5.5 5.4 4.2 1.0 1.0 1.1 1.8 14.3 15.0 12.5 Chemical 10.9 12.4 11.4 11.8 9.0 8.8 8.8 9.1 9.7 10.8 12.0 Machinery 25.3 27.3 20.9 28.0 30.6 30.0 29.0 27.2 13.3 12.8 13.5 Building materials 2.8 3.8 3.8 4.5 9.3 9.0 9.6 10.9 3.9 4.9 5.8 Forest 1.9 1.8 2.0 1.5 3.9 3.9 3.7 3.5 2.8 2.0 1.2 Food 11.9 11.1 13.3 11.1 5.8 6.2 6.5 6.8 5.7 5.3 7.2 Textile, clothing .. 15.3 20.4 18.1 14.9 16.0 16.2 17.3 12.2 8.0 8.6 0 A leather Papermaking and .. 3.3 3.7 5.1 5.0 5.1 4.9 5.7 2.1 1.5 2.0 cultural articles Others .. 3.9 3.3 3.5 3.0 3.7 4.0 2.6 2.3 2.6 2.6 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 - ----- - -- - - -- - -- - - -- - - ----- - - ------ - - ---------- - -- - -- - - -- - - -- - - Source: (a) Shares of gross outpus are from: CHINA Statistics Press, 'Zhongguo gongy* jingji tongji nianj ian 1988' (Industrial Statistics Yearbook of China 1988), pp.54-57; (b) Shares of employment and investment are estimated based on data from CHINA Statistical Yearbook , various years. Table 9.6: CHINA: Proportions of Light Industries and Engineering Industries in Manufacturing Gross Output in 1963 and 1980 in Selected Countries (in Percent) Light Industries Engineering Industries 1963 1980 1988 1980 CPEs Czechoslovakia 81.1 26.6 32.9 32.7 Hungary 84.2 31.2 28.6 28.7 Poland 38.6 85.8 25.9 82.4 Middle Developed Western Countries Spain 40.2 25.5 17.1 28.2 Greece 58.3 44.4 18.9 15.0 Mature Industrial Western Countries Austria 35.4 27.6 23.2 28.8 Sweden 27.7 16.0 32.1 85.4 Netherlands .. 30.8 .. 28.0 W.Germany 24.9 17.8 84.1 87.4 CHINA Source: E.D.Winiecki, "The Consumer Goods Industries in Poland and Other East European Countries in Comparative Perspective' Doctoral Dissertation (Warsaw 1987). Table 10.1: CHINA: Total Wage Bill of Staff and Workers 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 (million yuan) Total Wage Bill 56890 64660 77240 82000 88200 93460 118340 138300 165970 188110 231620 264000 State-owned 46870 52940 62790 66040 70890 74810 87580 106480 128850 145930 180710 Collectives 10020 11720 14450 15960 17310 18850 25400 31230 36280 40910 48760 (percentage share) Total Wage Bill 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 State-owned 82.4 81.9 81.3 80.5 80.4 80.0 77.3 77.0 77.6 77.6 78.0 Collectives 17.6 18.1 18.7 19.5 19.6 20.0 22.4 22.6 21.9 21.7 21.1 (growth rate) Total Wage Bill .. 13.7 19.5 6.2 7.6 6.0 21.3 22.0 20.0 13.3 23.1 14.0 State-owned .. 13.0 18.6 5.2 7.3 5.5 17.1 21.6 21.0 13.3 23.8 Collectives .. 17.0 28.3 10.4 8.5 7.7 36.2 23.0 16.2 12.8 19.2 GDP (Current prices, million yuan) 358810 399870 447150 477510 618580 578460 692440 854060 971990 1135710 1386770 1573110 X Share of Wage bill into GDP 15.9 16.2 17.3 17.2 17.0 16.2 16.4 16.2 17.1 16.6 16.7 16.8 Source: CHINA Statistical Year Book 1988 pp.146 for 1978-87; Statistical Abstract 1989 pp.91 for 1988. Note: Total Wage bill includes various joint units for 1984-88. Table 11.1: CHINA: Labor force by Sector (million) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Farming forestry, animal husbandry, 284 287 292 298 309 312 309 312 313 317 323 fishery & water conservency Industry 81 83 67 70 72 74 79 83 90 93 97 Geological survey A exploration 1 1 1 1 1 1 1 1 1 1 1 Construction 9 9 10 11 12 18 17 21 23 24 25 Transportation, posts & telecommunications 7 8 8 8 9 9 11 12 13 14 14 Commerce, catering trade, supply A 12 12 14 15 16 18 20 24 25 27 28 marketing of materials and warehouses Real estate administration, public utilities, 2 2 3 3 4 4 5 4 5 5 6 residential & consultancy services Public health, sports and social welfare 4 4 4 4 4 4 4 5 5 5 5 Education, culture, art, radio and 11 11 11 11 11 12 12 13 13 14 14 television broadcasting Scientific research, technical service 1 1 1 1 1 1 1 1 2 2 2 Banking and insurance 1 1 1 1 1 1 1 1 2 2 2 Governments, parties and organizations 5 5 5 6 6 6 7 8 9 9 10 Others 6 5 6 8 7 9 13 13 13 15 17 TOTAL 402 410 424 437 453 464 482 499 513 528 543 Source: CHINA Statistical Year book 1989 (Chinese) pp.102 for 1988 and 1988 pp.124 for 1978-87. Table 12.1 : CHINA : General Price Indices (1980=100) 1978 1979 1980 1981 1982 1988 1984 1985 1986 1987 1988 1989 Retail Prices 92.5 94.3 100.0 102.4 104.4 105.9 108.9 118.5 125.6 134.8 159.7 188.1 Cost of Living of Staff A Workers 91.3 93.0 100.0 102.5 104.6 108.7 109.6 122.6 131.2 142.8 172.3 Purchasing Price of Farm A 76.4 93.4 100.0 105.9 108.2 113.0 117.6 127.6 135.8 152.0 187.0 Sideline Products Retail Prices of Industrial Products 99.1 99.2 100.0 101.0 102.6 103.6 106.9 110.3 113.8 119.3 137.5 in Rural Areas Price Parity between Industrial A 129.5 106.2 100.0 95.4 94.6 91.5 90.8 86.4 83.8 78.5 73.3 Agricultural Products Market Price of Consumer goods 102.7 98.0 100.0 105.8 109.3 113.9 113.4 132.9 143.7 187.1 217.7 244.0 Source: CHINA Statistical Year Book 1988 pp.892, 700 for 1978-87 and (Chinese) 1989 pp.688, 703 for 1988. I- Percentage GROWTH RATES over last year 4 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Retail Prices .. 2.0 6.0 2.4 1.9 1.5 2.8 8.8 6.0 7.3 18.5 17.8 Cost of Living of Staff & Workers .. 1.9 7.5 2.5 2.0 2.0 2.7 11.9 7.0 8.8 20.7 Purchasing Price of Farm A .. 22.1 7.1 5.9 2.2 4.4 4.0 8.6 6.4 12.0 23.0 Sideline Products Retail Prices o Products .. 0.1 0.8 1.0 1.6 1.0 3.1 3.2 3.2 4.8 15.2 in Rural Areas Price Parity between Industrial A .. -18.0 -5.8 -4.6 -0.8 -3.3 -0.8 -4.8 -3.0 -6.4 -6.5 Agricultural Products Market Price of Consumer goods .. -4.5 2.0 5.8 3.3 4.2 -0.4 17.2 8.1 16.3 30.3 12.1 Source: CHINA Statistical Year Book 1988 pp.692, 700 for 1978-87 and (Chinese) 1989 pp.688, 703 for 1988. Table 12.2: CHINA: Growth Rate of Overall Retail Sales Price Index Whole Nation (Growth rate over same month last year) Food Grain Non Fresh Dried Meat Aquatic Fresh Dried Garments Daily Overall Staple Vegeta- Vegeta- Poultry Products Fruit Fruit Use Food -bles -bles A Eggs Articles 1988 January .. .. .. .. .. .. .. .. .. February 16.3 6.2 23.9 48.3 13.6 27.6 26.5 7.7 17.6 5.6 3.3 11.2 March 15.8 5.7 24.3 30.2 12.7 30.3 26.3 13.7 16.6 6.8 4.8 11.6 April 18.1 7.4 24.7 16.0 14.7 35.4 27.1 7.5 16.2 8.6 6.5 12.6 May 17.7 8.9 26.9 17.8 15.6 37.7 26.5 6.0 17.4 10.1 8.4 14.7 June 20.2 13.6 29.5 13.2 16.0 40.3 38.0 8.7 17.6 11.0 10.7 16.6 July 23.6 12.3 32.3 30.3 16.6 41.0 31.8 29.0 16.5 12.5 12.8 19.3 August 28.9 18.6 37.4 47.8 19.1 42.6 37.1 18.2 17.6 15.2 15.8 23.2 September .6 .* .. .. .. .. .* .. . ... October 30.4 12.3 39.0 42.0 28.9 43.8 38.7 32.2 28.8 18.7 19.3 26.1 November 31.9 26.0 35.6 30.5 23.5 38.8 36.5 45.0 30.8 19.8 21.4 26.0 December 30.5 29.2 81.2 16.8 26.6 33.8 32.9 44.0 32.1 21.2 21.8 26.7 Average 1988 0' 1989 January 29.2 29.8 29.5 16.5 27.4 30.4 34.3 45.0 36.1 20.8 22.2 27.0 February 29.3 29.8 30.1 14.7 29.5 31.7 83.7 37.8 35.8 22.8 23.0 27.9 March 27.2 33.3 26.2 -3.7 27.5 30.7 28.9 24.9 37.9 23.4 22.6 26.2 April 26.6 33.6 25.0 6.2 26.5 26.5 27.4 22.4 38.3 22.7 21.4 25.8 May 24.4 32.8 21.1 15.4 25.3 19.7 25.2 28.8 36.8 22.4 20.4 24.4 June July 17.8 26.8 13.8 8.1 21.7 12.3 18.7 21.1 35.8 20.0 16.8 19.0 August 12.3 19.6 9.6 0.3 19.8 9.1 18.9 11.7 35.5 17.9 14.0 15.2 September 8.0 15.8 5.1 -6.3 15.0 4.3 7.2 2.9 29.5 15.1 13.4 11.4 October 4.6 9.9 2.2 -4.6 11.2 0.2 4.7 -2.1 17.7 13.5 0.3 8.7 Source: China Statistics Monthly, University of Illinois, Chicago. Table 12.3: CHINA: Growth Rate of Overall Retail Price Index (same month last year = 100) Beijing Tianjin Shenyang Shanghai Nanjing Wuhan Guangzhou Chengdu Xian Urban Total 1988 January 10.2 6.5 7.9 15.4 16.0 13.7 15.5 14.4 13.0 11.7 February 10.0 9.9 16.5 15.6 16.9 16.1 20.9 14.5 14.2 13.4 March 10.1 10.7 12.4 15.9 18.2 15.2 20.7 22.0 16.7 14.2 April 12.2 10.2 8.8 13.4 20.8 17.7 20.0 17.7 14.8 14.2 May 12.5 11.5 10.9 19.4 22.7 17.8 23.8 17.6 13.9 16.0 June 22.2 14.8 17.2 23.7 21.9 16.4 20.8 18.4 15.6 18.1 July 25.9 22.6 20.4 24.2 25.3 21.6 27.5 21.8 18.5 22=0 August 30.7 25.1 26.7 24.3 32.2 28.2 35.9 31.7 26.7 27.4 September 29.9 24.0 32.2 25.4 32.0 32.9 44.3 37.8 28.3 29.8 October 33.3 24.9 31.0 28.8 29.4 31.9 41.7 41.1 31.0 30.2 November 29.1 25.1 29.9 27.4 27.5 29.4 43.4 38.4 34.0 30.4 December 30.5 24.9 32.1 25.4 29.2 28.1 38.6 85.0 32.8 28.9 Average 1988 21.4 17.5 20.4 21.6 24.3 22.4 29.4 25.8 21.6 21.4 1989 0% January 28.9 24.4 34.1 26.4 27.5 24.5 44.0 32.9 37.9 27.8 February 28.5 22.0 31.3 29.7 30.5 26.3 45.0 32.7 34.9 27.8 March 28.4 20.2 28.9 26.9 25.8 23.9 41.5 23.7 31.0 26.0 April 25.6 19.9 27.4 26.5 21.1 20.0 39.5 26.2 32.8 25.6 May............... June 14.8 14.6 19.6 21.3 18.4 19.2 40.1 19.8 25.9 21.0 July 16.4 10.3 15.4 16.9 15.9 16.3 21.4 16.7 21.9 17.2 August 12.1 8.4 12.5 14.4 12.7 9.8 12.6 10.5 19.2 12.6 September 10.6 7.6 9.7 12.4 11.8 6.4 10.9 5.7 14.0 8.6 Source: China Statistics Monthly, University of Illinois, Chicago. Table 12.4: CHINA: Growth Rate of Cost of Living Index of Staff and Workers (Goods and Services) (Growth rate over same month last year) Beijing Tianjin Shenyang Shanghai Nanjing Wuhan Guangzhou Chengdu Xian Urban Total 1988 January 9.6 6.1 7.4 13.9 14.7 12.6 13.8 13.4 12.8 11.2 February 9.6 9.3 10.7 14.6 15.6 14.8 19.1 13.5 14.1 12.8 March 9.6 10.2 11.6 15.0 16.7 14.1 19.2 20.2 16.8 13.6 April 11.5 9.7 8.2 13.4 19.2 16.4 18.2 16.5 14.9 13.7 May 12.0 11.0 10.3 18.8 21.0 18.5 17.9 16.5 14.1 15.4 June 20.7 14.0 16.1 22.7 20.4 15.3 19.3 17.7 15.6 17.5 July 24.1 21.4 19.0 23.2 23.6 20.1 25.5 20.5 18.4 21.2 August 28.6 23.8 24.8 23.2 30.1 26.6 33.3 30.1 25.8 26.6 September 27.9 22.9 29.7 24.4 30.1 31.1 42.1 86.6 27.8 29.2 October 31.0 23.8 29.4 26.8 27.3 30.3 39.9 39.9 30.2 29.7 November 27.1 24.0 28.4 25.4 25.8 28.1 41.6 37.5 33.0 29.8 December 28.3 23.8 30.5 23.6 27.3 26.9 37.4 34.4 31.9 28.6 Average 1988 20.0 16.7 18.8 20.4 22.7 21.1 27.3 24.7 21.8 20.8 01 1989 January 26.6 23.2 32.6 25.4 26.3 23.5 42.5 32.6 36.1 27.3 February 26.2 21.0 29.1 28.2 29.9 24.3 43.4 32.3 33.3 27.4 March 26.2 19.4 28.9 25.7 25.5 23.0 40.2 24.4 30.3 25.7 April 23.6 19.0 25.5 24.5 21.1 19.3 38.7 26.7 31.7 25.3 May . .. .. ** ** June 13.8 14.0 18.3 19.7 18.6 18.4 89.1 20.3 25.9 21.0 July 16.3 9.9 14.4 15.7 18.3 15.7 22.1 17.8 22.2 17.6 August 11.4 8.2 11.9 13.5 13.2 9.3 14.2 11.3 20.0 13.0 September 10.2 7.6 9.6 12.4 13.1 6.4 10.5 5.8 15.2 9.2 Source: China Statistics Monthly, University of Illinois, Chicago. Table 18.1: CHINA: Total Investment in Fixed Assets GDP % of (million yuan) (percentages) (million Total ---- --- --- --- --- --- ---- --- -- --- --- --- ---- --- --- --- --- -- uan) !"yest- Total State Collec- Indivi- Total State Collec- Indivi- (current ment to Invest- Owned -tive -dual Invest- Owned -tive -dual prices) DP -sent -ment 1981 96101 66751 11524 17826 100.0 69.5 12.0 18.5 477510 20.1 1982 123040 84531 17428 21081 100.0 68.7 14.2 17.1 518580 23.7 1988 143006 95196 156833 32177 100.0 66.6 10.9 22.5 578460 24.7 1984 183287 118518 23869 40900 100.0 64.7 13.0 22.8 692440 26.5 1986 254319 168061 32746 58522 100.0 66.1 12.9 21.0 854060 29.8 1986 301962 197850 39174 64988 100.0 65.5 18.0 21.5 971990 31.1 o0 1987 364086 229799 54701 79586 100.0 68.1 15.0 21.9 1185710 32.1 1988 449654 276276 71171 102208 100.0 61.4 15.8 22.7 1885770 32.4 1989 400000 251000 51200 98700 100.2 62.8 12.8 24.7 1578110 25.4 Source: Statistical Year Book of China 1988 pp.493 for 1981-87 and Statistical Year Book of China (in Chinese) 1989 pp.477 for 1988. Table 13.2: CHINA: Total Investment in Fixed Assets State-Owned Enterprises (million yuan) (percentages) Total Capital Techni- Other Total Capital Techni- Other Invest- constr- cal Invest- constr- cal -sent ction updating -Ment ction updating 1978 86872 50099 16773 0 100.0 74.9 25.1 0.0 1979 69936 52348 17588 0 100.0 74.9 25.1 0.0 1980 74590 55889 18701 0 100.0 74.9 25.1 0.0 1981 66751 44291 19530 2930 100.0 86.4 29.3 4.4 1982 84531 55558 25037 3941 100.0 85.7 29.8 4.7 1983 95196 59413 29113 6870 100.0 62.4 30.8 7.0 1984 118518 74315 30928 13275 100.0 82.7 26.1 11.2 1985 168051 107437 44914 15700 100.0 83.9 28.7 9.3 1986 197850 117611 61921 18318 100.0 59.4 31.3 9.3 1987 229799 134310 75859 196830 100.0 58.4 33.0 8.5 1988 271280 152579 97951 20751 100.0 568.2 36.1 7.6 1989 251000 153800 .. .. 100.0 61.3 Source: Statistical Year Book of China 1988 pp.498 for 1981-87 and Statistical Year Book of China (in Chinese) 1989 pp.482 for 1988. Table 13.3 : CHINA: Investment in Capital Construction by Sector of National Economy State-Owned Enterprises (in million yuan) All Agricul- Indsutry Const- Geology Trans- Commerce Research Utili- other Sctors ture ruction port ties 1981 44291 2921 21801 909 250 4047 2801 4383 8185 4214 1982 55553 3412 26060 1052 259 5721 3597 5081 4221 8149 1983 59413 3545 28228 1032 336 7804 2893 5944 3802 5830 1984 74315 3712 34159 1124 372 10848 3517 7879 57386 6970 1985 107437 3894 44649 2200 725 17095 7209 12081 9274 10510 0 1986 117611 38666 5314 1853 711 18081 6891 14028 8301 10914 1987 134310 4282 68279 1554 734 18973 7842 15117 6169 11361 1988 152579 4719 79609 1497 464 20829 9935 15283 7061 13182 Source: Statistical Year Book of China 1988 pp.504 for 1981-87 and Statistical Year Book of China (in Chinese) 1989 pp.488 for 1988. Table 13.4 : CHINA: Investment in Capital Construction by Sector of National Economy State-Owned Enterprises (in percentages) All Agricul- Indsutry Const- Geology Trans- Commerce Research Utill- other Sectors ture ruction port ties 1981 100.0 8.8 48.8 2.1 0.6 9.1 8.3 9.9 7.2 9.5 1982 100.0 6.1 46.9 1.9 0.5 10.3 6.5 9.1 7.6 11.1 1983 100.0 6.0 47.5 1.7 0.6 13.1 4.9 10.0 6.4 9.8 1984 100.0 6.0 46.0 1.5 0.6 14.6 4.7 10.6 7.7 9.4 1985 100.0 3.4 41.6 2.0 0.7 15.9 6.7 11.2 8.6 9.8 1988 100.0 3.1 45.2 1.6 0.6 16.4 5.9 11.9 7.1 9.3 1987 100.0 3.2 50.8 1.2 0.5 14.1 5.8 11.3 4.6 8.5 1988 100.0 3.1 52.2 1.0 0.3 13.7 6.5 10.0 4.6 8.8 Source: Table 13.3. Table 18.5 : CHINA: Investment in Capital Construction by Sector by Branch of Industry State-Owned Enterprises (in million yuan) Total Metallu- Power Coal Petro- Chemical Machine Forest Builiding Textile Food Paper Industry ragIcal 1e'ur Buiiding Materials making 1981 21601 2735 4014 2315 2795 1902 2439 863 879 1988 926 191 1982 26060 4300 4623 2985 2530 2578 2712 785 1167 2116 1407 189 1988 28228 4247 5746 4007 2902 3007 2675 642 1400 1708 1128 171 1984 34159 4673 7699 5514 3083 3574 3043 705 1667 1810 1191 207 1985 44649 5203 10786 5511 3317 5380 4748 649 2738 2074 1749 88 1986 53164 5416 15974 5770 3881 5893 4175 743 3188 2687 2231 432 1987 88279 7927 20864 5960 5856 8400 5017 958 3416 3096 3071 536 1988 79609 9543 24432 6360 8645 10131 5682 892 3210 3610 2946 573 Source: Statistical Year Book of China 1988 pp.504 for 1981-87 and Statistical Year Book of China (in Chinese) 1989 pp.489 for 1988. Table 13.6 : CHINA: Investment in Capital Construction by Sector by Branch of Industry State-Owned Enterprises (in percentages) Total Subtotal Metallu- Power Coal Petro- Chemical Machine Forest Builiding Textile Food Paper Industry rgical leum Building Materials making 1981 100.0 96.5 12.7 18.6 10.7 12.9 8.8 11.3 3.1 4.1 9.2 4.3 0.9 1982 100.0 97.4 16.6 17.7 11.5 9.7 9.9 10.4 8.0 4.5 8.1 5.4 0.6 1983 100.0 97.9 16.0 20.4 14.2 10.3 10.7 9.5 2.3 5.0 6.1 4.0 0.6 1984 100.0 97.0 13.7 22.5 16.1 9.0 10.5 8.9 2.1 4.9 5.3 3.5 0.8 1985 100.0 96.2 11.7 24.2 12.3 7.4 12.0 10.8 1.5 6.1 4.6 3.9 0.8 1986 100.0 94.7 10.2 30.0 10.9 7.3 11.1 7.9 1.4 6.0 5.1 4.2 0.8 1987 100.0 95.3 11.6 30.6 8.7 8.6 12.8 7.3 1.4 5.0 4.5 4.6 0.8 1988 100.0 95.8 12.0 30.7 8.0 10.9 12.7 7.1 1.1 4.0 4.5 3.7 0.8 Source: Statistical Year Book of China 1988 pp.504 for 1981-87 and Statistical Year Book of China (in Chinese) 1989 pp.489 for 1988. Table 13.7: CHINA : Sectoral Breakdown of Investment (Percentage Shares) 1981 1982 1983 1984 1985 1988 1987 1988 Capital Construction 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 of which Agriculture 6.6 6.1 6.0 5.0 3.4 3.0 3.1 4.6 Industry 48.8 46.9 47.5 46.0 41.6 45.2 50.8 Energy 21.4 18.4 21.5 22.3 19.0 22.5 24.5 24.0 Communications 9.1 10.3 13.1 14.6 15.9 15.4 14.1 14.1 Technical Updating 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 -f which Agriculture 2.6 2.2 2.1 1.7 1.4 1.2 1.3 Industry 73.2 70.0 71.3 72.9 78.2 77.4 77.1 Energy 13.0 12.6 13.0 13.1 10.4 10.3 9.8 Communications 11.2 10.9 11.2 11.3 9.0 8.9 8.5 Collectives 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 of which Agriculture 22.5 20.2 18.5 13.3 9.3 8.4 8.1 Industry 72.0 70.2 69.0 67.5 62.1 63.2 63.4 Energy 1.0 1.0 1.0 1.0 1.0 1.0 0.9 .. Communications 2.4 2.5 2.3 2.0 1.3 5.2 5.4 -J Source: CHINA Statistical Year book 1988 pp. 258,277,493,503f,543,545f,571,573,579; State Statistical Bureau, Statistics for 1988 Socioeconomic Development; Beijing Review, March 6-12, 1989, and World Bank estimates. Note: Technical updating investment in energy has been calculated by assuming the .. of energy to transport investment in 1987 throughout. Sectoral investment ratios for collectives assume that the ratio of sectoral investment to sectoral GVIO is the same as in 1987 for all years. Table 13.8: CHINA : Sectoral Allocation of National Capital Construction Investment (Investment as a Percentage of Total State Investment in all Sectors) 1953-87 1958-62 1903-85 1966-70 1971-75 1978-80 1958-80 1981-85 1981 1982 1983 1984 1985 1986 1987 Agriculture 7.1 11.3 17.7 10.7 9.8 10.5 12.0 5.1 6.6 6.1 6.0 5.0 3.4 3.0 3.1 Light Industry 8.4 6.4 3.9 4.4 5.8 6.7 5.4 6.9 9.8 8.4 6.5 5.7 S.9 7.0 7.4 Heavy Industry 36.1 54.0 45.9 51.1 49.6 45.9 49.3 38.5 39.0 38.5 41.0 40.3 35.7 38.2 43.5 Source: 'Investment Issues in the Chinese Countryside' by Andrew Watson in Australian Journal of Chinese Affairs, No. 22, July 1989. I-- Table 14.1: CHINA: Total Production and Consumption of Energy and its Composition 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 PRODUCTION 628 648 637 632 68 713 779 855 881 913 958 (millions of standard fuel) Proportion (%) Coal 70.3 70.2 69.4 70.2 71.2 71.6 72.4 72.8 72.4 72.6 73.1 Crude Oil 23.7 23.5 23.8 22.9 21.9 21.3 21.0 20.9 21.2 21.0 20.4 Natural Gas 2.9 3.0 3.0 2.7 2.4 2.3 2.1 2.0 2.1 2.0 2.0 Hydro Power 8.1 3.3 3.8 4.2 4.5 4.8 4.5 4.3 4.3 4.4 4.5 COSUMPTION 571 586 603 594 628 660 709 770 817 859 920 (millions of standard fuel) Propr~ion fM) Coal 70.7 71.8 72.5 72.2 73.9 74.2 75.3 75.9 76.1 76.3 76.1 Crude Oil 22.7 21.8 20.7 20.0 18.8 18.1 17.4 17.0 17.0 17.0 17.1 Natural Gas 3.2 3.3 3.1 2.8 2.6 2.4 2.4 2.3 2.2 2.1 2.1 Hydro Power 3.4 3.6 4.0 4.5 4.8 5.3 4.9 4.8 4.7 4.6 4.7 GDP (Constant 1980 Prices in 392760 420250 447150 489060 507990 557780 633080 716010 773290 864480 950190 million yuan) Energy Consumption 1.5 1.4 1.3 1.8 1.2 1.2 1.1 1.1 1.1 1.0 1.0 (million ton per billion yuan) Source: CHINA Statistical Year Book 1988 pp.369 for 1978-87; 1989 (Chinese) pp.351 for 1988. NOTES: Excluding bio-energy, solar, geothermal and nuclear energy. All fuels are converted into standard fuel with thermal equivalent of 7000 kilocalorle per kilogram. The conversion is 1 kg of coal (5000 kcal) = 0.714 kg of standard fuel. 1 kg of crude oil (10000 kcal) = 1.43 kg of standard fuel. 1 cubic metre of natural gas (9310 kcal) = 1.38 kg of standard fuel. The conversion of hydropower into standard fuel is calculated on the basis of the consumption quota of standard coal for thermal power generation of the year. Table 14.2: CHINA: Share of Fuel Sector in Industrial Investment in 1976-1980 and 1981-85 in Selected Countries (Percentage) 1976-80 1981-85 1986-88 CHINA 10.7 28.9 9.1 CPEs Czechoslovakia 11.8 14.8 Hungary 11.8 17.2 Poland 18.8 20.9 Romania 13.1 19.1 Soviet Union 20.8 28.5 Mature Industrial Western Countries Italy 1.8 6.3 France .. 6.5 Source: Economic Survey of Europe in 1988-87 (for CPEs) and Yearbook of Industrial Statistics 1981 & 1986. CHINA Statistical Year book 1988 pp.605 for 1976-87; 1989 (Chinese) pp.489 for 1988. 中祝翁 А N N Е Х I I А L Р Н А В Е Т I С А L N 0 Т Е S - 178 ANNEX II Page 1 of 11 CHINA COUNTRY ECONOMIC MEMORANDUM: BETWEEN PLAN AND KARKET References Chapter I a/ See "False Starts and Second Wind: Financial Refcrms in China's Indus- trial System" by Barry Naughton, in The Political Economy of Reform in Post-Mao China, eds. Elizabeth J. Perry and Christine Wong, Harvard Contemporary, China Series, No. 2, 1985, pp. 223-24; China's Political Economy, by C. Riskin, Oxford University Press, 1987, pp. 342-46. Cyril Lin notes that, "Chinese reform debates in 1978-82 focused largely on enterprise autonomy as the pivot on which related aspects of reform would or should turn." (p. 103). He also goes on to observe that the 1978 experiments with enterprise autonomy in Sichuan, which were extended to the whole nation in 1979, were derived from the 1962 "Seventy Articles: on Industry." (p. 110). The continuity of change is remarkable. "Open- ended Economic Reform in China," by Cyril Lin, in Remaking the Economic Institutions of Socialism, eds. Victor Nee and David Stark, Stanford University Press, 1989. b/ The resources and power gained by local authorities through decentrali- zation and their strong support for reforms that continue this trend are discussed in "Material Allocation and Decentralization Impact of the Local Sector on Industrial Reform," by Christine Wong, esp. p. 276. in The Political Economy of Reform in Post-Mao China, eds. Elizabeth J. Perry and Christine Wong, Harvard Contemporary China Series, No. 2, 1985. c/ Inflation rose to 6 percent in 1980. Even this was viewed as a grave development and a policy of freezing prices was introduced in late 1980. By 1981 prices were rising by 2.4 percent. "The Politics of Price Con.- trol," by Dorothy J. Solinger, in Policy Implementation. in Post-Mao China, ed. David M. Lamp-ton, University of California Press, 1987, pp. 81-82. d/ The enterprise contract system is described in "Enterprise Management- Issues and Options," World Bank Report, No. 7773-CHA, July 1989. e/ Prior to reforms, industl7ial wages were subject to uniform bureaucratic guidelines. In the mid-eighties some decision-making autonomy concerning wages, allowances and bonuses was passed down to enterprises. An announcement in late 1989 indicated that wage bills in 1988 would be assessed with reference to actual payments in 1984. This prompted enterprises to use their newly gained powers and grant workers, promotions salary increases and generous bonuses. Total wage bills rose by 75.4 percent in December 1,984. The stage was selt for the wage-price cycle. "Macroeconomic Development of China: Overheating in 1984-87 and ANNEX II Page 2 of 11 Problems for Reform", by R. Komiya, Journal of Japanese and International Economies, Vol. 3, 1989, p. 33. Chapter 2 a/ "The State Council Issues a Notification Demanding Rectification of All Types of Fixed Investment," Jingji Ribao, October 5, 1989, p. 1; a full elaboration of the policy is in "Fundamentals of This Year's Fixed Investment Policy," Zhongguo Jiben Jianshe, 1989, No. 2, pp. 4-6. b/ Wei Jing, "Scale, Structure, Efficiency: Analysis of 1988 Fixed Invest- ment," Zhongguo Jiben Jianshe, 1989, No. 3, p. 22; China Investment and Construction, 1989, No. 7, p. 8. c/ "Price Inspectors to Investigate Markets in Major Cities," Jingji Ribao, October 2, 1989, p. 2. d/ Current heterodox thinking on stabilization policy supports the use of a price freeze to modify expectations, slow the inflation spiral and win adherence to the government's program. See "Israel's Stabilization" by Michael Bruno and Sylvia Piterman, in Inflation Stabilization, eds. M. Bruno, et al., MIT Press, 1988, p. 11; "The End of the High Israeli Inflation: An Experiment in Heterodox Stabilization" by Alex Cukierman, p. 65; and "Lessons from Mexico," by Francisco Gil Diaz and Raul R. Tercero, in M. Bruno, et al., eds., 1988, op. cit. e/ China: Country Economic Memorandum, 1989, op. cit., pp. 57-61. ff On the importance of the call money market for monetary management in Japan during the sixties and seventies, see "Banking and Finance," by Henry C. and Mabel I. Wallich, in Asia's New Giant, eds. Hugh Patrick and Henry Rosovsky, Brookings Institution, 1976, pp. 312-314. yg/ See "Financial Flows to Developing Countries," March 1990, World Bank, Table 15.A., p. 28. Chapter 3 a/ See China: Country Economic Memorandum, 1989, op. cit., p. 13 where the evidence on factor productivity is summarized. b/ See China: Country Economic Memorandum, 1989, op. cit., pp. 15-17. Josef Brada's study of the CMEA countries for the 1971-85 period suggests, that macropolicy impinging on growth is the major determinant of efficiency, whereas economic reform influences technical efficiency less strongly and its effects are felt more slowly. "Technological Progress and Factor Utilization in Eastern European Economic Growth," by Josef C. Brada, Economica, vol. 56, November 1989, p. 443. c/ "What Determines the Rate of Growth and Technological Change?" by Paul M. Romer, World Bank Working Paper Series, No. 279, September 1989, p. 23. - 180 - ANNEX II Page 3 of 11 d/ The strength of heavy industry's claim on resources arises from the importance it has received since the 1950s, the size and quality of its bureaucracy and its contribution to the central government's revenues. Opposition from this sector could offset the future of industrial reform and distort the choice of strategy. "The Politics of Industrial Reform," by Susan L. Shirk, in The Political Economy of Reform in Post-Mao China, op. cit., 1985, pp. 207-208. e/ Examples are Japan, the United States, the Federal German Republic, and Italy among developed countries; South Korea and Brazil among the devel- oping nations. f/ A discussion of current industrial plans and suggestions with regard to future policies is contained in a forthcoming Bank report, China: Industrial Policies in the Medium Term, World Bank, February 1990. g/ Automobile production capacity in 1989 was 650,000 vehicles, actual output 573,000. "Motor Vehicle Production," Xinhua, September 2, 1989. h/ See "The Economic Costs of Food Self-Sufficiency in China," by Yang Yongzheng and Ronald Tyers, World Development, Vol. 17, No. 2 where the costs and implications of self-sufficiency are discussed. i/ The details of reform are to be found in "Agricultural Organization: New Forms, New Contradictions," by Reeitsu Kojima, The China Quarterly, No. 116, December 1988; and "The Evolution of Agricultural Policy," by Robert F. Ash, The China Quarterly, No. 116, December 1988. j/ See "Investment Issues in the Chinese Countryside," by Andrew Watson, Australian Journal of Chinese Affairs, No. 22, July 1989, pp. 90-94. The irrigated area was increased from 20 million hectares in 1950 to 45 million hectares in 1976, 45 percent of the total cultivated. The mul- tiple cropping index also increased from 131 percent to 151 percent, which is similar to that of India and among the highest in the world. k/ According to one estimate, 41 percent of the growth in productivity during 1965-87 was because of rising inputs with fertilizers accounting for two thirds. "Inhibition of Factor Markets, Institutional Reform and Induced Technological Theory and Empirical Evidence," by Justin Yifu Lin, UCLA Working Paper No. 576, December 1989. 1/ See R. Ash op. cit., 1988, pp. 346-47; and "Trends in Crop Production, 1978-86," by Kenneth Walker, The China Quarterly, No. 116, December 1988, p. 611. m/ Andrew Watson, op. cit., 1989. n/ See "Agricultural Crisis in China," by Joseph Fewsmith, Problems of Communism, November/December 1988, p. 91. Further discussion of inter- sectoral transfers can be found in "Structure and Motifs in the Food and Price Policy Story," by Terry Sicular in Food Price Policy in Asia, edited by Terry Sicular, Cornell University Press, 1989, esp. pp. 276-77; - 181 - ANNEX II Page 4 of 11 "Intersectoral Resource Flows in China Revisited: Who Provided Industrialization Funds?" by Katsuji Nakagane, The Developing Economies, Vol. 27, No. 2, June 1989, pp. 146-173; "Peasants and Politics," by David Zweig, World Policy Journal, Vol. 6, No. 4, Fall, 1989, pp. 637-41; and "China: Consumer Food Subsidies," by Alan Piazza, World Bank, mimeo, February 1990. One interesting finding reported in this paper is that the total transfer value of all food subsidies to the urban population (including budgetary transfers) was Y 44 billion in 1988. o/ "China's Energetics: A System Analysis," by Vaclav Smil, in Energy in the Developing World, eds. V. Smil and W.E. Knowland, Oxford University Press, 1980, pp. 135-37. p/ These choices are analyzed in a forthcoming study by the World Bank entitled Managing Agricultural Transition, June 1990. China and India are the countries which will most profoundly influence the cereals defi- cit of developing countries (and hence market prices) through the year 2000. See World Agriculture: Toward 2000, ed. by Nikus Alexandratos, FAO, Bellhaven Press, 1988, pp 83-92. g/ For an analysis of tax incidence in terms of direct and indirect taxes, see China: Revenue Mobilization and Tax Policy, Issues and Options (June 15, 1989), World Bank, Report No. 7605-CHA. r/ Industrial Yearbook, p. 19; Fiscal Statistics, pp. 126-127. s/ "Fiscal Reform, Elite Turnover and Central-Provincial Relations in Post- Mao China", by James Tong, The Australian Journal of Chinese Affairs, No. 22, July 1989, pp. 2-7. t/ See "Regional Economies and Government Finances," by Yuzo Ishikawa, China Newsletter, No. 83, November/December 1989, p. 13. u/ The issuance of money has also transferred resources equivalent to 3.5 percent of GNP on average (1984-88) per annum to the monetary authorities which are then used to finance state investments. The PBC has directly funded the capital spending of 600 to 800 state owned enterprises and indirectly supported the investment of others through low interest lending to the specialized banks. v/ Gongye Jingji Guanli Congkan [Industrial Economic Management Digest], 1989:3, pp. 3-4; 1989:5, p. 78; 1989:9, p. 5. w/ The dispersal of political authority in China, which in a small way resembles that of the US, makes it difficult to introduce broad tax reforms as against incremental changes or changes of a particularistic nature. What Steinmo notes of the US is also true for China, "Because political authority is fragmented, it is exceptionally difficult to change the basic rules of the tax system, but introducing or amending specific measures to adjust the system on behalf of specific groups can be done relatively easy .... Similarly the incentive structure of the (political] system forces interest groups to fight for particularistic - 182 - ANNEX II Page 5 of 11 tax measures even when the general ideological positions would tend to favor a more neutral tax system." "Political Institutions and Tax Policy in the U.S., Sweden and Britain," by Sven Steinmo, World Politics, Vol. 41, No. 4, July 1989, pp. 512-13. x/ The evidence on the social costs of taxation and the effects of these "deadweight" losses on national output is summarized in "Do Taxes Mat- ter," by Jonathan Skinner, World Bank, Working Paper Series, No. 48, August 1989, esp. p. 45. y/ "Intersectoral Financial Flows in Developing Countries," by Patrick Honohan and Izak Atiyas, World Bank Working Paper Series, No. 164, March 1989, pp. 32-33. z/ High tax/GNP ratios and respectable tax elasticities in Sweden and Britain as compared to the US are traced by Steinmo to the breadth and rate of consumption and not income taxes. Steinmo, op. cit., 1989, pp. 513-18. aal "Issues in Income Tax Reform in Developing Countries, by Cheryl W. Gray, World Bank Working Paper Series, August 1989, pp. 31-39. ab/ See "Implementing Chinese Tax Policy," by David Bachman, in Policy Implementation in Post-Mao China, ed. David M. Lampton, University of California Press, 1987, pp. 152-53. ac/ "CPEs' Structural Change and World Market Performance: A Permanently Developing Country Status," by Jan Winiecki, Soviet Studies, Vol. 41, No. 3, July 1989, p. 370. ad/ The Daqing field, which accounts for 40 percent of output, is 14 years old. Total production was 135 million tons in 1988, rising to 137.5 million tons in 1989. New finds in the northwest (Tarim Basin) have been reported but the target of 200 million tons by the year 2000 seems optimistic. "Chinese Oil Industry Begins to Feel its Age," Financial Times, January 5, 1990. ae/ Since 1985, coal production has risen by 47 million tons per annum and in 1989 reached 1.04 billion tons. China Daily, December 29, 1989. af/ "China and Japan in the New Energy Era," by Vaclav Smil, Journal of Business Administration, Vol. 16, Nos. 1 and 2, 1986, p. 229. ag/ Thirty-two coal faces, each capable of producing 1 million tons per annum were commissioned in 1989. China Daily, December 29, 1989. ah/ Only about one fifth of all coal is washed to separate ash and mining debris. About 30 percent of raw coal output is made up of rocks, clay and ash, this poses problems for the end-user and places an unnecessary burden on the railway system, 40 percent of whose capacity is devoted to transporting coal. Smil, op. cit., 1986, p. 229; and Coal Strategy Note, World Bank, January 24, 1990, pp. 11-12. ANNEX II - 183- Page 6 of 11 all The scale of returns is noted in "Money to Burn," The Economist (London), January 6, 1990, p. 65. ajl "The Energy Impediment to China's Growth," R. Granzer, OECD Observer, April/May 1989, p. 14. ak/ China: Coal Utilization Study, Report No. 8915-CHA, World Bank, July 9, 1990; see also Smil, op. cit., 1986, p. 229. Upgrading some of the 300,000 boilers in use, especially the smaller ones, would also contri- bute significantly to energy efficiency. al/ "Improving the Efficiency of Electricity Use in Industry," by Marc Ross, Science, April 21, 1989, Vol. 244, pp. 311-17. am/ The General Logistics Department owns and operates a large number of enterprises that were created to make each province at least militarily self-sufficient in the event of a "people's war". These include coal mines and various service sector agencies. The four main defense indus- tries--aeronautics, space, weapons and nuclear power--comprise some 1,200 enterprises, employing approximately 3 million workers. The total pro- duction of the defense sector was valued at Y 18.5 billion in 1988 and Y 20 billion in 1989. Civilian goods, e.g., TV sets, motorbikes and refrigerators, accounted for 60 percent or more of the total. Military enterprises have established numerous joint production arrangements with civilian manufacturers and transferred technology in areas such as energy, integrated circuits, aeronautics, medicine and electrical machin- ery. See "Civilian Goods Production by the Military Supply Industry," by Seiichi Nakajima, China Newsletter, March-April 1990, No. 85, pp. 10-12; "The Military in China," by Harlan W. Jencks, Current History, September 1989, p. 265; and "Defense Budget Will Rise Over Last Year, China Daily, January 23, 1990; and "China's Drive to Close the Technological Gap: S&T Reform and the Imperative to Catch Up," by Denis Fred Simon, China Quar- terly, No. 119, September 1989, pp. 612-613. an/ "Science, Technology and China's Political Future," by Richard P. Suttmeier in Science and Technology in Post-Mao China, edited by Denis Fred Simon and Merle Goldman, Harvard University Press, 1989, pp. 387-88. ao/ Asia's New Giant, by Alice H. Amsden, Oxford University Press, 1989, Chs. 11 and 12; "Technology: Concepts, Methods and Issues," by Sanjaya Lall, Oxford University, mimeo, June 1989, p. 23. ap/ "The Quiet Path to Technological Preeminence," Scientific American, Vol. 261, No. 4, October 1989, p. 43. a/ "Jiangsu's New Wave in Foreign Investment," by Richard Pomfret, China Business Review, November/December 1989, p. 15. ar/ "Joint Ventures in China: Inscrutable, The Economist (London), March 17, 1990, pp. 66-68. - 184 - ANNEX II Page 7 of 11 as/ "Foreign Direct Investment in the PRC: Progress, Problems and Propos- als," by Jerome A. Cohen and Stuart Valentine, Journal of Chinese Law, Vol. 1, No. 2, 1987, pp. 206-14. at/ "Foreign Land Leases Will Help Develop Coast, SEZs," China Daily, April 13, 1990, p. 1; and. "Bank Ready for Active Role," China Daily, April 1, 1990, p. 1. au/ Hirschman has labeled this phenomenon the "tunnel effect". See "The Changing Tolerance for Income Inequality in the Course of Economic Development" in Economics to Politics and Beyond by Albert 0. Hirschman, Cambridge University Press, 1987. av/ In 1988, the annual average wage for Party and state employees was at the bottom of the scale for nonagricultural employees (1,708 yuan); commerce workers came next with 1,733 yuan; workers in the education sector 1,764 yuan; health workers 1,793; and at the top were industrial workers with 1,931 yuan. Subsidies to government employees narrowed these differentials but, on the other hand, industrial workers also received in-kind benefits which probably restore the gap in total compensation. Data are from 1989 Statistical Yearbook. aw/ 'Reform Corruption: A Discussion on China's Current Development," by Stephen K. Ma, Pacific Affairs, Vol. 62, No. 1, Spring 1989, pp. 49-51. ax/ See, for instance, "Pre- and Post-Reform Income Distribution in a Chinese Commune: The Case of Dahe Township in Hebei Province," by Bingyuang Hsiung and Louis Putterman, Journal of Comparative Economics, Vol. 13, September 1989, pp. 439-43; and "Growth Processes and Distributional Change in a South Chinese Province: The Case of Guangdong," by Peter Nolan, Contemporary China Institute, SOAS, Research Study No. 5, 1983, p. 88. Nolan attaches more importance to a widening spread of incomes in rural areas along with a decline in poverty. Chapter 4 a/ "China's Price Reform in the 1980s," by Thomas M.H. Chan, in China: Modernization in the 1980s, ed. Joseph Y.S. Cheng, Chinese University Press, 1989, pp. 312-20; see also "Planning and the Market in China," by Kyoichi Ishihara, The Developing Economies, Vol. 25, No. 4, December 1987, p. 305. b/ Domestic prices for raw materials are generally below border prices whereas for intermediates, it is the reverse. China: Industrial Policies for an Economy in Transition, World Bank Report Nos. 8312-CHA, February 1990, p. 66. c/ For example, even with a commodity such as coal where controls are extensive, many consumers buy on the free market. In 1989, the prices for a ton of steam coal in Shanxi were 120-150 yuan and 200-250 yuan in East China, the latter being equal to or above world market prices. Coal Sector Strategy Note, World Bank, January 24, 1990. However, in certain - 185 - ANNEX II Page 8 of 11 areas such as transport, the fixity as well as the uniformity of prices introduces important distortions. Even though passenger fares were increased by 120 percent in October 1989, freight rates remained unchanged until March 1990 and did not reflect the route, gradient, equipment and traffic volume. Hence, supply routes for commodities such as coal have not been optimally determined and industries that are heav- ily transport-intensive, e.g., metallurgical as well as power-generating facilities, may not be sited optimally. "Chinese Experience in the Introduction of a Market Mechanism into a Planned Economy: The Role of Pricing," by Yushi Mao and Paul Hare, Journal of Economic Surveys, Vol. 3, No. 2, 1989, p. 144. d/ China: Industrial Policies in the Medium Term, World Bank, February 1990. el "Factory and Manager in an Era of Reform," by Andrew Walder, The China Quarterly, No. 118, June 1989, p. 243. f/ "China's Capital Goods Market," Beijing Review, November 13-19, 1989. g/ "Price Reform in China: Editor's Introduction," by Chen Shenshen, Chinese Economic Studies, Spring 1989, p. 11. h/ This structuralist explanation of inflation as a struggle over shares has been frequently advanced to explain the macro problems of Latin America. It seems as valid in China. See Varieties of Stabilization Experience by Lance Taylor, Clarendon Press, Oxford, 1988, pp. 63. On China, see "The Politics of Industrial Reform," by Susan Shirk, in The Political Economy of Reform in Post-Mao China, op. cit., 1985, pp. 199-202; "Open-Ended Economic Reform in China," by Cyril Z. Lin, in Remaking the Economic Institutions of Socialism, op. cit., pp. 107-112; and "The Political Economy of Chinese Industrial Reform," by Susan Shirk, in Remaking the Economic Institutions of Socialism, op. cit., pp. 343-348. i/ See Flexible Rigidities by Ronald Dore, The Athlone Press, London, 1986; "Employment and Wage Systems in Japan and Their Implications for Produc- tivity," by M. Hashimoto, in Paying for Productivity, ed. by Alan S. Blinder, Brookings Institution, 1990; and "Differences in Economic Fluc- tuations in Japan and the U.S.: The Role of Nominal Rigidities," by John B. Taylor, Journal of Japanese and International Economics, Vol. 3, June 1989. J/ "Changing Conceptions of the Socialist Enterprise in China, 1979-88," by Robert C. Hsu, Modern China, Vol. 15, No. 4, October 1989, pp. 508-11. k/ See Andrew Walder, "Factory and Manager in the Era of Reform," The China Quarterly, No. 118, June 1989, pp. 249-53; Jim Mann, writing on the experience of foreign investors in China notes, "Private Western busi- nessmen discovered that Chinese factory managers spent much of their time on welfare problems and had little independent decision-making authority. The real power lay with cadres in the municipalities, in government ministries or in the Party leadership.... Chinese state enterprises were ANNEX II Page 9 of 11 more willing to tolerate inefficiency for the sake of equality of income, full employment and social order." Beijing Jeep, Jim Mann, Simon and Schuster, 1989, p. 307. 1/ Walder, op. cit., 1989, pp. 246-47. m/ Hsu, op. cit., 1989, p. 516. n/ A managerial objective in some Western firms in the past, though perhaps less so in the era of leveraged buy-outs. 0/ "Chinese Experience in the Introduction of a Market Mechanism into a Planned Economy: The Role of Pricing," by Yushi Mao and Paul Hare, Journal of Economic Surveys, Vol. 3, No. 2, 1989, p. 149. p/ See China: Country Economic Memorandum, 1989, Vol. 2, pp. 116-17. _/ From Marx to the Market, by W. Brus and K. Laski, Clarendon Press, Oxford, 1989, Ch. 10. r/ The decision in early 1990 to set up the China National Automotive Industry Corporation, enfolding all of China's auto producers, although it may improve planning and coordination under the existing system, is unlikely to advance the cause of industrial competition. Far Eastern Economic Review, February 22, 1990, p. 67. s/ Brus and Laski, op cit., 1989, pp. 141-43. t/ See Rural Non-Farm Activities in China: Growth and Effects of Township Enterprises, 1978-87, by Yok Shiu Federick Lee, PhD dissertation, MIT, May 1988. u/ A sample of TVEs in five provinces indicated that workers were frequently exposed to high levels of lead dust, mercury, silica dust and asbestos. See China: Long-Term Issues and Options in the Health Transition, World Bank, May 1990, Chapter 3. w/ However, recent work by Gary Jefferson shows that scale economies may be important in state and collective sectors. He suggests that it may be advisable to regulate the proliferation of small-scale enterprises. "Potential Sources of Productivity Growth Within Chinese Industry" by Gary H. Jefferson, World Development, Vol. 17, No. 1, p. 54. x/ The nature of China's private sector, its future role and the problems it has generated have been the subject of much discussion in China. See "The Private Economy," ed. Stanley Rosen (1) and (2), Chinese Economic Studies, Fall and Winter, 1987/88; and "Policy, Practice and the Private Sector in China," by Susan Young, Australian Journal of Chinese Affairs, No. 21, January 1989. - 187 - ANNEX II Page 10 of 11 Chapter 5 a/ The importance of the SEZs for China's development strategy and the intention to intensify the export orientation of coastal areas was reaffirmed by Premier Li Deng at a conference convened by the State Council in February 1990. "Li Describes SEZs as Part of Nation's Major Reform Plan," China Daily, February 10, 1990. b/ Post-1988 reform actions by new FTCs and trading enterprises moved some of China's trading partners to consider antidumping actions and threaten to discontinue trading. As legal and market institutions are still too underdeveloped to exert corrective pressures, action by the center was difficult to avoid. "GATT's Problems with China," Far Eastern Economic Review, January 11, 1990, p. 46. c/ "Information, Transaction Costs and the Organization of Distribution: The Case of Japan's General Trading Companies," by Kwang-shik Shin, Journal of Japanese and International Economics, Vol. 3, September 1989. d/ The debt service ratio of 15 percent for end-1989 announced by the Chinese authorities includes the amortization of short-term debt. e/ "China's Hard Currency Problem," China Newsletter, JETRO, No. 82, Sep- tember/October 1989, p. 6; and "China's Gold Stocks on Increase," China Daily, November 9, 1989. "Financial Difficulties and Prospects for the Future," by Isao Okubo, China Newsletter, No. 84, May-June 1990, p. 16. During the latter half of 1989, China is believed to have sold between 100 and 120 tons of nonpublic gold ingot reserves valued at about $1.3 billion. See "Prolonged Economic Adjustment," by Satoshi Imai, China Newsletter, March-April 1990, pp. 7-8. f/ A hint of the trend in future spreads is contained in the syndicated loan of $30 million being arranged by CCIC Finance, Ltd. for China Interna- tional Iron and Steel Investment Corporation. Four Japanese banks com- mitted themselves to this loan in February 1990. The interest rate spread is reported to be 75 to 100 basis points over LIBOR. Spreads reported by the Chinese in mid-1990 are averaging 70 to 80 basis points. A loan of $126 million by the Mitsubishi Trust and Banking Corporation to Air China in early July 190 was made at 1 percent over LIBOR. "Japanese Bank Loan Agreed for Air China," South China Morning Post, July 1, 1990. g/ See World Bank, Korea: The Management of External Liabilities, 1988. Chapter 6 a/ "Reform Economics: The Classification Gap," by Janos M. Kovacs, Daedalus, Winter 1990, pp. 216, 223. b/ Contradictions and Dilemmas by Janos Kornai, The MIT Press, 1986, p. 216. c/ Kornai, op. cit., 1986, p. 223. ANNEX II - 188 - Page 11 of 11 d/ "Localism, Elitism and Immobilism; Elite Formation and Social Change in Post-Mao China," by Cheng Li and David Bachman, World Politics, Vol. 42, October 1989, No. 1, p. 91. el "Fiscal Reform, Elite Turnover and Central-Provincial Relations in Post- Mao China," by James Tong, Australian Journal of Chinese Affairs, No. 22, July 1989, pp. 7-9. f/ Cheng Li and David Bachman, op. cit., 1989, p. 73. g/ Questions regarding ownership rights have been debated in China since the late 1970s, initially in the context of setbacks encountered by earlier efforts at decentralization. In the 1985-88 period, the worry has been over the blurring of authority, responsibility and interests between central and local governments and between government and enterprises. With ownership issues still unsettled, negotiation, which is not governed by widely accepted rules, tends to prevail over market forces in the allocation of resources. One of the earliest articles on ownership matters was by Dong Fureng (1979). His contribution, as well as more recent ones by Chinese authors, are collected in "On the Question of Ownership and Property Rights," Chinese Economic Studies, Fall 1989. h/ China: Reforming Social Security in a Socialist Economy, World Bank Report No. 8074-CHA, March 1990. i/ The international experience is summarized by Blinder. See "Introduc- tion," by Alan Blinder in Paying for Productivity, ed. Alan S. Blinder, Brookings Institution, 1990. j/ On the empirical evidence of links between savings and growth, see "The Economics of Development: A Survey," by N. Stern, Economic Journal, vol. 99, No. 397, September 1989, p. 612. k/ The relationship between savings and the interest rate is quite uncer- tain. For a positive marshalling of the evidence, see "Financial Liber- alization in Developing Countries," by Bela Balassa, World Bank Working Paper Series, No. 55, September 1989. 1/ China Country Economic Memorandum: Macroeconomic Stability and Indus- trial Growth Under Decentralized Socialism, World Bank, Report No. 7483-CHA, June 12, 1989, pp. 103-113. ��� ���� �$Е�� ���$� �� � ���� �х �� $��� ����� к ��� ����� ���� �� �� ���g �� �� �� ���� ��gy.>"�s� ����� � �Б � s � � �� . � � � �� � ��+А�p �� � ��° � � � Ф �r � �а � � � i5��� у�8� �' 8�.. °� g��s � � �S`� г �� � � а� � "' �� ц�� �• х �� �г°' � �� � ��� �� � � � �.� �г� � �я � � � � � � � � �' � � ; � � � � � ��� � � � .� � � � � �� b й' �`��.• q � "f1 Р Ч "О �I � у� w ц •а., х;о н t� е q r� У' � р � �� �� ��� ���� ���� ���� ����� ����� �� � �� ��� V �; �� ���� ���� ������7t ��� � �� ��Qд,��уΡ р� � ��Q � '����С � к G� �� ��� �� � � � � � �� ��Э �r �� ��¢+х ��g� �д к� � ���у �iy��� у�,+,� 6�diZ �лk с Ё�В � �� ��� � � 9�� �� ���КΡ� ��я �$ �� о� �R�� �[С� � � �7 ~� �� и � � r�S � �я � �,9 � � � �> � � е� � п � � tA g уΡуΡ� '�� L � � ��� �� � $ �� � � 3. � � � � О �.� ■ �� � о � � � � � � � � � � � � � � � � � � � w ь �7 О � п У ro �, и+ аи •г''°�'> о �д О b�z � О ro О: А О � > .`1. �0 й Т � � � � � °� �� � ��� �• � � ��� � � � �• ��т � � � ���� ab� � �° �� � А у���. ������ �������� ��� ��� ������� ���� ���рΡрΡ� СΡ�� �� ��� �� ����� ^��� �� �� '� �� ����� �� � ���� �уΡ $ �, �4 :рΡ 1а � ���( �� � � г @� ��S � � �j � а8 �v� � �( 3f � $" � Lj ��� F � � у $� �а ek i ^ ы fff((( 1�b �Q0 �д д. � �,� � �� �а� ;С• � � В � � � �+ � �ВВ$ �ttss..� � �АЯ� � �i'. rZ �g � Е`! �� � �и ��i 8ы � s � � > � �7 SS�j' �0.у � � � � $ � � � �� � Я � � �.� � �� � � � �� � � � � � � � $ � � Q; а � � � � s А �'. 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