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Chinas Economics

For various reasons, China has always been an important country in the world.

With its increasing large population, it was determined by other countries that
is has a lot of economic potentials. In just one decade and a half, China has
transformed itself from a giant that use to live in poverty into a wealthy
powerhouse to the world economy. With one-fifth of the worlds population,
China is now producing 4% of world merchandise and a proportion of global
production. It has also one of the worlds oldest and most influential
civilizations. China has established three approaches to the world economy and
they are establishing an alternative socialist system (1950s); isolating itself
from the system (the 1960s to mid 1970s); and participating in the system again
from the 1970s. Chinas economic system was quite similar to Soviet Unions
because it is central planning system. However, after the 1950s, this central
planning is broken into regional planning by different provinces in China. In
another words, China has changed from a centrally based country in a regionally
based country, in which different provinces produces different goods and servies.

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This change has encouraged the development of small enterprises, which are the
main driving forces of Chinese growth. In 1978, China has liberalised its
economy and start participating in the world economy. With its new market
reforms in every sector, Chinas door has opened its economic door to foreign
investors and freer trade in special economical zones. Beginning in 1994,
China’s economic structural reforms have begun new breakthroughs. Major changes
have been made to sectors like personal enterprises, taxation, finance, foreign
investment and foreign trade. At the same time, the Chinese government is
speeding up its establishment of a socialist market economy system. Hopefully,
this socialist market economic system can be in place by 2010. (Roy 1-5) Major
Structural Reforms Reforms already launched: 1. Reform of the state-owned
enterprises has been furthered. h Some adjustment and reorganisation have
been carried out in industries like textile, coal, oil and weapon-makings. 2.

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

Reforms to be launched: 1. Financial reforms will be undertaken h To achieve
the perfect management system, sectors like banks, securities, insurance and
trust businesses are becoming independent from each other for clearer financial
supervisions. h Government is speeding up the reform of state-owned
commercial banks, in order for the banks to operate independently. h In case
when companies have bad credit and unpaid debts, banks are reinforcing strong
policies to ensure the quality of bank loans. h To safeguard financial assets
and eliminate corruption of people who have political positions. 2. To increase
export to maximize the economy h People are expanding export productions.

h People are improving the development of international tourism to increase
non-trade exchange earnings. (Online) Economic Activity GDP/GNP China must have
annual GDP growth greater than 5% to maintain social stability and political
survival. Economic freedom has increased Chinas prosperity. With its Real
GDP of US$960.91 billion, it seems that is has increased its output by 7.8% from
1997. Within the GDP, primary industry increased by 3.5%, secondary industry up
by 9.2%, and tertiary industry enlarged by 7.6%. The social labour productivity
rose by 6.9% over 1997. In the first half of 1999, GDP grew at the rate of 7.6%.

(Morrison) Beginning in 1979, China launched several economic reforms. To
improve the standard of living of farmers, government is now allowing them to
sell a portion of their crops on the free market. The government also
established four special economic zones to attract foreign investment and boost
exports and imports. The decentralisation of economic control of various
enterprises was given to provincial and local governments. This allowed
enterprises to operate more freely and competitively, rather be controlled by
the central government. Some coastal regions and cities were designated as open
cities and development zones, which allowed people to experience free market
reforms and to attract foreign investment. Therefore, the state price controls
on good and services were gradually eliminated. Starting from the introduction
of economic reforms, China’s economy has grown proportionately faster than
during the pre-reform period (see Table 1). This Chinese statistic shows the
growth of real GDP from 1979 to 1998, which is making China one the world’s
fastest growing economies. According to the World Bank, China’s rapid
development has driven 200 million people out of poverty. Table 1. China’s
Average Annual Real GDP Growth: 1960-1998 Time Period Average Annual % Growth
1960-1978 (pre-reform) 5.3 1979-1998 (post-reform) 9.8 1990 3.8 1991 9.3 1992
14.2 1993 13.5 1994 12.7 1995 10.5 1996 9.7 1997 8.8 1998 7.8 Sources: Official
Chinese government data reported by the World Bank, World Development Report
(various issues), and DRI/McGraw-Hill, World Economic Outlook, various issues.

Economists who worries about China’s rapid economic growth are mainly
concentrating on two factors: large-scale capital investment (by large domestic
savings and foreign investment) and rapid productivity growth. These two factors
appear to interdependent of each other. Economic reforms led to higher
efficiency in the economy, which boosted output and increased resources for more
investment in the economy. Most of the Chinese are known to have a high rate of
savings. When reforms began in 1979, domestic savings as a percentage of GDP
turned out to be 32% (nearly as high as Japan’s at the time). Eventually,
savings as a percentage of GDP has steadily risen; it was 42.7% in 1998, among
the highest savings rates in the world. In U.S. dollars, China’s GDP in 1998 was
$968 billion with its per capita GDP of $769 billion. Such data would indicate
that China’s economy and living standards were significantly lower than those of
the United States, Japan, and Germany. China’s 1998 GDP was about 45% the size
of Germany’s, 23% of Japan’s, and 11% that of the United States. Surprisingly,
China’s per capita GDP was only 2.4% of the United States (see Table 2). The
following data shows that China’s per capita GDP is $3,701. However, it falls
far below the PPP per capita GDP levels of some major developed countries. For
example, it is only 12% of U.S. levels. The International Monetary Fund
estimates that China might surpass the United States as the world’s largest
economy in the year 2007. However, even if that does occur, it would take China
significantly longer time to achieve U.S. standard of living levels. Table 2.

Comparisons of U.S., Japanese, German, and Chinese GDP and Per Capita GDP In
Nominal U.S. Dollars and PPP: 1998 Country Nominal GDP ($Billions) GDP in PPP
($Billions) Nominal Per Capita GDP Per Capita GDP in PPP U.S. 8,500 8,500 31,414
31,414 Japan 4,190 2,969 29,860 23,228 Germany 2,109 1,637 26,024 21,376 China
948 4,610 769 3,701 Source: DRI/McGraw Hill. World Economic Outlook, Volume I
1st Quarter, 1999, p.A-27. Employment/unemployment By the end of 1998, China’s
employment was 699.57 million, 3.57 million more than at the end of the previous
year. Of the total, 32.32 million people were in urban private enterprises. In
1998, great changes were made in the re-employment program, which enabled 6.09
million laid-off staff and workers of state-owned enterprises to find new jobs.

By the end of 1998, the registered unemployment rate in the urban areas was 3.1%
with no significant changes from the previous year. The income of people that
are living in urban and rural areas increased steadily, and their living
standard continued to rise. With the falling price levels, the growth of the
per-capita disposable income of urban residents rise 5.8%, and that of rural
residents increased by 4.3%. The registered unemployment rate in the urban areas
is 3.5% in 1999. The number of people laid off in 1997 was 15 million,
two-thirds from state owned enterprises. If privatisation of state enterprises
continues, it is estimated that 15 million more workers would be laid off over
the next two years (although the unemployment number may vary in different
provinces). In some undeveloped provinces, the ratio of laid off to working
labour was 3:1 in 1998. (Morrison) Inflation Inflation has reached 25.5% in 1994
and has become a prime concern of the government. Therefore, the government has
planned a tight credit policy which helped to bring inflation figures down to
17.1% in 1995, 8.3% in 1996, and 4.1% in 1997. Due to statistics, the year-end
figures for 1997 shows an average inflation of 2.8% for CPI. This steady drop in
inflation during 1997 was due to large stockpiles of inventory such as wheat and
cereals, which produced more competition in the economy. It looks like steady
deflation would continue for the next few years. In 1998, the total retail sales
of consumer goods amounted to US$352.14 billion, up by 6.8% compared with 1997.

Despite the deflation, the actual growth was 9.7%. (China: Economic Overview)
Value of currency During the period of the Asian financial crisis, China has
enforced a policy of maintaining the stability of RMB. There has also been a
favourable balance in Chinas current account for five consecutive years.

Foreign direct investments have continued to flow in. All these made it possible
for RMB to remain stable in 1998. Now, its exchange rate against the US dollar
is at US$1: RMB 8.2789. Unlike HK dollar, value of RMB might change over the
year because RMB is not pegged to the US dollar. Specific contributions From
several observations, it is known that the fastest growing provinces are
Zhejiang, Jiangsu, Guangdong, Fujian, and Shandong. These places are where the
state-owned industries have fallen most sharply. From 1981 to 1994, the shares
of state-owned industry in each of the five provinces dropped by more than 40%
for it was creating a lot of non-state owned enterprises. On the other hand, in
the western regions, the state-owned enterprises have experienced a much slower
structure reformation. The decline of importance of the coastal provinces was
caused by the fast growth of enterprises in provinces like Jiangsu and Zhejiang.

It can also be caused by foreign-invested enterprises in Guangdong as well as
private enterprises in Wenzhou, Zhejiang. The output of these enterprises grew
at an annual average rate of 25 %, that is, 14 % higher than that of the
state-owned industrial enterprises. The five fastest growing provinces are
construction of free enterprise or indirect macro-management because they all
attract foreign investments. In contrast, the inland areas lack foreign-invested
enterprises and private enterprises. The fasted growth province, Guangdong, has
an annual average GDP growth rate of 12%, while Jiangsu and Guizhou grew at an
annual average growth rate of 6%. However, this increasing difference of
provinces’ growth performance could lead to serious economic and political
tensions among regions. (Decentralisation and Provinces’ Growth Performances)
Government production of public goods/services State economy includes all
enterprises that are funded by governments of various levels. Because of the
economic reform, companies and business that use to receive government funding
now have none. To increase growth without arising regional crisis, the
government is using the good old-fashioned Keynesian approach V spend big on
public programmes. Last year, government investment in telecommunications has
increased by 53.4% and funding in agriculture and water conservation increased
by 47.8%, as well as cement production jumped by 37.2%. The Statistical has
shown that government owned retail sales grew at 9.4% pa in 1998. Due to the
socialist system, most of the companies in this economy are state-planned
production companies. The main financial burden that these state companies have
to carry is the workers’ life long security, that is, paying for a worker’s
child delivery bill and covering the funeral expenses of the dead retired
worker. Along with other reasons, more than half of such companies are currently
not profitable. Therefore, government is slowly re-organising small state-owned
companies and selling them to private entrepreneurs. At the same time, they are
transforming large ones into corporations. To maintain social stability, the
government has to make sacrifices in this economic sector. (Roy 48) Economic
Stability Fiscal policy Chinas political and economic systems lack of
transparency and constant enforcement has created many uncertainties for foreign
investors. The complexity of national and local laws has made foreign trade and
investment more difficult in China. Chinas main problem has always been the
incompleteness of economic reforms and the absence of political reforms. This
was due to the fact that Communist Party Officials are functioning as Chinas
ruling class. They are a self-selected group accountable to nobody. Fiscal
reforms China has made the following new pledges: 1. To eliminate high tariffs.

2. To have a more “balanced and equitable access” for foreign
companies. They also made the following decisions about State-Owned-Enterprises:
1. Lend to those enterprises that can survive in the market. 2. For enterprises
without a lot of hope for survival, better performing ones will acquire them. 3.

Support bankruptcy for extremely insolvent enterprises. Mr. Jiang Zemin, Chinas
new President has brought some strong changes in China. However other countries
in the World Trade Organisation (WTO) are saying that Chinas should obtain
lower tariff and freer trades because the use of high tariffs made it difficult
to export to China. Import taxes in the form of value-added tax (VAT) and other
taxes are added to tariffs on items entering China. This highly discouraged
trade inflow. In 1995, the National People’s Congress (NPC) established banking
reforms, including the Peoples Bank of China Law. This new law gives NPC more
authority in its functioning. It also abolishes loan and corruption from
politicians. The reforms has sped up the commercialisation of the big four
State-owned specialised banks, which include Agricultural Development Bank of
China, Export and Import Credit Bank of China, and State development Bank. As a
result, the Chinese government has opened its doors to some foreign banks to
emerge new banks in China. The new banks are more efficient than the big four
and offer much better quality of service. Monetary policy In 1994, Consumer
Price Index was up by 24%. This is a sign of Chinas failure for the interest
rates being set by the government and not economically. Monetary policy is
useless in China because the central bank is not independent. Inflationary
pressure resulted in money supply growth of 34.4% in 1994. China is not allowed
to use the “raising interest rates” tool for fighting inflationary
demand because it fears that the effect on state owned industries that survived
on borrowed working capital. The raise in interest rates would greatly effect
state-owned firms as they already borrow money from banks to pay their interest
bills. Monetary reform Formerly Bank of China, it was transformed into a central
bank in 1983. Its responsibilities include: 1. Making and improving financial
polices to meet government rules. 2. Controlling the supply of money. 3. Setting
exchange and interest rates. 4. Setting policies concerning credit. 5.

Controlling both domestic and foreign banking activities. 6. For practical
purposes, the bank of China is the overseas agent of Central Bank. Therefore,
privately owned firms are left to fund their own funds from sources outside the
state banking system which include foreign investments, foreign currency
borrowing, domestic share sales, bond issues, credit unions, non-bank financial
institutions and unofficial private banks. The new interest rate for 6-month
loans is now 9.5% and officials say, “Over the next five years our monetary
policy direction will be a moderately tightening one.” Banking system China
now has specialist banks and other financial institutions, which include: 1. The
big-four State-Owned Specialised banks i.e. Agricultural Bank of China, Bank of
China, Industrial and Commercial bank of China and The Peoples Construction
Bank; 2. China International Trust and Investment Corporation; 3. The Industrial
/ Commercial Bank of China; 4. Bank of Communications, etc. Since the central
bank in China is not independent, the transparency in the banking sector is then
very poor. This makes the precise measurement of banks loans to become more
difficult. The accounting principles are inconsistent and poorly understood by
bankers. Interest rates are still be dictated by the bank and government instead
of allowing the market to determine it. However, with the new reforms and laws
to its state owned enterprises, China may be on its way to a substantial
economic recovery with a bright future in sight. (Grace Bosede) Economic Equity
Income distribution/Standard of living Less than 60% of Chinese are covered by
unemployment insurance. In 1997, most of the laid off workers received payments
of less than 10% of the average national wage. There are virtually no social
securities or pensions in China. Therefore, some people live at starvation
level. However, the high rate of China’s economic growth last year has provided
people with higher standard of living. Urban residents who use to make 27% of
the national income are now making more than 50%. There is also a great
difference depending on the specific provinces in which people work in (see
Table 3). Table 3. Comparison of per capita income between urban and rural
sectors in 1995 Province Urban Per Capita Income (RMB) Rural Per Capita Income (RMB)
Anhui 2,767 973 Fujian 3,508 1,578 Guangdong 5,877 2,182 Zhejiang 4,691 2,225
Source: Internet article: “How to Benefit from the Booming Retail Market in
China” Because China has a large population, the government rarely
interferes with income distributions of individuals. However, there is more
interference from the government in the state owned businesses than the
privately own ones. Therefore, private businesses that try to maximize their
profits often exploit workers who are in serious need of money. The average per
capita income of urban resident raise from RMB1,826 in 1992 to RMB3,179 in 1994.

Recent figures show that the high growth rate will continue for some time (Table
4). Table 4. Urban per capita income Year Average Income (RMB) Growth Rate 1992
1,826.1 18.3% 1993 2,336.5 28.0% 1994 3,179.4 36.1% Source: Internet article:
“How to Benefit from the Booming Retail Market in China” China has now
developed large shopping centres and department stores in many provinces in
order to bring up the standard of living, as well as to encourage consumer
spending (Table 5). Table 5. Consumer spending in different provinces. Rank Area
1994 ( RMB billion ) 1993 ( RMB billion ) Rate 1 Guangdong 175.67 131.40 +33.7%
2 Jiangsu 124.73 93.50 +33.4% 3 Shandong 113.24 84.23 +34.4% 4 Zhejiang 96.37
67.44 +42.9% 5 Sichuan 93.33 71.79 +30.0% 6 Liaoning 86.80 67.22 +29.1% 7
Shanghai 77.07 62.19 +23.9% 8 Henan 70.25 49.72 +41.3% 9 Hubei 68.50 50.05
+36.9% 10 Beijing 66.67 53.18 +25.4% Source: Internet article: “How to
Benefit from the Booming Retail Market in China” International Trade and
Competitiveness Trading pattern Chinas international trade in 1928 was only
2.3% of the world total. In 1977, when Chinas economy was still isolated,
its trade was 0.6%. It did not gain an important economic position until 1993.

As one of the WTO members, China has opened many closed sectors under the
Western influences. The Washington-based Institute of International Economics
estimates that Western exports to China could rise annually by US$21 billion.

Economic reforms have transferred China into a major trading partner for many
countries. Chinese exports rose from $14 billion in 1979 to $184 billion in
1998, while imports grew from $16 billion to $140 billion. China’s ranking as a
trading power rose from 27th in 1979 to 10th in 1998. China’s trade volume fell
slightly in 1998 over 1997 for it is too affected by the global financial
crisis. Chinas exports rise by 0.5% after the rising of 20.9% in 1997, while
imports dropped by 1.5%. Due to statistics, China has been running trade
deficits in some years and surpluses in others. Over the past 5 years, China has
run trade surpluses. In 1998 the surplus totalled about $44 billion (see Table
6). Merchandise trade surpluses and the large amount of foreign investment have
made China to become the world’s second largest foreign exchange reserves, with
a total $145 billion at the end of 1998. During the first nine months of 1999,
China’s exports increase by 2.1%, while imports rise by 19.3%. Table 6. China’s
Merchandise World Trade: 1979- September 1999 ($Billions) Exports Imports Trade
Balance 1979 13.7 15.7 -2.0 1980 18.1 19.5 -1.4 1981 21.5 21.6 -0.1 1982 21.9
18.9 2.9 1983 22.1 21.3 0.8 1984 24.8 26.0 -1.1 1985 27.3 42.5 -15.3 1986 31.4
43.2 -11.9 1987 39.4 43.2 -3.8 1988 47.6 55.3 -7.7 1989 52.9 59.1 -6.2 1990 62.9
53.9 9.0 1991 71.9 63.9 8.1 1992 85.5 81.8 3.6 1993 91.6 103.6 -11.9 1994 120.8
115.6 5.2 1995 148.8 132.1 16.7 1996 151.1 138.8 12.3 1997 182.7 142.2 40.5 1998
183.8 140.2 43.6 Jan.-Sept. 1998 134.2 98.6 35.6 Jan.-Sept 1999 137.0 117.6 19.4
Source: International Monetary Fund, Direction of Trade Statistics and official
Chinese statistics. Trading partners China’s trade data differs significantly
from its major trading partners statistics. This is due to the fact that a
large share of China’s trade (both exports and imports) passes through Hong.

China treats a large share of its exports through Hong Kong as Chinese exports
to a foreign country. However, China treats the imports from Hong Kong as
provincial trading. According to Chinese trade data, its top five trading
partners in 1998 were Japan, the United States, the European Union (EU), Hong
Kong, and South Korea (see Table 7). Chinese data shows that United States is
its second largest export partner and the third largest source of its imports.

China’s trade with many of its Asian trading partners fell in 1998, while trade
with the United States and the EU rose. Table 7. China’s Top 10 Trading
Partners: 1998 ($Billions and % Change over 1997) 1998 Merchandise Trade ($) %
Change over 1997 Country Total Trade Exports Imports Total Trade Exports Imports
All Countries 323.9 183.8 140.2 -0.4 0.5 -1.5 Japan 57.9 29.7 28.2 -4.8 -6.7
-2.7 U.S.* 54.9 38.0 17.0 12.1 16.1 4.1 EU15 48.4 27.9 20.4 12.6 17.2 6.3 Hong
Kong 45.4 38.8 6.7 -10.6 -11.5 -4.7 S. Korea 21.3 6.3 15.0 -11.6 -31.3 0.4
Taiwan** 20.5 3.9 16.6 3.3 13.9 1.1 Singapore 8.2 3.9 4.2 -7.2 -9.1 -5.4 Russia
5.4 1.8 3.6 -10.5 -9.7 -10.9 Australia 5.0 2.3 2.7 -5.2 13.9 -17.2 Indonesia 3.6
1.2 2.5 -19.6 -36.4 -8.1 Source: Official Chinese trade data. *U.S. trade data
on U.S.-China trade differ significantly with Chinese trade data. **China and
Taiwan do not maintain direct trade links. Most trade takes place via Hong Kong.

However, the US trade data differs significantly with Chinese trade data.

According to the U.S. trade data, it indicates that U.S. market is an important
market to China’s export, but it is not reflected in Chinese trade data. Based
on U.S. data on Chinese exports to the US, it is shown the exports have grown
from 15.3% in 1986 to an estimated 38.7% in 1998. This would indicate that the
United States is China’s largest export market. The importance of the U.S.

market for China’s exports has increased in 1998 because of the global financial
crisis in Asia. China has survived the financial crisis because U.S. imports
from China have continued to rise, whereas imports by several East Asian
economies from China have fallen. There is an increasing level of Chinese
exports from foreign funded enterprises (FFEs) in China. According to Chinese
data, the total share of Chinese exports produced by FFEs has risen from 0.1% in
1980 to 44.1% in 1998. Many of these FFEs are owned by Hong Kong and Taiwan
investors because they have shifted their labour-intensive, export-oriented,
firms to China to take advantage of low-cost labour. A large percentage of the
products made by such firms are exported to the United States. Export and
imports/Foreign trade China has gained more access to export markets through the
long term restructuring of the Chinese economy. Reforms initiated by President
Jiang Zemin and Prime Minister Zhu Rogji have tended to languish under political
pressure and economic and cultural inertia. Another cause of increasing export
is the wider opening of China’s industrial and agricultural sectors to Western
style management and competitive discipline. The strategy that Chinese used was
a currency devaluation to promote export growth. This would inevitably be
followed by a new round of defensive devaluation throughout the region,
accompanied by further capital outflows, deepening liquidity problems, a return
to protectionism and delay in recovery. (Roy 57) China’s cheap labour force has
made it internationally competitive in many low cost, labour-intensive
countries. As a result, manufactured products comprise an increasingly larger
share of China’s trade. The share of Chinese manufactured exports to total
exports rose from 50% in 1980 to 89% in 1998, while manufactured imports as a
share of total imports rose from 65% to 84%. A large share of China’s
manufactured imports is comprised of intermediates like chemicals, electronic
components, and textile machinery that are used in manufacturing products in
China. Major Chinese imports in 1998 included electrical machinery, textile
products, specialised machinery, plastics, and telecommunications and recording
equipment (see Table 8). China’s major exports included articles of apparel and
clothing, electrical machinery, textiles, office machines, and
telecommunications and recording equipment (see Table 9). Table 8. Major Chinese
Imports: 1998 Commodity Total ($Billions) % of Total Imports Electrical
machinery, apparatus, appliances ; parts, and household electrical
appliances $16.5 11.8% Textile yarns, fabrics, and made-up articles 11.1 7.9
Specialized machinery for particular industries 8.3 5.9 Plastics in primary form
8.2 5.8 Telecommunications and sound recording and reproducing apparatus and
equipment 7.9 6.6 Total top 5 52.0 37.0 Source: Official Chinese trade
statistics Table 9. Major Chinese Exports: 1998 Commodity Total ($Billions) % of
Total Exports Articles of apparel and clothing accessories $30.0 16.3%
Electrical machinery, apparatus, appliances ; parts, and household
electrical appliances 13.9 7.6 Textile yarns, fabrics, and made-up articles 12.8
7.0 Office machines and data processing machines 11.9 6.5 Telecommunications and
sound recording and reproducing apparatus and equipment 11.1 6.0 Total top 5
79.7 43.4 Source: Official Chinese trade data. China has pursued a trade
strategy of import substitution. This means Chinese only import the goods
necessary to its economic development that cannot produce itself, and once it
attains a domestic production capability, it stops importing those goods. This
approach even carried over to China’s exports, which have consciously been used
primarily as a means of generating foreign exchange for the purchase of advanced
foreign technology. China’s imports fall mainly into one of two categories: raw
materials (food, energy, lumber, wool and synthetic fibres, fertilizer,
chemicals, steel, etc.) from the developing countries, and advanced technology
(machinery, software, etc.) from the developed countries. Chinese exports, in
keeping with China’s comparative advantage, are mostly relatively cheap labour-intensive
manufactured goods, which are particularly attractive in lower-income countries.

In other words, China generally “buys in the core and sells in the
periphery”. Thinking that higher-tech products earn higher profits on the
capitalist world market, China is running trade surpluses with developing
countries and trade deficits with developed countries. China’s foreign trade has
grown exponentially since the opening to the world market. Exports comprised
about 2% of China’s GDP in 1980; in 1996, they account for 10%. (Roy 89) Total
trade between China and the United States rise from $4.8 billion in 1980 to
$85.4 billion in 1998, making China the 4th largest U.S. trading partner. China
has become a major supplier to the U.S. market with its variety of low-cost U.S.

consumer goods, such as toys and games, textiles and apparel, shoes, and
consumer electronics. China has been a major buyer of U.S. aircraft,
fertilizers, and machinery. In recent years, U.S. imports from China have far
exceeded U.S. exports to China. In 1998, U.S. imports from China totalled $71.2
billion while U.S. exports to China were only $14.3 billion. As a result, the
U.S. trade deficit with China has increased to nearly $57 billion in 1998.

(China-U.S. Trade Issues). Foreign investment China has kept out all foreign
investment until 1979, the heavy restrictions were loosened to allow all kinds
of foreign investment in China. This way, China can gain more access to foreign
technology. Western investors began to rush into China in the 1970s but
decreased in numbers in the early 1980s because they realised that China is
still a difficult place for them to do business. Several reasons for this is
that China has many regulations, corruption scandals and the assumptions that
foreigners are wealthy and therefore should pay extra for everything. In the
early 1990s, the Chinese government has reformed and clarified many laws
concerning foreign investment to stimulate foreign investment in China. (Roy 90)
In 1998, foreign capital investment in China has reached US$58.9 billion, with
foreign direct investment (FDI) of US$45.6 billion. Within the countries that
made direct investment in China, Hong Kong ranked first with 40.6% of China’s
total foreign investment (see Table 10). Table 10. Foreign Direct Investment
Countires % in total Hong Kong 40.6 United States 8.6 Singapore 7.5 Japan 7.5
Source: China’s economic conditions. In the first quarter of 1999, FDI totalled
to US$7.34 billion. In the first half of 1999, FDI reached US$18.6 billion. As a
result, FDI has brought new technology and more capitals into China. Conclusion
Further Outlooks 1999-2002 is the switch period for China from its command
economy to a market economy. Therefore the Chinese government develops macro
economic policies reinforce things like reform, development and stability. The
governments main objectives in this period are to maintain a low inflation
economy and improve employment rate while the restructuring is under its way.

The long term outlook for the Chinese economy remains mixed. China has been able
to weather out the effects of the Asian financial crisis, although this has done
at the cost of delaying economic reforms to the SOEs and banking system.

Continued support of money-losing SOEs draws resources away from more
potentially productive enterprises, and thus undermines future growth. China’s
commitment to join the WTO appears to represent a major commitment on the part
of the Chinese government to significantly reform its economy and provide
greater access to its markets. Some China observers believe that the Chinese
government views accession to the WTO as an important, though painful, step to
making Chinese firms more efficient and able to compete in world market (by
exposing them to competition from abroad). In addition, the government hopes
that liberalized trade rules will attract more foreign investment to China.

Economists argue that over the long-run greater market openness in China would
boost competition, improve productivity, and lower costs for consumers, as well
as for firms using imported goods as inputs for production. Economic resources
would be more likely redirected away from money-losing activities towards more
profitable ventures, especially those in China’s growing private sector. As a
result, China would likely experience more rapid economic growth (than would
occur under current economic policies). Goldman Sachs estimates that WTO
membership would double China’s trade and foreign investment levels by the year
2005 and raise real GDP growth by an additional 0.5% per year. In the short run,
however, widespread economic reforms (if implemented) could result in
disruptions in certain industries, especially unprofitable SOEs, due to
increased foreign competition. As a result, many firms would likely go bankrupt
and many workers could lose their jobs. How the government handles these
disruptions will strongly determine the extent and pace of future reforms. The
central government appears to be counting on trade liberalization to boost
foreign investment and spur overall economic growth; this would enable laid-off
workers to find new jobs in high growth sectors, especially in China’s growing
private sector. However, the Chinese government is deeply concerned with
maintaining social stability. If trade liberalization was followed by a severe
economic slowdown, leading to widespread bankruptcies and layoffs, the central
government might choose to delay (or even rescind) certain economic reforms
rather than risk possible political upheaval. The Chinese government has
recently taken a number of steps in preparation for China’s WTO entry. For
example, In January 2000, Zhen Peiyan, Chairman of China’s State Planning
Commission, stated that the government would eliminate all restrictive
regulations against private enterprises in China in preparation for China’s WTO
accession. Currently, private firms in China face a variety of discriminatory
government policies, including lack of access to borrowing from state banks,
that have made it difficult for such firms to develop. China’s entry into the
WTO will require the government to establish a level playing field for Chinese
firms to compete against foreign firms. This could greatly expand the role of
the private sector in China’s economic development and accelerate China’s
transition to a market-oriented economy. Economic Growth – China want to expand
its domestic demand to promote its economy. For the next few years, domestic
demand, that is, the consumption and investment will slightly increase.

Researchers say that after the year 2000, the impact of the financial crisis
will gradually reduce, whereas the international environment will gradually
improve. Chinas economic growth rate is expected to be about 7% and its CPI
to be around 3% in this period. Investment – Foreign and local investments in
fixed assets will continue to be the main driving force in Chinas economic
growth. Due to the changes in policies, it is known that investment in the state
sector will increase, as well as the investment in the non-state sector will
also speed up gradually. The estimated average increase in the investment in
fixed assets will be 12% or so in 1999-2002. The Chinese government has also
pursued policies to improve the amount of foreign investment. Foreign Direct
Investment is expected to rise after 2000. Employment – In the period between
1999 and 2002, the working population will be over 11 million and 85% of them
will enter the labour market. As the reform of the state-owned enterprises
continues and the economic restructuring speeds up, it is estimated that the
registered unemployment rate will be 3.5%. China is speeding up the development
of its economy to create more employment outlets and to deepen labour market
reforms. The government is also thinking of building of a social security system
that will improve the standards of living among people in the future. (Roy 57)
Table 11 China: Overall Economic Performance 1992 1993 1994 1995 1996 1997 1998
GDP and Major Components (% change from previous year, excepted as noted)
Nominal GDP (billion US$) 483.00 601.10 540.90 697.60 816.90 903.00 960.90 Real
GDP 14.20 13.50 12.60 10.50 9.60 8.80 7.80 Total Consumption 14.20 9.30 8.00
9.20 9.30 6.10 6.80 Private Consumption 14.30 9.40 7.70 10.10 9.60 5.80 6.10
Government Consumption 13.60 9.10 9.10 5.90 8.40 7.20 8.90 Total Investment (1)
12.90 24.90 15.60 15.50 10.40 7.10 14.40 Private Investment Government
Investment Exports of Goods and Services (2) 18.20 8.00 31.90 22.90 1.50 20.90
0.50 Imports of Goods and Services (3) 26.30 29.00 11.20 14.20 5.10 2.50 -1.50
Fiscal and External Balances (% of GDP) Budget Balance -0.97 -0.85 -1.23 -1.00
-0.78 -0.78 -1.50 Merchandise Trade Balance (f.o.b.) 0.87 -2.03 0.99 2.41 1.51
4.46 5.48 Current Account Balance 1.33 -1.98 1.42 0.23 0.89 3.29 3.03 Capital
Account balance -0.05 3.91 4.68 4.74 4.89 2.54 0.00 Economic Indicators (%
change from previous year, except as noted) GDP Deflator 7.90 14.60 19.50 13.10
6.10 1.50 -1.30 CPI 6.40 14.70 24.10 17.10 8.30 2.80 -0.80 M2 31.30 32.40 34.50
29.50 25.30 19.58 15.30 Short-term Interest rate (%) 8.10 8.80 9.00 9.00 9.72
7.65 6.34 Exchange Rate (Local Currency/US$) (4) 5.50 5.76 8.62 8.35 8.31 8.28
8.28 Unemployment Rate (%) 2.30 2.60 2.80 2.90 3.00 3.10 3.10 Population
(millions) 1172.0 1185.0 1199.0 1211.0 1224.0 1236.0 1248.1 Source: APEC Members
Economy Report


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