China’s Economic Structural Reforms

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

With its increasing large population, it was determined by other countries thatis has a lot of economic potentials. In just one decade and a half, China hastransformed itself from a giant that use to live in poverty into a wealthypowerhouse to the world economy. With one-fifth of the worlds population,China is now producing 4% of world merchandise and a proportion of globalproduction. It has also one of the worlds oldest and most influentialcivilizations. China has established three approaches to the world economy andthey are establishing an alternative socialist system (1950s); isolating itselffrom the system (the 1960s to mid 1970s); and participating in the system againfrom the 1970s. Chinas economic system was quite similar to Soviet Unionsbecause it is central planning system. However, after the 1950s, this centralplanning is broken into regional planning by different provinces in China. Inanother words, China has changed from a centrally based country in a regionallybased country, in which different provinces produces different goods and servies.

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

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

Reforms to be launched: 1. Financial reforms will be undertaken h To achievethe perfect management system, sectors like banks, securities, insurance andtrust businesses are becoming independent from each other for clearer financialsupervisions. h Government is speeding up the reform of state-ownedcommercial banks, in order for the banks to operate independently. h In casewhen companies have bad credit and unpaid debts, banks are reinforcing strongpolicies to ensure the quality of bank loans. h To safeguard financial assetsand eliminate corruption of people who have political positions. 2. To increaseexport to maximize the economy h People are expanding export productions.

h People are improving the development of international tourism to increasenon-trade exchange earnings. (Online) Economic Activity GDP/GNP China must haveannual GDP growth greater than 5% to maintain social stability and politicalsurvival. Economic freedom has increased Chinas prosperity. With its RealGDP of US$960.91 billion, it seems that is has increased its output by 7.8% from1997. Within the GDP, primary industry increased by 3.5%, secondary industry upby 9.2%, and tertiary industry enlarged by 7.6%. The social labour productivityrose 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. Toimprove the standard of living of farmers, government is now allowing them tosell a portion of their crops on the free market. The government alsoestablished four special economic zones to attract foreign investment and boostexports and imports. The decentralisation of economic control of variousenterprises was given to provincial and local governments. This allowedenterprises to operate more freely and competitively, rather be controlled bythe central government. Some coastal regions and cities were designated as opencities and development zones, which allowed people to experience free marketreforms and to attract foreign investment. Therefore, the state price controlson good and services were gradually eliminated. Starting from the introductionof economic reforms, China’s economy has grown proportionately faster thanduring the pre-reform period (see Table 1). This Chinese statistic shows thegrowth of real GDP from 1979 to 1998, which is making China one the world’sfastest growing economies. According to the World Bank, China’s rapiddevelopment has driven 200 million people out of poverty. Table 1. China’sAverage Annual Real GDP Growth: 1960-1998 Time Period Average Annual % Growth1960-1978 (pre-reform) 5.3 1979-1998 (post-reform) 9.8 1990 3.8 1991 9.3 199214.2 1993 13.5 1994 12.7 1995 10.5 1996 9.7 1997 8.8 1998 7.8 Sources: OfficialChinese 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 mainlyconcentrating on two factors: large-scale capital investment (by large domesticsavings and foreign investment) and rapid productivity growth. These two factorsappear to interdependent of each other. Economic reforms led to higherefficiency in the economy, which boosted output and increased resources for moreinvestment in the economy. Most of the Chinese are known to have a high rate ofsavings. When reforms began in 1979, domestic savings as a percentage of GDPturned 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, amongthe 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 indicatethat China’s economy and living standards were significantly lower than those ofthe United States, Japan, and Germany. China’s 1998 GDP was about 45% the sizeof 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). Thefollowing data shows that China’s per capita GDP is $3,701. However, it fallsfar below the PPP per capita GDP levels of some major developed countries. Forexample, it is only 12% of U.S. levels. The International Monetary Fundestimates that China might surpass the United States as the world’s largesteconomy in the year 2007. However, even if that does occur, it would take Chinasignificantly 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 InNominal 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 31,41431,414 Japan 4,190 2,969 29,860 23,228 Germany 2,109 1,637 26,024 21,376 China948 4,610 769 3,701 Source: DRI/McGraw Hill. World Economic Outlook, Volume I1st Quarter, 1999, p.A-27. Employment/unemployment By the end of 1998, China’semployment was 699.57 million, 3.57 million more than at the end of the previousyear. Of the total, 32.32 million people were in urban private enterprises. In1998, great changes were made in the re-employment program, which enabled 6.09million 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 thatare living in urban and rural areas increased steadily, and their livingstandard continued to rise. With the falling price levels, the growth of theper-capita disposable income of urban residents rise 5.8%, and that of ruralresidents increased by 4.3%. The registered unemployment rate in the urban areasis 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 enterprisescontinues, it is estimated that 15 million more workers would be laid off overthe next two years (although the unemployment number may vary in differentprovinces). In some undeveloped provinces, the ratio of laid off to workinglabour was 3:1 in 1998. (Morrison) Inflation Inflation has reached 25.5% in 1994and has become a prime concern of the government. Therefore, the government hasplanned a tight credit policy which helped to bring inflation figures down to17.1% in 1995, 8.3% in 1996, and 4.1% in 1997. Due to statistics, the year-endfigures for 1997 shows an average inflation of 2.8% for CPI. This steady drop ininflation during 1997 was due to large stockpiles of inventory such as wheat andcereals, which produced more competition in the economy. It looks like steadydeflation would continue for the next few years. In 1998, the total retail salesof 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 hasenforced a policy of maintaining the stability of RMB. There has also been afavourable balance in Chinas current account for five consecutive years.

Foreign direct investments have continued to flow in. All these made it possiblefor RMB to remain stable in 1998. Now, its exchange rate against the US dollaris at US$1: RMB 8.2789. Unlike HK dollar, value of RMB might change over theyear because RMB is not pegged to the US dollar. Specific contributions Fromseveral observations, it is known that the fastest growing provinces areZhejiang, Jiangsu, Guangdong, Fujian, and Shandong. These places are where thestate-owned industries have fallen most sharply. From 1981 to 1994, the sharesof 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, inthe western regions, the state-owned enterprises have experienced a much slowerstructure reformation. The decline of importance of the coastal provinces wascaused 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 asprivate enterprises in Wenzhou, Zhejiang. The output of these enterprises grewat an annual average rate of 25 %, that is, 14 % higher than that of thestate-owned industrial enterprises. The five fastest growing provinces areconstruction of free enterprise or indirect macro-management because they allattract foreign investments. In contrast, the inland areas lack foreign-investedenterprises and private enterprises. The fasted growth province, Guangdong, hasan annual average GDP growth rate of 12%, while Jiangsu and Guizhou grew at anannual average growth rate of 6%. However, this increasing difference ofprovinces’ growth performance could lead to serious economic and politicaltensions among regions. (Decentralisation and Provinces’ Growth Performances)Government production of public goods/services State economy includes allenterprises that are funded by governments of various levels. Because of theeconomic reform, companies and business that use to receive government fundingnow have none. To increase growth without arising regional crisis, thegovernment is using the good old-fashioned Keynesian approach V spend big onpublic programmes. Last year, government investment in telecommunications hasincreased by 53.4% and funding in agriculture and water conservation increasedby 47.8%, as well as cement production jumped by 37.2%. The Statistical hasshown that government owned retail sales grew at 9.4% pa in 1998. Due to thesocialist system, most of the companies in this economy are state-plannedproduction companies. The main financial burden that these state companies haveto carry is the workers’ life long security, that is, paying for a worker’schild delivery bill and covering the funeral expenses of the dead retiredworker. Along with other reasons, more than half of such companies are currentlynot profitable. Therefore, government is slowly re-organising small state-ownedcompanies and selling them to private entrepreneurs. At the same time, they aretransforming large ones into corporations. To maintain social stability, thegovernment has to make sacrifices in this economic sector. (Roy 48) EconomicStability Fiscal policy Chinas political and economic systems lack oftransparency and constant enforcement has created many uncertainties for foreigninvestors. The complexity of national and local laws has made foreign trade andinvestment more difficult in China. Chinas main problem has always been theincompleteness of economic reforms and the absence of political reforms. Thiswas due to the fact that Communist Party Officials are functioning as Chinasruling class. They are a self-selected group accountable to nobody. Fiscalreforms China has made the following new pledges: 1. To eliminate high tariffs.

2. To have a more “balanced and equitable access” for foreigncompanies. They also made the following decisions about State-Owned-Enterprises:1. Lend to those enterprises that can survive in the market. 2. For enterpriseswithout a lot of hope for survival, better performing ones will acquire them. 3.

Support bankruptcy for extremely insolvent enterprises. Mr. Jiang Zemin, Chinasnew President has brought some strong changes in China. However other countriesin the World Trade Organisation (WTO) are saying that Chinas should obtainlower tariff and freer trades because the use of high tariffs made it difficultto export to China. Import taxes in the form of value-added tax (VAT) and othertaxes are added to tariffs on items entering China. This highly discouragedtrade inflow. In 1995, the National People’s Congress (NPC) established bankingreforms, including the Peoples Bank of China Law. This new law gives NPC moreauthority in its functioning. It also abolishes loan and corruption frompoliticians. The reforms has sped up the commercialisation of the big fourState-owned specialised banks, which include Agricultural Development Bank ofChina, Export and Import Credit Bank of China, and State development Bank. As aresult, the Chinese government has opened its doors to some foreign banks toemerge new banks in China. The new banks are more efficient than the big fourand offer much better quality of service. Monetary policy In 1994, ConsumerPrice Index was up by 24%. This is a sign of Chinas failure for the interestrates being set by the government and not economically. Monetary policy isuseless in China because the central bank is not independent. Inflationarypressure resulted in money supply growth of 34.4% in 1994. China is not allowedto use the “raising interest rates” tool for fighting inflationarydemand because it fears that the effect on state owned industries that survivedon borrowed working capital. The raise in interest rates would greatly effectstate-owned firms as they already borrow money from banks to pay their interestbills. Monetary reform Formerly Bank of China, it was transformed into a centralbank in 1983. Its responsibilities include: 1. Making and improving financialpolices to meet government rules. 2. Controlling the supply of money. 3. Settingexchange and interest rates. 4. Setting policies concerning credit. 5.

Controlling both domestic and foreign banking activities. 6. For practicalpurposes, 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 thestate banking system which include foreign investments, foreign currencyborrowing, domestic share sales, bond issues, credit unions, non-bank financialinstitutions and unofficial private banks. The new interest rate for 6-monthloans is now 9.5% and officials say, “Over the next five years our monetarypolicy direction will be a moderately tightening one.” Banking system Chinanow has specialist banks and other financial institutions, which include: 1. Thebig-four State-Owned Specialised banks i.e. Agricultural Bank of China, Bank ofChina, Industrial and Commercial bank of China and The Peoples ConstructionBank; 2. China International Trust and Investment Corporation; 3. The Industrial/ Commercial Bank of China; 4. Bank of Communications, etc. Since the centralbank in China is not independent, the transparency in the banking sector is thenvery poor. This makes the precise measurement of banks loans to become moredifficult. The accounting principles are inconsistent and poorly understood bybankers. Interest rates are still be dictated by the bank and government insteadof allowing the market to determine it. However, with the new reforms and lawsto its state owned enterprises, China may be on its way to a substantialeconomic recovery with a bright future in sight. (Grace Bosede) Economic EquityIncome distribution/Standard of living Less than 60% of Chinese are covered byunemployment insurance. In 1997, most of the laid off workers received paymentsof less than 10% of the average national wage. There are virtually no socialsecurities or pensions in China. Therefore, some people live at starvationlevel. However, the high rate of China’s economic growth last year has providedpeople with higher standard of living. Urban residents who use to make 27% ofthe national income are now making more than 50%. There is also a greatdifference depending on the specific provinces in which people work in (seeTable 3). Table 3. Comparison of per capita income between urban and ruralsectors 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 2,225Source: Internet article: “How to Benefit from the Booming Retail Market inChina” Because China has a large population, the government rarelyinterferes with income distributions of individuals. However, there is moreinterference from the government in the state owned businesses than theprivately own ones. Therefore, private businesses that try to maximize theirprofits often exploit workers who are in serious need of money. The average percapita 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 (Table4). Table 4. Urban per capita income Year Average Income (RMB) Growth Rate 19921,826.1 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 nowdeveloped large shopping centres and department stores in many provinces inorder to bring up the standard of living, as well as to encourage consumerspending (Table 5). Table 5. Consumer spending in different provinces. Rank Area1994 ( 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 96.3767.44 +42.9% 5 Sichuan 93.33 71.79 +30.0% 6 Liaoning 86.80 67.22 +29.1% 7Shanghai 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 toBenefit from the Booming Retail Market in China” International Trade andCompetitiveness Trading pattern Chinas international trade in 1928 was only2.3% 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 theWestern influences. The Washington-based Institute of International Economicsestimates that Western exports to China could rise annually by US$21 billion.

Economic reforms have transferred China into a major trading partner for manycountries. Chinese exports rose from $14 billion in 1979 to $184 billion in1998, while imports grew from $16 billion to $140 billion. China’s ranking as atrading power rose from 27th in 1979 to 10th in 1998. China’s trade volume fellslightly in 1998 over 1997 for it is too affected by the global financialcrisis. Chinas exports rise by 0.5% after the rising of 20.9% in 1997, whileimports dropped by 1.5%. Due to statistics, China has been running tradedeficits in some years and surpluses in others. Over the past 5 years, China hasrun trade surpluses. In 1998 the surplus totalled about $44 billion (see Table6). Merchandise trade surpluses and the large amount of foreign investment havemade China to become the world’s second largest foreign exchange reserves, witha total $145 billion at the end of 1998. During the first nine months of 1999,China’s exports increase by 2.1%, while imports rise by 19.3%. Table 6. China’sMerchandise World Trade: 1979- September 1999 ($Billions) Exports Imports TradeBalance 1979 13.7 15.7 -2.0 1980 18.1 19.5 -1.4 1981 21.5 21.6 -0.1 1982 21.918.9 2.9 1983 22.1 21.3 0.8 1984 24.8 26.0 -1.1 1985 27.3 42.5 -15.3 1986 31.443.2 -11.9 1987 39.4 43.2 -3.8 1988 47.6 55.3 -7.7 1989 52.9 59.1 -6.2 1990 62.953.9 9.0 1991 71.9 63.9 8.1 1992 85.5 81.8 3.6 1993 91.6 103.6 -11.9 1994 120.8115.6 5.2 1995 148.8 132.1 16.7 1996 151.1 138.8 12.3 1997 182.7 142.2 40.5 1998183.8 140.2 43.6 Jan.-Sept. 1998 134.2 98.6 35.6 Jan.-Sept 1999 137.0 117.6 19.4Source: International Monetary Fund, Direction of Trade Statistics and officialChinese statistics. Trading partners China’s trade data differs significantlyfrom its major trading partners statistics. This is due to the fact that alarge 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 exportsto a foreign country. However, China treats the imports from Hong Kong asprovincial trading. According to Chinese trade data, its top five tradingpartners in 1998 were Japan, the United States, the European Union (EU), HongKong, and South Korea (see Table 7). Chinese data shows that United States isits 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 tradewith the United States and the EU rose. Table 7. China’s Top 10 TradingPartners: 1998 ($Billions and % Change over 1997) 1998 Merchandise Trade ($) %Change over 1997 Country Total Trade Exports Imports Total Trade Exports ImportsAll 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 HongKong 45.4 38.8 6.7 -10.6 -11.5 -4.7 S. Korea 21.3 6.3 15.0 -11.6 -31.3 0.4Taiwan** 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 Russia5.4 1.8 3.6 -10.5 -9.7 -10.9 Australia 5.0 2.3 2.7 -5.2 13.9 -17.2 Indonesia 3.61.2 2.5 -19.6 -36.4 -8.1 Source: Official Chinese trade data. *U.S. trade dataon U.S.-China trade differ significantly with Chinese trade data. **China andTaiwan 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 importantmarket to China’s export, but it is not reflected in Chinese trade data. Basedon U.S. data on Chinese exports to the US, it is shown the exports have grownfrom 15.3% in 1986 to an estimated 38.7% in 1998. This would indicate that theUnited 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 financialcrisis in Asia. China has survived the financial crisis because U.S. importsfrom China have continued to rise, whereas imports by several East Asianeconomies from China have fallen. There is an increasing level of Chineseexports from foreign funded enterprises (FFEs) in China. According to Chinesedata, the total share of Chinese exports produced by FFEs has risen from 0.1% in1980 to 44.1% in 1998. Many of these FFEs are owned by Hong Kong and Taiwaninvestors because they have shifted their labour-intensive, export-oriented,firms to China to take advantage of low-cost labour. A large percentage of theproducts made by such firms are exported to the United States. Export andimports/Foreign trade China has gained more access to export markets through thelong term restructuring of the Chinese economy. Reforms initiated by PresidentJiang Zemin and Prime Minister Zhu Rogji have tended to languish under politicalpressure and economic and cultural inertia. Another cause of increasing exportis the wider opening of China’s industrial and agricultural sectors to Westernstyle management and competitive discipline. The strategy that Chinese used wasa currency devaluation to promote export growth. This would inevitably befollowed by a new round of defensive devaluation throughout the region,accompanied by further capital outflows, deepening liquidity problems, a returnto protectionism and delay in recovery. (Roy 57) China’s cheap labour force hasmade it internationally competitive in many low cost, labour-intensivecountries. As a result, manufactured products comprise an increasingly largershare of China’s trade. The share of Chinese manufactured exports to totalexports rose from 50% in 1980 to 89% in 1998, while manufactured imports as ashare of total imports rose from 65% to 84%. A large share of China’smanufactured imports is comprised of intermediates like chemicals, electroniccomponents, and textile machinery that are used in manufacturing products inChina. Major Chinese imports in 1998 included electrical machinery, textileproducts, specialised machinery, plastics, and telecommunications and recordingequipment (see Table 8). China’s major exports included articles of apparel andclothing, electrical machinery, textiles, office machines, andtelecommunications and recording equipment (see Table 9). Table 8. Major ChineseImports: 1998 Commodity Total ($Billions) % of Total Imports Electricalmachinery, apparatus, appliances ; parts, and household electricalappliances $16.5 11.8% Textile yarns, fabrics, and made-up articles 11.1 7.9Specialized machinery for particular industries 8.3 5.9 Plastics in primary form8.2 5.8 Telecommunications and sound recording and reproducing apparatus andequipment 7.9 6.6 Total top 5 52.0 37.0 Source: Official Chinese tradestatistics Table 9. Major Chinese Exports: 1998 Commodity Total ($Billions) % ofTotal Exports Articles of apparel and clothing accessories $30.0 16.3%Electrical machinery, apparatus, appliances ; parts, and householdelectrical appliances 13.9 7.6 Textile yarns, fabrics, and made-up articles 12.87.0 Office machines and data processing machines 11.9 6.5 Telecommunications andsound recording and reproducing apparatus and equipment 11.1 6.0 Total top 579.7 43.4 Source: Official Chinese trade data. China has pursued a tradestrategy of import substitution. This means Chinese only import the goodsnecessary to its economic development that cannot produce itself, and once itattains a domestic production capability, it stops importing those goods. Thisapproach even carried over to China’s exports, which have consciously been usedprimarily as a means of generating foreign exchange for the purchase of advancedforeign technology. China’s imports fall mainly into one of two categories: rawmaterials (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, inkeeping with China’s comparative advantage, are mostly relatively cheap labour-intensivemanufactured goods, which are particularly attractive in lower-income countries.

In other words, China generally “buys in the core and sells in theperiphery”. Thinking that higher-tech products earn higher profits on thecapitalist world market, China is running trade surpluses with developingcountries and trade deficits with developed countries. China’s foreign trade hasgrown exponentially since the opening to the world market. Exports comprisedabout 2% of China’s GDP in 1980; in 1996, they account for 10%. (Roy 89) Totaltrade 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. Chinahas 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, andconsumer electronics. China has been a major buyer of U.S. aircraft,fertilizers, and machinery. In recent years, U.S. imports from China have farexceeded U.S. exports to China. In 1998, U.S. imports from China totalled $71.2billion while U.S. exports to China were only $14.3 billion. As a result, theU.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 foreigninvestment until 1979, the heavy restrictions were loosened to allow all kindsof foreign investment in China. This way, China can gain more access to foreigntechnology. Western investors began to rush into China in the 1970s butdecreased in numbers in the early 1980s because they realised that China isstill a difficult place for them to do business. Several reasons for this isthat China has many regulations, corruption scandals and the assumptions thatforeigners are wealthy and therefore should pay extra for everything. In theearly 1990s, the Chinese government has reformed and clarified many lawsconcerning foreign investment to stimulate foreign investment in China. (Roy 90)In 1998, foreign capital investment in China has reached US$58.9 billion, withforeign direct investment (FDI) of US$45.6 billion. Within the countries thatmade direct investment in China, Hong Kong ranked first with 40.6% of China’stotal foreign investment (see Table 10). Table 10. Foreign Direct InvestmentCountires % in total Hong Kong 40.6 United States 8.6 Singapore 7.5 Japan 7.5Source: China’s economic conditions. In the first quarter of 1999, FDI totalledto US$7.34 billion. In the first half of 1999, FDI reached US$18.6 billion. As aresult, FDI has brought new technology and more capitals into China. ConclusionFurther Outlooks 1999-2002 is the switch period for China from its commandeconomy to a market economy. Therefore the Chinese government develops macroeconomic policies reinforce things like reform, development and stability. Thegovernments main objectives in this period are to maintain a low inflationeconomy and improve employment rate while the restructuring is under its way.

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

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

Economists argue that over the long-run greater market openness in China wouldboost competition, improve productivity, and lower costs for consumers, as wellas for firms using imported goods as inputs for production. Economic resourceswould be more likely redirected away from money-losing activities towards moreprofitable ventures, especially those in China’s growing private sector. As aresult, China would likely experience more rapid economic growth (than wouldoccur under current economic policies). Goldman Sachs estimates that WTOmembership would double China’s trade and foreign investment levels by the year2005 and raise real GDP growth by an additional 0.5% per year. In the short run,however, widespread economic reforms (if implemented) could result indisruptions in certain industries, especially unprofitable SOEs, due toincreased foreign competition. As a result, many firms would likely go bankruptand many workers could lose their jobs. How the government handles thesedisruptions will strongly determine the extent and pace of future reforms. Thecentral government appears to be counting on trade liberalization to boostforeign investment and spur overall economic growth; this would enable laid-offworkers to find new jobs in high growth sectors, especially in China’s growingprivate sector. However, the Chinese government is deeply concerned withmaintaining social stability. If trade liberalization was followed by a severeeconomic slowdown, leading to widespread bankruptcies and layoffs, the centralgovernment might choose to delay (or even rescind) certain economic reformsrather than risk possible political upheaval. The Chinese government hasrecently taken a number of steps in preparation for China’s WTO entry. Forexample, In January 2000, Zhen Peiyan, Chairman of China’s State PlanningCommission, stated that the government would eliminate all restrictiveregulations against private enterprises in China in preparation for China’s WTOaccession. Currently, private firms in China face a variety of discriminatorygovernment policies, including lack of access to borrowing from state banks,that have made it difficult for such firms to develop. China’s entry into theWTO will require the government to establish a level playing field for Chinesefirms to compete against foreign firms. This could greatly expand the role ofthe private sector in China’s economic development and accelerate China’stransition to a market-oriented economy. Economic Growth – China want to expandits domestic demand to promote its economy. For the next few years, domesticdemand, that is, the consumption and investment will slightly increase.

Researchers say that after the year 2000, the impact of the financial crisiswill gradually reduce, whereas the international environment will graduallyimprove. Chinas economic growth rate is expected to be about 7% and its CPIto be around 3% in this period. Investment – Foreign and local investments infixed assets will continue to be the main driving force in Chinas economicgrowth. Due to the changes in policies, it is known that investment in the statesector will increase, as well as the investment in the non-state sector willalso speed up gradually. The estimated average increase in the investment infixed assets will be 12% or so in 1999-2002. The Chinese government has alsopursued policies to improve the amount of foreign investment. Foreign DirectInvestment is expected to rise after 2000. Employment – In the period between1999 and 2002, the working population will be over 11 million and 85% of themwill enter the labour market. As the reform of the state-owned enterprisescontinues and the economic restructuring speeds up, it is estimated that theregistered unemployment rate will be 3.5%. China is speeding up the developmentof its economy to create more employment outlets and to deepen labour marketreforms. The government is also thinking of building of a social security systemthat 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 1998GDP and Major Components (% change from previous year, excepted as noted)Nominal GDP (billion US$) 483.00 601.10 540.90 697.60 816.90 903.00 960.90 RealGDP 14.20 13.50 12.60 10.50 9.60 8.80 7.80 Total Consumption 14.20 9.30 8.009.20 9.30 6.10 6.80 Private Consumption 14.30 9.40 7.70 10.10 9.60 5.80 6.10Government Consumption 13.60 9.10 9.10 5.90 8.40 7.20 8.90 Total Investment (1)12.90 24.90 15.60 15.50 10.40 7.10 14.40 Private Investment GovernmentInvestment Exports of Goods and Services (2) 18.20 8.00 31.90 22.90 1.50 20.900.50 Imports of Goods and Services (3) 26.30 29.00 11.20 14.20 5.10 2.50 -1.50Fiscal and External Balances (% of GDP) Budget Balance -0.97 -0.85 -1.23 -1.00-0.78 -0.78 -1.50 Merchandise Trade Balance (f.o.b.) 0.87 -2.03 0.99 2.41 1.514.46 5.48 Current Account Balance 1.33 -1.98 1.42 0.23 0.89 3.29 3.03 CapitalAccount balance -0.05 3.91 4.68 4.74 4.89 2.54 0.00 Economic Indicators (%change from previous year, except as noted) GDP Deflator 7.90 14.60 19.50 13.106.10 1.50 -1.30 CPI 6.40 14.70 24.10 17.10 8.30 2.80 -0.80 M2 31.30 32.40 34.5029.50 25.30 19.58 15.30 Short-term Interest rate (%) 8.10 8.80 9.00 9.00 9.727.65 6.34 Exchange Rate (Local Currency/US$) (4) 5.50 5.76 8.62 8.35 8.31 8.288.28 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 MembersEconomy Report