ESw r | R o : t .~~~~~~~~~ z ES U0 z X* o o~~~~~~s 4~~ *-I 0, A WORLD BANK COUNTRY STUDY The Chinese Economy Fighting Inflation, Deepening Reforms Tbe Wbrld Bank WVbiVSng/on, D. C. Copyright (C 1996 The International Bank for Reconstruction and Development/THE WORL) BANK 1818 1H Street, N.W Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing Mav 1996 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analy- sis by the 13ank of the economic and related conditions of its developing member countries and of its dialogues with the gov- ernments. 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: 0-0253-2123 Contents Acknowledgments v Overview vii Part I Recent economic developments I Chapter I Stabilization with growth 3 Growth, inflation, incomes, and employment 3 External trade and the balance of payments 6 Monetary policy 9 Public finance 10 Conclusion 11 Part 11 Structural reforms for rapid, sustainable growth 13 Chapter 2 Reforming state enterprises: the unfinished agenda 15 The problem 15 The government's response 17 Experimentation by local governments 18 The unfinished agenda 19 Chapter 3 Financial sector reforms: major issues and policy options 25 Recent progress in financial sector reforms 25 The credit plan 28 Interest rate policy 29 The central bank 32 State commercial banks 34 Policy banks 35 Nonbank financial institutions 36 The capital market 37 Chapter 4 Reforming public finances 39 Expenditure needs 39 Mobilizing revenues 42 Intergovernmental resource transfers 43 iii Annex I a Matrix of proposed financial sector reforms 47 Annex I b Matrix of proposed state enterprise reforms 51 Annex 2 Reforming public finances for sustainable development 53 Education and health 53 Poverty alleviation 55 Environment 55 Infrastructure 56 Contingent liabilities 56 Budgetary expenditures revisited 57 Mobilizing revenues 58 Intergovernmental fiscal regulations 61 Annex 3 Note on the calculation of the public sector deficit 65 Borrowing from the public and nonstate sector 65 Foreign financing 65 Borrowing from the domestic banking system 65 Annex 4 Technical note on the decomposition of China's growth 67 Methodology 67 Data requirements 68 Results 69 Annex 5 Statistical annex 71 TiIL CIIINLSIS LC(ONOMY: 1I1611TING !NILAHOION, DLLPLNIN.( HLIFORMS iv Acknowledgments This report was prepared bv a team led bv Vikram Nehru Exchange Control; Qiu Xiaohua, Chief Economist, State and comprising V7argha Azad, Bert Hofman. Aart Kraay, Liu Statistical Bureau; Li Weicheng, Professor, International Dusheng, Tamar Manuelyan Atinc, Zhou Xiaobing, and Trade Research Institute, Ministry of Foreign Trade and Eduardo Borensztein (IMF). The team visited China in Economic Cooperation; and Li Keping, Division Chief, November 1995. Harry Broadman, Hongjoo Hahm, Deena Macro Systems Control Department, System Reform Khatkhate, Surinder Malik, and Richard Newfarmer also Commission. The mission would also like to thank Tang contributed to the report. The peer reviewers were Pradeep Sining, Deputy Director, Foreign Debt and Investment Mitra, William Easterly, Nicholas Lardy, and Linda Koenig. Department. State Administration of Exchange Control; The WXbrld Bank team benefited from fruitful discus- Zheng Jingping, Deputy Director, Comprehensive sions with many government officials, who were generous Department, State Statistics Bureau; Li Boxi, Deputy with their time and knowledge. The mission is especially Director, Development Department, Development grateful to the members of the counterpart team, which Research Center: Wang Huijiong, Vice President, Academic included Gao Jian, Director, State Debt AManagement Committee, Development Research Center; Ding Department, Ministry of Finance; Ding Xianjue, Director, Ningning. Director, Enterprise Department, Development Comprehensive Department. Ministry of Finance: Pan Research Center; Li Shantong, Deputy Director, Xiaojiang, Deputy Director, World Bank Department, Development Department, Development Research Center; Ministry of Finance; Xu Jiatong, Director, State Admin- and Wang Weixin, Comprehensive Division, Budget istration of Taxation; Jiang Qiangui, Director, Enterprise Department, Ministry of Finance. Mei Hong, World Bank Department, State Economic and Trade Commission; Wlu Department, Ministry of Finance, coordinated arrange- Xiaoling, Deputy Director General, State Administration of ments on the government side. v Overview F or the first time since economic reforms were initi- The pressure on monetary policy was eased by a reduction ated in 1978, the government cooled an overheated in the aggregate public sector deficit and a shift toward non- economy without stalling growth. But keeping inflationary sources of finance. The key reason was stricter growth high and inflation low will be difficult and will controls on state enterprise investment. The government bud- require maintaining the momentum of economic reforms get deficit contracted only marginally as a share of GDP to increase the efficiency of investment, while moving to Underlying this, however, was a continued relative decline in indirect techniques of macroeconomic management. government revenues, which slipped to 11.3 percent of GDP Of significance was the increased reliance on noninflationary Stabilization with growth sources of deficit finance, especially borrowing from the pub- lic (using treasury bonds). This underlined the government's China's remarkable success in lowering inflation to below resolve to bring inflation under control. 15 percent in 1995 while keeping GDP growth above 10 Looking ahead, the government is in a good position to percent was accomplished through a judicious combination keep inflation below the target rate of 10 percent a year in of administrative measures and macroeconomic policies. 1996 while maintaining GDP growth in the 8-9 percent Good weather helped too; grain output reached record range. But this will still require skilled macroeconomic man- levels (465 million tons), pushing agricultural growth to 4.5 agement. Inflation could accelerate if credit expands prema- percent, raising real incomes in rural areas, and relieving turely, especially since prices were administratively repressed upward pressure on food prices. to some extent in 1995, and because of renewed strength in Stabilization of the domestic economy was accompa- the growth of investment and industrial production in the nied by further improvement in the external accounts. The last quarter of 1995. These considerations warrant a cautious trade surplus reached USS17 billion in 1995, and the cur- stance on monetary policy in early 1996, although room for rent account surplus expanded to 2 percent of GDP (after relaxation may appear as the year progresses, especially if being in deficit just two years before). Inflows of foreign inflationarv pressure from the external account recedes with direct investment climbed to US$38 billion, and foreign a slowdown in export growth. exchange reserves exceeded US$73 billion by year's end (equivalent to seven months of imports). High reserves and Structural reforms for sustained growth continued strength in exports eased the need to borrow with stability abroad. China's debt indicators improved further, reinforc- ing its strong credit standing in international markets. In the medium term, sustaining growth and maintaining sta- Broad money maintained its rapid expansion in 1995 on bility will require continued progress in structural reforms. the strength of rising foreign exchange resenres and higher- Efficiency gains from economic reforms have played an than-expected growth in domestic credit, as state commer- important part in China's impressive growth performance cial banks found new ways to circumvent the credit plan. since 1978. Harvesting these gains will be as important in the Despite this, inflation continued to fall. Contributory fac- future, if not more so. tors to the slowdown in inflation were a trend decline in the To do this, the government will need to maintain the velocity of broad money, weaker growth in narrow money, momentum of reforms in two strategic directions. The first and enhanced price surveillance and higher subsidies at the would place greater reliance on market forces, with an retail level, which moderated the price increases of essential emphasis on state enterprises and the financial sector. As commodities. banks and enterprises become more responsive to market sig- vii nals, indirect macroeconomic management will become more * Accelerate the transfer of pension, health, and education effective. This, in turn, will ease the phaseout of administra- obligations from state-owned enterprises to government author- tive controls, further enhancing productivity growth. The sec- ities. It would be difficult to liquidate, sell, merge, or ond would stress restoring the health of government finances restructure enterprises if they were still required to meet by raising government revenue as a share of GDP and shift- these social expenditures. Pilot programs to transfer such ing the focus of government expenditure policy toward such expenditures to municipal authorities need to be accelerat- priority areas as health and education, poverty reduction, ed. At an appropriate point, these could be merged with infrastructure development, and environment protection. the national pension and health program. * Further promote comipetition to encourage greater efficiency State enterprise reform in state enterprises. Of importance would be the reduction of interprovincial and international trade and investment bar- There is virtually complete agreement within China that riers. Lower foreign trade and investment barriers would state enterprise reform is of the highest priority. State have the added advantage of strengthening China's case for enterprises absorb a disproportionately large share of the joining the World Trade Organization (WTO). country's resources; they have also become a drag on In implementing these policies, the government will growth and employment creation. need to consider the specific needs and circumstances of The government's enterprise reform program operates at different groups of state enterprises by: two levels: improving economic performance through Using competition and governance policies, not subsidies, to stricter market discipline and developing better governance foster the efficient development of the Central Government's within firms to improve productivity. State-owned enterpris- priority 1,000 large state enterprises. These state enterprises es are being disciplined by the market through tough com- and enterprise groups are expected to eventually form the petition created by trade liberalization and the proliferation core of China's modern enterprise system. An appropriate of nonstate enterprises. At the same time, financial support way to improve their efficiency would be to provide these for state enterprises is being cut back. The combination of enterprises greater management autonomy and better gov- these two pressures is encouraging enterprise restructuring, ernance structures, expose them gradually to domestic and especially at provincial and municipal levels. international competition, diversify their sources of The stated policy of the government is to strengthen state finance, and apply better regulations. In cases where the enterprises and maintain their position as the mainstay of the government feels compelled to provide subsidies, these economy. To focus its efforts, the Central Government should be limited, time-bound, and channeled through the recently selected 1,000 large state enterprises as priority for budget rather than the financial system. reform and development. For the other state enterprises, a * Improving the efficiency of 14,000 large- and medium-size variety of approaches to reform are undenvay in the form of industrial enterprises by diversifiing ownershzp, reconfiguring experiments at the provincial and municipal level. operations, restructuring debt, encouraging mergers and consol- Looking ahead., the task of improving the efficiency and idations, and, where necessary, by liquidating. Marginal loss- competitiveness of China's state enterprises is expected to be making firms that are inherently viable financially could be complex and difficult. This report recommends three under- restructured by shedding labor, investing in new equip- lying sets of policies that provide a framework for state enter- ment, and reengineering finances. Debt restructuring prise reforms in the future. For all state enterprises, the gov- should occur only when a corporate strategy is agreed ernment should: between the bank, the (local) government, and enterprise *Implement programs to improve internal governance, diver- management, and on the strict understanding of no future sify ownership, and lower budgetary and financial subsidies. A bailouts. Heavy losers with little future would need to be first priority would be to implement the new accounting closed down, while highly profitable enterprises could be system, set clear commercial objectives, streamline asset corporatized. management bureaus, clarify representation of the govern- * Systematically developing and implementing a program to ment on boards of directors, and transfer autonomous transfer the remaining 90,000 small industrial state enterprises management rights to enterprises. to the nonstate sector through sales! leases, or mergers. The gov- TiIE CIIINESE ECONOMY: FIGHTING INFLATION, DEEPENING REFORMS viii ernment's proposed policy for such enterprises is to loosen activity will take their place (World Bank 1994). Important controls on leasing, mergers, sales, restructurings, and among these is control of monetary aggregates through bankruptcies. But the government should go further and open market operations. These considerations inform the systematically facilitate the transfer of these enterprises to following seven recommendations on financial sector the nonstate sector. A first phase could include the transfer reform in China: of 10,000-20,000 state enterprises in the eighteen reform * Reduce the scope and detail of the credit plan. State com- cities over two years. mercial banks already enjoy a little freedom in allocating fixed asset investment loans. By the end of 1997, it would Financial sector reforms be reasonable to expect that they would design their entire lending program on their own. The government could Problems in the financial sector mirror those of state enter- maintain some influence on credit allocation by placing prises. The parlous condition of public finances has placed ceilings (for example, not more than 10 percent of total a growing burden on banks to fund state-directed invest- loans to real estate) or floors (for example, not less than 20 ments and extend working capital loans to loss-making percent of all loans to agriculture). enterprises. The government's credit and investment plans * Reform interest rates in phases, reducing the most egregious steer the bulk of bank resources toward state enterprises at distortions quickly and subsequently extending greater freedom government-determined interest rates. The result is a bank- to financial markets to set interest rates. This is a complex and ing system with insufficient banking skills and a high pro- sensitive policy issue and needs to be approached prudent- portion of nonperforming assets; a central bank with limit- ly, but without delay. In the next two years, the government ed experience in monetary management, few policy instru- should immediately reduce the large number of officially ments, and inadequate regulatory and supervisory capacity; determined interest rates; let market forces increasingly and a volatile capital market. drive treasury bond pricing, initially by making purchases Previous attempts at liberalizing the financial sector voluntary and eventually by introducing treasury bill auc- accentuated macroeconomic instability because central tions; set interest rates quarterly, or more frequently if mar- bank controls were weak. They also shifted the pattern of ket conditions warrant; and expand bill rediscounting by investment in directions deemed undesirable by the gov- the central bank and open market operations. The govern- ernment. Learning from these experiences, the govern- ment could consider flexibility in lending (but not deposit) ment launched a gradual process of change across virtual- rates once it is satisfied with progress in commercializing ly the entire financial sector in November 1993. Important state banks. The central bank could alloxw all commercial features of these reforms include measures to strengthen banks to set interest rates freely on a small portion of their the central bank, the creation of three policy banks to portfolio, which could expand with time, or it could gradu- channel government-directed lending, and the transforma- ally widen the bands within which interest rates could fluc- tion of the four specialized banks into genuine commercial tuate. Once the net worth of banks was significantly posi- banks. tive, intermediation margins were acceptable and sustain- Building a stable, efficient, and safe financial system in able, and adequate loan loss provisions were available to C(hina will be a lengthy and complex process. In addition to protect banks from the possibility of nonrepayment of policy changes, it will require institutional and human loans, the central bank could introduce greater flexibility in resources development in areas as diverse as banking and deposit rates. accounting, government and public finance, and the judi- * Facilitate the transformattion of state commerczal banks into cial system. In addition, financial sector reforms will need genuine comnmercial banks. The government could consider to be synchronized carefully with reforms in other sectors increasing competition in the banking system, although of the economy, especially with state enterprise reforms. state commercial banks should be allowed to work out A primary objective of financial sector reform in China their inherited problems before they are exposed to full- is to phase out direct controls by government while relying blown competition. The banks, for their part, need to increasingly on commercial criteria. As these direct controls develop management information systems and introduce are withdrawn, indirect methods of influencing economic techniques for risk and asset-liability management, credit OVERVIELW ix and risk evaluation, liquidity management, and risk-based Reform of public finance provisioning. * Shape the operations of policy banks to make them consis- Reforming public finances is as much part of establishing tent with financial sector and public finance objectives. Policy a market economy as reforming state enterprise and the banks should not be expected to bear the risks of lending financial sector. The government budget needs to accom- to projects not of their own choosing; nonrepayment of anv modate costs associated with market reforms, including such loans should be covered by the budget. In addition, budgetary contributions for a reformed social insurance the yield on policy bank bonds placed with state commer- system. At the same time, the budget needs to support cial banks should be aligned with bank lending rates to pro- development of critically needed social and physical infra- vide an accurate reflection of the actual cost of borrowing. structure to sustain a rapidly growing economy. The Ultimately, the placement of policy bank bonds should be steady decline of government expenditures over the last entirely voluntary, with the subsidy element in lending rates decade and a half has meant that some high priority gov- covered by the government budget. ernment activities have been underfunded. These include Improve the central bank's management of monetary aggre- the provision of health and education services, poverty gates. In the short term, the central bank could use such alleviation, infrastructure development, and environmen- existing instruments as reserve ratios, asset-liability ratios, tal protection. Our rough estimates indicate that funding and the rediscount facility to manage monetary aggregates these additional expenditure needs could amount to 4.6 more actively. Open market operations can then be increas- percent of GDP. That would bring budgetary and extra- ingly relied on to make short-term adjustments in liquidity. budgetary expenditure requirements to about 22.5 per- For open market operations to succeed, however, the cen- cent of GDP tral bank will need to permit greater flexibility in interest This level of expenditures will necessitate additional rev- rates in the money market and at the shorter end of the enues of about 6 percent of GDP, if the government's goal maturity spectrum. At the same time, central bank supervi- of a balanced budget is to be achieved. Raising that much sors will need to ensure that banks follow its prudential revenue will require a combination of continued economic guidelines in spirit and in practice. growth, a broader tax base, and improved compliance - Strengthen regulator oversight of nonbankfinancial institu- through better tax administration. The options available to tions. Laws on the operation and supervision of nonbank government are to: financial institutions need to be enacted to ensure that these * Improve the coverage and compliance of the value added tax. institutions conform to international norms of investor pro- By stepping up enforcement, the average compliance rate tection and information disclosure. To protect banks from could be raised from the present 70 percent to 85 percent by risks emanating from nonbank financial institutions, the the end of the decade. severance of ownership links between the two should be * Increase the application of the individual income tax. completed. Keeping the exemption constant in nominal terms (as was Increase the efficienc-, stability, and transparency of capital done in 1995) would bring an increasing number of people markets and lower 3ystemic risk. The steadv shrinking of the into the tax net, gradually increasing revenues. credit plan will permit gradual elimination of quotas for * Merge theforeign and domestic enterprise income tax rate. share and bond issues, while gradual interest rate liberal- This would not yield substantial revenues in the short term, ization will facilitate the issuance of government bonds but revenues would rise rapidly when the profits of foreign and deepen the bond market. To help develop the prima- enterprises rise. ry market, standards for credit rating agencies should be * Increase taxes on pollutants. Not only will such taxes set, competition among underwriters could be encour- encourage environmentally responsible behavior, they are aged, and the regulatory regime and oversight could be also easy to collect, and the sheer quantities of pollutants strengthened. In the secondary market, the bond markets makes such taxes attractive. of Shanghai, Shenzhen, and Wuhan could be linked, and - Introduce social securtyq taxes. Some form of social secu- daily price limits could be introduced to curb unusual rity tax will become necessary to finance the basic pension volatility. pillar for (urban) workers. TiIE CIIINI-SL LCONOMY: FlGHTING INFLA1'ION, DlPLIENING REFORNIS x * Improve tax administration. A well-functioning tax direct controls over the economy need to be replaced by administration could significantly raise revenues from the indirect ones. An important example is the conduct of existing tax structure. monetary policy and the use of open market operations. Another is the reform of public finances. Government Conclusion attention needs to focus on allocating additional resources to such high priority areas as basic health and education, Maintaining rapid growth with stability will require contin- poverty reduction, infrastructure development, and envi- ued market reforms and a reorientation of government ronmental protection. Mobilizing revenues to meet these involvement in the economy. Benefits from further reforms additional expenditure needs will be central to China's would probably be greatest in state enterprises and the ability to sustain rapid growth with stability. financial sector. The government has made some progress in both areas; it is now critical to complete these reforms Reference with due attention to phasing and sequencing. World Bank. 1994. "Macroeconomic Stability in a Decentralized As important as market reform is the need for shaping a Elconomy," Report No. 13399-CHA, China and Mongolia new role for government in a changing economy. For one, Department. World Bank, Wlashington, D.C. OVERVIEW' xi Summary of policy recommendations Objective Short term State enterprise reforms Improve governance, diversify ownership, anp lower subsicies Complete implementation of international accounting system. Increase autonomy to managers. Separate comMercial activities from ministries and bureaus. Lower subsidies through budget and banking system. * Among the government's priority l000 enterprises ncr 500 l -t: ;"r ' 'y' for utiities estblish dear regut ios ol tar *e Mtl-* * Among 4,000 mnedium anid large nrd-stVial state enterprses Separate out n-marginal state enterprises and distinguish inherently viable from effectively bankrupt ones Begin liqLiidatinig enterprises that have little chance of becoming viable. Cor poratize the most viable enterpr-ises. * Amrong 90,000 small industrial enterprises Tran$fer 1 020,000 small entrpriets tothe wsorW5taM* r 6S leases, or sales- T-ansfer social services to goverinment Tanisfer pension. health anid educatoni obligatons from enterprises to govern- ment nri at least the I 8 pilot cities with compnensatory fiscal transfers, if requiree. Introduce expermentation witn unemployment insurance system. improv e a ipton poicies fr all state-owvned eterprises. Reduce scope of admntirisled price s il . M n - . Phase Out resrbons on O' : , tra'det . ,',t Init:ate free entty .and et.;t ::emove taxt - s foring l fIrms and speco zoets - Contnue With rationaation of traand ir gme as with World trade Orpneiaio css ae-eet Financial sector reforms Reduce government s role in determin rig the allocation and cost of capital Reduice scope and detail of credit plan for commer-cial banks Simplify inter-est rate structure and adjust interest rates more frequently, increase inter-est rate spreads to reasonable levels, and introduce wider bands in the interbank market. Improve cent-at bank operations. Adveb( use iiredct irnstfents of m ey mlrprove institional framework for the central .bank. T-ansform state comnmercial banks into genuine -ommer-c al barks. Introduce sound management and accounting systems. Implemnent regulatory framewoork for commercial banks. Shpe operons of policy banks consistent with fincial sec apublic an y Into ea i Provide aldequat buday swpportto sustain bank bonds and subsidzied 11nding rates. TIII. (IIINI.sL I O()NO)NIY: I 1(,111T\( INHII AlIlN, I) LI' NIN(, RtELtORiMS xii Medium term Long term Complete transfer of all fourteen autonomous rights to managers within the framework of the Company Law. Continue program. Introduce debt restructuring if fnancial s tuation and cor- Restructure r-ema ning margina but viable, state enterprises porate strategy ar-e acceptable to banks. Cont nue liquidation of nonviable state enterprises Complete liquidation of nonviable state enterprises Incorporate enterprises made viable after debt restructuring. Incorporate all medium and lar-ge state enterprises. bt vO~QQ ssUiaJ stat° ?ierptis~s. . f S liwsfer a# remi Wet g Xe piwse t:O fNestAe seMor Jnify municipal programs nto natonal prog-am fo' pension and heath, and implement in remain.ng cities Establish unemployment insurance progr-am. t~~ X :: -B....... ,- t, ,-. ... W. - , ., OA rest tobe t1W pt Eliminate credit plan for commercial banks so that credit plan covers policy Eliminate credit plan for policy banks. banks onlv L bera ize rnterest rates completely Allow commercial banks greater autonomy in setting lend ng (but not deposit) irates. ,, ,, Nv; w L e-Ce~ui X ' '-'''At;-.3 Impr-ove provisioning pol cies and practices. Achieve inter-nationa standards of capital adequacy. Rev ew the Commerc al Bank ng Law. -wW .5 -..'' ' i' , - - - - . . - OVERVILW 'Xiii Summary of policy recommendations, continued Objective Short term Financial sector reforms, continued Improve regulatory framework for nonbank financ al institutons. Further develop legal and regulatory framework of nonbank financial institutions. Complete separation of banks and nonbank financial institutions. Improve functioning of capital markets. Improve legal, regulatory, and supervisory framework. Improve scheduling, information, and pricing practices in primnary rnarkets. Improve framework for integrating regional secondary markets. Public finance reforms Increase tax revenues. Strengthen tax administraton. Enforce personal income tax law. Reduce income tax exemptions and preferences for for-eign enterprises. Experment with payroll taxes to finance social security payments. Exper ment with taxation of pollutants. Shift expenditure allocation. Initiate increases in budgetary allocation for heatth, education, infrasbucure, poverty alleviation, and environmental protection, in line with revenue availability. Improve regional distribution of government revenues and expenditures. Develop intergovernmental grants scheme. Research earmarking of ntergovernmentai grants for specific purposes. Research fsca' transfers at subprovincial levels. TIlL (.tlJNLSL lI(tANOPAl: 1IGllTIN(I INF.\lAl)N, DLLPININt Rtl ()RMlS xiv Medium term Long term Restrict government ownersh p of nonbank fnanc al institutions. Enforce better information disclosure. Permit muitiple listing. Initiate dual listing. Increase coverage of the value added tax. Improve personal income tax law. Merge foreign and domestic enterprise income tax rates. Introduce payroll taxes nationw de to finance social security payments. Increase taxat on of pollutants. Unify budgetary and extrabudgetary funds managernent. Implement intergovernmental grants scheme Consider allocating central grants directly to prefectures of the counties. Experiment with earmarked grants. Experiment with subprovincial grants. 0 VL R vI L V xV ,Ree ode m Part I ~Recent economic developments 'W,. Chapter 1 Stabilization with growth G overnment policies helped lower inflation in 1995 enterprises (chapter 2), the financial sector (chapter 3), and and edge GDP growth down to a more sustainable public finances (chapter 4). Ilevel. The key measures included administrative restrictions on investment, careful management of central Growth, inflation, incomes, and bank credit to banks, increases in administered interest rates employment on commercial bank loans, and price controls and subsidies for some essential commodities. Improved conditions in agri- China's stabilization policies in 1994 and 1995 proved suc- culture also helped, relieving upward pressure on food prices cessful in lowering inflation and nudging GDP growth and bolstering growth of output and incomes in rural areas. down to more sustainable levels. Inflation reached a peak The government's stabilization policies came at the cost of 25.2 percent in October 1994 (on a twelve-month basis, of rising interenterprise arrears, additional difficulties in using the retail price index), driven by increases in adminis- stock and real estate markets, and higher urban unemploy- tered prices for food, petroleum, fertilizer, coal, and steel, ment rates, especially in areas with a high concentration of and accommodated by excessive monetary expansion. gen- state enterprises. Nevertheless, aggregate demand was erated in part from sharp increases in foreign exchange managed more skillfully than in previous episodes of over- reserves. Since then, however, inflation has declined steadi- heating and was accomplished against a backdrop of struc- ly, reaching 8.3 percent in December 1995. The main factor tural reforms and major new economic policy initiatives. has been rapidly decelerating growth in food prices, As long as restraint in fiscal and monetary policies con- although the rise in nonfood prices has ebbed only gradual- tinues, the government is in a good position to achieve its ly since July 1993. Contributing to this decline in inflation 1996 inflation target of 10 percent and growth target of were administrative controls on investment by state-owned 8-9 percent. This would put the economy on a sound foot- units, a lower public sector deficit, sharply lower growth in ing at the outset of the Ninth Five-Year Plan. central bank credit, improved conditions in agricultural In the medium term, keeping growth high and inflation production and distribution, and a postponement of further low will require maintaining the momentum of economic upward adjustments in administered prices (figure 1.1). reforms and increasing the efficiency of investment, while Growth in GDP subsided from an unsustainable 13.5 moving to indirect techniques of macroeconomic manage- percent in 1993 to 11.8 percent in 1994. before descending ment. Nowhere is the potential for efficiency gains greater further to 10.2 percent in 1995.' This slowdown was the than in state enterprises, the financial sector, and fiscal pol- outcome of three forces: a significant reduction in invest- icy. The government has already embarked on ambitious ment growth, an easing in export growth, and a rebound in reforms in all three areas (see chapters 2-4). Completing consumption growth. these reforms will be crucial in laying a solid foundation for Investment growth (in real terms) cooled from its fever- sustainable growth with stability over the medium to long ish pace of 24.8 percent in 1993 to 12.7 percent in 1994, term. and then to an estimated 10.5 percent in 1995. Growth in This report updates information contained in the World fixed investment (which excludes inventory accumulation) Bank's previous Country Economic Memorandum on was slower still at an estimated 7.3 percent in 1995, down China (World Bank 1994a). The report begins with a brief from 21.4 percent in 1994 and 23.3 percent in 1993. The review of recent macroeconomic developments (chapter consequent slowdown in the growth of aggregate domestic 1). It then examines medium-term issues linking structural demand was compounded by an easing in export growth, reforms to sustainable growth, with special focus on state which had climbed from 8.8 percent in 1993 (in nominal 3 FIGURE I Inflation fell in late 1994 and through 1995 ... ... and GDP growth edged downward... Inflation: January 1990-December 1995 Annual GDP growth (Percentage change of the index over twelve months) (Percent, 1990 prices) 45 F~~~~~~~~~ood preindex lb6 40 14 35 30 / 25 10 20 8 ' 5 . 0 5 20Itt=X 0; 2)j Jan July jan July Jan July Jan July Jan July Janr Juli 1990 991 992 1993 1994 1995 1990 1991 1992 1993 1994 1995 est. ... as the authorities restricted investments by ... tightened central bank credit... state-owned units... Growth of investment in state-owned units Domestic assets of the People's Bank of China (Percentage change over twelve months) (Percentage change over twelve months) 90 40 80 35 70 30 60 25 50 20 40 I s 30 20 10 Trend 0 0 -10 -5 Jan JUly Jan JUlY Jan juy Jan Juy Jan July Dec June Dec June Dec June Dec June Dec June Dec June Dec 1 99 1 1 992 993 1994 1 995 1989 1990 1990 199 1 1991 1992 1992 1993 1993 994 1994 1995 1 995 ... lowered the public sector deficit ... ... and were helped by improved conditions in agriculture Aggregate public sector deficit Agricultural production and food price trends (Percent of GDP) (Percent) (Millions of tons) 6 45 460 40 Grain prodtion (n.ght sca e) 35 30 J 9 25 450 8 ~~~~~~~~~~~~~~~~~~~20 6 v5 T0 440 4 5 2 0 0 -5 430 987 988 1989 1990 1 991 1 992 1993 1994 99S Jan July jan Jn an Juy Jan ju y Jan Jul Jan lu y ~990 ~ 991 1992 .993 ~ 994 1995 Scu,e: Chrc StatrsticG Yecrbook various ssues; Ch;no Monrrh.' S:n~st rs, various issues: VI/orld Bank af est mates. TIiiE ChIINESE LCONIOMY: FIGHrTING INFLATION, DEEPENING REFORNIS 4 U.S. dollars) to 35.5 percent in 1994, but then fell back to the share of services (health, education, banking, and 23 percent in 1995. Countering these decelerating forces insurance). These increases were accommodated by on the demand side was the growth in consumption. which declines in the investment shares of industry and com- climbed from its low of 5.9 percent in real terms in 1994 to merce. Where the government was unable to curb invest- an estimated 6.7 percent in 1995. As a result, the accelera- ment groxwth was in real estate; here, the share increased tion in consumption spending completelv offset the slow- marginally although the intention was to lower it. down in investment demand (table 1.1). The rise in consumption growth can be attributed main- Investment demand growth in 1995 was kept in check Iv to two developments. One was the 40 percent increase by tight administrative controls on new investments bv in the wage bill in 1994 and accompanying increases in state-owned units, a sharp slowdown in net lending by the nonwage benefits, which raised the urban average annual People's Bank of China, and increases in interest rates. But income per capita by 4.9 percent in real terms. A second these measures were managed more skillfully than in previ- was the rise in rural incomes in 1995 (estimated at about ous stabilization episodes. According to the authorities, 5.3 percent in real terms) following the rapid increase in investment expenditures, while controlled more strictly, the relative price of food products and the procurement were not reduced drastically or cut across the board. An price of grain in 1994. attempt was made to weed out less viable investments and These developments indicate a small narrowing in rural- to consolidate resources in key high-priority projects. New urban income differentials in 1995 after more than a decade project starts were discouraged, and project approval limits of almost continuous widening (figure 1.2). According to for subnational governments were lowered. Lower the government, virtually all of China's 70 million poor live approval limits meant that, for the first time since 1990, in rural areas.2 The rise in rural incomes suggests further growvth in investment by the central government exceeded reductions in the number of poor, although a lack of data that of lower-level governments. Contrai, to any previous makes this judgment difficult to verifv. cycle since 1978, growth in investment by nonstate firms Net exports continued to contribute to growth in 1995. surpassed that of state-owned units during this investment Exports climbed an estimated 23 percent while imports downswing. increased only 14.2 percent. The trade surplus increased The government also attempted to alter the structure of more than twofold from US$7.3 billion in 1994 to US$17.3 investment during this period. The share of agriculture billion in 1995. The improvement in the trade balance con- increased markedly, in line with the government's stated tributed an estimated 17 percent of GDP growth in 1995, intention of boosting agricultural growth. Similarly, the compared with 20 percent in 1994 and negative 21 percent share of investment in physical infrastructure (energy, in 1993 (figure 1.3). transportation, and telecommunications) climbed, as did FIGURE 1.2 TABLE I Rural-urban income differentials narrowed in 1995 (percent a year at 1990 prices) Ratio of rural to urban incomes and the rural-urban terms of trade Income ratio Terms of trade 1984-93 1994 1 995a 60 R 200 Rural urban90 GDP 10.5 1.8 0.2 inoet axis) 80 Expenditure category 80 Consumption 10.1 5.9 6 7 70 Investment I .6 2.7 0 5 50 60 Exports 12 4 28.6 5.6 50 Imports 13.3 8.9 0.7 / \40 By sector of origin 1 \ Agricu ture 4.7 4 0 4.5 ral-urban terms of Industry 13.3 7.4 3.6 40 trace -r ght axis) 120 Manufadur ng 12.7 7.2 4.0 1 Services 12.2 8 2 8.0 a. Est mated 1978 1980 982 984 986 988 1990 992 1994 Source ChEC Srnr'srnrai rern,uck. government authortes Wcrd Ban' staff est mnates Souace ChinG Statrst;ol Yeiubook 1995 and Wor,ld Bank staff estimates STABILIZATION WlITll GROEXTII 5 On the supply side, the brunt of slower growth fell on be hampered, further aggravating problems in grain distri- the industrial sector, where growth in value added faded bution. Government procurement policies for grain from 17.4 percent in real terms in 1994 to 13.6 percent in remained virtually unchanged. as did those for cotton, 1995. The drop was largely the result of slower output where the government's monopsonv remains unchallenged growth in nonstate firms. State enterprises actually on the strength of the three "do not open" policies (do not improved their performance in 1995, climbing from 6.5 open the business, do not open the market, and do not percent output grow-th in 1994 to 7.2 percent in 1995. open the price). Despite this, the share of state enterprises in industrial out- put continued to decline, eroded by a rapid increase in the External trade and the balance of share of private enterprises and individual-owned firms payments (see chapter 2). Slower growth in industry contributed to a small rise in China experienced a swing of 5 percentage points in its cur- the urban unemployment rate from 2.6 percent in 1994 to rent account balance in tvo years, from a deficit of 3 per- 2.9 percent in 1995. In some small cities, the uneniplov- cent of GDP in 1993 to a surplus estimated at over 2 per- ment rate is above 10 percent. At the same time, the struc- cent of GDP in 1995.3 For the second year in a row, export ture of nonagricultural employment is changing rapidly growth exceeded 20 percent (in nominal U.S. dollar terms). According to the Ministry of Labor, employment during the A confluence of events and factors contributed to this first half of 1995 declined by 1.3 million in state-owned dramatic performance: exchange rate unification in January units and by almost 1 million in collectively owned enter- 1994' a slowdown in domestic demand in the wake of prises. Employment in individually and privately owned decelerating investment growth; introduction of a new firms (including joint ventures and foreign-funded firms) value added tax (VAT) regime in 1994 that increased the increased bv 4.8 million. effective tax credit for exports; the announcement in Despite floods in the south, generally favorable weath- March 1995 of a reduction of the VAT rebate rate mid- er helped improve overall performance in agriculture. vear, which may have encouraged exporters to bring for- Value added in agriculture expanded by 4.5 percent in ward their export shipments; large increases in the produc- 1995, significantly higher than the 3.5 percent growth tive capacity of export-oriented foreign direct investment; achieved in 1994. Summer grain output was just below the and strong demand in export markets. But monthly data record harvest of 108 million toils in 1993, with yields up show that the bulk of the accelerationi in export revenues in by 1.4 percent. The "governor responsibilitv system" intro- 1995 occurred in the first half of the year, when export duced in February 1995, which makes governors responsi- earnings were significantly above trend. Monthly export ble for balancing supply and demand for grain in their revenues declined steadily through 1995, having reached regions, raised fears that interregional trade in grain could their peak in January (figure 1.4)i By December 1995, they were 6.8 percent below their level in December 1994, FIGURE [3 contributing to a trade deficit of US$1.2 billion for the Investment's shrinking share in growth month. In the absence of any unusual developments, Sources of growth, 1994 Sources of growth, export growth is likely to sloxv in 1996 in light of the con- 1995 (estimated) tinuing real appreciation of the renminbi and notwith- consumnption Net expor-ts Consumnption Investment 4 A Con30.0omption 19.7exports C°n550.8m%ti°n Investment standing the continued high levels of export-oriented for- eign direct investment that continue to flow into the coun- try (see below). Import growth in 1994 and 1995 was in line with past trends, although the composition of impor-ts in 1995 shift- _mestment Net 8eEorts ed from capital goods and toward food, reflecting domes- Investment Net exportsfodpiean 50.3% 17.4% tic policy imperatives to lower pressure on food prices and Note. Annua increments as a shac-e of increnmental GDP (ex uding tock acculrT.lat on; Isn coristant 990 pR ces. control investment expansion. China's complex govern- 50urce: Ch!nn Stotisic,i Yemobook. IQ95. ddta prov,ided by government authorites: VVoiplrld 5ank staf estimrates ment-managed Import regime explains some of the riii. (_tIIINLSU LH NO)NWY: II(iII'I\IN(; INFI.AlTI)N, I)DLtLP.NIN(; RKI<(tRXNIS 6 FIGURE .4 Above-trend export growth in the first half of 1995 ... ... and trend growth in imports... Export developments, 1989-95 Import developments, 1989-95 (Seasonally adjusted. billions of U.S. dollars) (Seasonally adjusted, bill ons of U S. dollars) 1 6 2 14 12 Trend 10 8 6 6 4 2 2 1994 9 ' 01994 1995 o 0 Jan Juy Jan JUJy Jan) Juu an Ju; Jan July Jan July Jan July Jan Juy jan >JJy jani ja Jan luy Jan . Li Jan ,LIIy Jan July 1989 1990 1991 1992 993 1994 995 15c9 1990 1991 1992 993 994 1995 ... contributed to a sharp improvement in the ... and burgeoning foreign exchange reserves. current account... External current account balance Gross foreign exchange reserves (Billions of U S dollars) (Percent) (Billions of U.S. do ars) (Months of Imports) 20 4 so0 Bi ions of U S iB ons of U S 15 d~~~~~~ ~~~~~~ollars 3 0no jars6 Percent , Months f irmportsof 6 'of GDP g0 ongs and ser-vices 10 2 5 50 ; 0 1 \ 1993 ci O 40 990 99 1992 994 1995 30 990 99 1 1 992 1 943 1 994 995 eestemated) Note See enqdnote 3 for a d scussion on the -ev sed est nmate of the current account surp us ri1 1935 Sourc. Chiro Stotisticol Yea rook, xvarious ssues: Chiwo MonQthiy Stit,r,cs var ous Issues. data pi-ov ded by go,er-nment augthor- t es, \.0/oi d Bank staff est mates restrained growth in imports. The reginie is designed to ers, although evidence collected in 1993 suggests that some promote exports while protecting domestic producers from m-av not be binding (WYorld Bank 1994b). Cutting in the competition. Almost half of all imports are processed into other direction, however, were restrictions on imports of exports and so go untaxed. Another significant fractioni of automobile kits in 1994 and a ban oni foreign investment in imports, destined for special economic zones, open coastal auitomobile production, which were dcsigned to support cities, and foreign funded enterprises, enjovs preferential China's new automobile "pillar" industry under a niew i-2port duties. Onl 15 percent of total imports are subject industrial policv launched in 1994 (see chapter 2). to tariff and nontariff barriers, including import rights, Such restrictions notwithstanding, recent announce- licensing, and quantitative restrictions. ments bv China's leaders point to a steadv liberalization in Nontariff barriers have been lowered steadily (table import policy, in par-t as a bid to enter the Wtorld Trade 1.2). Less than 10 percent of tariff lines were subject to Organization (WTO). At the Asia-Pacific Economic nontariff barriers in 1995, far fewer than three vears ago. Cooperation (APEC) sunmm-it meeting in Osaka, Japan, in No data are available on the restrictiveness of thcse barri- November 1995, President Jianig Zenmin announced that SIlAlILI.ATl(ON Wll'ITI (,Ro'x%'Tll 20 on April 1. 1996, the government would cut tariffs on and Management Bureau investigated 5,570 FDI projects in 4,000 import items by not less than 30 percent, revoke or 1994 and found a 19 percent exaggeration of FDI from an alleviate import quotas and controls on 170 items (30 per- overvaluation of foreign investment entering the country in cent of all items subject to such controls), permit the estab- the form of imports of capital equipment (UNCTAD 1995). lishment of joint-venture trading companies in certain A recent feature of China's economic relations with the cities on a trial basis, and allow the expansion of joint ven- outside world is the increase in outward foreign direct ture retail businesses. investment. Indeed, foreign direct investment flows from In the capital account of the balance of payments, for- China in the 1990s were the second largest among devel- eign direct investment (FDI) inflows reached US$37.7 bil- oping economies.7 By the end of 1994, over 900 Chinese lion by the end of the calendar year.' About 80 percent of enterprises had established 4,600 foreign affiliates in 130 FDI projects are located in coastal provinces and 60 per- countries, with cumulative FDI outflows estimated at up to cent in industrv A recent study (Broadman and Sun 1995) US$16 billion (UNCTAD 1995, box 11.2). Of these, 50 shows that four factors-a province's market size, its level percent were in trading, 30 percent in natural resources of infrastructural development, the educational level of its (minerals, forestry, and ocean fisheries), and 15 percent in labor force, and its geographical location-explain 80 per- manufacturing. Hong Kong and Macau were the principal cent of the variation in the stock of FDI bv province. To destinations of Chinese outward FDI, followed by North counter growing income disparities between regions and America (figure 1.5). provinces, the government has introduced new regulations The unexpected strength in the trade balance was large- to encourage FDI into interior provinces, especially in ly responsible for a sharp increase in China's foreign infrastructure and other high priority sectors. exchange reserves in 1995. This contrasted with 1994, I-long Kong and Macau investors continue to be the when developments in the capital account were the major largest source of foreign direct investment inflows into contributory factor. Foreign exchange reserves, onlv US$22 China, followed by the United States and Japan. But some billion in 1993 (excluding gold), had climbed to US$53 bil- of these data need to be interpreted with caution. Capital lion by the end of 1994 (or 5.2 months of imports) and outflows repatriated back to China to take advantage of reached US$73.6 billion by the end of 1995 (equivalent to generous tax breaks could be significant. If true, such about seven months of imports). 'roundtripping" would be especially evident in FDI from High reserves and continued strength in exports eased Hong Kong and Macau. FDI inflows could also be exagger- China's need to borrow from international financial mar- ated for other reasons, such as overinvoicing imports. For kets, especially in 1995. Even so, net disbursements and net example, the Imnport and Export Commodities Inspection flows climbed higher from their previous peaks in 1993, with fresh commercial borrowing used largely to finance TABLE I 2 infrastructure projects, maintain a strategic presence in key Widening doors to import competition: tariff and nontariff measures FIGURE I .5 (percent) Destinations of China's outward foreign direct investment, 1979-1993 Unweighted Weighted average average Latin tariff rate tariff rate Non-tariff barriers Asiat America Africa Pacific 2% 2% Early 1992 43.0 32 0 Appled to 1530 tariff nes Europe 5% Hong Kong and End-1992 39.9 3 2.. 7% Maau End- 1993 36.4 30.7 Eliminated on 283 tariff nes 8% End- 994 35.9 . E minated on 206 tariff lines End- 1995 35.7 26.8 Eliminated on 367 tariff nes Early i996 22-23' .. Eminated on 170 tariff lines, Target. 1997 5.0, Nor'h Armerica :. a President lang Zemir,s speech at APEC s.,im m Osaka Japan dated Nosember 2 15% 1995 b Stater-en by Orce Prem,er Zh,. Rongi !n Nrvenbe, 1995. pn.,'ce Department of Customs Admir. stration: oovernnent asithorit es Source Xing i 994 as dep cted n UNCT AD 1995 I'IIE CIIINESI ECONOMY: FIGIFTING INFLATION, DE EPENING REFORMS 8 financial markets, and restructure the maturity of existing third quarter of 1995, contributing to barely undiminished debt. All indicators of sovereign creditworthiness remained momentum in the growth of broad money. The increase in largely steady in 1995 (table 1.3). While the debt-GDP ratio net foreign assets contributed 70 percent of reserve money declined from 19 percent in 1994 to an estimated 16 per- growth in 1994 and 60 percent in 1995. cent in 1995, the debt-service ratio remained stationary at But M2 growth was also propelled by net domestic around 9 percent as commercial debt borrowed in 1993 assets, which climbed 25.7 percent through 1994 and came due. These debt indicators point to China's strong 30.4 percent in 1995 (both twelve-month rates), this external position and sovereign credit standing in interna- despite the fact that the credit plan incorporated a mod- tional markets. At the same time, however, international est expansion in 1994 and 1995. The increasingly limited credit rating agencies downgraded the credit rating of some role of the credit plan as an instrument of monetary con- of China's largest non-sovereign borrowers. trol could be a consequence of the gradually declining Finally, China's balance of payments registered a dou- share of state commercial banks in the overall financial bling in "errors and omissions," from about $10 billion in system and of the persistence of large incentives for state 1994 to over $20 billion in 1995, which was more than the commercial banks to devise new wavs to circumvent the entire current account surplus.6 Reasons for such large credit plan.9 "errors and omissions" could include underestimation of Even though M2 growth showed little sign of slowing, profit remittances, overreporting of foreign direct invest- inflation continued to fall. There are three possible ment, overreporting of exports and underreporting of explanations. imports, and genuine unrecorded capital outflows resulting First, the velocity of broad money maintained its trend in increased holdings of foreign assets by Chinese residents. decline in 1995 (figure 1.6), reflecting heightened confi- It is important that the authorities redouble their efforts to dence in the banking system (following the disintermedia- improve the coverage and accuracy of balance of payments tion in 1993) and spurred. no doubt, by the introduction of statistics to provide a more reliable assessment of China's inflation-indexed interest rates for term deposits of house- external payments position. holds with a maturity of three years and longer. It is unlike- ly, however, that such a trend decline can be maintained for Monetary policy much longer, arguing for conservatism when setting M2 growth targets in the coming year. Moreover, the velocity The sharp rise in foreign exchange reserves in 1994 and decline in 1995 should be viewed with caution, as it may 1995 fueled strong expansion in reserve money through the partly reflect, in addition to increases in money demand, an TABLE I 3 FIGURF 1.6 Debt and creditworthiness indicators, 1993-95 The declining trend in the velocity of broad money (billions of U.S. dollars) (M2) Log scale 1993 1994 j1995a 0 5s Debt outstanding 84 2 98 4 112 8 Pubiic and publiciy guaranteed 70 82 4 92 2 Pr vate nonguaranteed 0 6 0 6 0 6 0 40 Short-term debt 13 5 5 1 20 0 By creditor 0.30 Multilateral 10.7 13.6 1 5.7 B ateral 3.7 15.4 n.a \ \ 0. Commercal 59.8 69.4 n a 0 20 Creditworthiness indicators (percent) Debt-GDP rato 14 8 8 6 2 Debt-ser'vice ratio 11 1 8 9 9 6 0.1 0 Interest-exports ratio 3.7 3 8 3 7 n.a s not ava lab e 0 a Fstiinaed 987 1988 989 1'90 99 992 1993 1994 So,Jrce '.'.:or Debt TGoles government author tes: Worn Bank staff estimates Source IMF STABILIZATION WiThI GROWTHi 9 incipient excess supply of money that will eventually feed A lower public sector deficit in 1994 was due to a sharp into higher prices. fall in the state enterprise deficit from 10.3 percent of GDP Second, the strong growth of M2 (29.9 percent growth in 1993 to 7.9 percent in 1994 (table 1.4). The shrinking through 1995 and 34.5 percent in 1994) contrasted with a deficit was a consequence of stricter control of state enter- more moderate expansioni in MO (currency) and Ml. This prise investment, manifested by slower growth in credit. discrepancy may have derived in part from inflation- especially for working capital, and a sharp increase in enter- indexed deposit rates and the increased availability of prise deposits. Lower subsidies to state enterprises (as a financial services. But in a financial svstem in which most share of GDP), together with tighter constraints on credit, transactions are still conducted wvith cash, the slower meant that intereniterprise arrears reachedc record highs. growth of currency in circulation probahly contributed to The government budget deficit also saw a small decline more subdued aggregate demand. from 2.3 percent in 1993 to 1.7 percent in 1994. Third, enhanced price surveillance and local governnment Underlying this apparent improvement, however, was a subsidies for key commodities at the retail level helped continued decline in government revenues as a share of moderate inflation, at least temporaril. A relevant question, GDP which slipped from 13.8 percent to 12.4 percent. therefore, is whcther the government will be able to keep Revenue data for 1995 suggest little improvement, with inflation under control in 1996 while gradually removing revenues sliding furthier to 11.3 percent of GDP. these temporar, subsidies and controls. So far the govern- The new! VAT has become the workhorse of China's ment has proved resolute in maintaining a reasonably reformed tax system, generating over 40 percent of rev- restrictive monetary policy. This stance is entirely appropri- enues in 1994 and the first three quarters of 1995. While ate, especially since growth in investment expenditur-es and VAT revenues grew satisfactorily in 1995 (at 22.4 percent industrial production showedc renewed strength in the last over 1994). rebates on VAT to exporters were higher than quarter of 1995. As the year progresses, however, there may expected. These rebates, amounting to RIMB 43 billion, he room for some relaxation of this position, particularly if may not seem unduly out of line with China's export per- inflationary pressures from the external account recede with formance, but thev do appear high once account is taken of a slowdown in export growth. The challenge for the govern- processing trade, wvhich is exempt from VAT." Concerned ment will be to fine-tune the growth of the money supply about the level of rebatcs (not just becaLuse of suspicion of while relying more on open market operations and other widespread fraud, but also kecause the rebate rate yielded indirect methods of monetarv management. higher refunds than the amount actually collected as VAT on inputs), the government reduced the rebate rate for Public finance manufactures to 14 percent in July 1995. A further redluc- tion of the rate to 9 percent was announced, effective The pressure on monetary policy in 1994 and 1995 was Januarv 1, 1996. eased by a significant reduction in the aggregate public sec- In an efftort to improve tax reveniuc collections, the gov- tor deficit and a shift toward noninflationarv sources of ernment is reducing or eliminating a variety of tax exemp- finance. (The aggregate public sector deficit measures the tions. Temporarv tax relief measures for diomestic enter- excess of expenditures over current revenues for govern- prises associated with the 1994 tax reforms were stopped at ment plus state enterprises.) 13etween 1987 and 1993. the the end of 1995. Similarly, the government is contemplat- public sector deficit hovered around 11-12 percent of GDP ing eliminating import dLuty exemptions, tax holidays, and (with a peak of 13 percent in 1993) and was a key factor lower corporate tax rates for new foreign investors, with underlying inflationary pressures in the economy. In 1994, suitable grandfathering provisions for existinig investors. however, the public sector deficit declined abruptly to 9.9 Declining revenues as a share of GDP, and the desire to percent, easing pressures on financing. providing a greater keep the budget deficit in check, have meant strong pres- flow of savings for nonstate investment, and contributing sures to keep budgetary expenditures under control. Yet toward a current account surplus. Although full data for government policv decisions resulted in expansion of some 1995 are unavailable, initial estimates suggest that the pub- budget items. For example, the budget is still absorbing the lic sector deficit continued to shrink, albeit at a slower pace. 30 percent wvage increase for all civil servants in 1994 TiIL CIIINLSE ECONOMY: 11(11TINO INFLATION, DEEI'ENIN(; RLI ()RMS I U TABLE I 4 The aggregate public sector deficit, 1987-94 (percent of GDP) estimated 1987 1988 1989 1990 1991 1992 1993 1994 1995 Aggregate public sector defict 10 7 10.7 11 4 12 3 10.9 3.1 12.7 9.9 8.7 Government budget defict 2.1 2.4 2 3 2.2 2.5 2 6 23 1.7 1.7 State enterprise defcit 8.6 8.3 9 1 10.1 8.5 10.5 10.3 8.2 7.0 Totalfinancing 10.7 10.7 11.4 2.3 109 13.1 12.7 99 87 Foreign borrowing 1.9 1 7 1.4 1 6 1.1 2.3 2.1 2.3 1 5 Net domestic borrow ng 8 8 9.0 0.0 0.7 9.8 10.8 10 6 7 6 7.3 Issuance of debt securties 04 0.9 1 2 0 3 1.2 2 5 0.7 1.9 1.6 Bank ng system 8.4 8.1 8.9 10 3 8.7 8 2 9 8 5.7 5.7 People's Bank of China 1 6 3.9 I 8 1.2 02 4.6 3.4 -2.7 -3.4 Other 6.8 4 2 7.0 9.2 8 4 3 7 6.3 8.4 9 1 Note See Annex 3 for an explanation of the methodology underly ng these caiculations Source World Bank staff estimates. (retroactive to October 1993). Subsidies for agricultural lic (using treasury bonds). This shift was made possible, of trading enterprises increased in the wake of higher grain course, by a decline in investment demand by state-owned procurement prices in July 1994. And interest payments enterprises, reflecting the government's resolve to bring almost doubled in the first three quarters of 1995, reflect- inflation under control. One consequence of this shift will ing greater dependence on treasury bond financing of the be a pick-up in the growth of government debt over the deficit. To compensate, other expenditures were lowered in next few years. This will need to be watched carefully, espe- 1994 and 1995. For example, subsidies to cover the oper- cially in light of possible increases in real interest rates fol- ating losses of state-owned enterprises showed a decline in lowing reforms in the financial sector (see chapter 3). nominal terms in 1994 and 1995, maintaining a trend that had begun in 1990. And government investment expendi- Conclusion tures declined by 22 percent in nominal terms in 1994, so that despite expanding by about 28 percent in 1995, they China's success in 1995 in bringing inflation under control were still below their nominal level in 1993. without disrupting growth is a marked departure from pre- T'he intergovernmental fiscal arrangements introduced vious economic cycles. This performance reflects consen- in 1994 brought a sharp increase in the central govern- sus at the highest levels to combat inflation, growing ment's share in total revenues from 36 percent in 1993 to sophistication in macroeconomic management, and 56 percent in 1994. But the bulk of that revenue was increased resilience in the economv returned to the same provinces that collected it. Only a In the near term, the government faces the difficult task small share of the central government's increased revenues of keeping inflation below its target rate of 10 percent for was redistributed to poorer provinces. The government is 1996 while ensuring that economic growth is maintained in still studying different options for a more equitable inter- the 8-9 percent range. Balancing the need to keep inflation governmental grants scheme, but a decision has not vet low with the legitimate credit requirements of a growing been made. Regional disparities in fiscal depth are likely to economy will require flexibility in macroeconomic policies widen for some years to come, reflecting widening income during the year. The government needs to guard against disparities. policies that are so restrictive as to stall growth as much as Just as important as the decline in the public sector it needs to avoid the possibility of rekindling inflation by deficit has been a substantial shift in the financing of the prematurely adopting expansionary policies. deficit to noninflationary sources. Between 1987 and 1993, Over the medium term, the Chinese authorities still the public sector deficit was financed largely through the need to tackle deep structural problems that feed inflation- banking system. But 1994 and 1995 saw a contraction in ary pressures in the economy and that underlie a tendency borrowing from the central bank and a shift toward com- toward sharply fluctuating cycles. As the rest of this report mercial bank financing, and direct borrowing from the pub- suggests, resolving these structural issues of state enterprise STABILIZATION WX'ITIi G ROWX'THI 11 reform, financial sector development, and sound public 5. A change in the method for collecting export statistics finances will help sustain rapid grovwth into the future and added six davs to the January 1995 estimate, leading to an facilitate greater reliance by government on indirect meth- unusually sharp spike in export earnings for that month. 6. Given some investment hy Chinese firms in other coun- ods of macroeconomic management. tries, net foreign direct investment inflows are expected to be about US$3-4 billion less. Notes 7. The largest was 'Taiwan (China). 8. The latest revisions to the balance of payments for 1995 1. These gronth rates are based on official statistics. If the (see endnote 3) include a slightlv lower estimate for errors and national accounts are adjusted for various statistical deficiencies, oisn. omissions. China's GDP growth would probably be about one to two per- 9. This shows in the monetary survey as a big increase in other centage points lower (see WXbrld Bank 1994c). items (net) 2. The official poverty datum line upon which this estimate is 10. Actual refund obligations exceed Renminbi 43 billion, but based is Renminbi 324 per capita at 1993 prices. the Government's refund payments are in arrears. 3. Just as this report was going to press, the authorities issued preliminary revisions to the balance of payments for 1995. The new estimates show a significant reduction in the current account References surplus, largely owing to a sharp upward adjustment in profit remittances. Interpretation of these new estimates is difficult at Broadman, H. and X. Sun. 1995. The Distribution of Foreign this stage, especially as similar adjustments have not been made Direct Investment in China. World Bank, China and Mongolia to the balance of payments estimates for previous years and the Department, Washington, D.C. implications of these changes are omitted from estimates of UNCTAD (U.N. Conference on Trade and Development). 1995. GNP WV'orld Invest ment Report: Transnational Corporations and 4. The effective real exchange rate depreciation for exporters Comnpetitiveness. Geneva: UNCTAD. was sizable because under the old foreign exchange system World Bank. 1994a. "China: Macroeconomic Stability in a exporters received a 10 percent retention quota, which entitled the Decentralized Economy." Report No. 13399-CHA, China and holder to the purchase of foreign exchange at the official rate for Mongolia Department, World Bank, Washington, D.C. import purposes and which could be sold at the swap market price. World Bank. 1994b. China: Foreign Trade Reform. Washington Another 70 percent retention quota accrued to local governments D.C.: World Bank and foreign trade corporations. Thus, from the point of view of World Bank. 1994c. "China: GNP per Capita." Report No. exporters, the unification depreciated the exchange rate signifi- 13580-CHA, China and Mongolia Department, World Bank, cantly. Further, the expanded access to trading rights increased Washington, D.C. competition and reduced margins for foreign trade corporations. World Bank. Various years. World Debt Tables. Washington, D.C. TIlE CIIINESE ECONOMY: FIlGHTING INFLATION, DEEPENING REFORMS 12 JiM ~Part II -' ~ Structural reforms for rapid, sustainable growth t nhe first chapter reviewed recent economic develop- improved incentives for production, unleashed entrepre- ments, focusing on China's success in lowering neurial energies, and introduced competition between . inflation without disrupting growth. The next three domestic firms and from international trade. Indeed, com- chapters ask how China can sustain rapid growth in the pared with other countries (especially the Soviet Union) medium and long run. China's grouth has been quite intensive (figure A). Sustaining growth means more than just maintaining Consider the period 1985 to 1994, when average GDP rapid growth. It also means improving the quality of growth growth in China was 10.2 percent. Two-thirds of the growth while ensuring stability. This involves reforming the struc- was the result of capital accumulation, supported by an ture of the economy, building its institutions, and creating extraordinarily high savings rate that has come to depend an enabling environment for improvements in productivity increasingly on China's thrifty households (figure B). Less and efficiency. As government controls give way to market important, but significant nonetheless, have been increas- forces, the role of government itself would need to shift ing labor force participation rates. increasingly toward indirect methods of macroeconomic One-third of growth was the result of productivity management. The ultimate objectives should be to create improvements in the use of inputs, due to structural change adequate and remunerative employment for the labor across sectors and efficiency improvements within produc- force; eliminate the desperate poverty that plagues parts of tion units (table A). The movement of labor from agricul- the rural interior (and is surfacing in some cities); improve ture to industry and to a lesser extent services contributed access to health and education, especially for women and about 1 percentage point to aggregate GDP growth in the girls in rural areas; and protect the environment for future past decade. Another 0.4 of a percentage point was the generations. These objectives serve to remind us why result of resource reallocation between state and nonstate growth is important in the first place. They also point to a enterprises. The most striking feature of structural change pattern of development that will help sustain growth over in industry is the extraordinary growth of "private" firms- the long term. privately and individually owned enterprises, foreign joint Growth in China since 1978 has been fueled by more ventures, and foreign-funded enterprises. This group than the accumulation of capital. Economic reforms have increased its share of industrial value added from 1 percent played a key role. These reforms included substantial liber- in 1984 to 24 percent in 1994, much of it in the past five alization of domestic prices, internal and international years. trade, and the international exchange and payments svs- Will these sources of growth be as powerful in the next tem. Reforms also granted significant freedoms to agricul- decade as in the past? Probably not. For example, the tural households, nonstate enterprises, and local authori- potential for productivity gains from reallocating labor ties through a gradual process of experimentation and dis- from agriculture to other sectors will diminish as surplus semination of best practice. labor in agriculture is reduced. Furthermore, it is difficult The introduction of market-based incentives contributed to foretell the trajectorv of China's savings rate. Savings to growth by encouraging rapid structural change away from rates could decline, if for no other reason than that they are low-productivity sectors toward high-productivity sectors. already high by international standards. Much will depend Reforms also encouraged structural change within sectors, on the pace and pattern of growth, the availability of sav- as resources were increasingly absorbed in more efficient ings and investment opportunities, and the future direction nonstate firms rather than state enterprises. Finally, econo- of social security reforms. The projected deceleration of mywide efficiency gains were important, as reforms growth in the near term and increase in China's dependen- 13 I 5 IF! 1FE I' China is no Soviet Union China's thrifty households Capital output ratios of selected countries Urban and rural household savings as a percentage of GDP Capital output ratios Pe, ent 5 O ~~~~~~~, .-.t Jl,rz / 30 2 35 3.0_ I 13~~~~~~~~~~~~~~~~~~,Iiacr P7) Q,Ie1 8, g ' 1 4701 9°5 I 5 1 9 9°85 °99s 1 n70 953 198k 04 1988 19 88 1 990 921|994 ScaJn_e Data oi- Chira. Ko-ea alsd S rigapore rm-ori Nel n l Di- Dleshr.v.s - 93 t for -m to :W 'Vc Bark staf estimiates based or Ire: 'Satvtolu Errearlok var oUs issues Soviet Urnion from Easterly and Fisrleer I 1 s ee A rev I for deta 1I cv ratio (ratio of non-working-age to working-age popula- management through indirect means rather than direct con- tions) over the longer term ciast a sulbdued light on the out- trols. and to establish the rightful place of government in an look for China's savings rate. increasingly sophisticated mar-ket economn If the savings rate declines, capital accumulaLtion caninot It is these imperatives that uliderlie the central impor- he expected to generate the same groxwth impetus that it tance of reforming state enterprises, the financial sector. did in the past. But sustailledl rapid growth is critical to and public finances. The government has already maintaining the decline in the numhbe of poor-" providing embarked( on ambitious programs in all three areas employment opportunities for a labor force growing at Progress has varied. Furthermore, being in transition has 13-14 million each vear, and improv ing the incomes andf complicated the task of macroeconomic management. So quality of' litfe for China's imimlensely large population. This tO)Mp/tiofl of these reforms wvill he crucial ftor sustainahle places an added burden on the need to generate produc- growvth and stability over the long term. By feeling the tivitv gains in the economy and points to the importance ol' stones under thc water, Chinla is part way acr-oss the reform persevering with r-eforms that promilote efficiencvy riven. The next thiee chapters in this report recount part of To achieve these productiVitV gains, the government will the ri-eceit journev and indicate xvhat more needs to be need to maintain the momientium ol- reforms in two strategic accomliplished to get to the other side. directions. The first would place greater reliance on market forces, with special emphasis on state enterpr-ises and the vs. -- financial sector. The SCCOnid WLould stress restoring the Deconstructing growth in China, 1985-94 health of government finanices andi shifting the focus of gov- t, ~~~~~~~~~~~~~~Sources of growth 1985-94 1985-89 1990-94 emiment expenditure policy to\vardf such prioritv areas as (N[ P prsetS 02 20 10.5 health and education, reduction of poverty inlfrastructure ; t'ir,.'e" hi development, and environment protection. Both sets of E. tor, icuoimuatior b o 6. ac, , lIt5 a lodlcation ' 3 o t reforms are really investmenits in a system of la\vs, irstitl- , .-I Itr(apl era(-t Ice 0n4 00 09 tions, and processes designed to cicour-age efficiency and s1 pe vtiow 2.2 .4 technologicaLl progress, to facilitate effective macroeconiominc b; I,- S tf e .tc,oa te- J i - E , 1T1ff (t.II\I'I i I s (tNt \: I I1,IIINi( IN I II1()\, Itl ll NINil RIt I<\19 14 4 ~~Chapter 2 Reforming state enterprises: the unfinished agenda T here is virtually complete agreement among gregated data suggest otherwise. The relatively inefficient China's policymakers that reform of industrial state use of investment resources by state enterprises is evident enterprises is of the highest priority The consensus in thirty-seven out of the thirty-nine industrial sectors for is reflected in the speeches of China's senior leaders and which data are available (figure 2.1; see World Bank appears prominently in the preparatorv documents for the 1995a). Value added per worker in industrial state enter- Ninth Five-Year Plan. It also figures prominently in the prises is half that of nonstate enterprises, also suggesting fifty-point program announced by the Third Plenum of the lower levels of efficiency1I If the accumulation of unsold Central Committee in November 1993, which called for inventories of state-owned enterprises were deducted development of a "modern enterprise system" by 2000. from the valuation of output, value added per worker in The reasons are clear. Many of China's state enterprises state enterprises would sink even further.2 are inefficient and cannot compete against growing domes- Industrial state-owned enterprises as a group report oper- tic and international competition. This has made them a ating profits of 2 percent of GDP But the number of loss- drag on growth and employment creation. The financial making enterprises has grown steadily, from 26.4 percent of support these enterprises receive through the fiscal and state enterprises in 1992 to 44 percent in 1995.3 The major- banking systems has periodically threatened macroeco- ity of loss-making enterprises tend to be below average in nomic stability. So their reform is essential to growth and size. In the first three quarters of 1995, for example, loss- stability. But the central position of state enterprises in the making enterprises accounted for 20.8 percent of industrial Chinese economy, their importance as employers of urban state enterprise production, 18 percent of sales revenues, but workers, and their role in providing social security, health, 41 percent of employees. Moreover, losses, although rising in and education services have complicated the task of absolute and real terms, have been declining as a share of reform. The government has made some progress in tack- GDP T'he largest loss maker is the coal industry, followed by ling these thorny issues. But these accomplishments are defense, petroleum, nonferrous metals, and tobacco. only a beginning, and the most difficult and complex tasks Finally, the poor performance of industrial state-owned still lie ahead. Completing these tasks will be central to enterprises can be gauged by their relatively lackluster China's prospects for developing a modern enterprise sys- growth and employment record. Between 1984 and 1994, tem, ensuring macroeconomic stability, and further improv- for example, the growvth of industrial output (in real terms) ing the economy's competitiveness. in state-owned enterprises was one-half that of nonstate enterprises and in 1994 alone it was closer to one-fifth. The problem Similarly, in the last decade, employment growth in nonstate enterprises has been three times faster than in state-owned Several indicators point to the poor performance of indus- enterprises although the output elasticity of employment trial state enterprises relative to the nonstate sector. For has been declining in both state and nonstate enterprises. instance, state-owned enterprises (SOEs) account for 34 The slower grouth of state-owned enterprises has meant percent of industrial output but consume 73.5 percent of that their share in aggregate output and employment has industrial investment. As a result, the amount of capital been falling swiftly. Their declining market share was ini- used for each unit of output in industrial state-owned tially assumed by collectively owned and tounship and vil- enterprises is more than twice that used by nonstate indus- lage enterprises in a second wave of industrial growth (the trial enterprises. This could be because state enterprises first wave was state-owned industrialization) that began are concentrated in capital-intensive industries. But disag- soon after reforms were initiated in 1978. In the past few 15 FIJ C-dUE 2I1 State enterprise performance ... ... and reforms State enterprises use capital less efficiently.. Capital-output ratios of state and nonstate enterprises for thirty-nine industrial sectors Nion-tate erriterr se Lreerf erji i-il 1978-87: Central bank formulates genera pr rtc ples of economic reform: aw ... on ant ventures proomulgated; pr ce beta zat on in agricL tuare begins fiscal autonomy granted to leca government special economic zones createdc private incomiie tax int-oduced: price bera zation of consumer goods begins. state entecprise reforms "tax for- profts" bank lending begins to replace state enterpr se budgetars' /a loat ors: co ectively owned enterprises encouraged: * /. ,,S, * tsarSorn-iatsor o' People, Bank of China irtc cential bans O / * _________________________________________________________ beg ns: fourteen coasta cit es open ip towniship and v Ilage ' n 2 7 L, i enterprises created. ... and their rates of return have been declining After-tax profits of state industrial enterprises as percentage of fixed assets Per cent 1 988: State erterpr se conti act r esponsib I ty begins: Regu atiors on Private Enterpr ise System pibi snec: Enterpr se Law and Bankruptcy Lawi passed. 1989: Regulat ons ssueti on merge s oint stock companies. and commer cia zat on of banks 178 98:J 1982 a87 i)fr asfg 25 9Q; 359 1991: Persion and housing r etMo rm beg ns: rorporatization They have been losing market share... ercouiraged. Shares of industrial output Percent I 00 ~~~~~~~~~~~~~~~~~~~~~~~~1 992: Deng X iaoiping tou of sojutoi D r-ect ies on Newv 10900 t DOper at ng Mecnanism and F°orteen Autonoinous Pigonts ctr E0 state enter pr ises sstuec phasing out of p oduertion targets aid priice corntr ols: steady pr ogress onl trade ire al zattintr, 30 Sure, clirri ride Kr Si, ~~~~~~~~~~~~1 993: Adopt on of pr nriip e of 'soc alist nriarket economy' n I St.ate : Z ,ed7 S,tell:l sf' 19 H' - e ... and contributing less to employment creation 1994: Refom ns of the foreigrn exchange and tax systems; renuct on of bucgetarv si.bsidies to state enter-prises; Shares of total nonagricultural employment launcirng of 10 000- 000- 00- 10 progrnam: annoLincemerit Percent of industria po cy frramework ard creation of fifty- sx 200_ enterp-ise groups n "pillas ' industries. Enactmert of Cormiparv La.v 80 60 1995: Encrsuargement of iergers wth ronstate frres: estab snr-ent ol iechn insms trc c arifytonrer ship rigr-ts of 403 trhe state. I h~~~~~h `1984 1 z2.5 18t. I IH 1 I:c 1 -: 9?1'9 19;19; ) T1I11:. I [I N 1,1 1 I v)N( )N'i : H 1 1 V1-1\ I NI A .1( IN, I) Wl l' N I N R1Q:oeI years, however, a third wave of industrialization has been ance of the Chinese people. The government has since building in China, comprising largely privately and individ- begun to reduce the deficit and shift its financing from ually owned enterprises, supplemented by joint ventures money creation to domestic borrowing. and foreign-funded enterprises. The startlingly swift rise of this third wave is an indication of the rapidity of change in The government's response the Chinese economy and has important policy messages, especially for the way financial resources are allocated by Concerned about the deteriorating trend in the finances of the financial sector (see chapter 3). state enterprises and the consequences for stability, the gov- True, the poor performance of state enterprises is partly emment has been dealing with the reform of state enterpris- the result of constraints imposed by government policies. es in two ways. The first is by altering the policy environment Price controls, for example, depress state enterprise earn- in which they operate, notably by reducing subsidies through ings in coal, natural gas, fertilizer, and grain production. the fiscal and banking systems, but also by promoting com- Moreover, state enterprises are expected to provide social petition through increased trade, foreign investment and low security to their workers at their expense, including health, barriers to entry. The second is by altering incentives within education, pensions, and unemployment benefits. FinaHy, firms by making management more autonomous and firms have little freedom to fire workers. Sixty percent of accountable, restructuring operations, diversifying owner- respondents to a World Bank survey of 156 state enterpris- ship, and reforming corporate governance. es chosen for reform reported that redundant workers Some progress has been made in curtailing subsidies to exceeded 10 percent of their workforce (World Bank state enterprise. Budgetary subsidies fell from 7.5 percent 1995b). Overall China's state enterprises employ an esti- of GDP in 1992 to 2.3 percent in 1994, and implicit finan- mated 15 million redundant workers. cial subsidies were more than halved, from 3.6 percent of State-owned enterprises' losses arising from policy dis- GDP in 1992 to 1.7 percent in 1994 (table 2.1). But tortions are partially offset by transfers from the budget progress remains limited. Subsidies continue to flow and implicit financial subsidies through the banking sys- through other channels, especially at the local government tem. In 1994, for example, budgetary subsidies amounted level, where the majority of state-owned enterprises are con- to 2.3 percent of GDP while implicit financial subsidies- trolled. For example, despite reforms in the banking system, in the form of low interest rate loans and unpaid principal working capital continues to find its way to loss-making and interest-came to another 1.7 percent of GDP The enterprises. Data to support these contentions are hard to survey of 156 state-owned enterprises (see above) showed find, but there is indirect evidence. Consider wage increas- that the transfers roughly equaled the costs to enterprises es in loss-making enterprises during 1995. These wage arising from government price policies, social security ben- increases closely matched those granted in profit-making efits, and wages for redundant workers. enterprises, yet labor productivity grew much more slowly in The deficit (or net financing requirement) of state the loss-makers (table 2.2). Such large wage increases in enterprises has become the hard core of China's aggregate loss-making enterprises would have been impossible with- public sector deficit, failing to register much of a decline out some support from the government or financial sector. since 1990. In 1994, aggregate net financing by state Some progress is also being made in altering incentives enterprises equaled 7.8 percent of GDP (table 1.4), within firms. The government's "10,000-1,000-100-10" reflecting weak after-tax earnings and a large investment program announced in 1994 and the subsequent enact- program. In the past, the bulk of the borrowing require- ment of the Company Law in July 1994 provided an ment of state enterprises was financed by money creation. encouraging beginning.4 To encourage mergers, the gov- Yet China was lucky, because a substantial amount of ernment decreed that loans of acquired companies could seigniorage collected by the central bank helped limit the be paid by installment over five years and that accrued inflationary impact. Nevertheless, inflationary episodes interest prior to merger would be written off. To facilitate punctuated China's otherwise stable, but rapidly growing, bankruptcies, the responsibilities of enterprises toward economy. In 1993 and 1994 inflation reached hitherto laid-off workers have been clarified.5 The government has unclimbed peaks and severely tested the traditional toler- identified alternative mechanisms for restructuring enter- REFORMING STATE ENTERPRISES: TIHE UNFINISIIED AGENDA 17 TABLE 2 1 Subsidies to state enterprises, 1985-94 (percent of GDP) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Total 9.9 9.9 10.2 7.0 6.9 6.2 5.8 7.5 6.3 3.9 Through the budget 7.5 7.5 7.2 6.4 6.9 6.4 5.2 3 9 3. 2.2 Through the financial sector 2.4 2.4 3.0 0.6 -0.1 -0.2 0.6 3.6 3.2 1.7 a Includes pnce subsidies. Source. World Bank staff estrnates TABLE 2 2 Shanghai, increased competition, lower budgetarv subsi- Wages and productivity of state enterprise dies, and tight credit have led to enterprise restructuring, (percentage change, January-September 1994 to 1995) downsizing, and some bankruptcies (see box 2.1). Up to Increase Increase in 1994, fifteen small and medium state enterprises within the in wages labor productivity municipality had been declared bankrupt, and 130,000 Profit-makers 22.6 18.0 workers had been laid off. Shareholding experiments are in Loss-makers 21.3 2.1 full swing, whether to form cooperatives or to list compa- Source. Government autnor ties. nies on the Shanghai stock exchange. All state-owned enterprises and collectives participate in a pension pooling prise debt and is implementing these in some cases.6 scheme covering 20,000 enterprises and 5 million people- Administrative mechanisms are being put in place to per- roughly 80 percent of Shanghai's workforce. An intera- form the custodial functions of the state. gency State Asset Management Commission, headed by a An industrial policy was announced in June 1994, vice mayor, oversees various state asset management com- under which fifty-six enterprise groups have been estab- panies that represent the state's interests on boards of lished in "pillar industries" (automobiles and automotive directors of shareholding companies. parts, petrochemicals, electronics and machinery, and con- In Harbin, ten unprofitable, debt-ridden industrial city- struction). The government is now designating major owned enterprises were shut down, and two small ones enterprises as dominant partners while encouraging small- were sold through auction; in tvo other money-losers, man- scale enterprises to merge. The industrial policy initiative agers and workers were given control on a trial basis. In also provides pillar industries access to policy bank loans Wuhan, many unprofitable, small state enterprises have and additional protection from foreign competition. been closed or transformed into collectives. Another 148 Finally, at the Fourth Session of the Eighth National have been leased to various nonstate interests, including the People's Congress in March 1996 the government private sector. Of Wuhan's 288 state enterprises, the city announced its intention to concentrate on the reform and sold five that were declared bankrupt in 1994 and was development of 1,000 large state-owned enterprises and readying another seventeen for bankruptcy (eleven small enterprise groups that will form the core of China's modern and six medium-size). The city's property rights transaction enterprise system. At the same time, the government will center mediated mergers between fifty-five state enterprises loosen controls on the operations of China's roughly 90,000 and collectives. In Chongqing, two medium state enterpris- small industrial state enterprises. Reform in these enterprises es were declared bankrupt-a shoe manufacturer and a will be pursued through restructuring, mergers, leasing, per- knitting mill; the knitting mill was one of China's largest formance contracts, and sale to nonstate enterprises. bankruptcies, involving the layoff of 2,000 workers. From a nationwide perspective, however, these local gov- Experimentation by local governments emment initiatives add up to only a modest beginning. Of 102,200 industrial state-owned enterprises, 474 have been Local governments are at the forefront of the effort to identified for bankruptcy since November 1994; of these, 92 reform state enterprises, and so practices, experiences, and have been declared bankrupt and 161 have initiated bank- outcomes tend to differ from province to province. In ruptcy proceedings.7 But the government is gradually putting TIIE CHIlNESE ECONOMY: FIGHTING INFLATION, DEE-.PENING REFORMS 18 BOX 2 1 Planting change in Shanghai The Shanghai municipal government has chosen thirty-nine of its Contributing to the Shanghai pension pool. state enterprises to participate in a comprehensive program for The Shanghai No. 3 Radio Plant is a younger firm. It was estab- reform. Two of these are the Shanghai Chemical Plant and the lished in 1 960, following the integration of three smaller plants. In Shanghai No. 3 Radio Plant. They have different histories, but are the mid- I 980s, the firm made some profits from assembling reacting to the new forces of competition and commercialization in radios, televisions, and other low-end electronic products. But similar ways. They exemplify the challenges and opportunities that with increasing competition and a changing economic climate, loss- thousands of such state enterprises face throughout China. es emerged. Today. it owes more than it owns (excluding land and Founded in ! 924, the Shanghai Chemical Plant is relatively old. But buildings). The pressure to change its ways has corespondingly it has been consistently profitable. It is the third largest firm in China been more intense. So, among other things. it has: producing plastics and film. Reform has come slowly to the plant, and * Declared 200 of its approximately 1,300-person workforce it still reports to the Shanghai Chemical Industry Bureau. Nevertheless, redundant: 80 are to be laid off, and the remainder will retire or some changes have been introduced in recent years. They include: take extended sick leave. * Establishing a variety of commercial relationships with township * Subleased portions of its riverfront property to other domestic and village enterprises in rural and suburban areas, including joint and foreign investors and relocated some of its own facilities to ventures and subcontracting. cheaper, suburban locales. * Providing an increasing share of housing to its workers through * Formed separate accounting units, one of which has teamed up joint stock housing companies. with a Singapore firm in a joint venture. * Employing workers only on a contract basis; younger workers * Set up extensive relationships wth township and village enter- have contract terms of three to five years. prises, including capital investments, joint ventures, land subleasing, * Exploring joint venture arrangements with foreign firms from and licensing and trademark protection agreements. the United States and Singapore. * Participated in the Shanghai pension pool. in place an infrastructure that should facilitate reforms. For pation in the reform process, local governments in these example, it runs 2,600 retraining programs to upgrade the cities now rebate 15 percent of income tax payments from skills of laid-off workers and 24,000 employment informa- state enterprises. Work has also begun on divesting enter- tion offices to help displaced workers locate jobs.8 There are prises of social security obligations and housing for work- thirty-six markets nationwide for "property rights transac- ers. Local governments are encouraged to accept responsi- tions," with a national market planned for Beijing. These bility for running schools and hospitals previously run by markets mediate mergers and acquisitions among state state enterprises. Again, progress has been limited. Only enterprises and between state and nonstate enterprises. In two hospitals and twelve schools have been transferred suc- recent years, as many as 10,000 state enterprises have been cessfully, including three schools divested from the involved in mergers or acquisitions. Usually state enterprises Chongqing Iron and Steel Company. have merged with collectively owned enterprises, but some By the end of 1994, there were 4,850 shareholding com- have also formed joint ventures with foreign firms. panies in the industrial sector, accounting for only 4 per- Of one hundred firms selected for corporatization at the cent of industrial output and 7 percent of industrial assets. national level, sixty-one have been restructured under the About 170 companies were listed on the Shanghai Stock Company Law into shareholding companies with limited Exchange and another 110 on the Shenzhen Stock liability. The majority have the state as their major share- Exchange. More than 30 had received approval for listing holder. Some are government departments (for example, on foreign stock exchanges, of which a dozen are in Hong the Qingdao Administration Bureau for Light Industries is Kong and four in New York. now the First Light Industrial Company). In the eighteen cities chosen for comprehensive enter- The unfinished agenda prise reform, additional capital has been provided to increase production capacity and upgrade technology, To Notwithstanding such examples of enterprise restructuring help finance enterprise restructuring and motivate partici- at the local level, the task of improving the efficiency and RE FORAIING STATE ENTERI'RISES: TIlE UNI'INISIIlD AGENDA 19 competitiveness of China's 102,200 industrial state enter- ment on the boards of directors of incorporated compa- prises has only just begun. In preparatory documents for nies. Finally, the government could also focus on granting the Ninth Five-Year Plan, the government has emphasized additional autonomy to managers of state enterprises.9 its determination to break the back of the problem in the The World Bank survey of 156 state enterprises chosen next five years. It recognizes that much remains to be done. for reform showed that managers often did not possess Reliable financial information on state enterprise perfor- the freedom to make basic management decisions, such mance, for example, is still hard to obtain. Reforms have as on the size and composition of the labor force, input yet to provide sufficient market-based autonomy and risk- and output mix, sales outlets and input sources, and vol- reward incentives to state enterprises management. Lines ume and sources of financing. of authority over property rights between government and Accelerate the transfer of pension, health, and education management remain vague and in some cases, fundamen- obligations from state enterprises to govet7nrnment authorities. tally unchanged. The erosion of government authority over The momentum of the enterprise reform program could many enterprise decisions has not been replaced by mar- suffer if the thorny issue of removing the burden of social ket-based incentive systems, giving rise to opportunities for sector expenditures from state enterprises is not resolved. asset stripping and opportunistic behavior by managers, These expenditures can constitute a large part of the total workers, and sometimes even local governments. Despite cost of labor (figure 2.2). It would be difficult to liquidate, some high-profile bankruptcies of state enterprises in sell, merge, or restructure enterprises if they were still recent months, there remains considerable reluctance on required to meet these obligations. As mentioned earlier, the part of government (especially local governments) to the government has already started creating pension pools shut down enterprises that have little hope of financial via- at the municipal level and earmarking payroll taxes to bility. Institutional and procedural hurdles make bankrupt- finance pension, health, and unemployment benefits. cy difficult, time-consuming, and costly. These reforms could be accelerated with the introduction China's state enterprise reform program operates at two of a pilot program that transfers these expenditure obliga- levels: an improvement in economic performance through tions to municipal governments. When national pension market discipline and an improvement in incentives within and health programs are created, these could be merged enterprises to encourage better performance by introduc- with those at the municipal level. During the pilot phase, ing appropriate systems of governance. It is important that the central government could provide supplementary fund- the Government intensify and accelerate this reform ing if the sale of assets of divested or liquidated firms was process within a clear and well-articulated strategy for insufficient to cover the increased liabilities of municipal improving enterprise efficiency and competitiveness. To governments. In this context, housing subsidies would also this end, we recommend three sets of policies that should provide the framework for developing a detailed program FIGURE 2.) of enterprise reforms. Social sector expenditures constitute a large share For all state enterprises, implement programs to imllprove of the labor costs in state-owned enterprises governance, diversify ownership, and lower budgetary and (Percent of total labor cost) financial subsidies. A top priority is to implement the new Education accounting system, because good governance and well- P% designed policies start from good information. In addi- Health _ tion, the development of a modern enterprise system requires the separation of management functions from ownership concerns-a difficult task in an economy where the government is both owner and manager. To accelerate this process, the government could set clear commercial objectives, lower subsidies to enterprises, Wae bill diversify ownership, streamline state asset management 56% bureaus, and clarify the agency representing the govern- Sotvrce World Bank 1995b TIlE CIIINESE ECONOMY: FIGIITING INFLATION, DEEPENING REFORMS 20 need to be phased out, either by raising rents and wages Appropriate policies would include exposing these enter- simultaneously or by selling property rights to tenants. This prises to domestic and international competition (especial- is the largest component of social costs borne by enterpris- ly in export markets), granting greater management auton- es, and as long as housing is linked to firms, enterprise omy, diversifying sources of finance, and applying better reform will be difficult to move forward, regulations. Subsidies to these enterprises should be low- Further inmprove competition policies to encourage efficienc-y ered gradually If the government is compelled to provide improvements in state enterprises Part of the steady decline in subsidies, these should be limited, time-bound, and chan- the share of state enterprise output and employment can be neled through the budget rather then the financial system. attributed to increased competition from nonstate enter- Within these, the government's highest priority should be prises and imports. But much could still be done to intensi- enterprises delivering important public goods and services. fy competition further and heighten efforts to make state These include such subsectors as natural gas and electric enterprises more efficient. For example, the government power distribution, urban water supply, solid waste man- could eliminate interprovincial barriers to trade (especially agement, and railways. Here, the appropriate approach of foodstuffs) and expand the entry of nonstate domestic involves separating commercial activities from government and foreign investors into manufacturing industries and bureaus, clarifying the legal and regulatory framework for infrastructure (such as telecommunications, power genera- setting administered prices, and diversifying sources of tion, and oil exploration, extraction, and distribution). It finance by tapping domestic and foreign capital markets. In could phase out tax advantages offered foreign investors addition, wherever possible, the government's policies and thus not only remove a handicap that state enterprises should not restrict entry of new firms. Even though new (and other domestic firms) suffer, but also dampen the vol- firms ma' never enter these industries, the threat of entry ume of capital inflows that are posing problems in macro- itself tends to impose some discipline among existing mar- economic management. Similarly, eliminating interest rate ket participants. discrimination by class of ownership, together with a grad- Improve the efficiency of the 14, 000 large and medium-size ual phaseout of the credit plan, would remove implicit enterprises by diversifihng ownership, restructuring debt, adjust- advantages enjoyed by state enterprises at the expense of ing operations, encouraging mergers and consolidations, and, if nonstate firms. Finally, as noted earlier, continued liberal- all else fails, bhy liquidating. In some ways, this represents the ization and rationalization of the international trade and hardest task of all, because it requires judgments on which investment regime, including reduction of tariff barriers and firms have a financially viable future and which do not. phased elimination of nontariff barriers, would ease China's Preparing a strategy for firms with either heavy losses or entry into the World Trade Organization, sharpen the com- handsome profits should be relatively easy. But determin- petitiveness of state enterprises, and bring substantial wel- ing the fate of the one-third to one-half of enterprises that fare benefits to consumers (Bach, Martin, and Stevens are marginal will be more difficult, and will require the use 1995). of market forces and decentralized decisions. In applying these policies, however, the authorities will As in other instances, an important precondition is the need to pay special attention to the specific needs and cir- availability of good accounts based on modern internation- cumstances of particular types of enterprises and tailor their al standards, with independent audits and public disclosure interventions accordingly. To begin with, we would recom- for transparency. Using these, local governments, together mend differentiating between three groups of enterprises: with local branches of banks, will need to distinguish inher- the Government's priority 1,000 large enterprises, about ently viable from effectively bankrupt companies. Even 14,000 medium and large industrial state enterprises that when social service provision has been transferred to local are not on the priority list, and the remaining 90,000 or so governments (see above) and appropriate internal gover- small industrial enterprises. For each of these, we would rec- nance structures are in place, fundamentally viable enter- ommend the following: prises (expected to be about 8,000) may still need restruc- Use competitzon and governance policizes, not subsidies, to turing, including labor shedding, financial engineering, and foster the efficient development of the Central Government's equipment retooling. The rapid growth of employment in priority 1,000 state enterprises and enterprise groups. nonstate industrial and service firms provides such enter- REFORMING STATE ENTERPRISES: TIIE UNFINISI[ED AGENDA 21 prises a unique opportunity to prune their oversized labor Notes force without an unacceptable increase in the unemploy- ment rate, although some provinces and cities are likely to 1. The lower value added per worker could be due to lower cap- find this more difficult than others. ital-labor ratios, but this is unlikely As far as enterprise debt restructuring is concerned, 2. Inventory accumulation in China was 3.5 percent of GDP As far as enterprise debt restructuring is concerned, in 1994, which was low by historical standards. In some years, it two guiding principles could be followed. First, debt two g i pce o b ohas exceeded 10 percent of GDP It is fairlv safe to assume that restructuring should occur with a fully agreed future strat- these inventories have been accumulating mainly within state egy for the firm and a clear understanding that there will enterprises. be no future bailouts. T his means that debt restructuring 3. The 1995 figure is as of the end of September. Only part of should be implemented only toward the end of the reform this increase in losses can be explained by adoption of the new process, once better accounting systems are established, accounting sstem. 4. The "10,000-1,000-100-10" enterprise reform experiment appropriate governance structures are in place, and expe- calls for: 10,000 large and medium state enterprises adopting rienced managers are in position to design and implement new accounting standards bv Julv 1995; 1,000 large state enter- the corporate strategy. And second, the burden of debt prises adopting the new state asset management regulations by restructuring should be shared by banks, local govern- July 1997; 100 large and medium-size state enterprises beingcor- ments, and enterprises. poratized as limited liability or limited liabilitv shareholding com- Finally, nonviable enterprises should eventually be panies under the Company Law; and 10 (now 18) municipalities closed and their assets liquidated. This will take time undergoing comprehensive urban enterprise reform, including because of. th need to. mitigate the social costsofad' state-owned enterprises restructuring, technology upgrading, Just- mergers and consolidations, bankruptcy, and divestiture of social ment, establish the bona fides of claimants and the priority services. with which they will be paid, and ensure a fair and trans- 5. Laid-off workers who become self-employed and no parent process of asset liquidation. longer retain employee status may receive a one-off settlement Develop and systematically implement a program to tran-sfer equal to three times the average pay received in the previous six months. If the worker cannot find a job or the one-off settle- all 90, 000 small industrial enterprises to the nonstate sector ment cannot be a job uor beone-ff settle- ' ' ~~~~~~~~~~~~ment cannot be paid. then unemployment benefits are to he through sales, leases, or mergers. Ile government has already through sales, leaes,ormerers. The g vernmenthsalready paid for a fixed period. If this period expires. and the worker is stated its intention to loosen controls on the restructuring, still unable to find a job, then responsibility for unemployment merger, lease, or sale of China's 90,000 small industrial benefits is transferred to the local department of civil relief. state enterprises. But the government should go further Bankrupt companies previously running social, medical, and and encourage the transfer of these enterprises to the non- retirement insurance plans are required to pav a one-off settle- ment to cover pension entitlements, burial expenses, and med- state sector through sales or mergers wth nonstate firms. A ical copaments. program should be designed that systematically accom- 6. Enterprise debt restructuring mechanisms include: plishes this within the next five years. A first phase could * Debt-equity swaps, in which government claims against enter- see a pilot program launched in the eighteen reform cities, prises are converted to government equity, interenterprise claims with the objective of selling 20,000 small state enterprises are converted to equity, and claims of nonbank financial institu- in two years. Once lessons from this program are absorbed, tions are converted to equity. Ownership of bank claims would the government could accelerate the process in the next first have to be transferred to brokerage firms before they could the government could accelerate the process In thenext be converted to equity'. three years. One priority, apart from establishing the Suspension of interest payment and temporary suspension of machinery of implementation, is to decide on how sales amortization, which would cover enterprises making losses on proceeds will be divided between the central and provincial account of special government policies and enterprises imple- governments. In any event, the proceeds of such asset sales menting government-sponsored projects in high priority sectors. will first need to be applied toward funding pension liabili- * Writeoffs and exemptions of bank loans cover bankrupt ties transferred to municipal governments (see above), enterprises and can be set against dead loan reserves or bad loan reserves. Ariother priority would be that all firms to be sold would rsas Another priority' would e that allfirmstobesoldwould 7. An estimated 2,000 firms (of all ownership types) have need standardized, audited accounts, and all assets and lia- applied for bankruptcy since the Bankruptcy Law was promul- bilities would need to be quantified. gated; half of these have already been declared bankrupt. TIlE CIIINESE ECONWMY: FIGHITING; INFLATION, DEEPENING REFORMS 22 8. Despite their numbers, these offices cannot cope with the References demand for their services. The retraining programs have retrained 1.2 million unemployed so far, which is in addition to 3.2 million Bach, C. F., W Martin, and J. A. Stevens. 1995. "China and the being retrained in schools and universities. The employment WTO: Tariff Offers, Exemptions, and Welfare Implications." information offices have helped 13 million jobseekers find jobs International Trade Division, International Economics over the 'ears. But these offices are plagued with inadequate and Department, World Bank, Washington, D.C. outdated information, are slow in responding to individual Easterly, W and S. Fischer. 1995. "The Soviet Economic requirements, and are not integrated into a citywide, let alone Decline." The World Bank Economic Revieu 9(3): nationwide, network. 341-71. 9. Of the fourteen autonomous management rights, however, Nehru, V and A. Dhareshwar. 1993. 'A New Database on the "right to transfer assets" appropriately belongs with the owner Physical Capital Stock: Sources, Methodology, and Results." (the government) and not with management. Revista de AnZal/sis Econo;nico 8(1): 37-59. World Bank. 1995a. "China: Public Investment and Finance." Report No. 14540-CHA, China and Mongolia Department, World Bank, Washington, D.C. World Bank. 1995b. "China: Reform of State-Owned Enterprises." China and Mongolia Department, World Bank, Washington, D.C. (forthcoming). REFORMING STATE ENTERPRISES: TIIE UNFINISHIED AGENDA 23 ~~Chapter 3 Financial sector reforms: major issues and policy options is report makes a case for structural reforms on entire financial sector, including strengthening the central the grounds that they will help improve economic bank and creating special arrangements for directed policy- efficiency, sustain growth. and create conditions in related lending (see below). These reforms reflect the gov- which indirect methods of macroeconomic management ernment's recognition that its central role in directing can be effective. Chapter 2 noted the importance of state financial resources through the banking system is less enterprise reforms in achieving these objectives. This chap- appropriate, while acknowledging the need for some ter highlights the need for progressing rapidly with reforms finance to serve policy purposes for the foreseeable future. of China's financial system. The issue in China is not the need for financial sector A sound financial sector will be crucial for maintaining reform, but rather its design, the type of measures needed, rapid growth in China. Research findings show that well- their speed and sequencing, and their coordination with functioning financial systems tend to stimulate and sustain reforms in the rest of the economy. These are difficult ques- growth because they help pool financial savings and allocate tions, made more complex by enormous challenges con- them to the highest return use subject to appropriate safe- fronting the financial sector. The parlous condition of state guards (King and Levine 1993). In China, however, the finances has placed a growing burden on banks to fund financial system does not do this very well. Although the state-directed investments and to extend working capital recent proliferation of nonstate firms has improved efficien- loans to loss-making state enterprises at government- cy in production and substantially increased employment determined interest rates. The result is a banking system outside of agriculture, the government's investment and with limited banking skills and a high proportion of non- credit plans continue to steer the bulk of financial resources performing assets; a central bank with insufficient experi- toward state enterprises. Meeting the investment targets and ence in monetary management, few policy instruments, credit needs of state enterprises has often overshadowed and inadequate regulatory and supervisory capacity; and a other macroeconomic policy considerations, leading to reg- highly volatile capital market. ular bouts of overheating and subsequent retrenchment. This chapter briefly reviews recent progress in reforming China's government-directed banking system exists side China's financial system, examines key financial sector by side with an increasingly free market for goods, a rela- issues that remain unresolved, and maps the broad features tively smooth market-based foreign exchange system for of the task ahead, giving special attention to the important current account transactions, and a thriving and underregu- question of reform sequencing. lated nonbank financial system. This juxtaposition of a con- trolled banking sector at the heart of a rapidly reforming Recent progress in financial sector reforms economy has generated tensions within the banking system, complicated macroeconomic management, and slowed the Considerable progress has already been made in setting structural transformation of the economy. But each previous the foundation for a modern financial system. China's attempt at liberalizing the financial sector has not only financial system today bears little resemblance to its pre- accentuated macroeconomic instability owing to weak cen- decessor before the reforms began in 1978. The tral bank controls, but has also shifted investment in a direc- monobank system of the pre-1978 era has metamorphosed tion deemed undesirable by the government. into a diverse set of institutions akin to the financial sys- The experience gained from these episodes culminated tems of middle-income market economies (table 3.1). At in the November 1993 decision to embark on a gradual, its core is the People's Bank of China, "established" in more ambitious program of reform across virtually the 1984 as a separate central bank responsible for monetary 25 TABLE 3 1 China's financial system at a glance: structure ... ... and reforms Number Total assets of branches (Renminbi billion) Banking system 1978: People's Bank of China separated from M nistry of Finance. People's Bank of Ch na 2,529 1.758.8 l 1979: People's Construction Bank of China and Policy banks Agricultural Barik of China reestablished: China State Development Bank of China - 90.8 International Trust and Investment Corporation founded. Agrcultural Development Bank of China - 406 9 The 'Four Transformations" and Eight Reforms Export-Import Bank of China - 2.5 Promulgated. State commercial banks 198 1: Resumption of Government Domestic Bonds issue. Industrial and Commercal Bank of China 37,039 2,633.9 1983: State Couric dec ces to separate People's Agricultura Bank of China 63,816 1.253.1 Insurance Company from People's Bank of China: Bank of China 2.630 .837.9 Industrial and Commercial Bank of Ch na to take over People's Construction Bank of China 33.979 1,397.5 commercial banking business of PBC. Nationwide commercial banks Bank of Communications .937 305.0 China Trust and Investment Corpor-ation t 1987: Bank of Communicat ons reestab ished: Urban Industria Bank 54 70.7 Credit Cooperatives, Trust and Investment Corporations China Everbright BanK 12 20.3 and Finance Companpes formally estab!ished. Hua Xia Bank n.a. 82.91 HuaMXia Shengk(openingeary199) n.a. 89 1988: Secondary market for treasury bonds starts. Min Sheng (opening ear y 1996) n.a. Other commercial banks 1990: Cutback in number of Trust and Investment China Investment Bank 3 1 44.5 Corporat ons. Fitiance Companies: Recognition of Guangdong Development Bank 1 43.1 Shanghai Secur ty Exchange. Shenzhen Development Bank n.a. 15.4 Pudong Deve opment Bank 18 17.8 1993: Th rd Plenum of the 1 4th Central Comm ttee of the Shenzhen Merchants Bank 9 44.7 Communist Party of Ch na adopts its November Fu. an Industral Bank 7 19.8 "Decis ons'" announcing an acceleration of financial sector Yantai Houising Saving Bank 5 n. a. reforms. Main elements include: more independence for the People's Bank of China: gr-eater nterest rate fexibility: commercialization of specialized banks; estabiishment of Nonbank financial institutions policy banks: and payments system development. Rura' Credit Cooperatives 50.745 505 3 Urban Credit Cooperatives 50229 214.8 1994: Budget Law passed by the National People's Congress, prohibiting government borrowing from the Trust and investment companies 39 n.a. Central Bank Establishment of State Development Bank; People's Insurance Company of China 5,240 66.1 Export/Import Bank: Agr cultural Deve opment Bank. China Pacific Insurance Company n.a. 4.2 Finance companies 29 27.6 4 1995: Adoption of the I aw- on the People's Bank of China Financial leasing companies I I n a. and the Commercial Banking Law. Securities compan es 87 n a. January 1996: Estab ishment of nat onal interbank market Mutual fund companies 43 n a. 'ith I bera ized inter-est rates. Announcement that open Foreign financial institutions (representative offices) market operations wil commence from April I 1996. Foreign banks 250 n.a Foreign finance compan es 4 n.a. Foreign investment companies 7 na. Foreign insurance companies 70 n a. Fore gn securities companies 40 n.a. Foreign credit caid companies 4 n.a. Other 18 n.a. - s none. n.a. Is not available. Note: Data are for 1994. Soerce: People's Barnk of Ch na. 1995, Chino s Finoncrii Ouciook. Chino Steorstica! ,es.book 1995; A.4n70noc o Chone's F:none crd Bonk, ng 1995. TILE CIIINESF ECONOMY: FICIITING INFLA1ION, DEEPENING REFORMS 26 policy and supervision of the financial system. Dominating Approved the Central Bank Law, Commercial Banking the banking system are four huge state commercial Law, Negotiable Bills Law, Insurance Law, and Guarantee banks-created initially as specialized banks for separate Law. The Central Bank Law gives the People's Bank of sectors of the economv-and three new policy banks set China the legal right to formulate and implement monetary up in 1994 (see below). In their shadow are thirteen small- policy and the sole authority to control and supervise the er commercial banks, most of them established in the last financial system. It also forbids the central bank from six years. At the edges is a strong and growing competitive extending overdrafts and direct loans to the central or fringe of nonbank financial institutions that has emerged provincial governments. The Commercial Banking Law as a force in recent years, including thousands of rural and requires banks to hold capital equivalent to 8 percent of urban credit cooperatives operating like banks, and an their risk-adjusted assets, restricts banks from lending more expanding presence of foreign financial institutions in the than 10 percent of their capital to any single borrower, and form of representative and branch offices. Completing the prohibits banks from extending uncollateralized loans to financial system are two securities exchanges at Shanghai relatives of staff. It also explicitly requires banks to develop and Shenzhen, seventeen regional securities trading cen- asset-liability management skills through appropriate ters, two electronic securities trading networks (STAQS programs and to maintain internationally accepted financial and NETS), and myriad ancillary capital market institu- accounting standards. tions including brokers, dealers, and underwriters. * Adjusted interest rates more frequently and eliminated pref- In November 1993, the Third Plenum of the Fourteenth erential sectoral lending rates. Since November 1993, the Party Central Committee set the future course of financial central bank has raised lending rates four times as part of a sector development in China, calling for: broader package to cool the economy. In addition, prefer- Transformation of the People's Bank of China into a ential lending rates to thirteen sectors were eliminated in modern central bank responsible for monetary policy and January 1995 in an effort to rationalize the structure of supervision of the financial system; interest rates and give clearer signals about government * Separation of "policy" lending from commercial lending;' priorities. * Gradual transformation of specialized banks into com- * Granted some autonomy to state commercial banks in lend- mercial banks; ing decisions. Although the credit plan was strictly enforced * Separation of commercial banking from securities in 1994 and 1995, state commercial banks were granted trading; increased autonomy in making investment lending deci- * Controlled development of nonbank financial institutions sions within their individual credit ceilings. State commer- and capital markets to complement the banking sector; cial banks already possess some autonomy in extending * Modernization of the infrastructure of the financial working capital loans, which account for 60 percent of the sector. credit plan. But their freedom to allocate investment loans Since then, reforms in the financial sector have accelerated. had been circumscribed by a detailed lending program In the last two years, the government: drawn up by the State Planning Commission in consulta- * Created three policy banks to separate policy lending from tion with the central bank, the Ministry of Finance, and the commercial lending. These banks are now operational. Their State Economic and Trade Commission. Now, with the financing was secured by capital and other contributions establishment of the policy banks in 1994, the state com- from the government, financial bond placements with state mercial banks are being granted a measure of autonomy in commercial banks, and borrowing from the international their decisions on the investment lending program and are financial markets.2 Although state commercial banks were gradually gaining some independence to pursue commer- expected to transfer their existing stocks of policy loans to cial objectives . the policy banks, no assets have been transferred to the * Introduced asset-liability ratios for nationwide commercial State Development Bank of China or the Export-Import banks as an instnrment of monetary management to comple- Bank of China, giving them a strong portfolio position at ment the credit plan. In its endeavor to gradually move away the outset of their operation. from the credit plan as the key instrument of monetary FINANCIAL SECTOR REFORMS: MAJOR ISSUES AND POLICY OPIIONS 27 management, the central bank has introduced asset-liability the banking system (described in the previous chapter) will ratios as an additional instrument of control over lending by serve to strengthen and underpin the changes being con- nationwide commercial banks. Regulations require that templated for the financial sector. each bank keep its lending volume below its credit quota or Phasing and sequencing of financial sector reforms will keep the loan-deposit ratio below 75 percent. This is be crucial for their success. Because it is difficult in this expected to encourage nationwide commercial banks to report to describe full details of the phasing and intercon- mobilize deposits.3 nections between different policy recommendations, a * Unified the interbank market and liberalized interbank matrix has been created (Annex 1) to show visually how the lending rates. These actions, taken in January 1996, are the myriad actions needed in the financial sector fit together. first step in a longer-term program of interest rate reforms Seven critical areas require attention in the financial sector. and an important element in setting the stage for open These are discussed below, along with recommendations market operations. for addressing them. In addition, the government has announced decisions to modernize the payments system; sever ownership links The credit plan between banks and nonbank financial institutions; initiate open market operations on April 1, 1996; extend the book- Kev issue: The government continues to play an unusually entry system for government securities; and convert urban important role in determining the allocation of credit by credit cooperatives into urban cooperative banks in thirty commercial banks This involvement is in sharp contrast to cities. the government's reduced role in many of the real sectors These reforms and announcements are impressive in in the economy, where reforms now permit market forces a their coverage and intent. The government now faces the larger role in allocating resources. The credit plan (in con- challenge of ensuring their effective implementation. But junction with the budget) is mainly how the government even these wide-ranging measures represent only the influences the level and pattern of investment in the econ- beginning in what promises to be a long, difficult, and com- omy and maintains control over the direction of industrial plex reform process. China's financial system still faces development. Although diminishing in importance deep, inherited structural problems that have been exacer- (accounting for only a third of total investment finance in bated by weaknesses in its fiscal system. At the same time, 1994) and becoming increasingly ineffective as a tool of development of the country's institutional capacity and monetary management (see chapter 1), the credit plan nev- human capital has understandably failed to match the ertheless remains a key lever of government policy. It gov- growing demands of a financial system that is expanding erns each bank's credit volume directly (in aggregate, by rapidly in size, diversity, and sophistication. different types of lending, and sometimes by different sec- Ultimately, the financial sector will need to mobilize and tors, subsectors, and even individual borrowers), and trans- allocate resources in an efficient and prudent manner, to lates the government's investment plans into reality. The support rapid, stable, and sustainable growth, better achievement of investment targets by the government has employment opportunities, and an improved quality of life come at the cost of deteriorating loan portfolios in the for the population. Achieving this will be a long, complex banks. In many instances, the creditworthiness of borrow- process. It will require not just policy changes but institu- ers and the commercial viability of projects were not impor- tional and human resource development in areas as diverse tant considerations in lending decisions. The government as banking and accounting, the judiciary, government, and estimates that about 20 percent of the assets of the state public finance. In addition, financial sector reforms will commercial banks are nonperforming.4 need to be carefully synchronized with reforms in other The establishment of policy banks and the intended sectors of the economy For example, the pace of financial transformation of the specialized banks into genuine sector reforms will be influenced by state enterprise commercial banks are critical steps in the reform of the reforms, since the financial health of one affects that of the financial sector. The policy banks are there to ensure that other. Measures to commercialize state enterprise opera- state-directed lending does not interfere with commercial tions and end their dependence on subsidized credit from banking activity and that the costs of state-directed lend- TIIE CIIINESE ECONOMY: FIGHTING INFLATION, DEEPENING REFORMS 28 ing (interest rate subsidies, or nonrepayment of loans) are effective use of monetary policy. The ubiquity of govern- assigned to the budget. This objective cannot be achieved ment is equally apparent in the determination of interest immediately, however. It may take a few years before pol- rates. In all, the government sets over 200 interest rates. In icy banks have the resources to shoulder all policy lend- some instances, interest rates are set within a band around ing, so state commercial banks will need to bear some of a reference rate, with band widths varying by type of finan- the burden in the interim. But, as noted already, in the cial intermediary and the creditworthiness of the borrower. short period since the establishment of policy banks, The level of interest rates, especially lending rates, is commercial banks have been granted increased autono- gradually becoming an important tool for managing aggre- my in designing part of their investment lending pro- gate demand. In recent years, however, low and often neg- grams within their assigned credit quotas (although ative real interest rates contributed significantly to rapid approvals by the State Planning Commission and the increases in investment expenditures,complicated the task State Council are still needed). of aggregate demand management and encouraged rela- Recommendation: Give commercial banks increasing tively capital-intensive production in enterprises with autonomy in allocating loans. Letting commercial criteria access to bank credit. At the same time, however, the vol- and market forces guide more of the allocation of financial ume of bank deposits has grown swiftly and inexorably resources will require a phased withdrawal of government, over the years. This reflects China's high savings rate, While the longer-term aim would be to abolish the credit strong public confidence in the banking system, and the plan altogether, this must be done gradually to allow state dearth of alternative financial assets for most institutional enterprises time to adjust to the new policy environment. and household savers. The unusually rapid growth in bank In the next two years (the short term), the government deposits over the past two years also owes something to needs to further reduce the scope and detail of the credit the reintroduction of inflation-indexed deposits for house- plan covering the state commercial banks. For example, holds; the unusually large differential between interest state commercial banks could enjoy complete autonomy in rates in China and Hong Kong, which may have encour- preparing their lending programs for fixed asset invest- aged some capital inflow (see below); sluggishness in the ments, by, say 1997. Similarly, project-by-project lending stock market; and uncertainty about the effects of enter- details requiring the approval of the State Planning prise reform. Commission and the State Council could cover less than The structure of interest rates reflects government pri- half of the 1997 credit plan covering these banks and less orities on resource allocation across sectors and types of than a third of the 1998 credit plan. Allocating the remain- borrower and incorporates some recognition of a positive der should be left to the state commercial banks. Hlere, yield curve. But China's interest rate structure is unduly too, the government could maintain some influence, if it complex, often obscuring real economic priorities. Until desires, by placing ceilings (for example, not more than 10 recently, virtually all sectors received some loans at prefer- percent of aggregate loans to real estate) or floors (for ential or differential lending rates. Even no,x after the example, not less than 20 percent for agriculture), although elimination of preferential lending rates for thirteen sec- even these less stringent limitations could be eliminated tors, the number of special lending rates is large, creating over time. In the medium term (three to five years), state incentives for borrowers to spend time and money to commercial banks should be free from most credit plan secure these preferential rates from banks. restrictions, and all government-directed lending for Margins between lending and deposit rates tend to desired policy objectives could be undertaken through the fluctuate, and on several occasions deposit rates have policy banks or the budget. exceeded lending rates of similar maturity (table 3.2 and figure 3.1). Today, because three-, five-, and eight-year Interest rate policy deposit rates are linked to inflation, they exceed the rates for loans of similar maturity by' a handsome margin.5 Key trsue: government controls on interest rates will even- Partly as a result, three of the four state commercial banks tually arrest the development of the financial sector, had pre-tax losses in the first half of 1995, for the first impose high costs on parts of the economy, and hamper the time in their short history. Other factors behind these FINANCIAL SECTOR REFORMS: MAJOR ISSUES AND POLICY OPTIONS 29 FIGURE 3 1 the probable consequences. For example, the proximity of Comparing the one-year deposit and lending rate Hong Kong makes China's capital account relatively with inflation, 1982-95 porous. So it is quite probable that capital flows between Percent a year the two economies (through the neighboring province of 30 Rate of infation Guandong) respond to interest rate differentials (adjusted (twelve-month change n 25 the reta,l price index) for expected movements in the exchange rate). It is inter- 20 esting to note that China's official interest rates have loose- ly followed interest rates in Hong Kong, with China's inter- 1 s | | /2 \ est rates higher by several percentage points in recent years One-year fixed I° One-year asset loan rate (figure 3.2). In the last two vears, China's deposit rates deposit must have seemed attractive to Hlong Kong savers, and s h, 8 Hong Kong lending rates must have seemed attractive to 0 mainland Chinese borrowers, especially since the renminbi Jan Jan Jan Jan Jan Jan Jan I1983 I1985 I 987 989 199 I 1993 1995 strengthened against the Hong Kong dollar during this Source: Peoples Bank of Ch na; Ch,na Staristcol Yearbook, var ous years. period. This must have played a part in the capital inflows the Chinese economy enjoyed, although it is difficult to losses include excessive expansion of bank branches and estimate precisely how much. spiraling increases in operating costs (especially salaries Recommendation: Reform interest rate policy gradually, and bonuses and the price of rented real estate). These beginning by rationalizing the structure and ending with losses were incurred despite the fact that many banks full liberalization. Interest rate reform is a complex and treat accrued interest as paid income, provision negligible sensitive policy issue and needs to be approached with con- amounts for bad debt (in accordance with instructions siderable caution. International experience has demon- from the Ministry of Finance), raise the implicit return on strated clearly that while interest rates can be deregulated loaned funds through various unofficial add-on fees and quickly and seemingly easily, considerable financial disrup- service charges, receive substantial interest on their tion can follow if deregulation is not based on a foundation excess reserves deposited at the People's Bank of China, of adequate institutional and policy preparation. Thus, and often require low-yielding compensating balances while deregulated interest rates are an important and desir- from their borrowers. able objective, they should await the final stages of finan- Alongside controlled interest rates in China's main- cial reform process, after progress has been made in laying stream financial sector are freely determined interest rates such a foundation (see box 3.1). A liberalized interest rate in the capital market, in the informal sector, and in the off- policy functions best when: shore financial system in Hong Kong. These market-deter- * Macroeconomic conditions are reasonably stable. mined interest rates provide useful benchmarks to assess * Banks generally have positive net worth and can be whether official interest rates are unduly low (or high) and expected to remain solvent. TABLE 3.2 Interest rates at the longer end of the maturity spectrum (annual percent) March August November January March May July September Maturity 1994 1994 1994 1995 1995 1995 1995 1995 Indexed deposit rate Three-year 13.43 16.51 18.81 22.08 24.11 24.51 25.25 24.88 Five-year 16.13 19.21 21 52 24.78 26.81 27 21 27.95 27.58 Eight-year 18.83 2 .91 24.21 27.48 29.51 29.91 30.65 30.28 Fixed asset investment loan rate Three- to five-year 13.86 13.86 13 86 14.58 14.58 14.58 14.58 15.12 Five- to ten-year 14.04 14.04 14.04 14.78 14.78 14.78 14.78 15.30 Source People's Bank of Ch na. TuE CIIINESE ECONOMY: FIG(ITING INFLATION, DEEPENING REFORMS 30 * Bank staff are well trained in modem financial tech- [ JGURE 3 2 niques and in identifying creditworthy loan applicants. Higher deposit rates on the mainland * Financial markets are contestable. (One-year deposit rates in percent per year) * The real sector's financial health is good. China The central bank's supervision is skilled and incisive. 0 n The payments system is well developed. 8 * The audit and accounts system is of high quality. While the Chinese authorities have made considerable 6 progress in all these areas, these foundations need to be 4 strengthened further (see below). The weak financial health Hong Kong of segments of the state enterprise sector, the unknown sta- 2 tus of banks' portfolios, and China's history of government _ regulation in most aspects of financial resource allocation Jan Jan jan Jan Jan Jan Jan Jan Jan 1987 1988 989 1990 1991 1992 993 994 1995 suggest the need for considerable caution In introducin 8 98 99 19 19119 9 9 9 s t e c r ao Source People's Bank of China and Hong Kong Monetary Authority interest rate flexibility. At the same time, the need for cau- tion should not be an excuse for delay. Delays in interest rate reforms will continue to impose high costs on parts of around the country. Changing conditions make short-term the economy, arrest the development of the financial sector, recommendations difficult, but the current benchmarks and hamper the effective use of monetary policv. suggest that lending rates could be raised slightly, even Given the close connections between different branch- though inflation is falling rapidly, while deposit rates could es of the financial sector and between the financial sector be lowered marginally The higher intermediation margin and the rest of the economy, the sequencing of interest rate that would result could be used to increase provisioning policy reforms will determine the success of the outcome. against bad debts. For this reason, we propose that the government quickly v Fourth, the central bank's interactions with the banking phase in interest rate reforms that reduce the most egre- system, particularly when injecting or withdrawing liquidi- gious distortions and subsequently extend greater freedom ty, will need to be transacted increasingly at market-based to market participants in stages. These steps could include interest rates. The authorities at the People's Bank of the following: China have already indicated that they expect to proceed * First, the government could immediately reduce the with open market operations in April 1996. Similarly, the number of officially determined interest rates from over People's Bank of China will need to reconsider its policy of two hundred to fewer than thirty-roughly five deposit offering relatively attractive interest rates on all excess rates, ten lending rates (five each for working capital and reserves of banks. fixed asset lending), five rates for loans and deposits with * Fifth, the government could consider increasing flexibil- the Central Bank, and the remaining ten rates to be dis- ity in lending (not deposit) rates provided it is satisfied with tributed among classes of special loans or markets. progress on commercialization of the specialized banks, the v Second, the pricing of treasury bonds should be increas- level of competition in the domestic banking system, and inglv driven by market forces, partly to ensure that the gov- the quality of the People's Bank of China supervision (see ernment can sell the required volume of bonds, but also to below). The government could choose two ways to intro- secure the best price for government debt short of resort- duce flexibility gradually: first, it could allow commercial ing to administrative placement. banks to set their own interest rates on loans on a small v Third, interest rates could be set more actively, perhaps proportion of their asset portfolio (and this proportion quarterly or more frequently if conditions warrant. The sec- could be increased with time); and second, it could increas- ondary market yield on government debt is one benchmark ingly' widen the bands within which interest rates are the government could use as a guide when setting interest allowed to fluctuate. rates. Other benchmarks could include interest rates e Finally, the government could introduce greater flexibil- charged in the informal, unregulated financial markets ity in deposit rates, but only after it is satisfied that the net FINANCIAL SLCTOR REFORMS: MAJOR ISSUES AND POLICY OPTIONS 31 BOX 3 1 Preconditions for interest rate liberalization: five lessons from international experience A wide range of countries have reformed their financial systems ing of domestic and international economic developments. In and liberalized interest rates in recent years. These experiences Malaysia, where financial reforms were introduced successfully, have been analyzed at the World Bank and elsewhere. From this banks were given full autonomy over a large part of their loan port- body of research, five lessons on preconditions for interest rate lib- folios for the entire decade prior to the reform. In Indonesia and eralization emerge that could be useful to Chinese policymakers in New Zealand, banks were given time to improve their skill base their deliberations on the future of interest rate policy: before new entrants were allowed into the banking system, * The real sector should be financially sound. Financial although the presence of some foreign banks compensated in part reforms have progressed most smoothly where the net worth of for the shortage of skills in domestic banks. borrowers has been positive and their cash flow strong. The * Regulatory and supervisory standards should be Korean authorities, for example, maintained their control over lend- high. Bank supervision needs to shift from a passive check on ing rates until well after the 1979 oil prce shock, the large devalua- compliance w'th government lending guidelines to a prudential tion in 1 980, the start of the trade reform, and a significant decel- review of banks' risk management systems for the successful func- eration in inflation. By starting the process of interest rate liberaliza- tioning of a financial system with deregulated interest rates. This tion later than other reforms, and by going slowly the Korean shift requires a well-developed regulatory framework and high authorities allowed banks and their borrowers to work out their quality supervisory standards. But bank supervision alone cannot nonperforming loans and adjust to new economic conditions and defend against unsafe lend.ng practices. Requiring high levels of consequently to benefit from healthier corporate balance sheets. bank capital and encouraging liberal loan loss provisions would give * Banks should have positive net worth. When interest bank managements sufficient incentive to police themselves. Bank rates are liberalized and govern-nent Is not prepared to see a bank go supervision then becomes a backup support to bank management. bankrupt, managers of insolvent banks have every incentive to offer * Governments must be prepared to introduce inter- excessive deposit rates to maintain liquidity and then to exteno larger est rate deregulation gradually. Interest deregulation needs to and riskier loans at even higher lending rates to cover their costs. The proceed in stages with complete deregulation awaiting later stages best course of action in such instances is to dissuade bank managers of the financial reform process. The above preconditions need to from bidding deposit rates recklessly To do this in China, the govern- be satisfied, and inflaton needs to be iow and under control. ment may have little option but to place ceilings on deposit rates, Otherwise interest rates could rise to exorbitant heights in real especially since the extent of portfolio losses in banks are not fully terms, threatening the financial viability of borrowers and ultimate- known and the judicial process prevents prompt recovery of loans. ly, that of the financial system itself. This happened in Chile, and to * Bank management should be of high quality. The a lesser extent in Turkey in the early I 980s. Examples of successful process of interest rate deregulation should take into account the introduction of interest rate deregulation are the Republic of Korea ability of banks to assess and monitor risks, appraise the credit- and Malaysia which adhered most closely to the criteria above. Both worthiness of clients and the financial return on projects, and pre- waited till 1 99 1 to achieve complete interest rate deregulation pare and follow corporate strategies based on a good understand- (although in Malaysia's case, it was for the second time). worth of banks has been restored, intermediation margins steps could be taken quickly (preferably in one year, cer- are acceptable and sustainable, and adequate loan loss pro- tainly in two), eliminating the most grievous distortions in visions protect banks from the possibility of nonrepayment the financial system and, at the same time, sending strong of loans. If deposit rates are liberalized before the financial signals of the government's determination to implement health of banks is secure, there is a high risk that bank financial sector reforms. The remaining steps would then be managers, in an effort to improve profitability, will make introduced only after the government's program of reform risky loans at high interest rates and finance them by bid- in the banking system has made significant progress. ding up deposit rates. This would weaken balance sheets and raise the share of nonperforming assets in the total portfolio. The central bank The objective of liberalizing interest rates in China is desirable and achievable. This should be accomplished Key issue.: The central bank's ability to manage monetary through a series of discrete steps, each taken with due aggregates and supervise banks needs strengthening. regard to the progress of reforms in other parts of the finan- Periodic episodes of rapid inflation, including the most cial sector and in the real economy. The first four or five recent in 1993 and 1994, provide prima facie evidence of TIIE CIIINESE ECONOMY: FIGHTING INFLATION, DEEPENING REFORMS 32 weaknesses in monetary management. At the same time, the Considerable progress has been made on all these fronts. government's gradual withdrawal from direct control of Drafts of twenty-one of thirty new regulations describing investment decisions underscores the need to develop indi- accounting standards have been prepared and distributed rect instruments for achieving this purpose. As noted earlier, for comment. These regulations have been prepared with the credit plan, apart from being a key instrument for allo- four criteria in mind: to fulfill specific requirements under cating resources, is the principal means by which the the Central Bank Law; to ensure international acceptance of People's Bank of China influences aggregate demand and the People's Bank of China's regulatory and supervisory svs- controls the money supply But it is a relatively inflexible tems; to ensure clarity in the regulations for accurate inter- instrument, difficult to adjust in the face of changing macro- pretation and effective implementation; and to combine economic circumstances. It is also being eroded as an effec- international best practice with special aspects of China's tive control on total financial sector lending, because banks banking and legal systems. The draft on standards of enter- are disguising their loans to keep them outside the credit prise accounts includes definitions of past-due loans, accru- plan. Each time the authorities issue new regulations to stem al of interest, loan-loss reserves, off-balance-sheet items, and such unauthorized flows, new channels and techniques are disclosure requirements. The People's Bank of China is also created to circumvent them. The year 1995 was no excep- reviewing the format of reports required of all financial insti- tion; the monetary survey shows that although net domestic tutions and is improving its payments system. Supervisory credit increased by the amount of the credit plan, total net staff are being trained and manuals are being prepared to domestic assets increased by half as much again, due to guide bank examiners on procedures. credit creation outside the credit plan (see chapter 1). Recommendation: Through a painstaking process of insti- The central bank's ability to manage monetarv aggre- tution building, improve the central bank's ability to man- gates has been enhanced by the Central Bank Law which age monetary aggregates and supervise the banking system. forbids lending and overdrafts to the government and cen- The erosion of the credit plan as an effective instrument of tralizes monetary control at the head office of the People's monetary control and shrinking coverage of the credit plan Bank of China. In addition, the People's Bank of China to apply only to policy banks (as proposed in this report) recalled some loans to financial institutions in 1994, refined means that the People's Bank of China will need other its reserve requirements to suit individual banks' needs, instruments to control monetany aggregates. Certainly, the opened a rediscount window for refinancing strategic pro- People's Bank of China is already in a position to use jects, and called for special deposits for the first time, reserve ratios, asset-liability ratios, and the rediscount facil- heralding a more active role in managing the money supply ity more actively to absorb or inject liquidity into the finan- These developments have created the preconditions for the cial system. Over time, however, additional fine-tuning of People's Bank of China to move toward open market oper- monetary policy will require the use of open market opera- ations. One step in this direction was the unification of the tions to make short-term adjustments to liquidity interbank market on Januarv 1, 1996. Others include To prepare for open market operations, the government repurchase arrangements on Renminbi 20 billion of three- will need to permit somewhat greater flexibility of interest month bills issued to certain domestic banks. These actions rates in the money market and at the shorter end of the are expected to culminate with the initiation of open mar- maturity spectrum. Without such flexibility, open market ket operations in April, 1996. operations would be difficult to get off the ground. To ensure that bank managers and central bank supervi- Unification of the interbank market will facilitate this sors pay attention to the condition of banks' portfolios, greatly. The immediate concern in open market operations emphasis is being shifted from compliance with key targets is the withdrawal of liquidity from the financial system, but and ratios to the observance of prudential norms. This will the People's Bank of China has few securitized assets it can require the adoption of modern accounting systems and sell. The issue of Renminbi 20 billion of the People's Bank new financial reporting methods by the banks, the use of a of China bonds was an initial effort in this direction. The uniform risk-based loan portfolio classification system, and People's Bank of China could also consider securitizing its a focus in financial accounts on the overall risk borne by large accumulated stock of loans to the government individual financial institutions. (Renminbi 168.77 billion at the end of 1994) and selling FINANCIAL SECTOR REFORMS: MAJOR ISSUES AND POLICY OPTIONS 33 these on the market (with careful consideration of the bud- social welfare responsibilities for their staff. In addition, getary consequences of higher interest payments by gov- they are handicapped by such operational deficiencies as the ernment). Another possibility would be to securitize the absence of key management processes, (planning, budget- stock of debt owed by state commercial banks to the ing, reporting); lack of familiarity with asset and liability People's Bank of China. management techniques; inadequate accounting standards Some observers are concerned that interest rate flexibil- that render performance and risk assessment difficult; sub- ity in the money market could lead to disintermediation of standard infrastructure for information systems; inappropri- the banking system. While this needs to be monitored care- ate internal incentives systems for staff; and poorly articu- fuUly, it is unlikely to become a major problem. In the short lated institutional structures and legal frameworks, which term, with greater flexibility in the interest rate structure, are needed to underpin a sound system of corporate gover- an auction system could be introduced to sell part of the nance, eliminate interference and conflicts of interest (espe- annual treasury bond issues, a useful first step toward auc- cially by local governments), increase management autono- tion sales for all treasury securities. Of course, such mea- my, and protect the interests of owners and depositors. sures would be more effective in influencing aggregate These internal weaknesses seem all the more daunting demand if enterprises were motivated to keep costs down, considering the challenges that state commercial banks forced to bear their own losses, and no longer given loans face. These banks need to change their identity from pas- and subsidies to save them from bankruptcy. sive financing agents of government-identified projects to As efforts are made to use indirect instruments to man- proactive financial intermediaries serving a creditworthy age monetary aggregates, the People's Bank of China client base and ensuring the safe and remunerative use of should take care not to undercut its own efforts by lending depositors' funds. In making this change, state commercial directly to borrowers or providing high-powered money to banks have to deal with excessively decentralized branch finance policy loans. In fact, the People's Bank of China systems, high operating costs, an oversized workforce, and should also trv to avoid rediscounting policy bonds, staff unfamiliar with modern financial concepts and meth- because that would implicitly amount to injecting high- ods. Their size alone makes it difficult to implement rela- powered money for their support. In the long run, the tively simple decisions, let alone execute a major change in Pleople's Bank of China should consider removing all poli- strategy. Moreover, together with the government, they cy loans from its balance sheet. need to devise and implement a coherent strategy for deal- The central bank's efforts to manage monetary aggre- ing with a relatively high share of nonperforming assets, to gates closely will be ineffective if its bank supervisors cannot introduce adequate loan-loss provisioning, and manage the ensure that banks follow its prudential and other guidelines consequences of these actions on operating margins and in spirit and practice. Good supervision will also provide the profitability. At present, these banks have low and declining added benefit of ensuring safety; soundness, and stability in capital-asset ratios (see table 3.3), even when assets are not the banking system. The frequency of on-site inspections adjusted for risk; if nonperforming assets are equivalent to will need to be increased, mostly at provincial, city, and even about 20 percent of portfolios, the net worth of these county level. Rigorous implementation of accounting and banks is probably negative. auditing standards needs to be ensured in all banks. And Recommendation: Facilitate the transformation of state training for staff at all levels will be important for achieving commercial banks into genuine commercial banks. uniformly high supervision standards. Achieving this objective will require measures by both the government and the banks. Many of the policy measures State commercial banks described earlier will create the framework that will give state commercial banks the appropriate incentives to com- Key, issue: The four state commercial banks face major diffi- mercialize their operations. These measures include a culties in their transformation into genuine commercial phased reduction in scope and detail of the credit plan and financial institutions. State commercial banks are not yet the steady deregulation of interest rates (see above). entirely free to lend according to commercial criteria. Like The government could also consider gradually increas- other state-owned enterprises, they have to shoulder heavy ing the level of competition within the financial sector. The TIlE CIIINESE ECONOMY: FIGIHTING INFLATION, DEEPENING REFORMS 34 state commercial banks should, however, be allowed to ambitious agenda. Multilateral institutions, such as the work through the financial problems they have inherited World Bank and the Asian Development Bank, could also and be given the freedom to choose their clients before be tapped for their finance, expertise, and objectivity. being exposed to full-blown competition from financial institutions that are free of such encumbrances. In the Policy banks short term, therefore, policymakers should focus on preparing clear and consistent criteria for permitting the Key issue: The mandate of policy banks remains unclear, entry of only a limited number of new banks. The numbers especially their relationship with the rest of the financial could be increased in the medium term, once state com- system and their role as instruments of government policy. mercial banks are in a position to compete on an even play- A key issue here is the extent of autonomy to be accorded ing field. At first, only competition from domestically to policy banks. It is not yet clear whether policy banks are owned banks should be allowed, to prepare the founda- to operate as banks, evaluating loans independently, or as tions of a strong banking system. The government could government departments, implementing decisions made by study whether the large size of some of the state commer- the State Planning Commission or the State Economic and cial banks might hinder their development into efficient, Trade Commission. Current procedures suggest an amal- dynamic institutions and explore the advantages and dis- gain of the two. For example, projects that receive an advantages of breaking them up into smaller institutions. endorsement from the State Council under advice from the Only in the longer term, once the banking system is com- State Planning Commission can still, on occasion, be petitive and working well under the new set of laws and rejected by the State Development Bank's loan committee. regulations, should policvmakers consider opening the If the government insists on the project, the State banking system fully to foreign competition. Development Bank notes this for the record. At the same State commercial banks, for their part, have a formida- time, the State Development Bank is under pressure to ble agenda ahead as they transform themselves into com- operate profitably; so, in 1995, it started demanding third- mercial banking institutions. The first item on this agenda party guarantees for loans. Guarantors are usually other should be to conduct financial and human resource audits enterprises or commercial banks. Consequently, if any to ascertain their current position and then to prepare State Development Bank loans are not repaid, the com- strategic and corporate plans for the future. These plans mercial banking system will eventually be expected to meet are likely to include the introduction of risk and asset-lia- the cost (either directly or indirectly), undermining the bilitv management techniques; training programs for staff rationale for creating the policy banks in the first place. in modem financial and banking techniques (credit and A second issue is the extent to which policy banks are risk evaluation, liquidity management, risk-based provi- expected to take over existing policy loans extended by the sioning); and management information systems to support state commercial banks. While the Agricultural Bank of quick, informed decisionmaking at all levels of manage- China and the Industrial and Commercial Bank of China ment. No single blueprint could cover the different situa- have transferred some policy loans to the Agricultural tions, requirements, and strategic imperatives of each Development Bank of China, the State Development Bank bank. But managers should seek financial expertise from has not accepted any disbursed policy loans from the abroad, especially from Hong Kong, to help implement this People's Construction Bank of China. At the same time, TABLE 33 State commercial banks' low and declining capital-asset ratios (in percent) State commercial bank 1989 1990 1991 1992 1993 1994 Industrial and Commercial Bank of China 6.5 5 9 5.7 4.9 4.4 3.3 Agricultural Bank of China 6.3 5 4 4 7 4.0 3.0 3.6 Bank of China 5.4 5.0 1.8 4.5 5 2 4.4 People's Construction Bank of China 7.3 6 2 5.1 4.5 3 3 2 8 Source Almanac of Chinos Finance and Banking, 1995. FINANCIAL SECTOR REFORMS: MAIOR ISSUES AND POLICY OPTIONS 35 however, policy banks have taken over disbursements of ment program. In addition, just as in commercial banks, ongoing policy loans from the state commercial banks. policy banks should provision for bad debt and adequately Recommendation: Shape the operations of policy banks account for interest in arrears. to be consistent with financial sector and public finance objectives. The government and the banks' managers each Nonbank financial institutions have their separate roles. For its part, the government needs to issue detailed regulations on how the policy banks will be Key issue: There is a danger that risky financial activity by expected to meet their charters. For example, the State nonbank financial institutions can transmit large systemic Development Bank is restricted to financing projects with shocks to the banking system. Nonbank financial institu- high risk, long gestation, or low financial (but high social) tions include a variety of trust and investment corpora- profitability that would otherwise not be financed through tions, finance companies, leasing companies, insurance the commercial banking system. For this reason, it should companies, and securities dealers (see table 3.1). Many of not be expected to carry the risks associated with financing the trust and investment corporations and most of the projects not of its choosing. Any losses against nonrepay- largest securities dealers were set up as wholly or partially ment of interest or principal should be covered by the bud- owned subsidiaries of the state commercial banks. The get. The State Development Bank's initiative to seek state- rapid growth in the number and size of nonbank financial owned enterprises and commercial banks as guarantors is a institutions is one of the bright spots on the financial land- response to the absence of such a provision and defeats the scape, but it may also harbor considerable risk for the purpose of setting up policy banks in the first place. banking system. Policy banks need to key their bond prices to commer- The absence of laws on nonbank financial institutions cial bank lending rates, to ensure that their cost of funds is and securities markets and weak regulatory oversight have an accurate reflection of the actual cost of borrowing. In meant that the probability of financial failures among large fact, bonds issued by policy banks ( the State Development nonbank financial institutions is high. For example, most Bank in particular) have been administratively placed with trust and investment corporations do not adhere to the commercial banks at interest rates significantly below the provisional regulations issued in 1986, which require them lending rates of commercial banks (for example, 11.2 per- to have capital equivalent to at least 8 percent of their cent for a three-year State Development Bank bond com- assets, to restrict loans to a single enterprise to less than 30 pared to 15.1 percent for a three-year commercial bank percent of the borrower's fixed assets and less than 20 per- loan). This imposes a cost on commercial banks that adds cent of the lender's capital, and to hold fixed assets at less to their already high operating costs. Over the medium than 30 percent of the corporation's capital. The recent term, the placement of policy bank bonds should become example of large losses from manipulative trades in the voluntarv. Naturally, total borrowing by policy banks from treasury bond futures market by the Shanghai International the domestic financial market would need to be restricted. Securities Corporation is a cautionary reminder of how One way would be by requiring banks to keep within a suddenly such failures can arise and the disruptions they specified conservative gearing ratio.6 In addition, however, can cause. bank-specific lending ceilings could be set annually for all Even with the imminent severance of ownership links policy banks in line with the monetary program. between banks and nonbank financial institutions, close As is current practice, the composition of policy bank financial connections between these two groups of institu- lending could be agreed between the State Planning tions provide other channels through which losses arising in Commission, the State Economic and Trade Commission, the nonbank financial institutions can be transmitted to the and the policy banks, with ultimate approval from the State banking system, threatening the integrity of the entire Council. Policy banks should have the right to refuse to financial system. Of China's 391 trust and investment cor- finance a project considered technically or financially unvi- porations, 185 are associated with the state commercial able or outside their mandate. Over time, as policy banks banks. After the divestment process, 200 trust and invest- develop their own appraisal capacity, they could assume ment corporations are expected to remain, 20 of them responsibility for evaluating their part of the public invest- national and the remainder provincial institutions. TIlE CHINESE ECONOMY: FIGHTING INF LATION, DEEPENIN(G REFORMS 36 Recommenda/ion: Strengthen regulatory oversight of Shanghai and Shenzhen stock exchanges have exhibited nonbank financial institutions and separate their ownership extreme volatility in share prices.7 This tends to be caused from the banking system. To ensure that these institutions by inbuilt problems, such as limited disclosure, the "lottery" follow prudent financial practices in line with international system of assignment, bunching of public offerings, the cir- norms of investor protection and information disclosure, cumscribed role of competitive underwriters or primarv the authorities need to draft laws covering the operation dealers, and the limited participation of wholesale and insti- and supervision of nonbank financial institutions, including tutional purchasers of securities such as contractual savings securities markets, finance and leasing firms, housing institutions (such as insurance companies) and banks. funds, and mutual funds. Supervision and regulatory Finally, government oversight of the capital market is authority needs to be vested with appropriate agencies. For weak. The regulations are basically sound and in accor- example, the overlapping jurisdiction of the central bank dance with international principles. The weakness comes and China Security Regulatory Commission with respect to from the enforcement of these regulations, which is splin- the licensing and supervision of securities institutions and tered functionally, institutionally, and regionally and divid- mutual funds needs to be rationalized. The laws could also ed between municipal and central authorities. As a result, establish a separate oversight authority for insurance com- some regulations are not overseen by any government insti- panies and pension funds. tution, such as those on corporate bond trading or covering The government is completely severing nonbank finan- securities dealers and institutional participants. cial institutions from banks to protect banks from risks Recommendation: Increase the efficiency, stability, and arising in the nonbank financial sector. With the same transparency of capital markets and reduce systemic risk. objective in mind, and to tighten control over monetary China's capital markets will need to develop in tandem aggregates, the People's Bank of China could also restrict with the financial sector. Only the steady shrinking of the bank lending to nonbank financial institutions through the credit plan will permit the gradual elimination of quotas for interbank market or through other channels. While the share and bond issues. Similarly, greater flexibility in inter- financial failure of a large nonbank financial institution will est rates will facilitate the issuance of government and undoubtedly have repercussions for the banking system, enterprise bonds. In the interim, however, there is much the effects could be dampened by introducing such fire- the authorities can do to build the infrastructure of capital walls between the two sets of institutions, markets. Standards can be set for credit rating agencies, competition can be encouraged among underwriters, and The capital market the regulatory regime and oversight can be strengthened. The stock exchanges, rather than the government, should Kev issue: China's capital market suffers from distortions in enforce eligibility criteria for listing companies. Firms listed pricing, access, and market development, while share and on the stock exchange or planning on an initial public bond prices exhibit unusual volatility. China's capital mar- offering should be required to disclose more information in ket is subject to the same constraints and controls as the a timely manner. In the bond market, the government rest of the financial sector. The credit plan assigns quotas could announce its borrowing schedule in advance, focus on the amounts of equity and securitized debt that can be on the development of a wholesale bond market, and make issued in any year. The primary market for equities is dis- saving bonds available throughout the year for individual tributed by region, limiting enterprise access to capital mar- and household investors. kets in some regions more than in others. The pattern and To promote the secondary market, the government could speed of capital market development are consequently encourage Shanghai, Shenzhen, and Wuhan to set standards determined by administrative decree rather than market for mutual recognition of each others' bond certificates and forces. These constraints tend to affect primary markets to to examine options for multiple listing. To curb volatility in a greater extent than secondary markets, which seem to be share prices, the government needs to reintroduce daily more sophisticated and to enjoy greater freedoms. price limits immediately . It could subsequently explore the The development of China's capital markets is also possibility over the medium term of introducing a capital inhibited by their volatile and speculative nature. Both the gains tax or a share turnover tax to discourage speculation. FINANCIAL SECTOR REFORMS: MAJOR ISSUES AND POLICY OPTIONS 37 Notes 1994. It should be noted that detailed bank-wide portfolio audits have not been conducted for the four state commercial 1. According to government officials, "policv lending" refers to banks. loans for long-gestation, low-profitability, or high-risk projects 5. Three-, five-, and eight-year deposits held by households considered essential for national economic development. Such are offered the greater of the government-set rate of interest projects could be in infrastructure (harbors, airports), energy (pavable on maturity) or the cumulative inflation rate (a weighted (coal, natural gas, electricitv), agriculture inputs (fertilizers, grain average of the retail price index, the consumer price index, and reserves, small scale farming, animal husbandry, water conserva- the producer price index). In July 1995, for example, actual inter- tion, technical innovation), trade (buyers' and suppliers' credits est rates paid on three- and five-year deposits were 25.25 percent for exports of capital goods), or the "pillar industries" (automo- and 27.95 percent respectivelv; the equivalent interest rates on biles, electronics, machinery, construction). foans of similar maturity were 14.58 and 14.78 percent. 2. Registered capital is Renminbi 50 billion for the State 6. The gearing ratio measures the total debt of an entitv as a Development Bank of China, Renminbi 20 billion for the ratio of its equity. Thus, if government equity in a polic' bank is, Agricultural Development Bank of China, and Renminbi 2.38 hil- say, Renminbi 50 billion, and the specified gearing ratio is 4:1, lion for the Export-Import Bank of China. In addition, the State the total outstanding debt of that bank may not exceed Renminbi Development Bank has raised another Renminbi 126 biLlion 200 billion. (Renminbi 73 billion in 1994 and Renminbi 53 billion in 1995) 7. The A share market in both Shanghai and Shenzhen has from financial bonds placed by the People's Bank of China with been more volatile than the B share market. the commercial banks. 3. The People's Bank of China retains the authority to impose a binding credit ceiling in the event that the aggregate credit of Reference nationwide commercial banks expands beyond acceptable limits. 4. Statement by Mr. Dai Xiaolong, Governor of the People's King, R. G., and Ross Levine. 1993. "Finance, Entrepreneurship, Bank of China, quoted in the Financial Times, October 24, and Growth," Journal of Monetary Economics 32: 513-42. TIIE CHINESE ECONOMY: FIGHIING INFLATION, DEEPENING REFORMS 38 Chapter 4 Reforming public finances S trong public finances are necessary for sustainable imposing heavy costs on banks in the form of bad debts. growth and stability in a market economy. This is This issue was described in detail in a previous World Bank equally important in China, where the economy is in report on China (World Bank 1994). Second, some high transition toward a market-based system. Despite recent priority government activities have been underfunded, reforms in public finances, difficulties with tax collection including health and education services, poverty allevia- and heavy claims on government resources (including sup- tion, infrastructure development, and environmental pro- port for state enterprises) have created inflationary pres- tection. Moreover, some contingent liabilities associated sures and diverted resources from areas critical to sustain- with market reforms, such as pension payments, unem- ing rapid growth in the long run. These difficulties, if unre- ployment benefits, redundancy payments, and the moneti- solved, could severely weaken the government's ability to zation of housing benefits may eventually need to be borne provide essential public goods and services, and the goal of by the budget. The implications of these expenditure macroeconomic stability over the medium term could demands for the government's revenue strategy can be esti- become elusive. mated only as rough orders of magnitude owing to the Mlanaging government expenditures will require setting paucity of data on public expenditures in China. (A more priorities and making difficult choices. Not only does the detailed treatment is given in Annex 2.) government budget need to accommodate costs associated with market reforms, it also needs to play a pivotal role in Health and education developing critical social and physical infrastructure to sus- tain a rapidly growing economy over the medium to long China's social indicators are higher than in most low- term. Meeting these incremental expenditure needs and income countries and approach those in middle-income achieving the government's objective of eliminating the countries. The recent declining trend in social sector budget deficit by 2000 would mean a major turnaround in spending, however, is eroding China's favorable standing tax revenue performance. This is a major challenge, requir- among comparable Asian countries. Public spending on ing actions on a broad front, including improved cost recov- education declined from 3.1 percent of GDP in 1985 to 2.4 ery for the delivery of public goods and services, better tax percent in 1994. Public health spending shows a similar administration, and some changes in the structure of taxes. trend. China spends disproportionately less on basic edu- Expenditure needs FABLE 4 1 Comparing government expenditures The decline in government revenues and the desire to keep Central government the budget deficit in check have led to a steady reduction in Government expenditures as a expenditures as a percentage of all budgetary expenditures from 33.8 percent of GDP in 1978 percentage of GNP government expenditures to 14.1 percent in 1994. Extrabudgetary government expen- All countries 39 1 72 3 ditures are estimated to be an additional 3.8 percent of GDP Industrial countries 47.6 65.9 Today, China's budgetary expenditures as a share of Developing countries 3 .7 GNP are far below those in most other countries (table Ch na (budgetary 1994) 14.1 40 2 Note Data are frorn a sampe of eighteen industrial countries and twenly-two develop- 4.1). Two undesirable outcomes have resulted. First, a sub- Nrg coDntries forwnhicr data on general government are available n the Interrratino stantial portion of public expenditures is financed through lnonce Storusrnca Data are averages over three Years ending 1987 or 1988 Sov'2fe For countrry groups. Levin 99: for China, M n stry of Finance and World Bank the banking system, resulting in inflationary pressures and staff estimates 39 cation and health care than do other Asian countries. getary allocations, let alone eliminating poverty in the Though China's demographics and one-child policy explain remaining 2,500 counties or addressing the growing prob- some of this low funding, the harsh fact is that education lems of the urban poor. and health are underfunded. Inequalities in education and Extending the multipronged approach adopted in the health care remain large across provinces and between World Bank-financed South-West Poverty Reduction rural and urban areas. Functional illiteracy rates in the far Project to all the poor in China would mean additional west are twice those in the south coast (World Bank 1995).' public expenditures equivalent to 0.33 percent of GDP on Government employees (who live mainly in urban areas) average in the next five years. This is roughly double the spend three times the national average on health care. allocation in the government's National Poverty Reduction Local budgetary health spending per capita in Shanghai is Plan. In addition, the government will need to adjust its twice that in Guandong and seven times that in Anhui. expenditure targeting to assist the urban poor and to reach Generally, provinces with lower incomes per capita and a the poor in counties that have not been designated as poor. higher proportion of minorities tend to have lower public health and education expenditures per capita, higher pri- Environment protection vate costs, and worse social indicators. By increasing budget allocations to basic education and China's increased public spending on pollution control health, the government can arrest a possible deterioration in (from 0.4 percent of GDP in 1980 to 0.67 percent in 1992) China's social indicators, reduce disparities in access to edu- has been inadequate to deal with the environmental conse- cation and health facilities, and promote long-term growth. quences of rapid industrialization. Levels of total suspended To achieve universal access to good quality basic education, particulates remain well above those considered safe by the government expenditures on basic education would need to World Health Organization, sulfur dioxide concentrations rise from the current 1.2 percent of GDP to 2.1 percent by exceed the lowest acceptable Chinese air quality standard, the end of the century. Three-quarters of the increase would few urban rivers reach the lowest acceptable Chinese water be devoted to improving quality2 and the remainder to rais- quality standard, groundwater quality continues to fall at an ing the enrollment ratio from 81 to 100 percent. Similarly alarming rate, and petroleum discharges to surface waters financing a public health package alone would mean an esti- are once again increasing after an initial decline. Nearly 40 mated increase in budgetary expenditures of 0.8 percent of percent of urban China is unserved by sewers, and waste- GDP, or three times current spending according to guide- water is discharged directly into lakes and rivers. Under cur- lines prepared by the World Bank (World Bank 1993). Add rent municipal investment plans, 30 percent of urban China to that 0.6 percent of GDP in increased costs to cover basic will still remain unserved by sewers even in the year 2000. clinical services for China's uninsured rural population,3 Increased public expenditure is only one of several pol- and the incremental costs for adequate provision of health icy tools needed to resolve China's environmental prob- services would be about 1.4 percent of GDP lems. But it is an important one, especially for meeting the investment and operating costs of sewerage facilities, Poverty alleviation wastewater treatment, and solid waste handling.4 Estimates of investments to improve waste treatment and water sup- Despite enormous progress in reducing the number of ply in cities where the need is urgent are on the order of poor since 1978, poverty in rural areas remains widespread Renminbi 100 billion a year. The budget is expected to and living conditions deplorable. There are also signs in finance some 30 percent of this amount, suggesting bud- recent years of a new urban underclass, a consequence of getary expenditure requirements of about 0.2 percent of increased urban unemployment, lower real incomes of GDP per year over currently budgeted levels. fixed-income pensioners, and rural-urban migration. The government has been targeting the rural poor through the Infrastructure National Poverty Reduction (8-7) Plan with some success. But eliminating poverty in the designated 592 poor coun- China has made huge strides in infrastructure investments ties by 2000 will be difficult to achieve with existing bud- over the last decade, but still needs greater public spending TiIE CHINESE ECONOMY: FIGHTING INFLATION, DEEPENING REFORMS 40 in this area. Investments amounted to 7.5 percent of GDP percent payroll tax, sale of state enterprise assets, and in 1994, up from 4.4 percent in 1985. Higher tariffs (for incremental budgetary contributions amounting to about example, on power) and directed credit through the bank- 0.7 percent of GDP (table 4.2; World Bank 1996). To this ing system have been the principal sources of finance. But must be added projected unemployment benefits of about infrastructure needs in China are huge. Although the pri- 0.2 percent of GDP that wil also need to be met from the vate sector is expected to play a key role in meeting these budget. This assumes a 5 percent urban unemployment needs, public spending on infrastructure will also have to rate and benefit levels equivalent to the public pillar of the rise significantly. This is especially so in interior provinces. pension scheme. So far, though, budgetary contributions have been small. As noted, these estimates of additional public expendi- Of particular concern is China's road infrastructure, ture requirements in priority areas represent only rough especially in rural areas and in interior provinces, where orders of magnitude. Together, they add up to 4.6 percent cost recoverv is not a viable option. Physical indicators of GDP (table 4.3), and would raise total government show that China compares unfavorably with other large expenditures to about 22.5 percent of GDP, bringing them countries in per capita coverage of the road network. It is, more in line with government expenditures in other coun- therefore, reasonable for China to invest about 8-9 percent tries. This is a conservative estimate, however. It does not of GDP into infrastructure each year and to increase bud- include the growing cost of government services (whose getarv allocations by about 0.7-1.3 percent of GDP relative costs will rise with economic growth and wages), the monetization of other in-kind benefits to civil servants Social insurance (notably housing), or the possible need for a financial bailout of the state commercial banks (see chapter 3) It is important to evaluate carefully (and plan for) the bud- among others. getarv implications of alternative options being considered Financing these expenditures will require additional for pension reform. Take one such option-the multipillar government revenues equivalent to about 6.0 percent of approach-currently favored by the government. The first GDP This points to the fundamental importance of stop- of these pilars would have welfare and redistributive objec- ping the decline in revenues (as a share of GDP), and tives and be funded on a pay-as-you-go basis. The second reversing the trend quickly. Successful implementation of would involve fully funded, mandated, individual retire- the government's tax reforms is thus central to ensuring the ment accounts. The third would be voluntary savings. An sustainability of rapid growth with stability. ongoing study by the World Bank on pension reform in China recommends a viable pension scheme funded by a 6 TABLE 4 3 TABLE 4.2 Simulation of proposed expenditures and financing, Budgetary impact of pension reform: simulating 1994 pension liabilities in 1994 Proposed expenditure Percentage of GDP Amount Percentage Tota proposed expenditures 22 5 (billion RMB) of GDP Actual budgetary expenditures. 1994 14. Extrabudgetary expendituresa 3.8 Actual expendituresa 86.2 1.9 Add tional proposed expenditures 4.6 Proposed scheme' 78.8 1.7 Education (0.9) First pillar 31.9 0.7 Health (1.4) Second pillar 46.9 1.0 Poverty alleviation (0.2) Env ronment (0.2) Resources already in budget Infrastructure (1.0) for penson payments 29 6 0.6 Social Insurance (0 9) Financing gap' 49.2 I Financed by 22 5 Budget 29.7 0 7 Budgetary revenues 12 4 Sale of assets 19.5 0.4 Extrabudgetary revenues 4.1 a. Pensior expenditures of state owned un ts Additonal revenue required 6.0 b Beneft level reduced to 60 per cent of wages. c Proposed scheme less resources a ready in budget. a Based on 993 figures Source World Bank staff est mates. Source Wlorld Bank staff estimates REFORMING PUBLIC FINANCES 41 Mobilizing revenues individual income tax amounted to less than 0.2 percent of GDP The tax authorities estimate that this is about half of Raising government revenues as a share of GDP will what should be collected. The current exemption level of Y require a combination of growth, a broader tax base, and 800 per month is much higher than the minimum for living improved compliance through better tax administration. In expenditures that is usually exempted in other countries, the short run, improving compliance is likely to contribute and keeps most individuals outside the tax net. But as the most, while phasing out the plethora of tax exemptions wages are increasingly market-determined and the subsi- for domestic and foreign firms would greatly improve the dies that wage earners now obtain in the form of housing, buoyancy of the tax system. In the longer run, further tax education, and health care are monetized, it is likely that a reforms may be needed to increase tax revenues as a share larger share of value added will accrue to labor. Simply of GDP Several options are available to the government in keeping the exemption level constant in nominal terms (as both the short and the long term: was done in 1995) would bring an increasing number of * Improve the coverage and compliance of the valtue addled people into the tax net, and allow revenues to increase tax. As noted earlier (see chapter 1), almost half of all tax graduall. Illustrative simulations on the basis of urban revenues in China come from the value added tax. But household surveys indicate that xvith a broader tax base potential revenues from the value added tax are even larg- and better compliance, revenues from the individual tax er. At about 70 percent, compliance in China is compara- would rise by about 0.8 percent of GDP (see Annex 2). To ble to that in other developing countries with similar tax achieve this target, however, the tax authorities would have bases, but falls short of the 90-95 percent compliance rates to process 160 million taxpayers, compared to the current achieved by top tax performers.6 Increasing compliance to 30 million. 85 percent, a feasible target in light of the ongoing tax * Merge the foreign and domestic enterprise income tax administration reforms, would yield incremental revenues rates. This option is already under active consideration by slightly over 1 percent of GDP Each additional percentage the government. Foreign-funded enterprises enjoy lower improvement in compliance would yield a further 0.07 per- income tax rates and a variety of other tax and tariff cent of GDP Extending the VAT to services, which is desir- exemptions. Favorable treatment may have been justified able for efficiency reasons, would increase the VAT tax base in the past, on grounds that foreign enterprises bring new by about 8.6 percent of GDP but would not necessarily technologies, management techniques, and marketing generate additional revenues since the sector is now subject savvy that result in spillover benefits for Chinese firms. to the separate business tax.7 But increasingly foreigners are investing in China because Increase application of the individual income tax. China's of the attractive domestic market. Moreover, much of tax structure relies too heavily on the VAT. Other countries China's subsidy to foreign enterprises is taxed in the have more diversified tax bases, with income taxes playing home country of the investor and thus probably has little a much larger role (table 4.4). China's revenues from the effect on the decision to invest in China. Finally, tax TABLE 4 4 Comparisons of the composition of government tax revenue (percentage of total tax revenues) Personal Social Corporate VAT/general Excise Trade Wealth and Other income tax security tax income tax sales taxes taxes taxes property taxes taxes Industrial countries 28 28 8 16 10 3 3 4 Develop ng countries I1 6 1 8 4 3 29 3 6 Asia 15 0 17 '6 16 31 1 4 Europe 5 18 7 2 9 17 2 1 1 Western hemisphere 8 12 14 14 18 21 3 10 Ch na (l994) 1.5 n.a. 14 46 1 1 6 _ 8 na. is not appicable: -- s not available. Note: For countres other than China. reventues refer to central government for Ch na to genera government Source Burgess and Stern 1993 IMF THiE CHINESE ECONOMY: F[GHTING INFLATION, DEEPENING REFORMS 42 advantages for foreign enterprises tends to encourage assessment, development of efficient audit selection and roundtripping (see chapter 1). thus reducing the tax base procedures, introduction of best-practice computerized of domestic enterprises. information systems, internal reorganization of tax admin- Applying the domestic enterprise income tax rate to for- istration units and improved incentives for tax administra- eign-funded enterprises would not yield substantial addi- tors, close cooperation between the national and local tax tional revenues in the short term because the tax base of services, improvement in presumptive taxation methods, foreign enterprises is small.9 Their current low profits can and implementation of a streamlined system of stiff, but in part be explained by the long gestation period of their fair, monetary fines for various tax offenses. investments. Using assumptions about the average gesta- Together, then, these tax and tax administration mea- tion period of investments and the rate of return, we esti- sures could potentially raise incremental revenues equiva- mate that the government could raise 1.2 percent of GDP lent to 6.0 percent of GDP (table 4.5). Achieving that tar- in incremental tax revenues from this source by the end of get would require a monumental effort from the Chinese the century.' tax authorities. Just stabilizing the declining trend in the * Increase taxes on pollutants. Environmental levies and tax revenues as a share of GDP is proving difficult charges alone may not affect behavior enough to ade- enough. The difficulties associated with reversing this quately protect the environment. Taxing pollutants is an trend cannot be underestimated. Nevertheless, the important complementary option. The concentrated distri- options outlined above (and presented in greater detail in bution of the main pollutants (coal, petroleum) makes such Annex 2) put forward realistic targets, provided the products easy to tax. Moreover, the sheer quantities of pol- authorities at the highest level are committed to achieving lutants used in China makes taxing them an attractive them. proposition. To illustrate, in 1994 China used 209 million tons of oil products, including crude oil. Taxing all oil prod- Intergovernmental resource transfers ucts at Renminbi 1 per liter would have generated about Renminbi 133 billion, or almost 3 percent of GDP in rev- Marrying the objective of revenue mobilization to the pub- enues. Taxing only non-industrial use would have still yield- lic expenditure needs of the economy (discussed earlier) ed incremental revenues of almost Renminbi 50 billion, will require an effective system of intergovernmental Introduce social security taxes. As noted earlier, some grants for redistributing the revenue surplus from the cen- form of social security tax will become necessary to finance tral government to the provinces. The revenue assign- the basic pension pillar for (urban) workers. A pay-as-you- ments introduced in 1994 are expected to gradually raise go basic pension provision does not really necessitate a sep- the central government's share in total revenues to 60 per- arate tax. But experience in other countries shows less cent. The government is considering various options for resistance to a payroll tax for a generally accepted purpose redistributing the surplus revenues of the central govern- such as pensions than to raising general taxes. Moreover, ment. One overarching objective will need to be redistrib- enforcement becomes easier when pension eligibility is ution in favor of poorer provinces and counties. Both rich linked to paid-in premiums, since the payer has an incen- TABLE 4 5 tive to make regular payments. Another attractive feature Incremental revenues by 2000 from recommended of payroll taxes is its administrative similarity to the widely tax measures applied personal income tax withholding. As discussed (percentage of GDP) above, a payroll tax of 6 percent (leading to incremental Measure Revenue effect by 2000 revenues equivalent to 0.9 percent of GDP) could cover Value added tax I public pension liabilities and provide for unemployment Individual income tax 0.8 insurance. Enterprise income tax 1.2 Improve tax admzmnztration. We conservatively estimate Taxes on pollutar9ts A r that ongoing and further reforms to the tax administration Improved tax administration !.0 system could raise revenues by 0.8-1.0 percent of GDP Tota 6.0 These measures include a move toward taxpayer self- Sorrce WolId Bans staff estimates REFORMING PUBLIC FINANCES 43 and poor provinces have an inherent interest in such a Notes scheme. Poor provinces and counties would obviously wel- come net resource transfers from the center to supplement 1. The far west includes Xinjiang, Xizang, Qinghai, Gansu, and their inadequate fiscal resources. Richer provinces would Ningxia. The south coast includes Guangdong and Fujian. 2. Public expenditure per capita in Liaoning province was also find such a scheme beneficial. It would lower pres- chosen as the benchmark, because it is the non-city province with sures for migration from poor to rich provinces, reduce the highest such expenditures after Tibet. tensions by lowering disparities in income per capita and 3. This is smaller than the 0.6 percent of GDP that could be in poverty across provinces, and add infrastructure to poor saved if government and state enterprise employees reduced their provinces that would help open markets in the interior and average spending on health from three to two times the national integrate poorer provinces more fully with the national average. 4. Other, perhaps more important, policy tools would include economy, regulatory control and appropriate pricing. An effective intergovernmental grants scheme would 5. This assumes that the current level of budgetary subsidies require mechanisms to ensure that central resources find (2-3 percent of GDP) would be maintained and reoriented their way to poor counties and to the subprovincial levels. toward explicit budgetary support in the form of investment and One way would be to earmark central resources for poor working capital for industrial policy and social objectives. One wa would be to earmark central resourcesforpoor 6. The estimate for China's compliance was provided by the counties, relving initiallv on income per capita data. A small counties, relying initially on income per capita data.Asmall State Tax Administration and was based on the 1992 input-output program of this sort exists already, but it needs to be tables. expanded considerably to reach China's 70 million poor. 7. Consumption of services added up to 19.2 percent of GDP Care would also need to be taken to ensure that such trans- in 1990. However, the net addition to the VAT tax base would be fers represent additional funding and that subprovincial fis- less, since industrv had inputs to the services sector of about 10.6 cal arrangements demonstrate a redistributive bias in their percent of GDP .expenditure allocation across counties. 8. The simulations are illustrative. The household surveys as expendtummary, reforming public finances inChinawillbe published in the China Statistical Yearbook provide far too little In summary, reforming public finances in China will be detail to estimate detailed projections for the individual income tax. pivotal for sustaining development. Transition to a social- 9. The vast majority of foreign-funded enterprises are in the ist market economy involves more than market reforms. It industrial sector. has far-reaching implications for public finances and the 10. Assuming a gestation period of four years, the stock of role of government. This chapter identified areas where foreign investment yielding profits by the end of the century additional budgetarv expenditures would be desirable, would be as high as US$152 billion, or about 17 percent of GDP partly to facilitate reforms in key areas of the economy, but also to improve the quality, and so the sustainability, of References growth. It also showed that meeting these expenditure needs through revenue mobilization is feasible with Burgess, R. and N. Stern. 1993. "Taxation and Development," improvements in tax administration and a broadening of Journal of Economic Literature 31: 762-830. the taxbase. .,,se measures will needtobecomplemen- .Levin, J. 1991. "Measuring the Role of Subnational tedtax base. Thves mgetasuryrsesl aned tobe cntrompleent Governments." IMF Working Papers 91-8, Washington, D.C. ed by improved budgetary processes and the introduction World Bank. 1996. "China: Pension Systems Reform." Report of mechanisms to redistribute surplus central revenues to No. 15121-CHA, China and Mongolia Department, World poor provinces and counties. Bank, Washington, D.C. (forthcoming). TIlE CHINESE ECONOMY: FIGHTING INFLATION, DEEPENING REFORMS 44 s~ Annexes K ~Annex l a Matrix of proposed financial * sector reforms Overall objective: Establish a financial system that efficiently mobilizes and allocates resources in a safe and sound manner to support rapid, stable, and sustainable growth. Subordinate objective Area Phase 1(1-2 years) Phase 11 (3-5 years) Phase 111 (6-10 years) A. POLICY FRAMEWORK Reduce the role Credit plan Reduce the share of the Restrict credit plan to Eliminate cred t pian of government in credit plan subject to project- policy banks only directing resources by-project allocaton Securities market Ei minate provincial quotas for Elim nate aggregate quota share and bond issues; introduce aggregate quota Interest rate policy State Council de egate decsions Allow commercial banks the Liberalize interest rates on nterest rates to Monetary freedom to set their own completely Policy Committee. Simplify interest lending rates for a small rate structure: ncrease frequency proportion of their asset of interest rate adjustments: raise portfolio: increasingly widen lending rates to real positive levels: the bands within whicn increase spreads to r-easonab e evel lend ng r-ates can fluctuate Se increasing port ons of treasury Sell all bonds at market Sell all bonds at auct on bonds at market interest rates, rates, all rediscounting done initate auct ons for small portions at market rates of bond issue: sh ft to rediscount facil ty by Central Bank Tax policy Rev ew tax laws applying to Reduce tax rates on financial fnancial institutions inst tut ons: make mp ementat on of tax laws more rule-based B. CENTRAL BANK OPERATIONS Improve the Central Legal framework Promulgate and implement deta ed Review implementation of Bank's management rules and regulations related to new Central Bank laws and revise of monetary Central Bank law where necessary aggregates Control of monetary Abolish direct lending by the People's Restrict Indirect funding of Remove policy loans from PBC's aggregates Bank of China (PBC) for policy pur- po cy loans though balance sheet poses (except for agricultural discounting: elim nate PBC procurement) lend ng for agricultural procurement Actively use reserve ratios. Further expand use of Use indirect policy Instruments asset-i ability ratios. and discount indirect instruments as principal mechanisms for fac ty to manage moretary managing monetary aggregates aggregates: expand open market operations Institutiona Develop and extend payments Complete Ch na National development system Automated Payments System Strengthen PBC supervisory Reorganize PBC branches capab ities: develop strategy for into reg onal central bank reorgan zing PBC branches branches with clear superv sory responsibilitlies Vest PBC w th authorty to establish loan classificat on and provisioning methodologies 47 Subordinate objective Area Phase 1 (1-2 years) Phase 11 (3-5 years) Phase 111 (6-10 years) C. STATE COMMERCIAL BANKS Transform state Legal framework Promu gate and mplement Review mpementation of commercial banks detailed rules and regulations commercial banking law into genu ne related to new commercia and rev se where necessary commercal banks banking law Bank's divest nonbank financia institutions Create legal and regulatory structures to enforce securty interests and loan collection Review economies of scale and Based on review results, Implement bank restructuring ownership structure of banks prepare plans to restructure p ans banks into smaller units and diversify bank ownership Competition policy Estabish c ear licensing procedures Init ate entry of foreign banks Expand entry of foreign banks for banks, a obv entry of new in Renminbi business in Renm nb business domest c banks Institutional development Implement new accounting system and upgraoe management information system Conduct portfol o audits Assess bank cap tal adequacy Resolve bad debt problem and achieve internationa standards of capital adequacy Introduce risk-based provision.ng Ensure adequate provisioning for bad debts Introduce sound asset-liability management practices and r sk management techniques in lend ng: introduce sound loan approva procedures and develop cred t appraisal skills Conduct human resource Develop comprehensive training needs aud ts programs; ntroduce modern personnel management techniques D. POLICY BANKS Shape operations of Policy and institutional Issue detailed implementing policy banks consistent development regulations related to charters with financial sector of pol cy banks and public finance objectives Limit the operations of the State Transfer "soft" w ndow to the Development Bank (SDB) to pro Ministry of Finance jects with high risk, long gestation, or low financial (but h gh social) prof tability Set annual lending limts for policy banks consistent with development of commercial banking sector State Plann ng Commission, State Increase SDB autonomy to Econom c and Tlade Commission, dentify and finance part of and SDB to confer on SDB ending public nvestrnent program program, w th veto power for SDB in I ne with its mandate Introduce incentives for loan Introduce comoetition in collection in agency relationship seecton of agency relationship TIIE CIIINESE EICONOMY: FIGHITING INFLATION, DEEPENING REFORMS 48 Subordinate objective Area Phase 1(1-2 years) Phase 11 (3-5 years) Phase 111 (6-10 years) Liability Management Extend explicit sovereign backing Consider tapp ng equity for all PBC borrowing market for new capital if policy banks performance merits, evaluate need for continued sovereign backing Set policy bank bond rates In Review scope for policy bank relaton to commercial lending rates bond issuance directly to for loans of equal matujrnty; ntroduce public, extend maturity of voluntary placement of policy bank bonds to reduce term oonas transformat on risk Maintain pronibition of policy bank deposit taking Asset Management Policy banks to provision for bad Policy banks to introduce and debt and adequately account for identify guarantees as part of interest in suspense lending program Level of "soft' lending in SDB to vary in accordance with budgetary support SDB/SIDC to evaluate quality of assets acquired from former SICS, SIDC equity contr butions to be given same degree of scrutiny as SDB loans. E. OTHER BANKS AND NONBANK FINANCIAL INSTITUTIONS Separate nonbank Legal framework Prepare a law cover ng the operation financial nstitutions from for ali nonbank financia and supe-vision of nonbank financial the banking system inst tutions institutons; complete severance of and strengthen ownership I nks between banks and regulatory oversight nonbank firancial inst4tutions Credit cooperatives Separ-ate rura credit cooperatives Provide a clear framework for from the Agricultural Bank of Ch na. rural credit cooperatives under prepare ground for transforming Centra Bank supervis on: start urban credit cooperatves into banks transforming urban credit cooperatves into banks Trust and investment Restrict enter pri-se depos ts in trust Restrict government lending Restrict ownership of trust and corporations and investment corporations to trust and investment investment corporations by local corporations governments Leasing and finance Restrict ownership of trust and companies investment corporations and fnance companies Insurance companies Promulgate rules and regulatons unde- new insurance law Establisr oversight authonty for Insurance companies separate from PBC Pension funds Estabijsh overs ght authority for pension funds separate fr-om PBC Mutual funds Transfer supervision to China Security Regulatory Commisson (CSRC) MATRIX OF PROPOSED FINANCIAL SECTOR REFOR.MS 49 Subordinate objective Area Phase I ( 1-2 years) Phase 11 (3-S years) Phase IIl (6-10 years) F CAPITAL MARKETS Increase efficiency. Primary market treasury Pre-announce annual schedule of Sell limited government debt stability, and bonds government debt issues make directly to reta I nvestors transparency of capita savings bonds available throughout through savings bonds markets and ower the year for retail investor-s system c risK Primary market, equities Exchanges to enforce e gibility Enforce better d sclosure at criteria time of prospectus issue Expand auctions of in tial pubic Allow enterprises to set initia offerings public offering dates Secondary market Shangha, Shenzhen, and Wuhan Draw up standards for the Permit dual or mult ple listing in deve opment exchanges to set standards for mutual recognition of regional trading exchanges other than Shanghai recognition of bond certificates: start centers as exchanges; initiate and Shenzhen study on dual list ng n exchanges dual listing To reduce share price volatility, Introduce capital gains tax Consider opening 'A' share reintroduce daily pn-ice lim ts or share turnover tax market to foreign investors Market infrastructure Leave selection of underwriters for Encourage diversification of Permit foreign underwriters to share issue to the market underwriting techniques compete in the domestic market Estab sh standards for credit r-ating Credit rating made precon- Eliminate government approval agencies d tion for initial public offering for share issue Regulatory framework Pass the draft securities law: clarfy C arify lega regime for mutua overlapping jur sdict ons of PBC funds and other inst tutional and CSRC investors Enlarge the CSRC and strengthen Form CSRC regional offices its supervision capacty TtIE CIIINESE ECONOMY: FIGHTING INFLATION, DEEIPENING REFORMS 50 ^. ~Annex l b Matrix of pro osed state enterprise re orms Objective Short term Medium term Long term Improve governance, d versify Comp ete implementation of international ownership, and lower subs dies accounting system and independent audits Initiate transfer of 1 4 autonomous rights to Complete transfer of all 1 4 autonomous managers rights to manager-s Enact new state asset management law Promulgate impementing regulations of state asset management law Separate commercial actvit es from sector ministres and bureaus Lower subsidies through budget and banking system Refine property rghts, governance regme and corporatozation for- nonstate enterprses, for example by accelerating the estab shment of cooperative sharehold ng companies among collectively owned companies among the government's Incorporate 500 large state enterprises Extena incorporat on to remaining p-ority priority 1,000 enterprises under Company Law state enterprises Require pubic d sclosure of ndependent y aru_dted annual reports For utilities, establish clear regu ations for tariff setting * among i 4,000 medium and Separate out marginai state enterPprises anc Continue program Introduce debt restruc- Restructure remaining large industral state enterprises: distinguish inherently viable from effectively turing after fnancial situation and corporate marginal, but viable, bankrupt ones Ensure that new flow of st-ategy acceptable to banKs state enterprises working capita and investment loans fr-om banks are for commercially viable projects Begin liquidating enterprises that have little Continue liquidation of non-v able Complete liquidation of chance of becom ng v ab e state enterprises non -viable state enterpr ses Corporatize the most viab e enterpr ses. Incorporate enterprises made viable after- Incorporate ali medium Require public disclosure of independently debt restructuring. Requ re pub c d s- and large state enterpr ses audited annual reports. closure of independently audited annual reports * among 87,000 small industrial Transfer 10-20,000 small enterprises to the Extend program to 50,000 small state Transfer all remain ng enterprses. non-state sector through mergers, acqui- enterprses small state enterprses sitions, and sale to non-state sector Transfer sociai services to Transfer pension, health, and education Unify municipal pr-ograms into nat ona. government obligations from enterprises to government program for pens on and heath and imple- in at least the 15 pflot cties, with compen- rnent in remaining cities satory fscal transfers, if required Introduce experimentation with expanded Establish unemployment insurance program unemployment nsurance system 51 Objective Short term Medium term Long term Improve competition po'icies for Deregulate prices fjrther Eliminate admnistered pr ces for all but a Eliminate all administered a I state enterprises few essential commod ties prices Phase out restrictions on inter-provincial Eliminate restrictions on inter-provincial trade and investment trade and investment initiate free entry and exit. In tiate entry of Expand free entry and exit Eliminate all restrct ons domestic and fore gn nvestments nto infra- to free entry and exit structure (teiecommunications, onl and gas and power) Extend trading rights to all enterprises, subject to regstration and other standards Enact new bankruptcy aw Remove tax biases favoring foreign firms and special economic zones Continue with rationalization of trade and Continue program Comp ete program investment regime as consistent with WFO accession agreements TIIE CIIINESE ECONOMY: FIGHTING INFLATION, DEEPENING REFORMS 52 ~~Annex 2 Reforming public finances for sustainab e development T e decline in government revenues as a share of with low-income countries, approaching those in higher gross domestic product, and an otherwise commen- middle-income countries. However, recent years show a dable desire to keep the budget deficit in check, have declining trend in social sector spending, eroding China's led to a steady reduction in budgetary expenditures from favorable standing among comparable Asian countries. 33.8 percent of gross domestic product in 1978 to 14.1 per- Public expenditures on education declined from 3.1 cent in 1994. Extrabudgetary public expenditures amounted percent of gross domestic product in 1985 to 2.4 percent in to a further 3.8 percent of gross domestic product. 1994 (table A2.2). This is in contrast to the Asian NICs, The current level of China's budgetary expenditures is where steady increases in public spending on education substantially below' that in industrialized and developing (especially basic education) played a fundamental role in countries alike (table A2.1). This appears to have yielded sustaining their high growth. Part of China's declining two sets of undesirable outcomes: (a) the emergence of a share of education expenditures in gross domestic product sizable quasi-fiscal deficit, discussed in detail in the last may be explained by demographics and China's one-child Country Economic Memorandum (World Bank 1995); and policy Also, fees and self-raised funds have increasingly (b) underfunding of priority activities, including in infra- supplemented budgetary resources, raising the financial structure, health and education services, and poverty alevi- burden on poor households and reducing their access to ation, which perpetuate unacceptably poor living conditions schools. In addition, China is spending proportionately less for a large segment of the population and may threaten the on basic education than East Asian comparators. In 1985 sustainability of growth.1 This annex presents some esti- the share of basic education in China's total public educa- mates of the extent to which government budgetary expen- ditures in key sectors fall short of needs and puts forward TABLE A2 2 suggestions on how additional government revenues can be Public expenditures on education raised to finance incremental expenditures. (percent of gross national product) of which Education and health basic education 1985 (percent) 1989 China's record in human capital formation has been Hong Kong 238 69 3 28 Korea,Rep.of 3 0 83 9 3 6 impressive and its social indicators are high in comparison Singapore 5.0 64.6 3.4 Malaysia 7.9 74.9 5.6 Thailand 3.2 81.3 3.2 TABLEA2 I Indonesia 2.3 - - General government expenditures Ch na 3 1 60 3 27 Memorandum item Government Central government China (I1994) expenditures expenditures as percent Pubi,c expendoture 2.4 as percent of GNP of total expenditures Budget, 2.0 All countries 39.1 72 3 Note Public expenditures incude budgetary expendrtures extrabudgetary expenditures Industrial zed countries 47 6 65 9 fronm educat onal surcharge. and state enterprise expenditures on education Basic edu- Developing countres 31.7 77.8 cation only applies to government evpernd tures. ano is calculated as expenditures on China (budgetary 1994) 14 1 40 2 primarl/ educaton pus two thirds of secondary education a 1994 budget number ncludes expendi-uie front the educational surcharge, which is Sonnce M nistr-y of Finance Lev n 1991 World Bank staff est nates Lev n s data are not included n earlier budgetary numbers The strcharge amounted to about Renminbi from a sample of 8 ndusti a countries ano 22 deve oping countries for which data on Obill on or 0 4 percent ot gross domestic product in 1992. general government are available in the Internatonal Fnance Slatstcs Data are a,e- Snsi,ce M,ristry of Education, Statstica State Bureau 1995, Asian Development Bank ages over- three years ending 987 or 1988 993: Word Bank 1 995c World Bank 993a 53 tion expenditures was 15 percent below selected East employees. Except for about 100 million of the highest Asian countries and this share has been falling since. earners, the rural population is uninsured. Over the reform Overall spending in health has also been declining as a period, health financing has shifted from the government share of gross domestic product (table A2.3). While budget and collective health schemes toward insurance and China's national health indicators compare favorably to user fees. Whereas the government budget financed 25 other countries with similar per capita income levels, percent of health expenditures in 1980, it only financed 13 these indicators hide substantial regional variation. Access percent in 1992-below levels in most Asian comparators to adequate health care remains a problem for large seg- (table A2.5). Rural collective funding declined even more ments of the population and affordability is a growing sharply, from 16.7 percent of health expenditures in 1990 concern. to 5.5 in 1992, thus leaving most of the rural population Inequalities in education and health care-both in term paying user fees. T'hese fees now finance over a third of of outcomes and expenditures-remain large. Provinces expenditures. with lower per capita incomes and a higher proportion of The government can arrest a possible deterioration in minorities tend to have weaker social indicators. (table China's social indicators, mitigate disparities in education- A2.4) For instance, functional illiteracy rates in the Far al attainment and health status, and promote growth by West are twice those in the South Coast. The divergence in increasing the level of public expenditures allocated to school attendance among the regions would predict a per- basic education and health. To achieve the goal of univer- sistence in these patterns. sal access to good quality basic education, government Disparities in government spending contribute to this expenditures on basic education would have to rise from outcome. These disparities are large and have grown with the current 1.2 percent of gross domestic product to 2.1 greater fiscal decentralization. The poorest regions with the percent of gross domestic product by 2000. Of the 0.9 per- weakest fiscal base have the lowest per capita expenditures, cent rise in expenditures, about 0.5 percent of gross which are matched with the highest private fees. However, domestic product is necessary to bring the expenditures many of the poorer regions also have a large share of per student in basic education to acceptable levels.2 The minorities, which adds to education costs. Disparities rest is necessary to increase the enrollment ratio from the among local budgetary health spending show a similar pat- current 81 percent to 100 percent. Assuming a constant tern. Whereas Anhui spends barely Renminbi 5 per capita share of gross domestic product for government expendi- a year, Shanghai spends Renminbi 39 and Guandong tures on higher education, this would put government edu- Renminbi 18. cation expenditures at about 2.9 percent of gross domestic Inequalities in access and care have been exacerbated product. by changes in the structure of health care financing. The The package of public health and essential clinical ser- shift in health care finance towards insurance and insur- vices recommended in IX"orld Development Report 1993 ance coverage has tended to concentrate the benefits of (World Bank 1993b) requires resources equivalent to 3.5 health care on the urban population, especially government percent of gross domestic product for the whole popula- TABLE A2.3 Health indicators, selected countries, 1990 Health Public sector Life Child expenditure health expenditure expectancy mortality (percent of GNP) (percent of total) at birth (per 1,000) Established market economies 9.2 60 76 HI European former social st economies 3.6 71 72 22 China (I1990) 3.5 59 69 43 China (1993) 3.3 58 69 54 India 6.0 22 58 27 Other Asia 4.5 39 62 97 Latin Amenca 4.0 60 70 60 Note Inc udes pubic insurance schemes. Source. World Bank 993b: Howes asod Hussan 1994 Asian Development Bank 1995 Soc al lno cators of Deve opment. ThIE CtiNESE L [CONONI: FIGHIIN IN' NLUION, DLEPENIN(; REFORIMS 54 TABLE Ai2.' Regional education and health indicators, 1990 Minority Functional 6-14 year olds Population: Income per capita population illiteracy in school natural rate Infant mortality (1992, US$) share (percent) rate (percent) (percent) of increase (percent) (per 1000) Ch na (total) 470 8 1 22.3 81 6 14 34.5 East Coast 781 3 21.7 84 9 1 19.5 South Coast 695 .9 17.9 80.l I 7 24.8 North Coast 608 4.8 9.2 86.6 1.1 16.0 North Hinterland 430 6.3 18 5 84.1 .4 26.6 Far West 398 34.0 34.2 69.7 1.6 52.8 Central Core 332 2 8 23 9 82 5 1.7 36 4 South Hinterland 294 20 6 25 2 73 5 1 3 60. Source World Bank 995b TABLE A 5 tion, close to current levels of spending on health care.' A Financing of health expenditures public health package alone-arguably a government (percent of GNP) responsibility-would require budgetary expenditures of Government Insurance Private Total 1.2 percent of gross domestic product, almost three times China (1992) 0 4 .4 1 3 3.2 current government spending on public health. Adequate Inda 1 6 0.2 2.5 4.3 financing for basic clinical services for all Chinese is a larg- Indonesia 0.9 0.1 1 4 2.4 Korea 0 6 1. 3 4 5.1 er task, as the resources needed for the uninsured amount Malaysia 2 7 0.0 0.8 3.5 to some 1.9 percent of gross domestic product.' However, Thailand 1.1 0.0 2.6 3 8 the uninsured currentlv pav about 1.3 percent of gross Nore Countrtes other than Ch na, data for 986 or 1987 Soutce Gr ffn 992: M nistry of Health VVorld Bank 995c. As an Development Bank domestic product in fees. It would, therefore, take an addi- 995. tional 0.6 percent of gross domestic product in government spending to provide basic insurance coverage.5 objectives, to reach the rural poor residing outside the tar- Covering all basic clinical from the budget is probably geted 592 countries and to address the growing problems not desirable for cost control purposes. A combination of of the urban poor. budgetary allocations for the poor, increased coverage of The extension of the multi-pronged approach adopted formal insurance schemes, and copayments for all-includ- in the Southwest Poverty Reduction Project to all the poor ing government and state enterprise employees-would in China would necessitate annual expenditures of about serve such a purpose better and stands a good chance for Renminbi 18 billion, or 0.33 percent of gross domestic providing adequate health care for all. product in 1995.6 This is roughly double current expendi- tures under the 8-7 Plan. Whhile the Government's target- Poverty alleviation ed programs appear to have succeeded in reaching the poor in the designated areas,7 some refinements in approach Despite considerable achievements in poverty reduction (such as targeting below the county level) will be necessary since the advent of rural economic reforms in 1978, the to expand coverage to others in rural areas and to develop number of absolute poor in rural areas remains large and a package to assist the urban poor. their living conditions deplorable. Recent years have also witnessed the emergence of an urban underclass as a con- Environment sequence of increased internal migration. The government has recognized the need for special programs to target the To combat environmental degradation, there is a pressing rural poor through the National Seven Year Plan for need for more effective regulatory control, in particular over Poverty Reduction (8-7 Plan). While the 8-7 Plan has had township and village enterprises; appropriate pricing to some success, eliminating poverty in China will require dampen demand and reduce pollution; and allocating increased public expenditures to meet the 8-7 Plan's own increased resources toward meeting the investment and REI,oDRmIN(1 PUBLI-C FINAN(CES FOR SUST.MNABLE D)ISVELOPMEN'I 55 operating costs of municipal services, including sewerage, Infrastructure wastewater treatment, and solid waste handling. Spending on pollution control increased from 0.4 percent of gross Infrastructure needs in China are huge. This is not to deny domestic product in 1980 to 0.67 percent in 1992, but this that China has made tremendous strides in infrastructure remains insufficient to deal with the nearly threefold investments in the last ten years. These amounted to 7.5 increase in the output of heavy industry over the same peri- percent of gross domestic product in 1994, up from 4.4 od. Total suspended particulate levels remain well above percent in 1985. Higher tariffs (for example, on power) those considered safe by the World Health Organization, and government-directed credit have been the principal sulfur dioxide concentrations exceed the lowest Chinese air sources of finance with only a small contribution from bud- quality standard, few urban rivers reach the lowest accept- getarv funds. This has resulted in underfunding of infra- able Chinese water quality standard, groundwater quality structure projects that tend to be commercially non-viable continues to fall at an alarming rate, and petroleum dis- but yield large economic benefits.' Of particular concern is charges to surface waters are increasing after an initial China's road infrastructure. Physical indicators show that decline. Only 4.5 percent of municipal wastewater flows China fares relatively poorly in comparisons with other receive treatment of any kind, while industrial pretreatment large countries in per capita coverage of the road network. raises overall treatment rates to 1 7 percent. The It is, therefore, reasonable for China to aim for 8-9 percent Government's goal for the year 2000 is a modest 25 per- of gross domestic product and to channel, in particular, cent. Nearly 40 percent of urban China is unserved by sew- increased budgetary funds of some 0.5-1.0 percent of ers, with wastewater going directly into lakes and rivers, and gross domestic product to infrastructure investments with according to current municipal investment plans, 30 percent public goods characteristics. of urban China will still remain unserved in the year 2000. The effects of untreated wastewater on aquifer pollution Contingent liabilities and downstream supplies outside the producing municipal- ities suggests that central government intervention is nec- Public expenditure policies will not only have to address essary to safeguard water quality in China. A wastewater underfunding of priority sectors discussed above, but also treatment program for any discharge that reduces receiving to manage the implications of increased market orientation water quality to below irrigation use standards would cost for the budget. Tasks previously performed by other sectors about Renminbi 4.2 billion a year over the next ten years, of the economy will increasingly be shifted to the budget requiring an increase of 15 percent in the annual urban while in-kind benefits offered to civil servants will be mon- infrastructure construction program. Improved solid waste etized and contingent liabilities may increase. The implicit disposal (through landfills) might cost about Renminbi 5.2 pension debt is estimated to equal around 50 percent of billion a year. While the incremental cost of these interven- gross domestic product and according to official estimates,9 tions is a modest 0.3 percent of gross domestic product, about 20 percent of the state bank portfolio is nonper- cost recovery through increased user fees would result in a forming, which equals another 20 percent of gross domes- tripling of average effective water prices. tic product. In addition, with economic growth and rapidly Estimates of investments required to improve waste rising wages, government services are likely to become rel- treatment and water supply in cities where there are severe atively more expensive, necessitating a larger government shortages are in the order of Renminbi 100 billion a year share of the economy1Io over the next 10 years or 1.7 percent of 1995 gross domes- Pension reforms appear to be gaining momentum. It is tic product. This compares with current urban water invest- important to evaluate carefully the budgetary implications ments of only 0.35 percent of gross domestic product. of various options. The government now appears to be Substantial budgetary funds are expected to be necessary favoring a multipillar approach, the first of which would for interbasin transfer projects ( 15 to 30 percent of project have welfare and redistributive objectives and be funded costs) and sewerage and industrial waste management (30 on a pay as you go basis. Fully-funded mandatory individ- percent), yielding budgetary requirements of some 0.3 per- ual retirement accounts would constitute the second pillar cent of gross domestic product. and a voluntary scheme the third. A difficult issue which TIHE CHINESE ECONOMY: FIGHTING INFLATION, DEEPENING REFORMS 56 remains to be resolved concerns the transition from the that the government finance this partially through manda- current unfunded to a largely funded scheme in the future. tory social security contributions deducted from wages A parallel stud) on pension reform will furnish additional equivalent to 6 percent of the wvage bill. This would amount details but some rudimentary calculations provide useful to incremental resources available through the budget of indications. about Renminbi 29.7 billion. The remaining Renminbi 19.5 Pension expenditures now account for some 2 percent billion would could be raised through asset sales of state of gross domestic product and yield benefits which enterprises that undergo restructuring or are sold to the amount, on the average, to 70 percent of wages. The bulk nonstate sector (or declared bankrupt). of these payments (excluding civil servants) are now Unemployment benefits will rise with increasing open assumed by enterprises. Under the proposed scheme, the unemployment in urban areas. Assuming benefit levels government would assume responsibility for the basic ben- which are equivalent to the public pillar of the pension efit, which we propose should equal 24 percent of wages, scheme and 5 percent urban unemployment, budgetary and for transition costs. Below, we demonstrate the impact outlays would equal 0.2 percent of gross domestic product. of the new system on the budget using 1994 data (table A2.6). Budgetary expenditures revisited Pension expenditures of state-owned units (that is gov- ernment institutions and state enterprises) amounted to Adjusting the level of budgetary spending to reflect the Renminbi 86.2 billion in 1994. Of this, about Renminbi need for additional expenditures in priority areas (as dis- 29.6 billion was financed through the budget. Under the cussed above), and the implicit and extrabudgetary costs of proposed scheme, pension benefits would be reduced to 60 all government activities yields budgetary expenditures in percent of wages (compared to about 70 percent today). 1994 of some 22.5 percent of gross domestic product TIhis would mean that total pension expenditures in state- (table A2.7). This is substantiaLy higher than current bud- owned units would amount to about Renminbi 78.8 billion. getary expenditure levels and closer to international norms. The first pillar would cost about Renminbi 31.9 billion; the Given the government's decision to eliminate the bud- second would be about 46.9 billion. The calculations get deficit by the year 2000, government revenues will have assume that the Government would have to bear the entire to reach 22.5 percent of gross domestic product or double cost of the second pillar until the individual accounts are current levels of budgetary revenues (11.3 percent of gross fully funded. On the financing side, about Renminbi 29.6 domestic product). With extrabudgetary funds providing billion was already available in the 1994 budget. This would leave a financing gap of Renminbi 49.2 billion. We propose TABLE A2 Proposed expenditures: Cost of shouldering govern- TABLE A2 6 ment responsibility Budgetary impact of pension reform: Simulating Percent of pension liabilities in I994 Expenditures gross domestic product Actual budgetary expenditures. 1994 14.1 Percent of Extrabudgetary expenditures' 3.8 Renminbi billion gross domestic product Additonal expenditures proposed 4.6 Actual expenditures' 86.2 1.9 Education (O 9) Health (1.4) Proposed scheme 78.8 1 7Poverty alleviaton (0.2) First pillar 31.9 0 7 Environment (0.2) Second pillar 46.9 1.0 Infrastructure ( 1.0) Resources already in budget 29 6 0.6 Social insurance (0 9) for pens,on payments Adjusted budgetary expenditures, 1994 22 5 Financing gap: 49.2 1 I Financed by. 22.5 Budget 29.7 0.7 Budgetary revenue 2.4 Sale of assetsiborrowing 19.5 0.4 Extrabudgetary revenues 4 1 Additional revenues needed 6 0 a Pension expenditires of state-ownied urjits. Additional_revenues_needed_6 __ b Benefit level reduced to 60 percent of wages a Based on 1993 figures Source. World Bank staff estimates Source Word Bank staff estirnates, Staistrca State Bureau 1 995. REFORMING PUBLIC FINANCES FOR SUSTAINABLE DEVELOPMENT 57 another 4.1 percent of gross domestic product in fiscal product in extra revenues. Each additional percent in com- resources, there is a need to generate additional resources pliance would yield about 0.067 percent of gross domestic equivalent to some 6 percent of gross domestic product. A product in revenues. Extending the VAT to services, which reversal of the declining trend in government revenues is is desirable for efficiency reasons, would increase the VAT therefore among the most important goals for the next five tax base by about 8.6 percent of gross domestic product'2 years. but would not necessarily generate additional revenues as the sector is now subject to the separate business tax. Mobilizing revenues In the longer run, China's authorities could consider changes to the VAT that would reduce revenues. The cur- Increased revenues will have to come from a combination rent inability to credit the VAT on investment goods intro- of improved compliance, a broader tax base, and growth. duces a bias against investment and is out of line with inter- In the short run, improvements in compliance are likely to national practice. Moreover, if credits on investment goods contribute most to increased revenues. In addition, the were permitted, the VAT base would be reduced by a phasing out of the plethora of tax exemptions for both third.'3 This is inadvisable at this stage not only because the domestic and foreign firms would improve buoyancy of the potential revenue loss cannot be absorbed now, but also tax system. In the longer run, however, tax reforms may be because the tax system counteracts powerful biases in favor needed to further increase the tax to gross domestic prod- of investment in the rest of the economy. The VAT on uct ratio. investment goods could be credited, however, once China's current tax structure relies predominantly on increased coverage and compliance have raised revenues, taxes on goods and services, notably the VAT. The tax base and financial sector reforms have provided a better check in other countries is much more diversified than China's on investment demand. (table A2.8). Notably, the personal income tax, the enter- Increase application of the individual income tax. The indi- prise income tax and social security taxes play a much larg- vidual income tax plays a small role in China, with less than er role. 0.2 percent of gross domestic product in revenues in 1994. Improve the coverage and compliance of the VAT The VAT As with the VAT, this is in part due to low compliance. raised about 4.9 percent of gross domestic product in rev- Although information on all taxes due is scarce, the State enues in 1994, almost half of total tax revenues in that year. Tax Administration estimates a compliance rate of 50 per- However, the potential revenues from VAT are consider- cent in 1994. ably larger. At about 70 percent, compliance in China is The current exemption level of Renminbi 800 a month comparable to other developing countries with similar tax for wages and salaries is much higher than the minimum liv- bases, but falls short of the top performers, which achieve ing expenditures usually exempted in other countries, and 90-95 percent." Increasing compliance to 85 percent, a keeps most individuals outside the tax net. However, with feasible target in light of the ongoing tax administration wages increasingly market determined and a monetization reforms, would yield about 1.0 percent of gross domestic of subsidies that wage earners now obtain in the form of TABLE A2.8 Composition of government tax revenue (percent of total tax revenues) Personal Social Corporate VAT/general Wealth and income tax security tax income tax sales Excise taxes Trade taxes property Industrial countries 28 28 8 16 10 3 3 Developing I1 6 1 8 1 4 3 29 3 Asia i5 0 17 6 16 31 1 Europe 15 18 7 21 9 17 2 Western Hemnisphere 8 12 14 14 18 21 3 China(I1994) 1.5 n.a. 14 46 1 1 6 na. is not applicable: .. is not available. Note: For countres other tnan China, revenues refer to central government: for Cnina to generai government Source Burgess and Stern 1993 Brondolo and Si vani 1 993. TIIE CHINESE ECONOMY: FIGIITING INFLATION, DEEPENING REFORMS 58 housing, education, and health care, it is likely that a larger Mferge the foreigrn and domes,tic enterprise income tax. share of value added will accrue to labor. By keeping the Foreign funded enterprises are still subject to lower enter- exemption level constant in nominal terms (as was done in prise taxation than domestic ones and enjoy a number of 1995), an increasing number of people would fall under the tax and tariff exemptions. Favorable treatment may have tax, and revenues could gradually increase. Simulations on been justified in the past as means of attracting foreign the basis of the urban household surveys indicate that- enterprises that transferred technology to China. However, with current exemption levels and tax rates, and with an foreigners increasingly invest in China because of the annual 15 percent nominal growth in incomes-revenues attractive market the country offers. Moreover, much of from individual income taxes would rise from virtually noth- China's subsidy to foreign enterprises is taxed in the home ing in 1994 to 0.4 percent of gross domestic product by the country of the investor and thus hardly affects the decision year 2000 (table A2.9).I4 However, the authorities would to invest in China. Finally, tax advantages for foreign enter- have to process 160 million taxpayers, compared to the cur- prises increasingly induces "round tripping" by domestic rent 30 million (table A2.10). enterprises. A unification of domestic and foreign taxes has In due course, China may consider revising the individual therefore become desirable. income tax rate schedule. Revisions would reflect decisions Unification would not yield substantial additional rev- on whether the individual income tax is to be an instrument enues in the short term because the tax base of foreign of equity or an important source of revenues. If equity is the enterprises is small. 1 5The current low profits of the foreign primary goal, then the tax should target principally the high- enterprises can in part be explained by the long gestation est 5-10 percent of income earners. If, on the other hand, period of investments made. Assuming a gestation period revenues are an important motivation for the income tax, a of four years, the profit-generating stock of foreign invest- broad-based tax, applicable to a large number of taxpayers ment could be as high as US$152 billion, or about 17 per- should be conceived. The latter option would place a greater cent of gross domestic product, by the end of the centurv. burden on the tax administration. In both cases. however. Pre-tax profits would need to be about 3.8 percent of gross the current highly schedular income definition could be domestic product to generate after tax returns of 15 per- replaced by one that encompasses most income sources. In cent for investors, a rate which is low by international com- the latter case, a flat tax rate would be preferable from an parison. Thus a 33 percent tax rate could add 1.2 percent administrative point of view because this allows the vast of gross domestic product to tax revenues. majority of tax obligations to be fulfiled by withholding at Increase taxes on pollutants. As environmental concerns the source, without the need for filing a tax return. become more prominent, but are unlikely to be fully taken TABLE A2.9 Personal income taxes due according to the urban household survey Income deciles III+IV V+VI VII+VIII IX X Proportion of total households 20.00 20 00 20.00 10.00 10 00 Total number of employees (million) 39.53 39.95 40.78 20.08 19.24 Income per employee 4871 5649 6608 7861 104623 Tax per month per employee 3.6 Total tax each year (in Renmrinb mfillon) 829.2 After 15 percent nominal growth over 5 years Incomeperempoyee 9797 1 363 13291 15812 21042 Tax per month 0 8 7.4 15.4 259 70.4 Total annual tax (in Renminbi million) 389 8 3521 0 7527 3 6236 ' 16244.6 Tax as percent of gross domestic product 0.00 0.03 0.07 0.06 0.15 Note Income per emp oyee was found by mu t plIYng Income per capita by the number of househod riembers and divided by the number of employees in the households The aggregate number of empoyees was found by extrapolatngthe sample r-esults to the aggregate urban populaton It wavs astumed that the Y800 exempton level for wage ncome apptled to all emplosees The simulated results are found by apply ng tne 15 percent annual grovtil to the income per empiovee. whiie hoiding the total number of employees, the ncome distrobuton and the tax exemption leve constant All sursey data are Lirban All ru, a Incomes would. according to the pub shed surveys, still fall below the YBOO exemption. even after the assumed gr ovwh ,ource State Statistca Bureau 1995 World Bank staff estimates REFORMING PUBLIC FINANCES FOR SUSTAINABLE DEVELOPMILNT 59 TABLE A2. I0 Improve tax administration. A prerequisite for increasing Individual income tax in the year 2000 under a flat the revenue to gross domestic product ratio is a well func- tax rate tioning tax administration. Improving tax administration is Individual income tax also a precondition for more widespread application of per- (percent of Taxpayers sonal income tax and social security taxes, as these taxes gross domestic product) (in millions) tend to have large numbers of taxpayers. The 1994 deci- Flat tax rate of 25 percent 1.59 160 with Renm nbi 1, 200 exemption 043 40 sion to split the tax administration into a National Tax with Renminbi 000 exemption 0.84 60 Service-which is to collect the bulk of the taxes-and a local tax service could mean a break with the problematic Flat tax rate of 30 percent 1.90 160 with Renminbi 200 exemption 0.52 40 past of China's tax administration, when the "dual leader- with Renminbi 1,000 exempton 1.01 60 ship" undermined implementation of the tax laws. Source: China Stcttv,sv reorbook 1995 World Bank staff est mates Essential for the success of the National Tax Service is: * A move toward taxpayer self-assessment and withholding, care of by environmental levies and charges, taxing pollu- which would allow significant increases in the number of tants becomes an attractive option. Moreover, the concen- taxpayers, necessary to accommodate the administration of trated production and distribution of the main pollutants individual income taxes, payroll taxes, and the enforcement (coal, petroleum) makes such products easy to tax. Finally, of enterprise income taxes for nonstate enterprises the sheer quantities of pollutants used in China makes tax- * A reform in internal organization of the tax administration, ing them an attractive proposition. To illustrate, China pro- which focuses on administrative functions rather than types duced 209 million tons of oil products in 1994, including of taxes or types of enterprises crude oil. Taxing all oil products at Renminbi I per liter * Development of efficient audit selectzon and audit proce- would generate about Renminbi 133 billion, or almost 3 dures, which limits audit to those most likely to default on percent of gross domestic product in revenues.'6 If only their tax obligation nonindustrial use is taxed, such a tax may still yield almost * Developmentofbest-practicecomnputerizedinformation .ts- Renminbi 50 billion in additional revenues, or 1.1 percent tems with main processing at county or district level of gross domestic product. The authorities need to serious- * A change in the incentive system for tax administrators to Iv consider this important and easily collected tax. The rev- enhance tax enforcement and fight corruption enues from taxes on pollutants need not be earmarked for * Close cooperation between the National Tax Service and environmental purposes. Environmental projects in China the local tax service. At a minimum, information sharing is can be financed from general budgetary resources through necessary to improve enforcement of VAT and individual the normal budgetary process. income tax. Over time, the local tax service may increas- Mandate social security contributions. These contributions ingly want to shed some of its responsibilities to the could finance government's plans to introduce a minimum National Tax Service, once the latter has become an effi- pension for all (urban) workers. A pay-as-you-go basic pen- cient and neutral tax collection agency sion provision does not necessitate a separate tax, but expe- Improvements in the juridical environment. In most coun- rience of other countries shows that payroll taxes for a gen- tries, the tax administration can implement a system of erally accepted purpose such as social security yield less stiff, but fair, monetary fines for various tax offenses, with- resistance than other taxes. Moreover, enforcement out the assistance of the judiciary Such arrangements becomes easier when eligibility is linked to paid-in premi- greatly increase compliance while not overburdening the ums, as the payee has an interest in regular payments. Most judiciary with small tax cases. countries levy social security contributions as payroll taxes, Improvements in methods of presumptive taxation. Since and therefore the administrative requirements are much the the tax administration will only over time be able to handle same as those for a widely applied personal income tax. As increasing numbers of taxpayers, improvements in the discussed above, a payroUl tax of 6 percent (0.9 percent of methods of presumptive taxation could be a good short- gross domestic product) could cover public pension liabili- term measure for enhancing revenues and bringing tax pay- ties and provide for unemployment insurance. ments more in line with statutory obligations. TiIE CIINESE E(CONOMY: FIGHTING INFLATiON, DEEPENIN(G REFORMAS 60 The ongoing tax administration reforms envisage many While an increase in government revenues equivalent to of the above features. However, the central government 5.7 percent of gross domestic product seems large, the dis- may face significant opposition the local governments in tributional consequences remain limited due to China's establishing a truly national tax administration, since this high growth. For the other sectors of the economy, it implies limits the discretion of local governments to grant tax that available income would still rise at an average annual exemptions. Failure to establish a truly national organiza- rate of 6.9 percent.'7 Therefore, the revenue increase is not tion may jeopardize the necessary revenue increases. Thus only economically, but also politically feasible. ,'vertical leadership" of the National Tax Service should be firmly embedded in its organization, mainly through central Intergovernmental fiscal relations benefit and personnel policy, but also by unifying adminis- trative procedures and information systems across all local The quality and effectiveness of government policy offices of the National Tax Service. depends to a considerable extent on the division of labor Attention will also need to be given to raising non-tax among levels of government and the means by which these revenues. Further price reforms in government services, levels of government are funded. China's size and its com- including housing, provide significant scope for revenue position of government expenditures restrict the role of mobilization, and would contribute to the efficient use and central government in policy implementation, and only production of these services. Moreover, further price about 40 percent of expenditures are currently adminis- reforms in public services would reduce the policy losses tered by central government. However, the new revenue that burden the budget at present. Finally, revenues from assignments introduced in 1994 will increase central gov- divestiture may increasingly play a role as ownership of ernment's share in revenues to about 60 percent. state assets becomes more diversified. Government's main challenge in intergovernmental fiscal Increased enforcement, tax base broadening, and some relations is therefore to design and implement a grants tax policy steps could therefore increase the tax to gross scheme that will redistribute central government's revenue domestic product ratio by as much as 5.7 percent over the surplus to the provinces. next five years (table A2.11). The current intergovernmen- The overarching objective for the intergovernmental tal fiscal arrangements would yield central government rev- grants scheme is redistribution. The growing fiscal dispari- enue increases of 2.6 percent of gross domestic product. ties-in overall revenues and in terms of expenditures in key categories-threaten an equitable division of the gains TABLE A2 1 1 Sources of incrementalIrevenues from reforms and thereby weaken the consensus on these reforms. Although supporting measures in regional poli- Revenue effect by 2000 of which: Central cy-such as regional targeting of foreign investment-may (percent of gross Government contribute to a better distribution of government Measure domestic product) revenue' I Value added tax I I 0 6 resources, the burden will fall initially on the redistributive Individual income tax 0 8 0.0 nature of central-local grants. The scope for such a grants Improve compliance (0.2) 0.0 system can be considerable, if the discussed measures in Broaden base and expand (0.6) 0.0 definition of Income revenue mobilization are actually implemented: central Enterprise income tax 1.2 0.6 revenues could increase by more than 3 percentage points Socia security contributions 0 9 0 6 of gross domestic product by the end of the 9th Five-Year Taxes on pollutants I 0 0.6 Improve tax administration 1.0 0 4 Plan. Total 6.0 2.8 The intergovernmental grants scheme should both a According to latest arrangements for sharing tax revenues between the center and redress differences between provincial expenditure assign- the provinces, the VAT on ,mports s a centr-al revenue. the rest s shared 75:25 (center ment and revenue raising capacity and distribute fiscal local). but central government returns 30 percent of the increase over the 1993 rev- enue to the ocaity. Thus the effect,ve sharing is 52 5 47 5 It is assumed that half the capacity more equally among provinces. Diverging eco- foreign revestors pay ncome tax to central government and that soc a securty contr bu- n d tions wou d be spit evenly. The dsTrbution of the tax on pollutants depends on nomic development has created large differences In fiscal whether such a tax would be treated as a consumption tax (centra ) or as a resource tav capacity among provinces and increasingly within (snared). Tedsaiis gxrie Source World Bank staff est mates provinces. he resulting disparities in government expen- REFORMING PUBLIC FINANCES FOR SUSTAINABLE DEVELOPMENT 61 ditures may perpetuate income differentials, since public Notes goods financed by government are an essential ingredient for development. Increasing income disparities induce 1. The poorest 5 percent of rural China's 2200 counties saw near- zero growth in average income over 1985-91 (Howes and migration from the poor to the rich areas, aggravating envi- Hussain 1994). ronmental and urban poverty problems in the latter. 2. We chose Liaoning Province as representative of an Furthermore, increasing regional disparities may under- "acceptable" expenditure level. Liaoning Province is the non-city mine the political basis for the reform measures necessary province with the highest expenditures after Tibet. For primary to maintain China's high growth. Thus both rich and poor education, additional expenditures of about Renminbi 9.9 billion have an in.erest ,i a .ell-des gned, equal,zing grants would be necessary in 1993, or 45 percent of all budgetarv expen- prov znces ha1ve an tnterest zn a well-deszgned, equall'.zng grants ditures on primary education. A 45 percent increase was also mechpanism. applied for secondary education expenditures, for which data are Currently, government is studying the feasibility of a not available. grants mechanism that would take both revenue capacity 3. World Bank 1993b, p. 68. The World Development Report and expenditure needs into account, along the lines of the estimates per capita costs of public health and basic clinical ser- Australian standard budget approach. In the short run, vices in China at USS4 and US$8, respectively, in 1990. 4. The basic clinincal package would cost 2.4 percent of gross due to problems in budgetary and other data, a good strat- domestic product. However, about 220 million were uninsured. egy would be to start with a scheme that takes only a lim- The numbers are based on the 1993 health services survey, as ited number of factors into account and redistributes only reported in World Bank 1995c. The survey included both urban part of central government's revenue surplus. Over time, and rural data. as the budget mechanism is improved, and the grants 5. This is less than could be saved by reducing spending on scheme is fully operational, more factors can be taken into government and state enterprise employees from over three times the national average to two times the average. One means to do account and more resources can be devoted to the this would be by introducing co-payments for government and scheme. state enterprise employees. A good central-provincial grant scheme may not be 6. The Southwest Poverty Reduction project targets some 3 enough to guarantee each Chinese with essential govern- million poor in 40 counties and costs about US$ 400 million over ment services. Many of the disparities in fiscal capacity are a five-year period. The calculations here assume Renminbi 200 prefectures and countries within the same capita of expenditures in poor counties, excluding the health and among prefectures and countries within the same province, education package which are costed separatelv; the equivalent To redress those, central government could supplement the r ~~~~~~~~~~~~urban package is assumed to cost 40 percent more. central-provincial grants scheme with a prefectural one 7. See Jalan and Ravallion 1995. (comparable to the German finanzausgleich). However, 8. In 1992 budgetary' financed 7.4 percent of infrastructure such a system is unlikely to be developed in the near future, investments, a share marginally higher than the contribution of due to its complexity, and the dearth of good information the budget to all state investment (World Bank 1995a). at subprovincial level. 9. Statement by Mr. Dai Xianlong, Governor of the People's Bank of China, quoted in the Financial Timzes, October 24, 1995. As an alternative, government could earmark increased 10. The main cause of this so-called Baumol effect is lagging resources for poor countries, relying only on income per productivity in nontradables such as government services. If gov- capita data. The current program is small, and limited in ernment wages keep up with nongovernment wages, the relative scope, but increased central resources would give an costs of government increases. The new civil service system pro- opportunity to expand the program, and reach all of the vides for wage increases in line with wages in state enterprises. 70 .90 million poor with adequate government services. 11. The estimate for China's compliance rate was provided bv 70-0mllinoorwitaequ vrne s , the State Administration for Taxation and is based on the 1992 Such a program could either be in the form of a general input-output tables. Compliance numbers for other countries are grants scheme, or the central funds could be specifically taken from Brondolo and Silvani 1993. earmarked for essential government functions such as 12. Consumption of services added up to 19.2 percent of health and education. Care should be taken to guarantee gross domestic product in 1990. However, the net addition to the additionality of such government funding, because a VAT tax base would be less, since industry had about 10.6 percent change in subprovincial intergovernmental fiscal arrange- of gross domestic product of inputs to the services sector. change in subprovincial intergovernmental fiscal arrange- 13. This assumes that the share of nonconstruction investment ments might othervvise counter the effect of additional cen- in 1994 was the same as that in 1990. Nonconstruction investment tral government funds. would then be about 29 percent of gross domestic product. TiIE CIIINESE ECONOMY: FIGIhTiNC; INFL\TION, DEEPENING REFORMS 62 14. The simulations are illustrative. The household surveys, as References published in the China Statistical Yearbook, provide insufficient detail for adequate projections of revenues from the individual Asian Development Bank. 1995. Financing local government in the income tax. People s Republic of China. (Manila: Asian Development Bank). 15. For industrial enterprises-the vast majority of foreign Brondolo, J., and C. Silvani. 1993. 'An Analysis of VAT invested enterprises-after-tax profits amounted to only Compliance", Mimeo, International Monetary Fund. Renminbi 19.7 billion in 1994. Maximum revenue gains would Burgess, R., and N. Stern. 1993. "Taxation and Development." therefore be about 0.15 percent of gross domestic product, Journal of Economic Literature 31 (June): 762-830 assuming these enterprises pay no tax at this time. Griffin, C. C. 1992. Health Care in Asia. A Comparative Study of 16. A tax of Renminbi I would gross Renminbi 209 billion. Cost and Fznancing. (Washington DC: 'X%brld Bank). However, the price increase would reduce profits, taxed at 33 per- Howes and A. Hussain. 1994. "Regional Growth and Inequality cent, thus implying foregone income tax of Renminbi 68 billion. in Rural China." Working Paper EFI I, STICERD, London Moreover, diesel and gasoline are currently alreadv taxed at 0.1 School of Economics. and 0.2 Renminbi per liter, which would lower the gain by anoth- Jalan. Jyotsna and Martin Ravallion. 1995. 'Are there dynamic er Renminbi 4.5 billion. All numbers refer to 1994 (China gains from a poor-area development program?" Mimeo, Policy Statistical Yearbook 1995, p. 205). Research Department, World Bank. 17. The current nongovernment share is 87.5 percent of gross State Statistical Bureau. China Statistical Yearbook. XVarious editions. domestic product. If we assume 1995 gross domestic product to World Bank. 1993a. The East Asian Miracle. (New York: Oxford be 100, a growth rate of 8.5 percent a vear would mean a gross University Press). domestic product of 150 by 2000. Of that, government would . 1993b. WYbrld Development Report 1993: Investing in take 18.6 percent (excluding extrabudgetary funds). Thus, non- Health. (New York: Oxford Universitv Press). government income would grow from 87.5 to 122, which implies . 1995a. China. Public Investment and Finance. Report No. an annual growth rate of 6.9 percent. 14540-CHA (Washington, DC: World Bank). -_____ 1995b. China. Regional Disparities. Report No: 14496- CHA (Washington, DC: World Bank). -_____ 1995c. "China: Social Sector Expenditures." Mimeo, China and Mongolia Department, World Bank. REFORMING PLIBLIC FINANCES FOR SUSTAINABLE DEVELOPMENT 63 --E Annex 3 Note on the calculation of the public sector deficit T able 1.4 in the main text shows the evolution of the issued by state enterprises and that they are held either by nonfinancial public sector deficit or public sector households or the non-state sector. borrowing requirements between 1987 and 1995. The concept was utilized to gauge more broadly the Foreign financing resource requirements of the Chinese public sector, defined to include all state-owned units, or state-owned This category includes foreign lending and equity invest- enterprises, as well as government agencies and institu- ments in state owned units. It is assumed that all public and tions. The calculations break down the aggregate public publicly guaranteed medium- and long-term debt (source: sector into its government and state enterprise components 'World Bank Debtor Reporting System) finances the state and generate the savings of each unit, given their respective sector and the table includes net medium- and long-term expenditures on investments. borrowing converted into local currency at the official rate. In the absence of reliable enterprise accounts to deter- Short-term flows are excluded. It is assumed that foreign mine the nonfinancial public sector deficit, the calculations direct investment goes to the nonstate sector but there are aim to capture the use of all resources by state owned units some definitional problems regarding the classification of that are not self-generated. The borrowing requirements joint ventures. Investment data report foreign funded are thus calculated from the bottom up using financial enterprise investments as a separate category only since data. We aggregate all lending to, or investment in, state- 1993. Prior to that year, they are included in investments by owned units by the domestic banking system, the nonstate state-owned units, resulting in an overstatement of public sector and households, and by foreigners. While the sector savings. approach is straightforward, there are some problems due to insufficient disaggregation and incomplete data. The dis- Borrowing from the domestic banking cussion below provides details of the computations and system various assumptions. This is the largest category of deficit financing, yet the cal- Borrowing from the public and nonstate culations are subject to the greatest uncertainty. In line sector with the methodology we have adopted, this category needs to reflect net public sector borrowing from the This category includes securities (bonds and stocks) issued banking system-that is, net credit to the public sector by state owned units and held by households or nonstate minus any increase in deposits. We take net credit to the enterprises. While data are available on the shares of trea- government from the monetary survey but calculating this sury-bonds issued to households, financial institutions, and for enterprises is problematic in the absence of a break- enterprises from the Ministry of Finance, it is not possible down of lending and deposits by ownership category. For to break down enterprise bond holdings into the state and the purposes of these calculations, we assume that non-state sectors. The calculation assumes, therefore, that Chinese banks specialize in clientele, with the state com- all treasury-bonds issued to enterprises are held by state mercial banks and universal banks (together called enterprises, implying intra-public sector transactions which "national commercial banks") handling state enterprise do not affect the aggregate deficit. There is even less infor- accounts while rural and urban cooperatives cater to the mation available on stock and bonds issued by enterprises. nonstate sector. Specifically, we assume that 70 percent of It is assumed here that all enterprise bonds and stocks are all deposits in the national commercial banks are held by 65 state enterprises; all working capita] loans made by the nerable to inadequacies in the monetary survey This survey national commercial banks to industrial, commercial and shows large increases in the "other items, net" category construction enterprises are made to state enterprises; and during certain periods, reflecting in part diversion of funds all fixed investment loans made by the State Development towards activities outside the credit plan, largely through Bank and the national commercial banks are made to state the interbank market. To the extent that these funds enterprises. finance state owned units with nonstate resources, the cal- In addition to the difficulties associated with classifying culations in table A3.1 understate the non-financial public loans and deposits by ownership, the calculations are vul- sector deficit. TABLE A3.1 China: Nonfinancial public sector deficit (billion yuan) 1987 1988 1989 1990 1991 1992 1993 1994 1995 Borrowing from the public and nonstate sector S 13 21 6 26 68 26 87 87 T-bonds issued to households 4 8 17 1 9 17 22 87 87 T bonds issues to nonstate enterprises State enterpr.se bonds issued to households 0 3 3 5 14 40 0 and nonstate sector State enterprise equity issued to households 1 3 1 0 3 11 4 and nonstate sector Foreign borroving, net3 23 25 23 30 24 62 74 103 81 Borrowing from domestc banking system 100 121 50 191 187 219 337 257 317 State owned enterprises 85 III 156 174 171 131 369 165 237 change in deposits' -31 - 17 - 0 -64 -74 -134 -50 -266 -214 net credit, vworking capital3 93 102 148 197 169 182 295 230 166 net credit, investment' 23 27 18 41 76 83 125 200 286 Government, net credit from People's Bank of IS 10 -6 17 16 43 7 -23 -24 Chinae State Development Bank 76 80 Total pub'c sector borrowing 128 160 193 228 237 350 437 447 486 Total non-financal public sector deficit 10.7 10.7 I .4 12.3 10.9 13.1 i2.7 9 9 8.7 (as percent of gross domestic product) of which: State enterprses 8.6 8.4 9.2 10.3 8.7 10.8 10.6 8.2 7.0 Government 2.1 2.2 2 2 2 0 2 2 2.3 2 0 1.7 1.7 Financ ng the deficit (as percent of 10 7 10.7 11.4 12.3 10.9 13.1 12.7 9.9 8 7 gross domestic product) Foreign borrowing 1.9 1.7 1.4 1.6 1.1 2.3 2.1 2.3 i.5 Domestic borrowing 8.8 9.0 10 0 10 7 9 8 10.8 10 6 7.6 7.3 Public 0.4 0.9 .2 0.3 .2 2.5 07 1.9 1.6 Banking system 8.4 8. 8.9 10.3 8.6 8.2 9.8 5.7 5.7 From People's Bank of China 1.6 3.9 1 8 1.2 0.2 4.6 3.4 -2.7 -3.4 From other banks 6.8 4.2 7 0 9.2 8.4 3.7 6.3 8.4 9.1 a Disbursements of pubc and publicly guaranteed loans convented to local currency at the offcial exchange rate Foreign direct investment is not included on the assumption that this goes to the nonstase sector But note that state sector nvestment data prior to 1 993 Include nvestments by foreign invested enter pr ses. b From change in enterprise deposits an specalized and un versal banks: assumes 70 percent of these are state enterprise deposits. c. Includes oans to ndustnal corrimercial and construction enterpr ses by spec a ized and an versa banks d. F xed nvestment loans by national banks and the State Deve opment Bank Ther e is a large d screpancy betveen loans recorded in investment data and investment loans recorded by banks. There are several explanations: i ) bank data on y report investment oans by national banks. and do not include urbarr and rural credit cooperatives (a though bank data on investment oans are a so substantially lower than data on state sector investments finans ed by bank loans: 2) nvestment data r eport gross lend ng, bank data show net credit and 3) nvestment data sclude enterpr se bond issues e From the monetarr survey. TIlE CIiINESE ECONOMY: FIl(lTING INFLATION, DEEPENING REFORMS 66 ;;S Annex4 Technical note on the decom- position of China's growth T his annex details the growth accounting framework Logarithmic differentiation of this expression yields the used in the introduction to Part II of the report. It following decomposition of the growth rate of gross explains the methodology we used to determine the domestic product: contributions of aggregate factor accumulation and the improvements in the efficiency of the allocation of labor gY = 1 gK + ( 1 - ) &L + Y, 1¾, gk across sectors to growth in China between 1985 and 1994.1 ' (2) The two main sectoral shifts of interest are: (1) the transfer + ( 1 - P,) v1, g1 + Y',, gA_ of labor out of agriculture into the industrial and service sectors, and (2) the transfer of nonagricultural labor out of where the state sector and into the collective and nonstate, non- collective sectors.2 Of an average annual growth rate of g, = growth rate in variable x 10.2 percent between 1985 and 1994, 6.6 percent is due to D =v,, 13 = the share-weighted average capital share in factor accumulation. Of the remaining 3.6 percent, 1.2 per- cent is due to efficiency gains resulting from the intersec- the economy toral reallocation of labor. The remaining 2.4 percent con- y,, = value share of sector ij in value added, p,,Y, /Y sists of productivity growth and efficiency gains from k,, = share of sector ij in total capital K, K,,/K improvements in the allocation of capital across sectors. I, = share of sector ij in total labor L, L,,/L Methodology The first two terms in equation 2 can be interpreted as the contributions of aggregate factor accumulation to The sectoral breakdown of value added by form of owner- growth. The remaining three terms can be interpreted as ship may be written as: aggregate efficiency growth, as they correspond to the por- tion of aggregate gross domestic product growth which Y = ~p,, };, = A Kb" 5 (1) cannot be explained by growth in inputs. Of these three Y = Yp,, Y,, = Yp, A,, K,, i terms, the first measures the effects of the reallocation of capital between sectors, holding constant the total capital where stock. The second measures the same reallocative effect for labor, while the final term is a weighted average of sectoral Y = gross domestic product total factor productivity growth rates, and corresponds to i = agriculture (A), industry (I) and services (S) true aggregate productivity growth. j = state-owned (S), collectively-owned (C) and other own- Using agriculture as the reference sector, it is possible to ership (0) clarify the role of the intersectoral reallocation of labor to Y= value added in sector ij growth by rewriting the labor reallocation effect as p,, = relative price of value added of sector ij A = level of total factor productivity in sector ij LRE = l I L/Y{ MPL MPL, }g, 1,, (3) K = capital stock in sector ij ' L,, = employment in sector ij where 67 MPLA = value of the marginal product of labor in Nonagricultural employment consists of staff and work- agriculture3 ers9, rural collective-owned enterprise employment (con- MPL,,= value of marginal product of labor in sector ij sisting primarily of township and village enterprises) and urban and rural employment in privately and individually- This expression shows that a reallocation of labor owned enterprises. The distribution of staff and workers towards sector 1/ (that is, an increase in the share of labor by sector and by form of ownership is available in official in sector zi1 gl > 0) will contribute positively to the labor statistics (China Statistical Yearbook 4-4, 4-7, and 4-8), as reallocation effect as long as the value of the marginal is the sectoral distribution of rural collective employment product of labor in sector ij exceeds that in agriculture, and (China Statistical Yearbook 11-29). The sectoral distribu- the size of this effect depends on how much more produc- tion of rural and urban private and individual employment tive the receiving sector is, and how large the share of labor (China Statistzcal Yearbook 4-2) is not available, but a rea- in the receiving sector is. sonable assumption is that this lies primarily in the services The above expression combines two distinct realloca- sector."'5 The distribution of employment by sector and tion effects: the reallocation of labor out of agriculture, and ownership arrived at in this manner is multiplied by the the reallocation of labor from the state to the non-state sec- corresponding aggregate distribution described in the pre- tors. In order to isolate these two effects, we can define an vious paragraph. "agricultural labor reallocation effect" as While industrial gross output value is available by own- ership (China Statistzcal YKarbook 12-3), the distribution of LRE4 = I L/Y{MPL, - MPLA}g1l, (4) industrial value-added by ownership is reported only for enterprises with independent accounting units (China which is simply the labor reallocation effect ignoring differ- Statistical Yearbook 12-11). This subset of enterprises is ences in labor productivities between forms of ownership not representative, as in 1994 it accounted for more than in industry and setvices. The growth effects of the alloca- 95 percent of gross output value of state-owned units, but tion of labor between forms of ownership is then given as only 50 percent of collective-owned enterprises and Other. the difference between the overall and agricultural labor Assuming that the ratio of value added to the gross value reallocation effects., LRE - LRE', and is referred to as the of investment output is equal for enterprises with and "ownership reallocation effect."4 without independent accounting units, this ratio is multi- plied by total industrial gross value of investment output Data requirements by ownership to arrive at total industrial value added by ownership. Value added in urban construction is available Data on aggregate gross domestic product, capital and (Chind Statistical Yearbook 13-10), and rural construction labor, as well as the sectoral distribution of value-added value added is estimated as 20 percent of the gross output and employment are required for the above calculations. value of township and village enterprise construction Aggregate gross domestic product and its sectoral decom- (China Statistical Yearbook 11-30). position into agriculture, industry5 and services are based Neither value-added nor gross output value is available on official statistics (China Statistical Yearbook 2-10).'67 by ownership for services, so it is assumed that the distrib- Labor input is measured as total employment. The distrib- ution of value added in services is equal to the distribution ution of aggregate employment between agriculture, indus- of employment in services. This assumption that the aver- try and services is based on official statistics (China age product of labor is equal across ownership in the ser- Stattstical Yearbook 4-3), but is adjusted to account for the vices sector will tend to understate the ownership realloca- large "floating population" of rural-urban migrants.8 The tion effects, as it is reasonable to assume that, as in indus- aggregate capita] stock is drawn from Nehru and try; labor productivity is considerably higher in the non- Dhareshawar (1993) and is updated through 1994 using state, noncollective sector. This alternative assumption official investment statistics. would increase the ownership reallocation effect. The distribution of nonagricultural employment by Finally, data on capital shares by sector, 0,B,, and the ownership can also be constructed from official statistics. aggregate capital share 1 are required. A possible assump- TIlE CHINESE ECONOMY: FIGHTING INFLAIION, DEEPENING REFORMS 68 tion is that capital shares sector are equal across sectors. lective sector, although growing rapidly, was very small and However, it is more reasonable to assume that capital the reallocation of labor into this sector contributed negli- shares differ, both across sectors and across forms of own- gibly to aggregate gross domestic product growth. The sit- ership."' The capital shares used in this annex are given uation was reversed during the second half of the sample, below, and satisfy the following four constraints: (1) with the ownership reallocation effect becoming more Capital shares of industrial state-owned units are much important as the nonstate, noncollective sector accounted larger than in the collective-owned enterprise and non- for an increasingly larger share of industrial value added. state, noncollective sectors. (2) In agriculture and in ser- vices, the capital share is considerably lower than in indus- Notes try. (3) In services, capital shares are not very different across forms of ownership. (4) The weighted average capi- 1. The idea that the reallocation of factors can contribute to pro- tal shares should equal 0.5. 12 ductivity growth goes back as far as Denison (1962). In a remark reminiscent of current observations on agriculture in China, Denison writes that "...manv of the farm workers [in the United Results States in 19541 were grosslv underemployed or extremely wasteful- ly employed..." (p. 226). Jorgenson, Gollop, and Fraumeni (1987) The table in the introductory section to Part II of the report use a more elaborate version of this framework to estimate that the summarizes the results of the growth decomposition. The contribution of factor reallocation to total factor productivity first two columns present real gross domestic product growth in the United States between 1948 and 1979 was trivial. growth and the contribution of factor accumulation (assum- Growth accounting exercises for China similar to that in this paper are done by Woo (1995) and Borenzstein and Hong (1995) who ing an aggregate capital share of 0.5). Between 1985 and analyze the effects of labor reallocation across sectors, although not 1994, factor accumulation contributed an average of 6.6 per- bv ownership. The analysis here extends this work bv (a) consider- cent to an aggregate gross domestic product growth rate of ing reallocation both across sectors and types of ownership. (b) 10.2 percent. The next two columns present the two com- allowing capital shares to vary across sectors and ownership. ponents of the labor reallocation effect. The agricultural real- 2. This includes the following ownership forms: joint-owned, location effect, which accounts for the growth consequences shareholding, foreign-funded, overseas Chinese-funded, private, and individual. of the reallocation of labor out of agriculture, contributes on x ~~~~~3. The distinction betwveen ownership forms within agricul- average 1.0 percent to growth, while the reallocation of labor ture is suppressed as by 1984 (the beginning of the sample peri- between forms of ownership contributes a further 0.4 per- od analvzed), the transformation of agriculture to the household cent, for a total reallocation effect of 1.4 percent. responsibility system was essentially complete. The relative importance of the agricultural and owner- 4. The intersectoral reallocation of labor across sectors also ship reallocation effects has shifted over time. During the has indirect effects on measured gross domestic product growth. Suppose for example that total factor productivitv growth is rela- second half of the 1980s, the agricultural reallocation effect 9 ~~~~~~~~~~tivelv low In a sector which is experiencing an outflow of labor. was dominant, as there were large shifts out of agriculture Given relative prices, this outflow will lower the share of value employment, especially into the rural township and village added in that sector and will raise aggregate total factor produc- enterprise sector. During this time, the nonstate, noncol- tivity growth bv reducing the weight on that sector's below-aver- age total factor productivitv growth (see the final term in Equation 2). This effect is not calculated here as it requires data Capital share parameters (13) on sectoral total factor productivity growth rates by form of own- Agriculture 0.4 ership are required, which cannot be constructed using the data Industry, 0 63 available for this annex. State-owned unts 0 8 5. Industry is defined as including construction, in contrast to Collective-owned enterprise 0 4 the Chinese definition which excludes it. Other 0 46. References are to tables in the 1995 Chna Statstical Servicesd 0.4 State-owned units 0.4 Yearbook. Most of the time series were constructed from corre- Co lect ve-owned enterprise 0.4 sponding tables in previous issues of the China Statistical Yearbook. Other 0.4 7. This paper uses revised gross domestic product series Overall 0.5 (since 1978) published by the State Statistical Bureau in 1994 a. Share-weighted averages which correct longstanding problems with the undervaluation of TECHNICAL NOTE ON THE DECOMPOSITION OF CIIINA'S GROWTII 69 services consumption (see World Bank 1994). A further concern References not addressed in these revisions and advocated bv Woo (1995) is that industrial output is overstated due to improper deflation by Borensztein, Eduardo and Han Hong 1995. "Regional Growth collective-owned enterprises and towlnship and village enterprises. Differentials in Post-Reform China: A Preliminary Woo advocates the deflation of industrial output by the factory Assessment." Manuscript, International Monetary Fund. gate price index (which has risen much more rapidly than the Chow, Gregory. 1993. "Capital Formation and Economic Growth industrial value-added deflator) to correct for this bias. In the in China." Quarterlv Journal of Economics pp. 809-842. context of this paper, this correction lowers overall efficiency Denison, Edward F. 1962. "The Sources of Economic Growth in growth by about I percent, but has negligible effects on the labor the United States and the Choices Before Us." Supplementarv reallocation effect. Paper No. 13, Committee for Economic Development. 8. Specifically, a floating population of zero in 1984 and 100 Jorgenson, Dale, Frank Gollop, and Barbara Fraumeni. 1987. million in 1994 and a constant annual compound growth rate is "Productivity and U.S. Economic Growth." Cambridge: assumed. In the absence of details on the sectoral distribution of Harvard University Press. thses workers, it is assumed that they are distributed proportion- Li, Jingven. 1992. "Productivity and China's Economic Growth." ately to officially-reported employment industry and services. Economvic Studies Quarterlv 43 (5): 337-350. Although the size of the agricultural reallocation effect is clearly Li, WVei. 1995. "The Impact of Economic Reform on1 the sensitive to assumptions on the size of the floating population, it Performance of Chinese State E.nterprises: 1980-1989." has little effect on the ownership reallocation effect. If official Manuscript, Duke University employmenit statistics are used, the agricultural labor reallocation Nehru, Vikram and Ashok Dhareshawar. 1993. "A New Database effect falls from 0.9 percent to 0.6 percent. on Physical Capital Stock: Sources, Methodology and 9. This term corresponds to urban employment in of all forms Results." Reistca de Anialisis Economico 8 (1): 37-59. of ownership excluding employment in private and individually- State Statistical Bureau. China Statistical Yearbook. Various editions. owned enterprises. Woo, W G. Fan, WX Hei, and Y. Jin. 1993. "The E,fficiency and 10. Specifically, it is assumed that the industrY share of this Macroeconomic Consequences of Chinese Enterprise subtotal is equal to the share of industry in nonagricultural Reform." C(b/na Economic Retview 4 (2): 153-168. employment, scaled by a factor of .25 to account for the predom- Woo, Ving Thye. 1995. "Chinese Economic Growth: Sources and inance of services. Prospects." Manuscript, UCSD. 11. With varying methodologies, Woo and others (1993), WXau World Bank. 1994. "China: GNP Per Capita." Report No. 13580- (1994), Wu and W'u (1994), and Chow (1993) all report consider- CHA. ably different capital shares for various subsector of the economy Wu, Harry, and Yanrui Wu. 1994. "Productivity and Sources of 12. This is the representative estimate of the aggregate capital Growth in the Reforming Chinese Economy " Chinese Econ- share in China used by Woo (1995), as estimated in Li (1993). omy Research Unit Working Paper No. 94/6, University of Borensztein and [long (1995) obtains comparable estimates Adelaide. using a panel of provincial output, capital, and labor. Wu, Yanrui. 1994. "Productivity Growth, Technological Progress and Technical Efficiency Change in China: A Three-Sector Analysis." Chinese Economy Research Unit Working Paper No. 94/5, University of Adelaide. TIIE C}IINESE ECONOMY: FIGtITING INFLATION, DEEPENING REFORMS 70 'PI Annex 5 . Statistical annex 71 Table 1: CHINA: National Accounts (billions of yuan in current prices) 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 GDPatmarket prices 403.8 451.8 486.2 529.5 593.5 717.1 896.4 1,020.2 1,196.3 1,492.8 1,690.9 1,853.1 2,161.8 2,663.5 3,451.5 4,500.6 GDP at factor cost .. .. .. .. .. .. .. .. .. .. .. .. .. Agriculture 125.9 135.9 154.6 176.2 196.1 229.6 254.2 276.4 320.4 383.1 422.8 501.7 528.9 580.0 688.2 943.8 Industry 191.4 219.2 225.6 238.3 264.6 310.6 386.7 449.3 525.2 658.7 727.8 771.7 910.2 1,170.0 1,642.9 2,125.9 Mining and quarrying 5.6 6.4 6.6 7.0 7.7 9.1 10.9 13.9 15.0 18.4 22.2 24.7 28.0 33.6 45.8 59.2 Manufacturing 162.5 183.3 188.1 198.6 218.2 256.1 317.5 362.4 419.8 532.6 594.5 623.4 734.6 938.3 1,288.6 1,664.0 Services 86.6 96.6 106.1 115.0 132.8 177.0 255.6 294.6 350.7 451.0 540.3 579.6 722.7 913.6 1,120.5 1,430.9 Imports of goods & non-factor services 24.4 29.1 36.9 36.3 42.2 61.7 124.6 150.6 158.9 208.8 219.0 262.8 331.4 454.8 607.3 990.7 Exports of goods & non-factorservices 21.7 26.9 37.0 44.3 46.4 60.9 82.9 114.2 151.5 187.3 197.0 311.7 387.6 487.1 548.9 1,078.8 Resource balance -2.7 -2.2 0.1 8.0 4.1 -0.9 -41.7 -36.4 -7.4 -21.6 -22.0 48.9 56.2 32.3 -58.5 88.1 Total expenditures 406.5 454.0 486.1 521.5 589.4 718.0 938.1 1,056.6 1,203.7 1,514.4 1,712.9 1,804.2 2,105.6 2,631.3 3,510.0 4,412.5 Total consumption 259.1 295.0 327.4 345.5 388.9 471.2 599.5 671.9 771.5 964.9 1,103.4 1,159.9 1,353.9 1,667.6 2,010.2 2,518.1 General govemment 61.4 65.9 70.5 77.0 83.8 102.0 118.4 136.7 149.0 172.7 203.3 225.2 283.0 349.2 450.0 595.5 Non-govemment 197.7 229.1 256.9 268.5 305.1 369.2 481.1 535.2 622.5 792.2 900.1 934.7 1,070.9 1,318.4 1,560.2 1,922.6 Stastiscal discrepancy -2.8 -2.6 -3.5 -18.3 -13.2 1.6 22.2 17.8 26.4 28.9 47.8 23.3 39.3 72.4 -8.0 -147.5 Gross domestic investment 147.4 159.0 158.1 176.0 200.5 246.9 338.6 384.6 432.2 549.5 609.5 644.4 751.7 963.6 1,499.8 1,894.4 Gross domesticfixed investment 115.1 131.8 125.3 149.3 170.9 212.6 264.1 309.8 374.2 462.4 433.9 473.2 594.0 831.7 1,298.0 1,738.9 Nonfinancial public sector 69.9 74.6 66.8 84.5 95.2 118.5 168.1 197.9 229.8 276.3 253.5 291.9 362.8 527.4 765.8 932.2 General govemment .. .. .. .. .. .. .. .. .. .. .. .. .. Central govemment .. .. .. .. .. .. .. .. .. .. .. .. .. .. State and local govemment .. .. .. .. .. .. .. .. .. .. .. .. .. .. Non-financial public enterprise .. .. .. .. .. .. .. .. .. .. .. .. .. .. Non-State sector 45.2 57.2 58.5 64.8 75.7 94.0 96.0 112.0 144.4 186.1 180.4 181.3 231.2 304.3 532.2 806.7 Changesinstocks 32.3 27.2 32.8 26.7 29.6 34.3 74.5 74.8 58.0 87.1 175.6 171.2 157.7 131.9 201.8 155.5 Gross domesticsaving 144.7 156.8 158.8 184.0 204.6 245.9 296.9 348.3 424.8 527.9 587.5 693.2 807.9 995.9 1,441.3 1,982.5 Net factor income 0.0 0.0 -0.2 1.1 2.2 3.4 3.0 0.9 -0.6 -0.6 -0.4 1.4 4.8 1.6 -3.8 -8.8 Net current transfers 1.0 1.0 0.8 1.0 0.9 0.7 0.5 0.9 0.9 1.5 0.9 1.1 2.4 4.4 5.1 11.0 Gross national saving 145.7 157.7 159.4 186.1 207.7 250.0 300.5 350.1 425.1 528.9 588.0 695.6 815.0 1,002.0 1,442.6 1,984.7 Net indirect taxes 29.5 25.1 21.5 27.5 35.8 53.9 98.4 97.7 98.6 112.3 134.0 141.9 168.5 196.9 277.1 381.2 Indirecttaxes 49.0 52.5 58.3 64.7 78.4 94.9 149.1 155.9 165.6 188.6 231.3 237.9 256.8 273.6 348.0 448.9 Subsidies 19.5 27.4 36.8 37.2 42.6 41.0 50.7 58.2 67.0 76.3 97.3 96.0 88.3 76.7 70.9 67.7 Gross national product 403.8 451.8 486.0 530.6 595.7 720.5 899.5 1,021.1 1,195.6 1,492.2 1,690.5 1,854.5 2,166.6 2,665.1 3,447.7 4,491.8 Nominal official exchange rate (annual average) 1.56 1.50 1.70 1.89 1.98 2.32 2.94 3.45 3.72 3.72 3.77 4.78 5.32 5.51 5.76 8.62 GDP at market price (current million USS) 175,565 201,696 192,937 202,099 227,395 256,107 304,898 295,710 268,229 307,161 342,287 354,321 376,620 418,132 430,292 522,172 Sow Chmn SbascY Yk 1995, p.32. Table 2: CHINA: National Accounts ( billions of yuan in constant 1990 prices) 1979 1980 1 981 1982 1983 1 984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 GDP at market pnces 720.5 776.7 811.7 880.7 970.5 1,118.0 1,269.0 1,380.7 1,540.8 1,714.9 1,785.2 1,853.1 2,025.4 2,313.0 2,625.3 2,935.1 Net indirect taxes 52.6 43.2 35.9 45.7 58.6 84.0 139.3 132.2 127.0 129.0 141.5 141.9 157.9 171.0 210.8 248.6 GDP at factor cost .. .. .. .. .. .. .. .. .. .. .. .. Agriculture 279.7 275.5 294.8 328.7 355.9 401.9 409.1 422.6 442.4 453.5 467.6 501.7 513.7 537.9 563.2 585.7 Industry 274.0 311.3 317.2 335.0 369.8 423.4 502.2 553.4 629.2 720.4 747.8 771.7 874.4 1,064.1 1,284.4 1,507.9 Mining and quarrying 8.0 9.1 9.3 9.8 10.8 12.4 14.1 17.1 18.0 20.1 22.8 24.7 26.9 30.6 35.8 42.0 Manufacturing 232.6 260.3 264.6 279.1 304.9 349.2 412.3 446.4 503.0 582.5 610.9 623.4 705.7 853.4 1,007.4 1,180.3 Services,etc. 166.9 190.0 199.7 217.1 244.8 292.8 357.7 404.7 469.2 541.0 569.9 579.6 637.3 711.0 777.7 841.5 Imports of goods & non-factor services 71.7 129.7 144.5 128.6 145.8 192.9 296.5 257.0 235.0 280.6 301.6 262.8 304.6 390.7 510.0 555.2 Exports of goods & non-factor services 56.1 99.6 126.9 137.6 141.1 164.6 177.2 207.1 230.3 259.0 277.4 311.7 359.6 415.0 453.6 583.2 Resource balance -15.6 -30.2 -17.7 9.0 -4.7 -28.3 -119.4 -49.9 -4.7 -21.6 -24.2 48.9 55.0 24.2 -56.5 28.0 Total expenditures 736.2 806.9 829.4 871.7 975.2 1,146.3 1,388.3 1,430.6 1,545.5 1,736.5 1,809.5 1,804.2 1,970.4 2,288.8 2,681.7 2,907.0 Total consumption, etc. 473.1 533.5 565.4 579.0 647.4 761.5 909.0 910.1 988.8 1,105.3 1,166.0 1,159.8 1,266.1 1,498.4 1,695.1 1,794.6 Generalgovemment 109.7 116.6 119.2 120.7 133.1 164.6 186.8 189.5 192.5 201.8 221.4 224.2 265.1 318.7 366.7 390.7 Non-govemment 363.4 416.9 446.2 458.3 514.3 596.9 722.2 720.6 796.3 903.5 944.6 935.6 1,001.0 1,179.7 1,328.4 1,403.9 Statistical discrepancy 4.2 6.6 6.1 10.1 8.0 6.7 -2.4 2.9 12.9 15.0 19.3 27.5 33.1 43.7 50.7 42.2 Gross domestic investmentla 263.1 273.4 263.9 292.8 327.9 384.9 479.3 520.5 556.7 631.2 643.5 644.4 704.3 790.4 986.6 1,112.4 Gross domestic fixed investment /a 205.4 226.6 209.2 248.4 279.5 331.4 373.9 419.2 482.0 531.2 458.1 473.2 556.5 675.8 833.1 1,011.0 Nonfinancial public sector la 125.0 128.5 111.6 140.8 155.9 185.0 238.1 267.9 296.1 317.4 267.7 291.9 340.0 458.1 582.6 607.5 General govemment .. .. .. .. .. .. .. .. .. .. .. .. .. Central govemment .. .. .. .. .. .. .. .. .. .. .. .. .. State and local government .. .. .. .. .. .. .. .. .. .. .. .. .. Nonfinancial public enterprise .. .. .. .. .. .. .. .. .. .. .. .. .. Non-State sectorla 80.4 98.2 97.6 107.6 123.6 146.4 135.7 151.3 185.9 213.8 190.4 181.3 216.5 217.8 250.5 403.5 Changes in stocks 57.6 46.8 54.8 44.4 48.4 53.5 105.5 101.2 74.7 100.1 185.4 171.2 147.8 114.5 153.5 101.4 Net factor income 1.2 1.3 0.5 3.0 5.1 6.9 5.5 2.2 -0.3 -0.4 -0.4 1.4 5.2 1.9 -2.4 -8.0 Net current transfers 1.8 1.7 1.3 1.7 1.4 1.1 0.7 1.2 1.2 1.8 0.9 1.1 2.2 3.9 3.9 7.3 Gross national product 721.7 778.0 812.2 883.7 975.6 1,124.9 1,274.5 1,382.8 1,540.5 1,714.6 1,784.9 1,854.5 2,030.6 2,314.9 2,622.8 2,927.1 Gross domestic saving 255.0 263.5 266.9 321.0 342.1 382.2 380.1 458.3 545.7 602.3 613.2 693.3 755.9 818.1 937.5 1,161.8 Gross national saving 258.1 266.4 268.8 325.7 348.6 390.2 386.4 461.7 546.6 603.7 613.8 695.7 763.4 823.9 939.0 1,161.1 Capacitytoimport 63.6 119.8 147.3 156.8 160.0 190.3 197.3 194.9 224.0 251.6 271.3 311.7 356.2 418.5 460.9 604.5 Terms of trade adjustment 7.6 20.3 20.5 19.2 18.9 25.6 20.1 -12.2 -6.3 -7.4 -6.1 0.0 -3.4 3.5 7.3 21.3 Gross domestic income 728.1 797.0 832.2 899.9 989.4 1,143.7 1,289.1 1,368.4 1,534.5 1,707.5 1,779.2 1,853.1 2,022.0 2,316.5 2,632.6 2,956.4 Grossnational income 729.3 798.3 832.7 903.0 994.6 1,150.5 1,294.6 1,370.6 1,534.2 1,707.2 1,778.8 1,854.5 2,027.3 2,318.5 2,630.2 2,948.4 /a In the absence ot an offidal fixed investment deflator, the real investment numbers are derived by employing the GOP deflator until 1991. Thereafter the fixed investment deflator is employed. (China Statistical Yearbook , p. 250) Source: China Statistacal Yearbook 1995, p.32. Table 3: CHINA: National Accounts (implicit price deflators 1990=100) 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 GDP atmarket prices 56.0 58.2 59.9 60.1 61.2 64.1 70.6 73.9 77.6 87.0 94.7 100.0 106.7 115.2 131.5 153.3 Net indirect taxes 56.0 58.2 59.9 60.1 61.2 64.1 70.6 73.9 77.6 87.0 94.7 100.0 106.7 115.2 131.5 153.3 GDP at factor cost Agriculture 45.0 49.3 52.4 53.6 55.1 57.1 62.1 65.4 72.4 84.5 90.4 100.0 102.9 107.8 122.2 161.1 Industry 69.8 70.4 71.1 71.1 71.6 73.3 77.0 81.2 83.5 91.4 97.3 100.0 104.1 109.9 127.9 141.0 Mining and quarrying 69.8 70.4 71.1 71.1 71.6 73.3 77.0 81.2 83.5 91.4 97.3 100.0 104.1 109.9 127.9 141.0 Manufacturing 69.8 70.4 71.1 71.1 71.6 73.3 77.0 81.2 83.5 91.4 97.3 100.0 104.1 109.9 127.9 141.0 Services, etc. 51.9 50.9 53.1 53.0 54.2 60.4 71.5 72.8 74.7 83.4 94.8 100.0 113.4 128.5 144.1 170.0 Imports of goods & non-factor services 34.0 22.4 25.6 28.2 29.0 32.0 42.0 58.6 67.6 74.4 72.6 100.0 108.8 116.4 119.1 178.4 Exports of goods & non-factor services 38.6 27.0 29.2 32.2 32.9 37.0 46.8 55.1 65.8 72.3 71.0 100.0 107.8 117.4 121.0 185.0 Terms of trade (Px/Pm) 113.5 120.3 114.2 114.0 113.4 115.6 111.4 94.1 97.3 97.1 97.8 100.0 99.1 100.8 101.6 103.7 Total expenditures 55.2 56.3 58.6 59.8 60.4 62.6 67.6 73.9 77.9 87.2 94.7 100.0 106.9 115.0 130.9 151.8 Total consumption, etc. 54.8 55.3 57.9 59.7 60.1 61.9 65.9 73.8 78.0 87.3 94.6 100.0 106.9 111.3 118.6 140.3 General government 56.0 56.5 59.1 63.8 63.0 62.0 63.4 72.1 77.4 85.6 91.8 100.5 106.7 109.6 122.7 152.4 Non-government 54.4 55.0 57.6 58.6 59.3 61.9 66.6 74.3 78.2 87.7 95.3 99.9 107.0 111.8 117.5 136.9 Statistical discrepancy -66.5 -39.5 -57.4 -181.2 -165.0 23.9 -925.8 614.1 204.3 192.7 247.5 84.6 118.7 165.8 -15.8 -349.6 Gross domestic investment 56.0 58.2 59.9 60.1 61.2 64.1 70.6 73.9 77.6 87.0 94.7 100.0 106.7 121.9 152.0 170.3 Gross domestic fixed investment La 56.0 58.2 59.9 60.1 61.2 64.1 70.6 73.9 77.6 87.0 94.7 100.0 106.7 123.1 155.8 172.0 Nonfinancial public sector 55.9 58.1 59.8 60.0 61.1 64.0 70.6 73.8 77.6 87.0 94.7 100.0 106.7 115.1 131.4 153.5 General government .. .. .. .. .. .. .. .. .. .. .. .. .. .. Central government .. .. .. .. .. .. .. .. .. .. .. .. .. .. State and local government .. .. .. .. .. .. .. .. .. .. .. .. .. .. Nonfinancial public enterprise .. .. .. .. .. .. .. .. .. .. .. .. .. .. Non-State sector 56.2 58.3 60.0 60.2 61.3 64.3 70.8 74.0 77.7 87.1 94.7 100.0 106.8 139.8 212.4 199.9 Changes in stocks 56.0 58.2 59.9 60.1 61.2 64.1 70.6 73.9 77.6 87.0 94.7 100.0 106.7 115.2 131.5 153.3 Net factor income 56.0 58.2 -36.8 36.4 43.1 49.3 54.6 39.7 190.6 168.5 116.0 100.0 91.6 83.3 156.8 110.0 Net current transfers 55.2 56.3 58.6 59.8 60.4 62.6 67.6 73.9 77.9 87.2 94.7 100.0 106.9 115.0 130.9 151.8 Gross national product 55.9 58.1 59.8 60.0 61.1 64.0 70.6 73.8 77.6 87.0 94.7 100.0 106.7 115.1 131.4 153.5 Gross domestic saving 56.7 59.5 59.5 57.3 59.8 64.3 78.1 76.0 77.8 87.7 95.8 100.0 106.9 121.7 153.7 170.6 Gross national saving 56.5 59.2 59.3 57.1 59.6 64.1 77.8 75.8 77.8 87.6 95.8 100.0 106.8 121.6 153.6 170.9 /a In the absence of an official fixed investment deflator, the real investment numbers are derived by employing the GDP deflator until 1991. Thereafter the fixed investment deflator is employed. ( China Statistical Yearbook , p. 250) Source: Table 1 divided by Table 2. Table 4: CHINA: National Accounts (percentage growth rates in constant 1990 prices) 1 979 1980 1981 1982 1 983 1 984 1 985 1986 1987 1988 1 989 1 990 1991 1 992 1 993 1994 GDP at market prices 7.6 7.8 4.5 8.5 10.2 15.2 13.5 8.8 11.6 11.3 4.1 3.8 9.3 14.2 13.5 11.8 Net indirect taxes . . . . . . . . . GDP at factor cost Agriculture 6.1 -1.5 7.0 11.5 8.3 12.9 1.8 3.3 4.7 2.5 3.1 7.3 2.4 4.7 4.7 4.0 Industry 8.2 13.6 1.9 5.6 10.4 14.5 18.6 10.2 13.7 14.5 3.8 3.2 13.3 21.7 20.7 17.4 Mining and quarrying 8.2 13.6 1.9 5.6 10.4 14.5 13.9 21.2 5.1 11.7 13.4 8.4 9.1 13.7 17.0. Manufacturing 8.6 11.9 1.6 5.5 9.2 14.5 18.1 8.3 12.7 15.8 4.9 2.0 13.2 20.9 18.0 17.2 Services, etc. 9.2 13.9 5.1 8.7 12.8 19.6 22.2 13.1 15.9 15.3 5.3 1.7 9.9 11.6 9.4 8.2 Imports of goods & non-factor services 43.8 81.0 11.4 -11.0 13.4 32.3 53.7 -13.3 -8.6 19.4 7.5 -12.9 15.9 28.3 30.5 8.9 Exports of goods & nan-factor services 44.0 77.6 27.4 8.4 2.6 16.7 7.6 16.9 11.2 12.4 7.1 12.4 1 5.4 15.4 9.3 28.6 Resource balance Total expenditures 8.2 9.6 2.8 5.1 11.9 17.5 21.1 3.0 8.0 12.4 4.2 -0.3 9.2 16.2 17.2 8.4 Total consumption, etc. 11.1 12.8 6.0 2.4 1 1.8 17.6 19.4 0.1 8.6 1 1.8 5.5 -0.5 9.2 18.3 13.1 5.9 General government 21.3 6.3 2.2 1.2 10.3 23.7 13.5 1.4 1.6 4.8 9.7 1.3 18.3 20.2 15.1 6.6 Non-government 8.3 14.7 7.0 2.7 12.2 16.1 21.0 -0.2 10.5 13.5 4.5 -1.0 7.0 17.9 12.6 5.7 Statistical discrepancy . . . . . . . . . . . . . Gross domestic investment 3.3 3.9 -3.4 10.9 12.0 17.4 24.5 8.6 7.0 13.4 1.9 0.1 9.3 12.2 24.8 12.7 Gross domestic fixed investment 3.5 10.3 -7.7 18.7 12.5 18.6 12.8 12.1 15.0 10.2 -13.8 3.3 17.6 21.4 23.3 21.3 Nonfinancial public sector 1.0 2.8 -13.2 26.2 10.7 18.7 28.7 12.5 10.5 7.2 -15.7 9.0 16.5 34.7 27.2 4.3 General government.. . .. . .. . .. . .. . ... ... Central government.. . .. . .. . .. . .. . ... ... State and local government .. . .. . .. . .. . .. . ... ... Nonfinacial public enterprise.. . .. . .. . .. . .. . ... ... Non-Stale sector 7.7 22.0 -0.5 10.2 14.9 18.5 -7.3 11.5 22.9 15.0 -10.9 -4.8 19.4 0.6 15.1 61.0 Changes in stocks 2.6 -18.9 17.1 -18.9 9.0 10.5 97.2 -4.0 -26.2 33.9 85.3 -7.7 -13.7 -22.5 34.0 -33.9 Net factor income.. . .. . .. . .. . ... ... ... Net current transfers.. . .. . .. . .. . ... ... ... Gross national product 7.6 7.8 4.4 8.8 10.4 15.3 1 3.3 8.5 11.4 11.3 4.1 3.9 9.5 14.0 13.3 11.6 Gross domestic saving 2.3 3.3 1.3 20.3 6.6 11.7 -0.6 20.6 1 9.1 10.4 1.8 13.1 9.0 8.2 14.6 23.9 Gross national saving 2.3 3.2 0.9 21.2 7.0 11.9 -1.0 19.5 18.4 10.4 1.7 13.4 9.7 7.9 14.0 23.7 Terms of trade adjustment . . . . . . . . . . . .. .. Gross domestic income 7.8 9.5 4.4 8.1 9.9 15.6 12.7 6.2 12.1 11.3 4.2 4.2 9.1 14.6 1 3.6 12.3 Gross national income 7.8 9.5 4.3 8.4 10.1 15.7 12.5 5.9 11.9 11.3 4.2 4.3 9.3 14.4 13.4 12.1 Source: Table 2 Table 5: CHINA: Balance of Payments (billions of US dollars) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Exports of goods and non-factor services 23.5 26.7 28.2 29.6 39.1 45.9 47.8 57.3 65.8 78.8 86.5 118.8 Merchandise (fob) 20.7 23.9 25.1 25.8 34.7 41.1 43.2 51.5 58.9 69.6 75.7 102.6 Non-factor services 2.7 2.8 3.1 3.8 4.4 4.8 4.6 5.8 6.9 9.2 10.9 16.3 Imports of goods and non-factor services 20.7 26.3 41.1 37.5 38.9 50.0 52.7 46.6 54.3 73.8 98.3 111.5 Merchandise (fob) 18.7 23.9 38.2 34.9 36.4 46.4 48.8 42.4 50.2 64.4 86.3 95.3 Non-factor services 2.0 2.4 2.9 2.6 2.5 3.6 3.9 4.3 4.1 9.4 12.0 16.2 Resourcebalance 2.7 0.4 -13.0 -7.9 0.2 -4.1 -5.0 10.7 11.5 5.0 -11.8 7.3 Net factor income 1.2 1.6 0.9 0.2 -0.2 -0.1 0.3 1.0 0.9 0.3 -1.3 -1.0 Factor receipts 1.5 2.0 1.5 1.1 1.0 1.5 1.9 3.1 3.8 5.7 4.4 5.9 Factor paVments 0.3 0.4 0.5 0.9 1.2 1.6 1.7 2.1 2.9 5.4 5.7 6.9 Total interest due 0.8 1.0 1.2 1.1 1.8 2.2 3.2 3.1 3.7 3.4 3.4 4.8 Other factor payments & disc. -0.5 -0.6 -0.6 -0.1 -0.6 -0.6 1.5 -1.1 -0.8 2.0 2.3 2.1 Net current transfers 0.4 0.3 0.2 0.3 0.2 0.4 0.2 0.2 0.4 0.8 0.9 0.8 Current receipts 0.4 0.3 0.2 0.3 0.3 0.4 0.2 0.2 0.5 0.8 0.9 1.1 Workers remittances 0.4 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.2 0.2 0.1 0.4 Other current transfers 0.0 0.0 0.0 0.1 0.1 0.3 0.2 0.1 0.3 0.6 0.8 0.7 Current payments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 Current account balance before official qrants 4.4 2.4 -11.9 -7.5 0.3 -3.8 -4.5 1 1.9 12.9 6.1 -12.2 7.2 Current account balance as a share of GDP (percent) 1.9 0.9 -3.9 -2.5 0.1 -1.2 -1.3 3.4 3.4 1.4 -2.8 1.4 Official capital grants 0.1 0.1 0.1 0.1 0.0 0.0 0.1 0.1 0.4 0.4 0.3 0.5 Current acoount balance after offlcial.arants 4.5 2.5 -11.8 -7.3 0.3 -3.8 -4.3 12.0 13.3 6.4 -11.9 7.7 Lonq term capital Inflows 1.5 2.2 5.0 6.3 7.8 9.1 8.7 9.0 8.0 18.3 37.1 35.8 Direct investment 0.5 1.1 1.0 1.4 1.7 2.3 2.6 2.7 3.5 7.2 23.1 31.8 Net tonq term borrowinq 1.0 1.1 4.0 4.9 6.1 6.8 6.1 6.3 4.5 11.3 12.8 12.0 Disbursements 2.4 2.4 5.3 6.7 8.0 9.1 8.4 9.7 8.7 16.5 19.6 18.3 Repayrnents due 1.4 1.3 1.3 1.9 2.0 2.3 2.4 3.3 4.1 5.2 6.7 6.3 Other lonq term Inflows (net) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.2 1.2 -8.0 Total other items (net) -1.9 -4.6 4.4 -1.0 -3.3 -2.9 -4.8 -8.9 -6.7 -26.8 -26.4 -12.9 Net short-term capital -0.3 -0.9 2.3 -2.3 0.2 0.1 -1.5 -3.2 0.4 -0.9 -3.9 -3.1 Capital flows not elsewhere inciuded 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -2.5 -0.3 -17.6 -12.7 0.0 Errors and omissions -1.6 -3.7 2.1 1.3 -3.5 -3.0 -3.3 -3.2 -6.8 -8.3 -9.8 -9.8 Chanqes in net reserves -4.1 -0. 1 2.4 2.0 -4.8 -2.4 0.5 -12.0 -14.5 2.1 1.2 -30.5 Net crecit trom IMF -0.5 0.0 0.0 0.7 0.1 0.0 0.0 -0.4 -0.4 0.0 0.0 0.0 Reservechanqes not elsewhere induded -3.6 -0.1 2.4 1.3 -4.9 -2.3 0.5 -11.6 -14.1 2.1 1.2 -30.5 Escrow account 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Gross reserves (excludinq gold) La 15.0 17.4 12.7 11.5 16.3 18.5 18.0 29.6 43.7 20.6 22.4 52.9 Gross reserves (Includinq gold) lb 19.8 21.3 16.9 16.4 22.5 23.8 23.1 34.5 48.3 25.0 27.0 57.8 Exchanqe rates: Nominal official exchanQe rate (average) 2.0 2.3 2.9 3.5 3.7 3.7 3.8 4.8 5.3 5.5 5.8 8.6 Nominal official exchanqe rate (end-ot-vear) 2.0 2.8 3.2 3.7 3.7 3.7 4.7 5.2 5.4 5.8 5.8 8.4 Manufactures Unit Value Index (% channe) -2.3 -2.1 0.8 17.9 9.8 7.3 -0.7 5.7 2.2 4.3 -0.3 3.7 Real effective exchanqe rate index 84.2 74.9 63.6 46.3 40.2 43.7 50.7 37.3 32.4 /s Snrx Auges 1992 th. *ratheritie hve detined ge.m intt. rese e th. oud 1yel set. toe ign heaN. reenoe- met total r-se). g9Od. *ev stAlion in the Fund end SOR holdjn9. t Goldd td S Lo..d p,cs (Soo IFSj Sao,c: The Wo.Wd b-k IMSF tntuwl FPo,,c Stsen. Table 6: CHINA: Services (millions of US dollars) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 A. Shipment of freight Credit 786 668 671 705 904 1,308 1,061 1,937 1,179 1,294 1,391 2,065 Debit 739 761 1,224 850 1,186 1,387 2,382 2,139 2,193 3,876 5,134 6,926 B. Insurance Credit 203 224 196 229 252 345 332 227 342 486 452 1,700 Debit 110 121 69 82 142 214 187 84 214 274 362 1,880 C. Other transportation Credit 174 209 271 304 152 169 153 480 494 0 0 0 Debit 0 0 0 0 0 0 0 0 0 0 0 0 D. Port expenses Credit 381 376 360 306 289 304 300 289 338 368 245 760 Debit 614 560 300 670 456 889 370 1,106 314 449 345 695 E. Travel receipts Credit 767 922 979 1,227 1,693 2,078 1,707 1,738 2,346 3,947 4.683 7,323 Debit 53 150 314 308 387 633 429 470 511 2,512 2,797 3,036 F. Profits Credit 31 2 6 0 10 0 6 0 0 0 0 0 Debit 0 0 14 1 5 2 8 7 46 10 22 231 400 G. Interest Credit 707 925 484 216 177 427 247 667 747 614 535 928 Debit 41 92 68 298 457 644 394 480 870 1,886 2,079 2.506 H. Bank interest and charges Credit 715 995 897 685 789 1,042 1,641 2,350 2,972 4,981 3,855 4,809 Debit 254 296 464 611 732 978 1,264 1,536 1,999 3,439 3,364 3,868 I. Posts Credit 22 32 13 15 12 24 118 159 221 349 471 706 Debit 9 7 7 15 14 11 16 13 15 72 85 146 J. Interofficial Credit 13 28 130 215 204 137 151 107 115 141 200 266 Debit 154 223 263 251 150 277 337 239 184 227 472 518 K. Labor income Credit 75 96 91 199 51 35 53 52 74 60 47 117 Debit 0 0 0 0 0 0 0 0 0 20 22 98 L. Other services Credit 380 352 435 940 880 458 727 866 1,870 2,604 3,409 3,429 Debit 315 556 347 100 150 193 189 291 689 2,004 2,818 3,000 M. Total services Net 1,986 2,053 1.069 1,427 1,737 1,094 923 2,558 3,697 63 -2,420 -969 Credit 4,275 4,819 4,533 4,927 5,413 6,327 6,497 8,872 10.697 14,844 15,289 22,104 Debit 2,289 2,766 3,464 3,500 3,676 5,233 5,574 6,314 7,000 14,781 17,709 23,073 N. factor Services (F+G+H+K) Net 1,233 1,630 932 176 -164 -126 282 1,007 914 288 -1,259 -1,018 Receipts (credit) 1,528 2,018 1,478 1,100 1,027 1,504 1,947 3,069 3,793 5,655 4,437 5,854 Payments (debit) 295 388 546 924 1,191 1,630 1,665 2,062 2,879 5,367 5,696 6,872 0. Non-factor services (A+B+C+D+E+I+L) Net 753 423 137 1,251 1,901 1,220 641 1,551 2.783 -225 -1,161 49 Receipts (credit) 2,747 2,801 3,055 3,827 4,386 4,823 4,550 5,803 6.904 9,189 10,852 16,250 Payments (debit) 1,994 2,378 2,918 2,576 2,485 3,603 3,909 4,252 4.121 9,414 12,013 16,201 Sovc: The Wa1d Bank IIMF Inf.meon. Fruncl Stbcs. Table 7: CHINA: Transfers ( millions of US dollars) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Private unrequited transfers Net 436 305 171 255 249 416 238 222 444 806 883 836 Credit 446 317 180 266 260 428 247 233 484 823 901 1,095 Debit 10 12 9 11 11 12 9 11 40 17 18 259 Nonresidential remittances Net 444 315 177 205 163 125 73 119 189 213 93 376 Credit 446 317 180 208 166 129 76 124 207 228 108 395 Debit 2 2 3 3 3 4 3 5 18 15 15 19 Migrants' transters Net -8 -10 -6 50 86 291 165 103 255 593 790 460 Credit 0 0 0 58 94 299 171 109 277 595 793 700 Debit 8 10 6 8 8 8 6 6 22 2 3 240 Public unrequited transfers Net 75 137 73 124 -25 3 143 52 387 351 289 501 Credit 174 279 260 250 129 140 230 143 406 385 389 675 Debit 99 142 187 126 154 137 87 91 19 34 100 174 Intemational organizations °° Net 21 96 24 42 82 69 183 139 127 121 Credit 63 140 58 61 120 84 192 173 160 145 Debit 42 44 34 19 38 15 9 34 33 24 Grants and aid Net 52 28 -49 -39 61 -17 204 212 162 380 Credit 197 110 71 79 110 59 214 212 229 530 Debit . . 145 82 120 118 49 76 10 0 67 150 Total transfers Net 511 442 243 379 224 419 381 274 831 1,157 1,172 1,337 Credit 620 596 439 516 389 568 477 376 890 1,208 1,290 1,770 Debit 109 154 196 137 165 149 96 102 59 51 118 433 Source: The World Bank: IMF: Intemational Finandal Statistics. Table 8: CHINA: International Reserves (millions of US dollars) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Total reserves (minus gold) 14,987 17,366 12,728 11,453 16,305 18,541 17,960 29,586 43,674 20,620 22,387 52,914 SDR's 335 406 483 569 640 586 540 562 577 419 484 539 Reserve position with Fund 176 255 332 370 429 407 398 430 433 758 704 755 Foreign exchange reserves 14,476 16,705 11,913 10,514 15,236 17,548 17,022 28,594 42,664 19,443 21.199 51,620 Gold Gold (million fine troy ounces) 1 3 13 1 3 13 1 3 13 1 3 1 3 13 13 13 1 3 Gold (National valuation) La 464 435 486 541 629 594 587 623 634 610 612 646 London gold price(US$ per oz) lb 382 308 327 391 484 410 401 384 362 343 360 384 Gold at London price (USS million) 4,845 3,915 4,153 4,964 6,148 5,210 5,093 4,871 4,600 4,361 4,569 4,880 Total reserves including gold 15,451 17,801 13,214 11,994 16,934 19,135 18,547 30,209 44,308 21,230 22,999 53,560 (National valulation) Total reserves Including Gold 19,832 21,281 16,881 16,417 22,453 23,751 23,053 34,457 48,274 24,981 26,956 57,794 (London price) (a From Auguat 1992 onwards ie auttfonties han. dmined gros nf-emaonal resn.s as a sum of onty state foreign euchange rnas., (not total raser), gold, nav posnion wIt fhe Fund and SDR holdings it Gold valued at SOR 35 per fine ounc. Soo TheWorldBnk, tMF. nenton FnoalSbd5bcs Table 9: CHINA: Commodity Composition of Merchandise Exports (cuistoms basis; millions of US dollars) 19ag0 1981l 1 982 1 993 1984 _1990 1996 1887 1 988 1999e 1990o 1991 1 992 1 993 1 994 PRIMARY GOO00 9.114 10,248 10,050 9.970 11.934 13,929 11i.272 1 3.231 1 4,406 1 5.079 1 5,886 16.140 195,989 19,999 1 9,707 FOOD 2,995 2.924 2.908 2,853 3,232 3.a03 4,449 4.791 5.890 8,145 6.609 7,229 8.324 9.399 1 0,01 7 LjkeeohelechlefNlo lr od ...329 304 338 349 396 390 430 439 479 453 498 Meal e meet prodocle- 409 448 483 520 585 957 791 909 770 950 909 Flehe,e,al.fih,nofiaoeetc . . 305 2813 491 721 989 1.039 1.370 1,181l 1.369 1,204 1.9196 Gr.,, 99d gFUn produtI 444 1,090 998l 5 79 991 71 9 814 1.199 1.692 1.960 1.597 Veetable e-d Ifo6e 8-29 825 1,092 1,390 1.517 1,923 1.742 1.948 2,023 2.163 2,889 Cof.". leoxo . 449 435 468 496 524 568 034 491 499 0 10 494 INONFOOD 1,71 1 1.948 1.653 1.892 3,421 2,903 2,908 3,650 4,257 4,21 2 3.037 3.484 3.143 3.002 4,1 32 of which Oil e.ede & oi[o91mnig f.tIOS- .. 505 487 590 674 694 64 5 819 741 997 793 1,290 Texile fber t. W- . . 929 1,1 45 1,160 1,508 1.672 1,549 1.090 1.125 4,234 4.179 1,093 AcinWrrJed -egtbl M row ntrels 6 0 9 9 79a 1 05 442 399 486 645 724 945 909 705 606 81 7 1.139 00 ~~~MINERAL FUE5LS 4,290 5.228 5,31 4 4,689 9.027 7,132 3,993 4,544 3.950 4,321 5.237 4,754 4,672 4.109 4,061 C) of hetl Coal, coke en biqno19e -. . 322 349 455 536 594 990 7 55 929. PtRrofwim.p.tr.feu P10d0019 al... ... 5,701 6.777 3,224 4,003 3.350 3,933 4.460 3,975 .2,7899 0THER 1 38 149 175 209 2 54 240 233 259 309 400 503 979 s 950 1,09 1,497 MANUFACTUJRED OODS 9,005 I 1,759 I12,271 12,606 1 4.205 1 3,522 1 9,670 28.206 33,110 37,490 46.205 55,698 87,901 75,078 1 01,331 CHEMICALS& REL.ATEDPR0ODUCTS 1.120 1,342 1,1 96 1,251 1,364 1.356 1.733 2,335 2.897 3,201 3,730 3.8198 4,332 4,623 6,235 of cefoh Org-w ... 294 309 411 500 575 690 838 91 1 1,403 1,541 1.902 0019ill. . 293 297 379 5 53 762 791 942 91 3 1,050 1.1 45 1.350 LIGHT INDUSJTRY 3,999 4,1709 4,302 4.365 5.054 4,493 1.869 8.070 10C,499 10.997 f12.5079 14,456 1 6.1I30 18,392 23.2168 of w1hicf Verfbic,eo. goe .. 3.093 3.243 4,220 5.790 8,456 6,994 6.999 7,734 I. 1,819a Noo-mWiic nereb . . . - 260 227 317 638 5 79 792 1.31 6 1,669. 2,521 Meal 919900 . . . . 47 7 426 553 797 1.006 1.21 0 1,283 1,669. ..1,654 MACHINfERY &TRANP4OORT EQUIPMFI4 643 1,097 1,263 1.221 1,493 7 72 1.094 1.741 2,769 3,974 5.588 7,149 1 3,250 1 5,262 21,926 OTFfER 2,936 3.725 3,705 3,904 4.697 3,4886 4,949 8.273 8,268 10,755 1 2,996 18,.620 34.230 38,761 49,939 Cbafhi.g ..d ganen . . . 2,653 2,050 2,913 3,749 4,87 2 9,130 9.898 8,998 1 6.983 181,325 23,7322 PRODLCTS NOTa.ASSIFIEOnELSEWHERE 207 999 1,.905 1.965 1.597 3,61 3 6,009 7,387 8.697 6,733 11,925 13.655... 1 2 TOTAL I.19119 22,007 22.321 22.228 28,139 27,350 30.942 39,437 47,51 6 52,539 62,091 71.843 94,940 91,744 1 21,039 Note: Dute from 1960-91 a,. based o Staoded lrduetdal Trade Oa.Maslolo SlITC; 1992-4 cetgotl ace bsoed on tb. H-nnnlod Syem- ilfi). From 1982, Cotn.- Steoirfi wee cow coomdey cetegone prodct cot oh-lbere Was9ld hen been mir ad i. dileml celeopIS ofcoende. Sococ Cbh.a Olacdta Yea,book IS9O, p.5318. Table 10: CHINA: Imports (customs basis; millions of US dollars) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 FOOD 3,202 3,934 4,439 3,238 2,527 1,881 2,002 3,055 4,191 5,269 4,475 3,718 3,869 2,953 4,996 Food 2,927 3,622 4,201 3,122 2,331 1,553 1,625 2,443 3,476 4,192 3,335 2,799 3,143 2,206 3,119 Beverages 36 213 130 46 116 206 172 263 346 202 156 200 242 245 68 Animallat 239 99 108 70 80 122 205 349 369 875 982 719 484 502 1,809 PETROLEUM (Mineralfuels) 203 83 183 111 139 172 504 539 787 1,650 1,272 2,114 3,546 5,819 4,034 INTERMEDIATE 10,628 10,668 9,854 11,931 13,856 19,175 17,552 16,769 23,391 23,415 18,325 23,189 34,307 40,042 43,957 Chemicals and related products 2,909 2,606 2,936 3,183 4,237 4,469 3,771 5,008 9,139 7,556 6,648 9,277 11,201 9,704 12,131 Crude matenials (non-food) 3,554 4,027 3,012 2,459 2,542 3,236 3,143 3,321 5,090 4,835 4,107 5,003 5,801 5,438 7,438 Leather+Cork 4,165 4,035 3,906 6,289 415 770 851 728 842 747 938 1,267 1,626 1,859 2,943 Leather .. .. .. .. .. .. .. 184 224 280 374 642 206 263 1,903 Cork .. .. .. .. .. .. .. 544 618 467 564 625 1,420 1,596 1,041 Textile yam (yam, fabrics etc.) .. .. .. .. 953 1,607 1,632 1,848 2,388 2,845 2,748 3,689 3,690 3,145 9,347 - Nonmetallicminerals .. .. .. .. 225 325 363 342 430 520 453 443 4,519 3,776 1,001 Iron and steel .. .. .. .. 4,361 7,120 6,741 4,787 4,624 5,797 2,852 2,694 5,051 13,896 9,438 Non-ferrousmetals .. .. .. .. 1,123 1,648 1,051 735 878 1,114 579 816 2,420 2,224 1,659 CONSUMERGOODS 544 557 486 782 1,423 2,330 2,431 1,743 1,757 1,866 2,051 2,506 7,949 8,666 6,987 Paper(paperand related products) .. .. .. .. 241 428 554 727 610 634 745 969 1,771 1,741 1,923 Rubber .. .. .. .. .. .. .. 45 51 50 50 76 555 598 186 Fumiture .. .. .. .. .. .. .. 4 2 6 1 6 8 7 2 4 9 1 78 21 8 111 Travel goods .. .. .. .. .. .. .. 3 8 6 6 7 302 327 5 0 Clothing .. .. .. .. .. .. .. 17 28 38 48 61 437 543 622 Footwear .. .. .. .. .. .. 1 2 3 9 11 506 513 325 Photo supplies .. .. .. .. .. .. .. 432 365 398 361 441 2,024 2,320 1.656 Miscellaneous .. .. .. .. .. .. .. 476 632 669 759 892 2,177 2,407 2,114 MANUFACTURED 5,440 6,774 4,323 5,328 9,465 18,694 20,415 21,110 25,150 26,940 27,222 32,264 30,914 46,479 55,720 Total 20,017 22,015 19,285 21,390 27,410 42,252 42,904 43,216 55,275 59,140 53,345 63,791 80,585 103,959 115,693 Note Data twrim 190-91 ar b.ed on Standard Inrdustrial Trade Cles5oiftn (SITC); 1992-4 ategonex a based n the Harmnized System (HS). Source. Chnam Stabstical Ya6olr 1995 p. 539 Table 11: CHINA: External Debt: Disbursnements and Repayments (millions of US dollars) 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 1990 1991 1992 1993 1994 Disbursements Public & publicly guaranteed long-term debt 2,539 1,800 1,838 2,375 2,357 5,280 6,732 8,044 9,065 8,442 9,665 8,659 16,505 19,561 18,314 Olfical creditors 245 584 734 678 888 1,166 1,444 1,123 1,847 2,761 2.578 2,649 3,103 5,501 4,200 Multiateral 0 0 1 78 208 599 620 717 1,124 1,169 1,158 1,455 1,523 2,252 2,558 odwhichl DA 0 0 1 67 124 212 282 399 557 507 607 612 778 869 680 odwhichlBRD 0 0 0 4 73 354 324 303 553 604 591 668 552 977 1,380 Bilateral 245 584 733 600 680 567 824 405 724 1,592 1,420 1,194 1,580 3,248 1,642 Private credilors 2,294 1,216 1,104 1,697 1,470 4,114 5,288 6,921 7,218 5,681 7,087 6,010 13,204 13,729 14,113 Bonds 50 0 40 21 84 971 1,333 1,064 782 450 277 260 894 2,737 3,337 Commercialbanks 159 97 90 269 302 700 1,782 4,605 4,470 2,016 3,247 2,623 5,062 5,624 3,627 Otherprivate 2,085 1,119 974 1,408 1,084 2,443 2,172 1,252 1,967 3,206 3,564 3,127 7,248 5,368 7,149 Private non-guaranteed long-term 0 0 0 0 0 0 0 0 0 0 0 0 198 332 0 Total long-term disbursements 2,539 1,800 1,838 2,375 2,357 5,280 6,732 8,044 9,065 8,442 9,665 8,659 16,505 19,561 18,314 IMF purchases 0 896 0 0 0 0 701 0 0 0 0 0 0 0 0 Net shoru-term capital .. .. . Do Total disbursements 2,539 2,696 1,838 2,375 2,357 5,280 6,732 8,044 9,065 8,442 9,665 8,659 16,505 19.561 18,314 I) Repayments due Public & publicly guaranteed long-tem debt 613 1,204 1,302 1,389 1,287 1,297 1,874 1,956 2,285 2,365 3,319 4,123 5,213 6,729 6,343 Officialcreditors 50 78 77 56 57 49 279 496 492 485 851 605 760 886 1,083 Multilateral 0 0 0 0 0 0 2 99 41 63 220 141 215 272 359 ol which IDA 0 0 0 0 0 0 0 0 0 0 0 1 2 4 9 odwhichlBRD 0 0 0 0 0 0 0 97 39 62 216 130 196 245 315 Bilateral 50 78 77 56 57 49 277 397 451 421 632 464 545 614 725 Private creditors 562 1,126 1,226 1,334 1,230 1,248 1,595 1,460 1,793 1,880 2,468 3.517 4,453 5,843 5,260 Bonds 0 17 17 17 0 0 0 0 11 33 325 236 1,095 831 461 Commercalbanks 161 333 313 168 126 77 331 466 754 867 808 2,010 2,046 2.895 1,803 Otherprivate 401 777 896 1,149 1,103 1,171 1,264 993 1,028 980 1,335 1,272 1,311 2,117 2,996 Private non-gurenteed long-term debt 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total long-term repayments due 613 1,204 1,302 1,389 1,287 1,297 1,874 1,956 2,285 2,365 3,319 4,123 5,213 6,729 6,343 IMF repurchases 0 0 0 481 0 0 36 81 83 79 490 451 0 0 0 Total long-term repayment * IMF repurchase 613 1,204 1,302 1,870 1,287 1,297 1,910 2,037 2,368 2,444 3,809 4,574 5,213 6,729 6,343 Net flows Offidal creditors 195 506 657 623 831 1,117 1,185 626 1,355 2,277 1,727 2,044 2,343 4,615 3,117 ot which IDA 0 0 1 67 124 212 282 399 557 507 507 611 777 865 671 odwhichlBRD 0 0 0 4 73 354 324 206 514 542 376 538 357 732 1,065 Commitments IBRDcommitments 0 100 165 299 616 660 672 692 868 1,221 75 1,312 1.253 1,445 2,987 ot whirh fast dsbursing 0 0 0 0 0 0 0 0 200 0 0 0 0 0 0 IDAcoDmmitments 0 96 165 139 343 433 448 613 594 539 878 1,310 612 870 1,090 o which last disbursing 0 0 0 0 0 0 0 0 97 0 0 0 0 0 0 S-n. W WM Bat WdDdt Ti... Table 12: CHINA: External Debt: Interest and Debt Outstanding ( millions of US dollars) 1990 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Interest due Pubic & publicly guaranteed long-term debt 318 518 841 523 610 586 645 1.125 1.611 2,511 2,534 2,953 2,708 2,618 3,818 Otficialcreditors 17 55 81 104 131 172 262 402 434 457 531 635 678 827 1,131 Multilatenal 0 0 0 3 9 30 76 126 143 179 226 263 319 376 480 olwhich IDA 0 0 0 1 3 4 8 12 15 14 19 23 29 34 41 ol which IBRD 0 0 0 3 6 26 66 111 126 161 200 227 264 299 364 Bilateral 17 55 81 101 121 142 187 276 290 278 305 372 358 450 651 Privatecreditors 301 463 460 418 479 414 382 723 1,178 2,054 2,003 2,319 2,030 1.792 2,687 Bonds 3 4 5 5 4 20 91 213 289 347 367 356 337 286 363 Commemcialbanks 140 110 72 46 40 50 67 137 457 1,062 959 1,07t 776 738 1,034 Otherprivate 158 349 383 368 436 343 225 373 432 646 677 89t 918 767 1,289 Private non-guaranteed long-term debt 0 0 0 0 0 0 0 0 0 0 0 0 0 12 26 Intereat arrears 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Reducton in arreers(-) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Totallong-terminterestdue 318 518 541 523 610 586 645 1,125 1,611 2,511 2,534 2,953 2,708 2,630 3,844 Xn IMF servicecharges 0 21 34 21 2 2 2 50 51 67 65 24 0 0 0 Interest on short-term debt 0 0 248 277 386 594 417 640 534 628 547 707 697 809 948 Total interest due 318 539 823 821 998 1,181 1,064 1.815 2.197 3.206 3,146 3,684 3,405 3,439 4,792 Debt outstanding and disbursed (DOD) Public & publicly guaranteed long-term debt 4,504 4,913 5,220 5,301 6,179 9,937 16,571 25,963 32,620 37,118 45,515 49,479 58,463 70.076 82.390 Official creditors 447 932 1,536 2,181 2,812 4,724 7,028 9,496 10,536 12,039 14,514 17,073 19,105 24.339 28,973 Multlateral 0 0 1 77 271 983 1.810 2,852 3.753 4,783 6,111 7,576 8,614 10,690 13,588 olwhichlDA 0 0 1 67 181 431 774 1,330 1,819 2.296 3,016 3,672 4,286 5,160 6,097 ot which IBRD 0 0 0 4 73 498 965 1,427 1,831 2.330 2,865 3,494 3.752 4,549 5.933 Bilateral 447 932 1,535 2,104 2.541 3,741 5,218 6,644 6,783 7,257 8,403 9.497 10,491 13.650 15.385 Privatecreditora 4,056 3,982 3,685 3,121 3,367 5,213 9,544 16,467 22,085 25,079 31,001 32,406 39,358 45.737 53,417 Bonds 50 34 59 65 140 1,234 2,811 4,498 5,182 5,228 5,425 5,660 5.449 7,715 10,730 Commemcialbanks 1,814 632 369 406 546 776 1.780 6,087 10.393 11,432 14,520 14,963 17.913 20,678 20,910 Otherprivate 2,492 3,316 3,257 2,650 2,681 3,203 4,953 5.882 6,509 8,419 11,055 11,783 15.995 17,344 21.777 Private non-guaranteed long-tem, 0 0 0 0 0 0 0 0 0 0 0 0 200 556 583 Total long-tem DOD 4,504 4,913 5,220 5,301 6,179 9,937 16,571 25,963 32.620 37,118 45,515 49,479 58,663 70,632 82.973 Use ot IMF credit 0 884 838 324 303 340 1.072 1,155 1,013 908 469 0 0 0 0 Short-term debt 0 0 2,300 3,984 5,600 6,419 6.076 8,221 8,806 6,907 6,766 10,300 10,846 13,546 15,399 Total ternel debt 4,504 5,797 8,358 9,609 12,082 16,696 23,719 35.340 42,439 44,932 52,751 59,779 69,509 84,178 98,372 Memorandum items: % Debt on concessional temms I I 9 1 7 23 2 5 22 20 19 21 21 21 2 0 19 19 % Debt at vaiable interest rates 59 54 35 28 22 24 25 34 39 38 36 33 28 29 28 % Bilateral debt on comessional trms 1 1 6 9 1 0 12 1 2 11 10 12 13 11 1 0 12 12 % Multiateml debt on concessional terma 0 0 0 1 2 3 3 4 4 5 6 6 6 8 8 Prefferred credtor debt seivice 0 1 2 26 1 2 5 1 1 8 8 17 12 7 7 8 S-5. Wodd raa Ibdd Dbt Tabta aee a, 1994 d ean by te C G-t Table 13: CHINA: Domestic Debt ( billions of yuan) Year Type Issued Arnount Issued to Issued 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1992 Treasurv bonds Enterprises 2 40 0.48 0.48 0.48 0.48 Treasurv bonds Househols 2.00 0.39 0.39 0.39 0.39 1983 Treasurv bonds Enterprises 2.10 0.42 0.42 0.42 0.42 0.42 Treasury bonds Horsehot.s 2.10 0.42 0 42 0.42 0.42 0.42 1984 Treasurv bonds Enterprises 2.00 0.40 0 40 0.40 0 40 0.40 Treasurv bonds Hozethlcd 2.20 0 44 0.44 0.44 0.44 0.44 1985 Treasury bonds Enterprises 2.20 2.18 Treasurv bonds Houselubte 3.90 3.75 1986 Treasurv bonds Enterprises 2.30 2.29 Treasurv bonds Househokts 4.00 3.96 1987 Treasur bonds Enterprises 2.30 2.26 Treasurv bonds tHousehods 4 00 4.00 Kev construction born Houaehcs 0 50 0 s0 Key construction bomr Enterprises 4.90 4.90 1988 Treasury bonds Enterprises 3.50 3.47 Treasurv bonds Haehulds 5.70 5 73 Kev construction borc Houeholds 3.10 3.05 Fisce bonds Financial institutir 8.80 6.60 1989 Treasur bonds Hotuehokts 5.60 6.60 oo Price-indexed bonds Hcoushs 12.50 12 50 4>1 Special atte bonds Enterprises 4 30 4 28 1990 Treasurv bonds HFold 9.30 9.28 Special stte bonds Enterprises 3.20 3.20 Fscat bonds Financial instdutio 7 10 7.11 Conversion bonds Enterprises 9.40 9.40 1991 Treasury bonds Househokds 1 9.94 19 94 Specialstate bonds Enterprises 2 00 2.00 Frscal bonds Financial istduti 7.00 7.00 1992 Treasury bonds Hctasiiods 14g90 14.90 Treasurv bonds HuAghlds 24 70 24.70 1993 Treasurv bonds HOLethicds 22.64 22.64 Treasurv bonds HoAhtrds 8 94 8.84 Fiscal bonds Financial iatdutir 7.00 7.00 1994 Treasurv bonds Enterprises 2.00 2.00 Treasury bonds HFuseds 8.24 8.24 Treasury bonds Hoehdds 28.50 28.50 Treasury bonds Hosalhc 70.00 70 00 1995 Special sate bonds Financial stitutir 3 00 3.00 Treasurv bonds Financial instrtutir 25.00 25 TreasurV bonds Hulseh1obe 105.88 105.7 Treasury bonds HOsashols 8.00 6.00 Treasury bonds Financial iutitutir 11.89 11.89 TOTALAMSLTMATULRG 474963 0.87 1.71 2.55 23.53 18.00 26 04 10.12 24 22 52.65 99 9 0 84.90 9 9 C C 2.00 3 00 Treasury bonds Househl 0.39 0.81 1.25 5.00 10.55 10.46 9.72 19.94 24.70 22.64 14.90 8.84 0.00 0.00 Treasurv bonds Enterprises 0.48 0.90 1.30 3.48 6.58 3.08 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Keyv cosstrudion born Enterprises 0.00 0.00 0.00 4.90 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Key consrurtion boric Hnehlds 0.00 0.00 0.00 3.55 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Soecidattebonds Enterprises 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.29 3.20 2.00 0.00 0.00 0.00 0.00 Fiscal bonds Financial irsitutions 0.00 0.00 0.00 .860 0.00 0.00 0.00 0.00 7.11 7.00 0.00 6 00 0.00 0.00 Conversion bends Enterprises 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 9.40 0.00 0.00 0.00 0.00 0 00 Price-inde-ed bonds HotddcW 0.00 0.00 0.00 0.00 0.00 12.50 0.00 0.00 0.00 0.00 0 00 0.00 0.00 0.00 Sorc rise0 a Fi Table 14: Chine: Monetary Survey /A 1985 1986 1987 1988 1989 1990 1991 1992 1993 1993 1993 1993 1994 1 994 1994 1994 1995 1995 1995 1995 March June Sept. Dec. March June Sept. Dec. March June Sept. Dec. (billions of yuan; end of period) Nottforeign assets 2 1 4 23 30 37 93 137 1 55 14 4 136 150 168 357 307 429 506 508 503 541 937 Ndot domestic assets 4 99 668 812 990 1,159 1,438 1,797 2.395 2,971 2,808 2.879 3,164 3,197 3.522 3,727 3,976 4,290 4,566 4,982 5,186 Domestitc credit . .. . .. 1,372 1.696 2,039 2,551 2,690 2.795 2,994 3,234 3,490 3,667 3.858 4,149 4,310 4,410 4,942 5,098 Loam to enterpriese and indiyiduals 629 815 990 1,142 1,347 1,654 1.981 2,4 04 2.557 2,659 2,777 3.053 3,274 3,471 3.662 3,925 4,091 4,239 4,445 4,871 Not credit to goemmenltlb -9 6 2 1 3 1 25 42 85 147 112 117 113 115 128 113 114 131 129 7 7 100 131 Claimsmnorwnmonetary . .. . .. . .. . .. 2 1 20 1 4 25 80 93 93 9 1 100 94 93 96 firumiat inesfteons Othw items (net) /r -120 -152 -199 -193 -213 -259 -242 -166 -20 1 0 -26 -70 -292 -144 -131 -171 -20 156 240 88 Money plus quasi-money (broad money) 520 672 835 1.010 1.196 1,530 1,934 2.540 2.815 2,942 3,029 3,332 3,544 3,829 4.152 4,483 4.797 5,069 5,423 5,823 00 Moniey 374 4 74 569 695 74 4 879 1,122 1,501 1.396 1,463 1,434 1,819 1,644 1,768 1,901 2,054 2,103 2,142 2,248 2.397 Currenicy 9 9 122 145 213 234 264 317 433 4 55 485 507 585 584 578 641 729 727 700 737 789 Demand deosits 275 352 423 482 810 615 805 1.068 941 877 928 1,034 1,060 1,189 1,260 1,325 1,376 1,442 1,511 1,608 Hlousehrold dmaraddepwsits 4 0 5 1 7 1 95 95 115 145 214 . . . . . . . Enterprie depitsi 203 262 307 348 367 439 584 785 .. . .. . .. - .. . Officialtinatitutions 33 40 45 36 48 61 75 69 Osuar-montey 146 198 267 315 452 661 812 1,039 1.419 1,480 1,594 1,713 1,900 2,062 2,551 2,429 2.695 2,927 3,175 3,426 Capital conssruction depesits 24 25 3 1 3 1 42 65 52 110 .. . .. . .. . .. . Household term deposits 122 173 236 284 410 586 760 929 .. . .. . .. . .. . (twelve-mronflh percentage change) Net dlomeatic assets 22.1 33.9 21.5 20.7 18.3 24.1 25.0 32.7 33.5 30.0 25.3 26.4 19.3 25.5 29.5 25.7 34.6 29.6 31.0 30.4 ot which Domnestic credit . .. . .. 17.0 23.7 20.2 25.1 22.3 22.5 21.9 22.6 29.8 31.6 33.3 28,3 23.9 20.3 20.3 22.9 Loans to enterprises and individuats 22.3 29.5 20.3 16,8 18.0 22.8 19.8 21.3 . . . . . . . Money cod quasi-money (broad money) 17.1 29.3 24.2 21.0 18.4 28.0 26.4 31.3 30.3 26.6 22.2 24.0 25.9 30,1 37.1 34.5 35.4 32.4 30.6 29.9 of which:Currency 24.7 23.3 19.4 46.6 9.8 12.8 20.2 36.4 46.2 54.2 42.6 35.2 28.2 1 9.1 26.6 24.6 24.6 21.1 14.9 8.2 Is C-n.. Sr.6o.rar of m Pest.'.. ark, Ste tour a -aoerr.n barb, eha tao -rt.ra banks n-r -r ute ordtmoae.. and Sr. A0rIeitut Dansiruoer ea6. C ee.- rated eaft. b.g. Iprtn 1ea gosr..--r deposht atWs kdus .utshbfar depsir StSd sot.oo- r,Inln.AW NrtdW bods send by bats Seer W. Table 15: CHINA: Operations of the People's Bank ( billions of yuan; end of period) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1993 1993 1993 1994 1994 1994 1994 1995 1995 1995 1995 March June Sept. Dec. March June Sept. Dec. March June Sept. Dec. Net foreign assets 12 4 15 21 33 69 132 120 132 129 145 155 244 308 382 445 499 532 602 667 Claims on financial institutions 225 269 277 339 421 515 599 698 667 687 788 961 930 938 958 1,045 1,030 999 1,037 1,151 Otherdomesticassets -9 10 30 46 48 74 94 153 169 174 158 197 188 168 180 231 230 198 232 258 Claims on other financial institutions 21 20 14 25 26 28 23 27 31 20 18 18 Loans 9 13 23 31 35 41 45 53 56 60 64 68 68 70 71 73 74 74 70 68 Budgetary borrowino, net La -9 6 21 31 25 42 58 101 108 111 106 108 95 71 67 85 67 8 35 61 Otheritems, net -8 -9 -14 -15 -11 -9 -9 -1 -16 -17 -26 -4 -1 -1 19 46 58 96 109 111 oo (71 Reserve money 229 283 322 406 502 657 825 971 969 989 1,091 1,313 1,361 1,414 1,519 1,722 1,759 1,730 1,871 2,076 Liabilities to banks 96 120 127 145 208 313 400 421 375 372 439 549 600 650 667 745 789 767 835 932 Required deposits 42 57 67 84 104 139 181 234 239 246 250 275 300 331 357 383 413 441 478 511 Other deposits 47 56 53 51 91 159 203 163 110 95 158 229 253 271 259 303 321 266 298 352 Cash invault 7 8 8 10 13 14 16 24 26 31 31 45 47 48 51 60 56 59 59 69 Liabilitiestononbanks 132 163 195 260 294 345 425 551 593 617 653 764 760 764 852 977 970 963 1,036 1,144 Currencyincirculation 99 122 145 213 234 264 317 433 455 485 507 585 583 578 641 729 727 700 737 789 Deposits of nonmonetary institutions 35 34 36 50 40 38 47 61 50 59 74 104 Depositsolthepublic 33 41 49 47 59 81 108 118 103 98 110 130 137 148 164 187 193 204 225 251 Total Liabilities Memorandum Items, Money multiplier Lb 2.27 2.40 2.60 2.50 2.40 2.30 2.34 2.61 2.90 3.00 2.80 2.54 2.60 2.71 2.73 2.60 2.73 2.93 2.90 2.80 Ratio of excess reserves to deposits (%) Lc 12.10 10.10 7.70 6.80 10.10 13.70 13.55 8.88 5.75 5.10 7.50 9.96 10.14 9.80 8.83 9.66 9.24 7.45 7.63 8.37 /. Clai related to dte b.dpr opertions le. g-oe nrr dpoei, which brolod. etrebodgeatry depofst. of leasi gooerentr. lb Th. rdio d raoye sod qua.i-rny to r-s-ev -ony. to Deport oud. dpeoiU Ih rh aPC. Note: Drt. from March 1993 hbe been ri..d on th. baa. o a n. e-rs -tri orthodofogy that irludse rn s ro-d encorrtrg syste end epdd oor. So-n .MDF. Table 16: CHINA: Specialized and Universal Banks Domestic Currency Assets and Liablittles (billions of yuan;end of period) 1988 1989 1990 1991 1992 1993 1993 1993 1993 1994 1994 1994 March June Sept. Dec. Match June Sept. Total deposits 669 798 1,046 1,330 1,748 1,846 1,918 1,964 2,140 2,144 2,480 2,544 Enterprises 293 308 399 505 696 749 763 718 782 902 1,057 1,117 Sight 262 267 336 455 590 650 666 620 675 834 989 1,049 Term 31 41 64 50 107 98 97 98 107 68 68 68 Saving 259 363 501 647 820 865 909 994 1,057 1,189 1,395 1,395 Sight 60 61 76 102 155 182 205 205 219 239 239 239 Term 199 302 424 545 665 683 705 789 838 951 1,156 1,156 Township enterpises 6 6 7 9 14 14 14 13 15 27 Agricultural collectives 2 2 2 2 4 4 5 4 5 16 16 17 Rural credit cooperatives 59 64 76 92 107 102 102 111 140 00 Other deposits 50 56 61 74 107 112 1,125 124 142 10 12 15 Liabilities to the PBC 336 420 508 591 671 663 680 752 961 908 934 953 Sell-ownediundsoibanks 91 91 112 102 154 154 154 154 172 190 191 191 Other liabilities, net 57 67 74 96 -52 -183 -148 -116 -64 -69 -199 -103 Total Liabilities 1,153 1,385 1,740 2,119 2,522 2,480 2,604 2,754 3,597 3,495 3,742 4,242 Loans 1,024 1,206 1,476 1,759 2,108 2,126 2,201 2,297 2,578 2,611 2,755 2,885 Industrial 260 331 421 493 581 582 600 630 702 662 663 689 Commercal 410 477 576 668 743 764 783 811 902 920 943 994 Constructlon 50 60 67 72 91 90 93 93 105 99 104 107 Urbancollectives 64 69 82 93 134 121 126 129 136 115 106 110 Business loans to individuals 2 2 2 2 2 3 3 3 3 3 4 5 Agricultural loans 78 86 100 117 142 146 152 158 169 132 145 148 Loans to rural credit cooperatives 4 4 4 4 3 3 4 4 3 Flxed investment loans 139 157 198 274 357 360 376 398 476 561 650 683 Otherloans 19 22 27 37 55 57 64 72 81 66 79 83 CashInvaull 10 13 14 16 24 25 29 29 42 37 48 51 Required deposits 61 101 134 173 222 237 242 247 271 307 339 367 Other deposits at the PBC 38 65 116 170 122 93 76 126 214 218 244 223 Total Assets 1,153 1,385 1,740 2,119 2,522 2,480 2,604 2,754 3,597 3,495 3,742 4,242 Sotce IMF Table 17: CHINA: Balance Sheets of Rural Credit Cooperation (billions of yuan; end of period) 1986 1987 1988 1989 1990 1991 1992 1993 1993 1993 1993 1994 1994 1994 1994 1995 1995 1995 March June Sept. Dec. March June Sept. Dec. March June Sept. Deposits 76 104 140 167 214 271 348 372 385 400 430 469 502 530 568 616 649 678 Ruralcollectiveenterprises 8 9 10 9 11 14 22 22 23 22 25 63 68 71 81 75 77 81 Township enterpnses 9 11 13 13 15 19 30 32 34 32 36 4 5 5 6 6 7 9 Individual deposits 62 87 114 141 184 232 287 308 317 336 358 403 430 454 482 535 564 589 Sight 23 30 35 33 39 43 59 65 70 69 73 83 83 83 .. x0 Temm 54 71 79 108 145 188 228 244 248 266 285 319 346 370 .. O0 Other deposits 2 3 3 4 5 7 9 10 10 11 11. Loans from banks 4 4 4 4 4 5 6 7 6 7 6 7 7 7 . . Other liabilities, net 6 10 5 5 0 -4 0 -3 -1 6 16 23 16 6 .. Total liabilities 85 118 149 175 219 272 353 376 392 413 452 499 525 543 .. Domestic credit 49 76 91 110 141 181 245 275 291 304 314 358 384 402 417 464 477 502 Loans to collective enterprses 5 7 8 11 13 17 22 24 25 26 26 76 84 88 .. .. Loans to township enterprises 27 36 46 57 76 101 147 162 172 183 200 191 202 211 .. .. Loanstoindividuals 36 34 37 42 52 63 76 89 94 94 88 90 98 105 .. .. Redeposits al banks 49 59 58 66 77 92 108 101 101 110 138 142 142 142 .. .. Total assets 85 118 149 175 219 272 353 376 392 413 452 499 525 544 .. Not. N.w ftwtial nMhodoIogy was introd c-d in 1994. 5- Tab. 1s. Soa: IUF. Table 18: CHINA: Balance Sheets of Rural Credit Cooperatives (billions of yuan; end of period) 1994 1994 1994 1994 1995 1995 1995 March June Sept Dec March June Sept. Foreign assets (net) Reserve assets 63 68 77 88 91 103 106 Required reserves 54 58 62 67 74 79 83 Deposits with the PBC 2 2 5 9 7 12 11 Cash in vault 7 8 9 12 11 12 12 Central bank bonds Claims on central government Claims on other sectors 358 384 402 417 464 477 502 Claims on nonmonetary financial institutions .. .. .. .. Liabilities to nonfinancial sector 469 502 530 568 616 649 678 Demand deposits 63 68 71 81 75 77 81 Time deposits 4 5 5 6 6 7 9 Savings deposits 403 430 454 482 535 564 589 Other deposits Liabilities to central bank Liabilities to nonmonetary financial institutions .. .. .. .. .. Bonds Owners' equity 55 55 57 62 62 64 64 Paid-in capital 55 54 52 69 37 36 36 Other items (net) -104 -105 -108 -124 -123 -133 -134 Note: New statistical methodology was introduced in 1994. Source: IMF. Table 19: CHINA: Consolidated Government Revenue Ja& (billions of yuan) 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Total revenue 126.3 131.6 138.6 141.2 159.4 183.5 228.3 244.6 257.6 280.3 326.4 355.0 367.2 392.8 475.9 558.4 Tax revenue 122.7 128.1 135.4 136.8 153.5 175.5 218.8 224.8 232.1 257.6 301.7 313.8 331.7 345.7 447.5 524.0 Taxes on income and profits Lt 76.6 78.4 79.9 75.0 78.4 84.1 73.9 73.4 71.7 76.4 78.9 84.7 82.1 81.1 80.5 94.0 Enterprses income tax 73.4 75.4 76.7 71.6 72.6 78.0 69.7 68.9 66.5 68.2 69.4 74.5 73.1 72.1 67.9 70.9 State enterprises Ld 68.9 70.9 72.3 66.8 66.6 71.8 59.6 59.6 56.3 57.1 58.3 60.4 62.7 62.5 58.3 61.0 Collectives 4.5 4.5 4.4 4.8 6.0 6.2 10.1 9.3 10.2 10.5 10.5 13.3 10.4 9.6 9.6 9.9 Joint ventures . . 0.6 0.6 0.8 .. Personal income tax (other) 0.3 0.2 0.4 0.5 2.5 2.6 .. .. .. 0.8 1.0 1.4 .. Agrcultural income tax 2.9 2.8 2.8 2.9 3.3 3.5 4.2 4.5 5.2 7.4 8.5 8.8 9.0 9.0 12.6 23.1 Taxes on goods and services 43.5 46.3 50.0 55.7 56.9 67.9 96.3 106.7 111.9 130.8 158.2 164.0 175.5 206.6 287.8 346.5 General sales taxes 42.5 45.4 49.1 54.7 55.9 66.9 95.3 104.0 109.5 126.3 144.8 149.7 159.9 205.8 286.8 346.5 Product tax . 59.4 54.7 53.9 48.1 53.0 58.1 62.9 69.3 82.1 48.7 Value added tax 14.8 23.2 25.4 38.4 43.1 40.0 40.6 70.6 108.1 230.8 Business tax . 21.1 26.1 30.2 39.8 48.7 51.6 56.4 65.9 96.6 67.0 Urban maintenance and development tax . 8.6 9.2 10.0 Real estate tax 2.2 2.6 3.2 3.8 O Speclal tax on oil . . 1.6 1.5 1.4 1.2 1.1 1.0 .. 0.2 Saft tax 1.0 0.9 0.9 1.0 1.0 1.0 1.0 1.1 0.9 0.9 1.0 0.8 0.8 0.8 0.8 Customs tax 2.6 3.4 5.4 4.7 5.4 10.3 20.5 15.2 14.2 15.5 18.2 15.9 18.7 21.3 25.6 27.3 Other taxes 0.0 0.0 0.1 1.4 12.8 13.2 28.1 29.5 34.3 34.9 46.4 49.2 55.4 36.7 53.6 56.2 of which: Construction tax 0.0 0.0 0.0 0.0 0.2 1.0 2.3 2.4 3.0 2.6 2.8 3.8 3.1 3.2 3.8 4.3 Nontax revenue 3.6 3.5 3.2 4.4 5.9 8.0 9.5 19.8 25.5 22.7 24.7 41.2 35.5 47.1 28.4 34.4 Gross profit reminances from state owned enterprisesLe 0.0 0.0 0.0 0.0 0.0 0.0 4.4 4.2 4.3 5.1 6.4 7.8 7.5 6.0 4.9 Depreciation funds 2.5 2.7 2.6 2.6 2.7 2.7 .. .. .. .. .. .. .. Other 1.1 0.8 0.6 1.8 3.2 5.3 5.1 15.6 21.2 17.6 18.3 33.4 28.0 41.1 23.5 34.4 of which foreign grants (net) 0.0 -0.1 0.2 -0.1 0.1 0.3 0.2 0.4 -0.1 0.0 0.5 0.2 2.1 1.9 1.7 Memorandum item: Gross profit remittances from state owned enterprises 68.9 70.9 72.3 66.8 66.6 68.7 4.4 4.2 4.3 5.1 6.4 7.8 7.5 6.0 4.9 GNP in current prices 403.8 451.8 486.0 530.6 595.7 720.5 899.5 1,021.1 1,195.6 1,492.2 1,690.5 1,854.5 2,166.6 2,665.1 3,447.7 4,491.8 LI A-ordiva lv the detiv-vn vontarnd in MF. Manue on Govenme nt Finare Statics (GFS). 1956. a This invhrdee .el o .ernrent revenue, with rh vptr o -trsbudgt.ry r-pte ri the .ations en-*it g gnrn-wnt. j ProederA oIth. prormfitt nv ate enerpri.ee itrod ..d in 1983 are v1-died under proh rentae tos the br..kdow o *nte.rs pament. in 1983 4 betwen prfit ten end profit trenete is not avaiabl Bginn,,g wth 1t95. prft t-n ste. entrprisee er. Included unde ran rev-nue at The proud te ad rdjuMmt,oen it vn Mete eterdpne; ero-s protfit erttnoe tr.n at. enterprise., urdil ta84. Ls Umil 184. mrdiidedin i-ror leo on l ate errepres. d n tee, -nI b.nk. and fin.W eirethtiusvas ea. *uOi et to re-htnttr S- ,e: IMF. Table 20: CHINA: Structure of Consolidated Government Revenue (as a percentage of total revenue) 1979 1980 1961 1982 1983 1984 1 985 1988 1 987 198 18 90 19 992 1993 1994 Total revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Tax revenue 97.1 97.3 97.7 96.9 96.3 95.6 95.8 91.9 90.1 91.9 92.4 88.4 90.3 88.0 94.0 93.8 Taxes on income and profits 60.6 59.6 57.6 53.1 49.2 45.8 32.4 30.0 27.8 27.3 24.2 23.9 22.4 20.6 16.9 16.8 Enterprises income tax 58.1 57.3 55.3 50.7 45.5 42.5 30.5 28.2 25.8 24.3 21.3 21.0 19.9 18.4 14.3 12.7 State enterprises 54.6 53.9 52.2 47.3 41.8 39.1 26.1 24.4 21.9 20.4 17.9 17.0 17.1 15.9 12.3 10.9 Collectives 3.6 3.4 3.2 3.4 3.8 3.4 4.4 3.8 4.0 3.7 3.2 3.7 2.8 2.4 2.0 1.8 Joint ventures .. . . . . . . . . 0.2 0.2 0.2 Personal income tax (other) 0.2 0.2 0.3 0.4 1.6 1.4 .. . . 0.3 0.3 0.4 Agricultural income tax 2.3 2.1 2.0 2.1 2.1 1.9 1.8 1.8 2.0 2.6 2.6 2.5 2.5 2.3 2.6 4.1 Taxes on goods and services 34.4 35.2 36.1 39.4 35.7 37.0 42.2 43.6 43.4 46.7 48.5 46.2 47.8 52.6 60.5 62.1 General sales taxes 33.7 34.5 35.4 38.7 35.1 36.5 41.7 42.5 42.5 45.1 44.4 42.2 43.5 52.4 60.3 62.1 Product tax . .. . .. . .. 26.0 22.4 20.9 17.2 16.2 16.4 17.1 17.6 17.3 8.7 - ~~~~~~~Value added tax . .. . .. . .. 6.5 9.5 9.9 1 3.7 13.2 11.3 11.1 18.0 22.7 41.3 Businessatax . .. . .. . .. 9.2 10.7 11.7 14.2 14.9 14.5 15.4 16.8 20.3 12.0 Urban maintenantce and development tax . .. . .. . .. . ... .. 2.6 2.6 2.7 Real estate tax .. . . . . . . . . 0.8 0.8 0.9 1.0 Special tax on oil .. . . . . . . 0.7 0.6 0.5 0.4 0.3 0.3 Salt tax 0.8 0.7 0.6 0.7 0.6 0.5 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.2 Customs tax 2.1 2.6 3.9 3.3 3.4 5.6 9.0 6.2 5.5 5.5 5.6 4.5 5.1 5.4 5.4 4.9 Othier taxes 0.0 0.0 0.1 1.0 8.0 7.2 12.3 12.1 13.3 12.5 14.2 13.9 15.1 9.3 11.3 9.6 of which: 0.0 0.0 Construction lax 0.0 0.0 0.0 0.0 0.1 0.5 1.0 1.0 1.2 0.9 0.9 1.1 0.8 0.8 0.8 0.8 Nontax revenue 2.9 2.7 2.3 3.1 3.7 4.4 4.2 8.1 9.9 8.1 7.6 11.6 9.7 12.0 6.0 6.2 Gross profit remitfances from state owned enferprises 0.0 0.0 0.0 0.0 0.0 0.0 1.9 1.7 1.7 1.8 2.0 2.2 2.0 1.5 1.0 Depreciation funds 2.0 2.1 1.9 1.8 1.7 1.5.. . ......... Other 0.9 0.6 0.4 1.3 2.0 2.9 2.2 6.4 8.2 6.3 5.6 9.4 7.6 1 0.5 4.9 6.2 of which foreign grants (net) .. -0.1 0.1 -01 0.1 0.2 0.1 0.2 0.0 0.0 0.2 0.1 0.6 0.5 0.3 Memorandum item: Gross profit remittances from satse owned enterprises S4.6 53.9 52.2 47.3 41.8 37.4 1.9 1.7 1.7 1.8 2.0 2.2 2.0 1.5 1.0 Sourc: TWAb 19 Table 21: CHINA: Structure of Government Revenue (as a peomentage of GNP) 1979 1980 1981 1982 1983 1984 1985 1998 1987 1988 1989 1990 1991 1992 1993 1994 Total revenue 31.3 29.1 29.5 26.6 26.8 25.5 25.4 24.0 21.5 19.8 19.3 19.1 18.8 14.7 13.8 12.4 Tax rwemene 30.4 28.4 27.9 25.8 25.8 24.4 24.3 22.0 19.4 17.3 17.8 18.9 15.3 13.0 13,0 11.7 Taxes on income and profits 1 9.0 17.4 16.4 14.1 13.2 11.7 8.2 7.2 8.0 5.1 4.7 4.8 3.8 3.0 2.3 2.1 Enterprises income tax 18.2 18.7 15.8 13.5 12.2 10.8 7.7 6.7 5.8 4.8 4.1 4.0 3.4 2.7 2.0 1.6 State enterprises 17.1 15.7 14.9 12.6 11.2 10.0 8.8 5.8 4.7 3.8 3.4 3.3 2.8 2.3 1.7 1.4 Collectives 1.1 1.0 0.9 0.9 1.0 0.9 1.1 0.8 0.9 0.7 0.8 0.7 0.5 0.4 0.3 0.2 Joint ventures . . . . . . . . . . . . Personal income tax (odre) 0.1 0.0 0.1 0.1 0.4 0.4 .. . . 0.1 0.1 0.1 Agricuftuma inicome tax 0.7 0.6 0.6 0.5 0.6 0.5 0.5 0.4 0.4 0.5 0.5 0.5 0.4 0.3 0.4 0.5 Taxes on goods and services 1 0.8 10.2 10.3 1 0.8 9.6 9.4 10.7 10.4 9.4 8.8 9.4 8.8 8.1 7.8 8.3 7.8 Goensralaa"tsata.es 10.5 10.0 10.1 10.3 9.4 9.3 10.8 10.2 8.2 8.9 8.6 8.1 7.4 7.7 8.3 7.8 Producttax 6. . . . . . .6 6.4 4.5 3.2 3.1 3.1 2.9 2.6 2.4 0.0 Value addedte .. . . . . . 1.6 2.3 2.1 2.8 2.5 2.2 1.9 2.8 3.1 9.1 Business tax . .. . .. . .. 2.3 2.8 2.9 2.7 2.9 2.8 2.6 2.5 2.8 1.5 Urban maintenance and development taox . . . .. . . . . . 0.5 0.5 0.8 Readiestate tex .. . . . . . . . . 0.1 0.2 0.2 0.2 Special tau monil. . . . . . . 0.2 0.1 0.1 0.1 0.1 SON tax 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 . Customs tax 0.6 0.8 1.1 0.9 0.9 1.4 2.3 1.5 1.2 1.0 1.1 0.9 0.9 0.9 0.7 0.6 Odw taxes 0.0 0.0 0.0 0.3 2.1 1.8 3.1 2.9 2.9 2.3 2.7 2.7 2.6 1.4 1.8 1.2 of which: Consrusofon tax 0.0 0.0 0.0 0.0 0.0 0.1 0.3 0.2 0.3 0.2 0.2 0.2 0.1 0.1 0.1 Nontax rwveue 0.9 0.8 0.7 0.8 1.0 1.1 1.1 1.9 2.1 1.9 1.9 2.2 1.6 1.8 0.8 0.8 Gross profit remittance tronm state owned enterprises 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.4 0.4 0.3 0.4 0.4 0.3 0.2 0.1 DOspmiaton tunds 0.8 0.6 0.5 0.5 0.5 0.4 .. . .. . ... Other 0.3 0.2 0.1 0.3 0.5 0.7 0.6 1.5 1.8 1.2 1.1 1.8 1.3 1.5 0.7 0.8 ot witch foreign grants (net) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 Memorandum item: Gross profit remitturoces from utate owned enterprises 17.1 15.7 14.9 12.6 11.2 9.5 0.5 0.4 0.4 0.3 0.4 0.4 0.3 0.2 0.1 S-o T.: . a0. Table 22: CHINA: Structure of Government Expenditure 1979 1980 1981 1982 1983 1 984 1985 1986 1987 1988 1989 1 990 1991 1992 1993 1994 (billions of yuan) Total expenditure and net lending 146.9 146.4 144.4 148.3 169.0 193.9 232.4 262.7 282.7 313.7 363.8 391.7 415.2 453.9 545.9 632.6 Current expenditure 86.2 99.1 107.1 113.2 126.4 138.1 168.1 187.5 207.1 237.6 288.2 306.9 328.5 364.0 424.3 538.5 Administration 5.7 6.7 7.1 8.2 10.1 13.7 14.4 18.2 19.5 23.9 28.5 33.3 34.3 42.5 53.6 72.9 Defense 22.3 19.5 16.8 17.6 17.7 18.1 19.2 20.1 21.0 21.8 25.1 29.0 33.0 37.8 42.6 55.1 Culture, education, public health 13.2 15.7 17.0 19.7 22.3 26.3 31.7 38.0 40.3 48.6 55.3 61.7 70.8 79.3 95.8 127.8 science, and broadcasting of which: Education .. .. .. .. .. 14.8 18.4 21.4 22.7 27.9 31.6 35.3 41.0 45.3 55.8 Economic services 18.7 19.2 16.8 17.6 18.8 20.4 22.4 25.2 26.0 28.9 34.6 37.9 46.0 47.8 57.4 57.8 Geological survey .. .. .. .. .. 2.6 3.0 3.1 3.0 3.3 3.3 3.6 7.8 4.4 4.9 6.4 Agriculture .. .. .. .. .. 9.6 10.1 12.4 13.4 15.4 19.7 22.2 24.4 26.9 32.3 40.0 Operating expenditure for industry, .. .. .. .. .. 3.0 3.5 3.7 3.3 3.9 4.5 4.7 5.2 6.5 7.6 communication and commerce Development of new products .. .. .. .. .. 4.2 4.4 5.0 5.1 5.3 5.9 6.3 7.3 8.9 10.7 11.4 Working capital for state owned enterprises .. .. .. .. .. 1.0 1.4 1.0 1.2 1.0 1.2 1.1 1.3 1.1 1.9 Social welfare relef .. .. .. .. .. .. .. 3.6 3.7 4.1 5.0 5.5 6.7 6.6 7.5 9.5 Subsidies 19.5 27.4 36.8 37.2 42.6 41.0 50.7 58.2 67.0 76.3 97.3 96.0 88.3 76.7 71.0 68.0 Daily living necessities 16.0 24.0 30.5 30.0 30.9 31.5 31.4 25.7 29.5 31.7 37.4 38.1 37.3 32.2 29.9 31.4 Agrcultural Inputs 0.0 0.0 2.2 2.1 1.4 1.0 1.3 .. .. .. .. Operating losses of state owned enterprises 3.5 3.4 4.2 5.2 10.3 8.5 18.0 32.5 37.5 44.6 59.9 57.9 51.0 44.5 41.1 36.6 Interest payments .. .. .. .. .. .. .. 1.9 2.8 3.0 2.8 4.4 7.8 14.2 9.7 16.7 Other 6.8 10.7 12.6 12.8 15.0 18.6 29.7 22.3 26.7 31.0 39.6 39.1 41.6 59.1 86.7 130.6 Capital expenditure 60.7 47.3 37.3 35.1 42.6 55.8 64.3 75.2 75.6 76.1 75.6 84.8 86.7 89.9 121.6 94.1 Capital construction .. .. .. .. .. 48.9 58.4 67.2 68.2 66.4 66.9 75.8 76.0 76.5 90.1 64.0 Development of the productive .. .. .. .. .. 6.9 5.9 8.0 7.4 9.7 8.7 9.0 10.7 13.4 31.5 30.1 capacity of existing enterprlses (as a percentage of GNP) Memorandum items: Current expenditure 21.4 21.9 22.0 21.3 21.2 19.2 18.7 18.4 17.3 15.9 17.0 16.5 15.2 13.7 12.3 12.0 Subsidies 4.8 6.1 7.6 7.0 7.1 5.7 5.6 5.7 5.6 5.1 5.8 5.2 4.1 2.9 2.1 1.5 Daily living necessities 4.0 s.3 6.3 5.6 5.2 4.4 3.5 2.5 2.5 2.1 2.2 2.1 1.7 1.2 0.9 0.7 Operating losses of state owned enterprises 0.9 0.7 0.9 1.0 1.7 1.2 2.0 3.2 3.1 3.0 3.5 3.1 2.4 1.7 1.2 0.8 Capital expenditure 15.0 10.5 7.7 6.6 7.1 7.7 7.1 7.4 6.3 5.1 4.5 4.6 4.0 3.4 3.5 2.1 (as a percentage of total expenditure) Subsides 13.3 18.7 25.5 25.1 25.2 21.1 21.8 22.2 23.7 24.3 26.7 24.5 21.3 16.9 13.0 10.7 Capital expenditure 41.3 32.3 25.8 23.7 25.2 28.8 27.7 28.6 26.7 24.3 20.8 21.6 20.9 19.8 22.3 14.9 Scu,s: WP. Table 23: CHINA: Budget and Its Financing 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 (billions of yuan) Revenue 123.4 128.8 135.8 138.3 156.1 180.0 228.3 244.6 257.6 280.3 326.4 355.0 367.2 392.8 475.9 558.4 Expenditure 146.9 146.4 144.3 148.3 169.2 193.9 232.4 262.7 282.7 313.7 363.8 391.7 415.2 453.9 545.9 632.6 Deidit -23.5 -17.6 -8.5 -10.0 -13.1 -13.9 -4.1 -18.1 -25.1 -33.4 -37.4 -36.7 -48.0 -61.1 -70.0 -74.2 Financing 23.5 17.6 8.5 10.0 13.1 13.9 4.1 18.1 25.1 33.4 37.3 36.8 48.0 61.2 70.0 74.2 Domestic 17.0 12.6 9.7 13.5 14.4 14.2 10.1 12.8 18.3 22.0 26.0 23.7 38.0 46.1 41.9 67.1 Monetarysystem 17.0 12.6 2.5 7.3 8.7 8.6 4.0 12.8 7.9 22.0 26.0 23.7 16.1 88.9 -31.6 16.0 Nonbank 0.0 0.0 7.1 6.2 5.7 5.6 6.1 0.0 10.4 0.0 0.0 0.0 21.9 -42.8 73.5 51.0 Foreign 6.5 5.0 -1.2 -3.5 -1.3 -0.3 -6.0 5.3 6.8 11.4 11.3 13.1 10.0 15.1 28.1 7.1 Gross foreign borrowing .. .. .. .. .. .. .. 7.6 10.6 13.9 14.4 17.8 18.0 20.9 35.8 14.7 Amortization .. .. .. .. .. .. .. -2.3 -3.8 -2.5 -3.1 -4.7 -8.0 -5.8 -7.7 -7.6 (as a percentage of GNP) \0 Revenue 30.6 28.5 27.9 26.1 26.2 25.0 25.4 24.0 21.5 18.8 19.3 19.1 16.9 14.7 13.8 12.4 Expenditure 36.4 32.4 29.7 27.9 28.4 26.9 25.8 25.7 23.6 21.0 21.5 21.1 19.2 17.0 15.8 14.1 Deficit -5.8 -3.9 -1.7 -1.9 -2.2 -1.9 -0.5 -1.8 -2.1 -2.2 -2.2 -2.0 -2.2 -2.3 -2.0 -1.6 Financing 5.8 3.9 1.7 1.9 2.2 1.9 0.5 1.8 2.1 2.2 2.2 2.0 2.2 2.3 2.0 1.6 Domestic 4.2 2.8 2.0 2.5 2.4 2.0 1.1 1.3 1.5 1.5 1.5 1.3 1.8 1.7 1.2 1.4 Monetary system 4.2 2.8 0.5 1.4 1.5 1.2 0.4 1.3 0.7 1.5 1.5 1.3 0.7 3.3 -0.9 0.4 Nonbank 0.0 0.0 1.5 1.2 1.0 0.8 0.7 0.0 0.9 0.0 0.0 0.0 1.0 -1.6 2.1 1.1 Foreign 1.6 1.1 -0.3 -0.7 -0.2 0.0 -0.7 0.5 0.6 0.8 0.7 0.7 0.5 0.6 0.8 0.2 Gross foreign borrowing .. .. .. .. .. . .. 0.7 0.9 0.9 0.9 1.0 0.8 0.8 1.0 0.3 Amortization .. .. .. .. .. .. .. -0.2 -0.3 -0.2 -0.2 -0.3 -0.4 -0.2 -0.2 -0.2 (as a percentage of total deticit) Financing 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.2 100.4 99.7 99.8 100.3 100.0 100.2 100.0 100.0 Domestic 72.3 71.4 114.5 135.0 110.0 102.0 246.4 70.9 73.1 65.8 69.5 64.6 79.2 75.5 59.9 90.4 Monetarysystem 72.3 71.4 30.0 73.0 66.2 62.0 97.6 70.9 31.5 65.8 69.5 64.6 33.5 145.5 -45.2 21.6 Nonbank 0.0 0.0 84.5 62.0 43.8 40.0 148.8 0.0 41.5 0.0 0.0 0.0 45.6 -70.0 105.0 68.8 Foreign 27.7 28.6 -14.5 -35.0 -10.0 -2.0 -146.4 29.3 27.3 34.0 30.3 35.7 20.8 24.7 40.2 9.6 Gross foreign borrowing .. .. .. .. .. .. .. 42.1 42.5 41.4 38.5 48.5 37.5 34.2 51.2 19.8 Amortization .. .. .. .. .. .. .. -12.7 -15.2 -7.5 -8.2 -12.8 -16.7 -9.5 -11.0 -10.3 Sow: IMF. Table 24: CHINA: Production of Major Crops 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 (millions of tons) Total food qrains 332.12 320.56 325.02 354.50 387.28 407.31 379.11 391.51 402.98 394.08 407.45 446.24 435.29 442.66 456.49 445.10 465.00 Rice 143.75 139.91 143.96 161.60 168.87 178.26 168.57 172.22 174.26 169.11 180.13 189.33 183.81 186.22 177.70 175.93 Wheat 62.73 55.21 69.64 68.47 81.39 87.82 85.81 90.04 85.90 85.43 90.81 98.23 95.95 101.59 106.39 99.30 Cam 60.04 62.60 59.21 60.56 68.21 73.41 63.88 70.86 79.24 77.35 78.93 96.82 98.77 95.38 102.70 99.28 Tuber 28.46 28.73 25.97 27.05 29.25 28.48 26.04 25.34 28.20 26.97 27.30 27.43 27.16 28.44 31.81 30.25 Total oil seeds 6.44 7.69 10.21 11.82 10.55 11.91 15.78 14.74 15.28 13.20 12.91 16.13 16.38 16.41 18.04 19.90 22.50 of which: Peanuts 2.82 3.60 3.83 3.92 3.95 4.82 6.66 5.88 6.17 5.69 5.36 6.37 6.30 5.95 8.42 9.68 10.24 Rapeseed 2.40 2.38 4.07 5.66 4.29 4.21 5.61 5.88 6.61 5.04 5.44 6.96 7.44 7.65 6.94 7.49 9.76 Cotton 2.21 2.71 2.97 3.60 4.64 6.26 4.15 3.54 4.25 4.15 3.79 4.51 5.68 4.51 3.74 4.34 4.50 Suqarcane 21.51 22.81 29.67 36.88 31.14 39.52 51.55 50.22 47.36 49.06 48.57 57.62 67.90 73.01 64.19 60.93 64.40 Beetroots 3.11 6.31 6.36 6.71 9.18 8.28 8.92 8.31 8.14 12.81 9.36 14.53 16.29 15.07 12.05 12.53 13.60 Cured tobacco 0.81 0.72 1.28 1.85 1.15 1.54 2.08 1.37 1.64 2.34 2.41 2.26 2.67 3.12 3.01 1.94 2.10 (thousand of tons) Fruits 7.02 6.79 7.80 7.71 9.49 9.85 11.64 13.48 16.68 16.66 18.37 18.74 21.76 24.40 30.11 35.00 41.90 Apoles 2.87 2.36 3.01 2.43 3.54 2.94 3.61 3.34 4.26 4.34 4.50 4.32 4.54 6.56 9.07 11.13 Citrus 0.56 0.71 0.80 0.94 1.30 1.50 1.81 2.55 3.22 2.56 4.56 4.86 6.33 5.16 6.56 6.81 Pears 1.44 1.47 1.59 1.76 1.80 2.10 2.14 2.35 2.49 2.72 2.57 2.35 2.50 2.85 3.22 4.04 Bananas 0.07 0.06 0.13 0.20 0.21 0.30 0.63 1.25 2.03 1.83 1.40 1.46 1.98 2.45 2.70 2.90 So-: ChinM- Sisttrk.I Y..,bsok 1995. pp. 347. Table 25: CHINA :Yield of Major Crops (by sown area; kgVhectare) 1 979 1980 1981 1982 1983 1984 1 985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Total food grains 2,835 2.745 2,835 3,135 3,405 3,615 3,480 3,525 3,615 3,585 3,630 3,930 3,870 4,004 Rice 4,245 4,140 4,320 4,890 5,100 5,370 5,250 5,340 5,415 5,280 5,505 5,730 5,840 5,803 Wheat 2,145 1,890 2,115 2,445 2,805 2,970 2,940 3,045 2,985 2,970 3,045 3,195 3,105 3,331 Com 2,985 3,075 3,045 3,270 3,830 3,960 3,600 3,705 3,915 3,930 3,885 4,530 4,575 4,533 Soybeans 1,035 1,095 1,170 1,080 1,290 1,335 1,365 1.395 1,470 1,440 1,275 1,455 1,380 1,427 Tuber 2,595 2,835 2,700 2,895 3,120 3,165 3,030 2,910 3,180 2,985 3,000 3,015 2,985 3,141 'I0 c' Peanuts 1,365 1,545 1,545 1,620 1,800 1,800 2,010 1,815 2,040 1,905 1,815 2,190 2,190 2,000 2,492 2,564 Rape- d 870 840 1,080 1,380 1,170 1.230 1,245 1,200 1,260 1,020 1,095 1,260 1,215 1,281 1,309 1,296 Cotton 495 555 570 615 765 915 810 825 870 750 735 810 870 660 750 785 Sugarcane 42,030 47.565 53,820 56,460 47,610 54,285 53,430 52,860 55,140 53,115 50,850 57,120 58,350 58,605 59,012 57,671 Beetroots 9,555 14,250 14,595 14,520 16,890 16,500 15,915 15,960 16,350 17.190 16,245 21,660 20,790 22,832 20,124 17,936 Cured tobacco 1,590 1,815 2,190 2,085 2,010 2,160 1,920 1,530 1,785 1,800 1,605 1,680 1,710 1,687 1,654 1,491 So.-r.: chn- Smrfk.t Y..wbuek 1995. pp. 350. Table 26: CHINA: Gross Output Value of Industry 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 (billions of yuan) Total 971.6 1,119.4 1,381.3 1,822.5 2,201.7 2,392.4 2,824.8 3,706.6 5,269.2 7,690.9 BYTYPE OF OG*EFIS State-owned 630.2 697.1 825.0 1,035.1 1,234.3 1,306.4 1,495.5 1,782.4 2,272.5 2,620.1 Collective-owned 311.7 375.2 478.2 658.7 785.8 852.3 1,008.5 1,410.1 2,021.3 3,143.4 Township 76.1 98.1 128.4 184.7 219.4 244.1 300.1 441.7 749.6 1,135.1 Village 66.3 83.8 116.5 170.4 211.8 239.4 293.4 454.0 645.4 1,207.2 Joint urban-nrral 15.2 24.8 31.6 43.9 49.6 53.9 56.9 87.0 132.2 261.1 Joint urban 0.0 2.1 3.0 3.9 5.0 5.5 6.9 10.2 15.6 33.8 Jointnural 15.2 22.7 28.6 40.0 44.6 48.4 50.0 76.8 116.6 227.3 Individual-owned 18.0 30.9 50.2 79.0 105.8 129.0 160.9 250.7 440.2 885.3 Urban 3.3 2.9 5.0 6.8 9.0 10.7 12.9 19.5 39.6 86.7 Rural 14.6 27.9 45.2 72.2 96.8 118.3 148.0 231.1 400.6 798.7 Other 11.7 16.3 27.9 49.5 75.8 104.8 160.0 263.4 535.2 1,042.1 BYTYPE OF INCUSTRY Ught 457.5 533.0 665.6 897.9 1,076.1 1,181.3 1,380.1 1,749.2 2,318.4 Heavy 514.1 586.4 715.7 924.5 1,125.6 1,211.3 1,444.7 1,957.4 2,950.8 (as a percentage ot total) BY TYPE OF OWNERSFIP State-owned 64.9 62.3 59.7 56.8 56.1 54.6 52.9 48.1 43.1 34.1 Collective-owned 32.1 33.5 34.6 36.1 35.7 35.6 35.7 38.0 38.4 40.9 Township 7.8 8.8 9.3 10.1 10.0 10.2 10.6 11.9 14.2 14.8 Village 6.8 7.5 8.4 9.3 9.6 10.0 10.4 12.2 12.2 15.7 Joint urban-rural 1.6 2.2 2.3 2.4 2.3 2.3 2.0 2.3 2.5 3.4 Joint urban 0.0 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.4 Joint rural 1.6 2.0 2.1 2.2 2.0 2.0 1.8 2.1 2.2 3.0 Individual-owned 1.8 2.8 3.6 4.3 4.8 5.4 5.7 6.8 8.4 11.5 Urban 0.3 0.3 0.4 0.4 0.4 0.4 0.5 0.5 0.8 1.1 Rural 1.5 2.5 3.3 4.0 4.4 4.9 5.2 6.2 7.6 10.4 Other 1.2 1.5 2.0 2.7 3.4 4.4 5.7 7.1 10.2 13.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 BY TYPE OF INDUSTRY Ught 47.1 47.6 48.2 49.3 48.9 49.4 48.9 47.2 44.0 Heavy 52.9 52.4 51.8 50.7 51.1 50.6 51.1 52.8 56.0 Souce.: CAhi Sthl Yeebrk 1995, pp. 375. Table 27: CHINA: Output of Major Industrial Products Product Unit 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Coal million tons 620 622 666 715 789 872 894 928 9B0 1,054 1,080 1,087 1,116 1,150 1,240 1,298 Crude oil million Ions 106 101 102 106 115 125 131 134 137 137 138 141 142 145 146 149 Naluralgas billionrum 14 13 12 12 12 13 14 14 14 15 15 16 16 17 18 Electricity billion kWh 301 309 328 351 377 411 450 497 545 585 621 678 754 840 928 1.000 Hydropower billion kWh 58 66 74 86 87 92 95 100 109 118 127 125 131 152 167 Steel million tons 37 36 37 40 43 47 52 56 59 62 66 71 81 90 93 94 Rolled steel million tons 27 37 29 31 34 37 41 44 47 49 52 56 67 77 84 80 Cement million tons 80 83 95 108 123 146 166 186 210 210 210 253 308 368 421 450 Timber million cu m 54 49 50 52 64 63 65 64 62 58 56 58 62 64 66 67 \0 Fertilizers million tons 12 12 13 14 15 13 14 17 17 18 19 20 20 20 23 25 00 growth rutes) Coal -2.4 0.3 7.1 7.4 10.3 10.5 2.5 3.8 5.6 7.6 2.5 0.6 2.7 3.0 7.8 4.7 Crude oil -0.2 -4.5 0.9 3.9 8.1 9.0 4.6 2.6 2.0 0.1 1.0 1.9 0.8 2.2 0.6 2.0 Natural gas -1.7 -10.7 -6.4 2.3 1.8 4.0 6.4 0.9 2.7 5.5 1.7 5.1 -1.8 6.2 4.7 Electricity 6.6 2.9 5.9 7.2 7.3 8.9 9.4 10.6 9.6 7.3 6.2 9.1 11.3 11.4 10.6 7.7 Hydropower 16.2 12.5 13.6 16.1 0.5 6.5 2.5 5.6 9.2 8.3 7.1 -1.6 4.8 16.1 10.3 Steel 7.7 -4.1 4.4 7.7 8.6 7.6 11.6 7.8 5.6 3.6 7.7 7.0 14.0 10.6 3.4 1.5 Rolled steel 8.8 35.1 -20.9 5.9 9.8 9.5 9.9 8.1 7.1 3.6 5.9 9.4 18.8 15.2 9.2 -5.1 Cement 8.1 3.8 14.8 13.7 13.6 18.6 13.8 12.2 12.8 0.1 -0.3 20.5 22.0 19.4 14.5 6.8 Timber -1.5 -7.8 2.0 3.8 22.0 -1.0 2.8 -1.4 -3.0 -6.6 -4.0 4.2 6.3 3.5 3.5 0.5 Fertilizers 15.6 0.6 3.2 7.9 5.9 -9.5 2.8 23.0 4.1 4.6 3.3 5.3 3.5 -4.5 16.2 7.9 S- 0*. SbhDt Y.wboa 1wrs, W. 40. Table 28: CHINA: Total Wage Bill of Staff and Workers by Employment Category 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 (billionrs of yuan) Total wage bill 64.7 77.2 82.0 88.2 93.5 113.3 138.3 166.0 188.1 231.6 261.9 295.1 332.4 393.9 491.6 665.6 State-owned 52.9 62.8 86.0 70.9 74.8 87.6 106.5 128.9 145.9 180.7 205.0 232.4 259.5 309.0 381.3 517.7 Urban collectives 11.7 14.5 16.0 17.3 18.7 25.4 31.2 36.3 40.9 48.8 53.4 58.1 65.9 74.3 85.0 102.3 Other .. .. .. .. .. 0.4 0.6 0.8 1.3 2.2 3.4 4.6 7.0 10.6 25.4 45.6 (as a percentage of total) Total wage bill 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 State-owned 81.9 81.3 80.5 80.4 80.0 77.3 77.0 77.6 77.6 78.0 78.3 78.8 78.1 78.5 77.6 77.8 aD0 Urban collectives 18.1 18.7 19.5 19.6 20.0 22.4 22.6 21.9 21.7 21.1 20.4 19.7 19.8 18.9 17.3 15.4 Other 0.0 0.0 0.0 0.0 0.0 0.3 0.4 0.5 0.7 0.9 1 3 1.8 2.1 2.7 5.2 6.8 (growth rates) Total wage bill 13.7 19.5 6.2 7.6 6.0 21.3 22.0 20.0 13.3 23.1 13.1 12.7 12.6 18.5 24.8 35.4 State-owned 13.0 18.6 5.2 7.3 5.5 17.1 21.6 21.0 13.3 23.8 13.5 13.4 11.7 19.1 23.4 35.8 Urban collectves 17.0 23.3 10.4 8.5 7.7 36.2 23.0 16.2 12.8 19.2 9.6 8.7 13.4 12.8 14.4 20.4 Other .. .. .. .. .. .. 63.9 42.4 50.0 70.6 57.7 35.7 53.0 50.0 140.2 79.7 Percentage share of eage bill in GOP 16.0 17.1 16.9 16.7 15.7 15.8 15.4 18.3 15.7 15.5 15.5 15.9 15.4 14.8 14.2 14.8 Not.: T.owbal nS.- ri. nt ,t tar 94-a5. SO- OS. SrsftbW YVe.tk Iess, pp. 10". Table 29: CHINA: Average Annual Wage by Sector and Employment Category (yuan in current prices) Sector 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Staff and workers Total 974 1,148 1,329 1,459 1,747 1,935 2,140 2,340 2,711 3,371 4,538 Farming & forestry, etc. 770 878 1,048 1,143 1,280 1,389 1,541 1,652 1,828 2,042 2,819 Excavation 1,066 1,324 1,569 1,663 1,964 2,378 2.718 2,942 3.209 3,711 4,679 Manufacturinq 955 1,112 1,275 1,418 1,710 1,900 2,073 2,289 2,635 3,348 4,283 Elecric power, gas,and water 1,321 1,239 1,497 1,677 1,971 2,241 2,656 2,922 3,392 4,319 6,155 Gealocicalsurvev 1,179 1,406 1,604 1,768 2,025 2,199 2,465 2,707 3,222 3,717 5,450 Construction 1,154 1,362 1,536 1,684 1,959 2,166 2,384 2,649 3,066 3,779 4,894 Transport & communications 1.082 1,275 1,476 1,621 1,941 2,197 2,426 2,686 3,114 4,273 5,690 Commerce&servicesetc. 859 1,007 1,148 1,270 1.556 1,660 1,818 1,981 2,204 2,679 3,537 Realestate 919 1,028 1,216 1,327 1,715 1,925 2,243 2,507 3,106 4,320 6,288 Sodalservices 588 777 980 1,085 1,719 1,926 2,170 2,431 2,844 3,588 5,026 Healfth care, sports & welfare 948 1,124 1,343 1,446 1,752 1,959 2.209 2,370 2,812 3,413 5,126 Education, culture & arls etc. 920 1,166 1,330 1,409 1,747 1,883 2,117 2,243 2,715 3,278 4,923 Scientificresearch 1,072 1,272 1,492 1,620 1,931 2,118 2,403 2,573 3,115 3,904 6,162 Baningand insurance 973 1,154 1,353 1,458 1,739 1,867 2,097 2,255 2,829 3,740 6,712 Govemmentagencies 989 1,127 1,356 1,468 1,707 1,874 2,113 2,275 2,768 3,505 4,962 Others 3,371 5,213 Staff and workers in state-owned enterprises Total 1,034 1,213 1,414 1,546 1,853 2,055 2,284 2,477 2,878 3,532 4,797 Farming & forestrv, etc. 785 892 1,062 1,154 1,291 1,401 1,559 1,665 1,845 2,043 2,821 Excavation 1,112 1,384 1,638 1,734 2,038 2,449 2,763 2,982 3,239 3,856 4,863 Manufacturing 1,028 1.190 1,382 1,543 1,872 2,081 2,289 2,505 2,889 3,562 4,508 ° Electricpower, gas,andwater 1,357 1,272 1,518 1,692 1,994 2,248 2,648 2,883 3,354 4,317 6,124 Geoloqicalsurvev 1,180 1,408 1,607 1,773 2,025 2,199 2,463 2,718 3,235 3,729 5,476 Constnuction 1,275 1,532 1,731 1,882 2,192 2,419 2,667 2,924 3,406 4,182 5,498 Transprort & eommunications 1,164 1,383 1,610 1,773 2,140 2,423 2,697 2,967 3,452 4,604 6,212 Commerce & services etc. 776 1,087 1,268 1,398 1,737 1,851 2,028 2,201 2,478 2,933 3,856 Realestate 1,063 1,170 1,364 1,500 1,750 1,992 2,247 2,476 3,082 4,278 5,997 Socialservices 988 1,208 1,417 1,545 1,842 2,028 2,307 2,547 3,008 3,661 5,098 Health care, sports & welfare 981 1,164 1,376 1,481 1,793 1,999 2,263 2,417 2,883 3,494 5,267 Education, culture & arts etc. 934 1,184 1,344 1,422 1,764 1,899 2,134 2,257 2,732 3,292 4,944 Scientificresearch 1,074 1,268 1.494 1,624 1,935 2,123 2,411 2,580 3,130 3,898 6,212 Bankingandinsurance 1,038 1,234 1,427 1,540 1,842 1,960 2,200 2,355 2,967 3,885 7,017 Govemmentagencies 993 1,133 1,361 1,472 1,709 1,875 2,115 2,277 2,774 3,512 4,967 Others 3,793 5,744 Staff and workers in urban collective-owned enterprises Total 811 967 1,092 1,207 1,426 1,557 1,681 1,866 2.109 2,592 3.245 Farming&forestry.etc. 618 725 875 979 1,111 1,178 1,238 1,366 1,487 1,887 2,510 Excavation 702 852 945 1,016 1,208 1.433 1,844 1,960 2,000 2,327 2,793 Manufacturing 805 963 1,075 1,180 1,388 1,523 1,622 1,798 2,017 2,469 3,076 Electdric power, gas,and water 615 667 875 1,250 1,294 1,625 2,133 2,588 2,737 3,539 5,734 Geological survey 900 900 1,286 1,333 1,500 1,000 1,212 1,765 2,188 2,843 3,692 Constnuction 959 1,101 1,232 1,380 1,597 1,763 1,935 2,216 2,554 3,182 3,936 Transport&communications 878 1,009 1,139 1,236 1,409 1,575 1,661 1,854 2,070 2,711 3,110 Commere&servicesetc. 1,017 912 1,008 1,118 1,335 1,417 1,548 1,691 1,827 2,213 2,823 Real estate 860 1,050 1,238 1,130 1,602 1,967 1,969 2,432 2,763 4,006 5,290 Social services 736 806 1,057 1,167 1,333 1,521 1.638 1,905 2,082 2,727 3,754 Heatthcare, sports & weltare 831 975 1,212 1,296 1,570 1,774 1,956 2,135 2,416 2,935 4,238 Education, culture & arts etc. 634 779 945 1,033 1.202 1,352 1,533 1,689 1,987 2,539 3,548 Scientific research 900 1,052 1,286 1,319 1,636 1,710 1,997 2,120 2,392 3,474 4,719 Bankinq and insuranee 800 945 1,150 1,235 1,450 1,597 1,806 1,965 2,428 3,182 5,625 Govemment aqencies 885 1,046 1,227 1,368 1,648 1,860 2,042 2,206 2,565 3,071 4,411 Others 2,547 4,067 Sovn .: ChiS utx-,l Ytrok 1995, pp.111-5. Table 30: CHINA: Social Labor force by Sector (millions of workers) 1984 1985 1988 1987 1988 1989 1990 1991 1992 1993 1994 Farming forestry, animal husbandry, 308.7 311.3 312.5 316.6 322.5 332.3 341.2 349.6 . 348.0 339.7 333.9 fishery & water conservancy Excavation 7.7 8.0 8.1 8.2 8.3 8.4 8.8 9.1 9.0 9.3 9.2 Manufacturlnq 70.3 74.1 80.2 83.6 86.5 85.5 86.2 88.4 91.1 93.0 96.1 Electric power, qas and water 1.3 1.4 1.5 1.6 1.8 1.8 1.9 2.0 2.2 2.4 2.5 Geoloqical survey & exploration 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.4 1.4 Construction 16.6 20.4 22.4 23.8 24.9 24.1 24.2 24.8 26.6 30.5 31.9 Transportation, posts & telecommunications 11.2 12.8 13.8 14.5 15.2 15.2 15.7 16.2 16.7 16.9 18.6 Commerce, catering trade, suppiv & 19.9 23.1 24.1 25.8 27.4 27.7 28.4 30.0 32.1 34.6 39.2 marketinq of materals and warehouses Real estate 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.5 0.7 0.7 C - Social services 4.4 4.0 4.7 5.0 5.3 5.5 5.9 8.0 6.4 5.4 6.3 Public health, sports and social welfare 4.4 4.7 4.8 5.0 5.1 5.2 5.4 5.5 5.7 4.2 4.3 Education, culture, art, radio and t2.0 12.7 13.2 13.8 14.0 14.3 14.6 15.0 15.2 12.1 14.4 television broadcasting Scientific research, technical service 1.4 1.4 1.5 1.6 1 6 1.7 1.7 1.8 1.8 1.7 1.8 Bankdnq and insurance 1.3 1.4 1.5 1.7 1.9 2.1 2.2 2.3 2.5 2.7 2.6 Govemments, parties and orqanizations 7.4 8.0 8.7 9.3 9.7 10.2 10.8 11.4 11.5 10.3 10.3 Others 13.1 13.2 13.4 15.0 16.6 17.1 18.0 19.1 23.1 37.4 41.6 TOTAL 482.0 498.7 512.8 527.8 543.4 553.3 567.4 583.6 594.3 602.2 614.7 AGRP.LTFRE 308.7 311.3 312.5 316.6 322.5 332.3 341.2 349.6 348.0 339.7 333.9 INDUSTRY 95.9 103.8 112.2 117.3 121.5 119.8 121.2 124.3 128.8 135.2 139.6 SERVICES 77.4 83.6 88.1 93.9 99.4 101.3 105.0 109.8 117.6 127.4 141.2 NorW Agricunur. reon ot t.rrning, furarry animri hubadry, f.hary and wl ruon.ruey; .rn .u ar roIdual. Sown.: Ch..a S.6d V..-took r9se,rp. so. Table 31: CHINA: Labor Force by Employment Category 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 (millions of workers) Total 482.0 498.7 512.8 527.8 543.4 553.3 567.4 583.6 594.3 602.2 614.7 Staffandworkers 118.9 123.6 128.1 132.1 136.1 137.4 140.6 145.1 147.9 148.9 148.5 State-owned 86.4 89.9 93.3 96.5 99.8 101.1 103.5 106.6 108.9 109.2 108.9 Urban collective-owned 32.2 33.2 34.2 34.9 35.3 35.0 35.5 36.3 36.2 33.9 32.1 Other ownership 0.4 0.4 0.6 0.7 1.0 1.3 1.6 2.2 2.8 5.8 7.5 Urban individual laborers 3.4 4.5 4.8 5.7 6.6 6.5 6.1 6.9 7.4 9.3 12.3 Rural laborers 359.7 370.7 379.9 390.0 400.7 409.4 420.1 430.9 438.0 442.6 446.5 (as a percentage of total)) Total 100.0 100.0 100.0 100.0 100.0 100.0 99.9 99.9 99.8 99.8 98.8 Staff and workers 24.7 24.8 25.0 25.0 25.0 24.8 24.8 24.9 24.9 24.7 24.2 State-owned 17.9 18.0 18.2 18.3 18.4 18.3 18.2 18.3 18.3 18.1 17.7 Urban collective-owned 6.7 6.7 6.7 6.6 6.5 6.3 6.3 6.2 6.1 5.6 5.2 Other ownership 0.1 0.1 0.1 0.1 0.2 0.2 0.3 0.4 0.5 1.0 1.2 Urban individual laborers 0.7 0.9 0.9 1.1 1.2 1.2 1.1 1.2 1.2 1.5 2.0 Rural laborers 74.6 74.3 74.1 73.9 73.7 74.0 74.0 73.8 73.7 73.5 72.6 (growth rates) Total 23.5 3.5 2.8 2.9 2.9 1.8 2.5 2.9 1.8 1.3 2.1 Staff and workers 3.3 3.9 3.6 3.2 3.0 1.0 2.3 3.2 2.0 0.7 -0.3 State-owned -1.5 4.1 3.8 3.4 3.4 1.3 2.3 3.1 2.1 0.3 -0.3 Urban collective-owned 17.2 3.4 2.9 2.0 1.1 -0.7 1.3 2.2 -0.2 -6.3 -5.4 Other ownership .. 18.9 25.0 30.9 34.7 36.1 24.2 31.7 30.6 105.7 29.3 Urban individual laborers 46.8 32.7 7.3 17.8 15.8 -1.7 -5.2 12.7 6.9 25.7 31.7 Rural laborers 3.7 3.0 2.5 2.7 2.7 2.2 2.6 2.6 1.6 1.0 0.9 Soume: Chna Statistical Yearbook 1995, p. 84. Table 32: CHINA: General Price Indices (annual growth rates) 1 979 1 980 1 981 1 982 1 983 1 984 1 985 1 986 1 987 1 988 1 989 1 990 1 991 1992 1 993 1 994 1 995 Overat Retail Price 2.0 6.0 2.4 1.9 1.5 2.8 8.8 6.0 7.3 18.5 17.8 2.1 2.9 5.4 13.2 21.7 14.8 Overall Retail Price Index 1990=100 49.1 52.1 53.3 54.3 55.2 56.7 61.7 65.4 70.2 83.1 97.9 100.0 102.9 108.5 122.8 149.4 171.5 Overall Consumer Pice .. .. .. .. .. .. 9.3 6.5 7.3 18.8 18.0 3.1 3.4 6.4 14.7 24.1 17.1 of which Urban 1.9 7.5 2.5 2.0 2.0 2.7 11.9 7.0 8.8 20.7 16.3 1.3 5.1 8.6 16.1 25.0 C Rural .. .. .. .. .. .. 7.6 6.1 6.2 17.5 19.3 4.5 2.3 4.7 13.7 23.4 Overall Farm and Sideline 22.1 7.1 5.9 2.2 4.4 4.0 8.6 6.4 12.0 23.0 15.0 -2.6 -2.0 3.4 13.4 39.9 Purchasing Price Overall Industrial Products Rural 0.1 0.8 1.0 1.6 1.0 3.1 3.2 3.2 4.8 15.2 18.7 4.6 3.0 3.1 11.8 17.2 Retail Prce Overall Industrial and Agrcultural -18.0 -5.9 -4.6 -0.6 -3.3 -0.9 -5.0 -3.0 -6.4 -6.3 3.2 7.4 5.1 -0.3 -1.4 -16.2 Products Prce Party S:. aw. Swan YaMi 199S. P. 233; 1hn lns9hy Sawat. for 1994 Table 33: CHINA: Annual Rates of Inflation by Month (percentage change in the index over the previous 12 months) JAN FB MAR APR MAY JUN JUL AUG SEP OC1 NOV DM Overall Retail Price index 1987 5.0 5.1 5.5 6.5 7.6 7.8 8.0 8.4 7.9 7.6 8.5 9.1 1988 9.5 11.2 11.6 12.6 14.7 16.5 19.3 23.2 25.4 26.1 26.0 26.7 1989 27.0 27.9 26.3 25.8 24.3 21.5 19.0 15.2 11.4 8.7 7.1 6.4 1990 4.1 4.1 3.3 3.1 2.6 3.0 0.7 0.4 0.8 1.1 1.6 2.2 1991 1.4 1.0 0.9 0.6 3.1 3.8 4.2 4.0 4.3 4.0 4.4 4.0 1992 5.1 4.9 5.0 6.2 4.1 4.2 4.3 4.7 5.7 6.4 6.6 6.7 1993 8.4 8.7 10.2 10.9 12.5 13.9 14.9 15.1 14.5 14.6 15.1 17.6 1994 18.8 20.9 20.2 19.5 18.9 19.6 21.4 23.5 24.6 25.2 25.0 23.3 1995 21.2 19.7 18.7 18.0 17.6 16.0 14.6 12.3 11.4 10.3 9.2 8.3 Cost of Living Index 1987 5.0 5.3 5.6 6.6 7.7 7.9 8.0 8.4 7.8 7.6 8.5 9.2 O 1968 9.7 10.7 11.6 12.6 14.5 16.7 19.8 24.1 26.4 27.0 26.6 27.7 1989 27.4 28.4 27.0 26.5 24.7 22.5 18.9 14.8 10.8 7.7 6.4 5.5 1990 3.5 3.5 2.7 2.5 2.0 2.4 0.2 -0.1 0.5 0.9 1.4 2.1 1991 1.5 1.0 0.8 0.4 3.0 3.8 4.3 4.1 4.4 4.0 4.6 4.0 1992 5.1 4.9 5.2 6.9 4.3 4.3 4.7 5.1 5.9 6.7 6.8 7.0 1993 8.6 8.9 10.2 10.4 11.9 13.3 14.3 14.6 14.1 14.4 15.2 17.9 1994 21.1 23.2 22.4 21.7 21.3 22.6 24.0 25.8 27.4 27.7 27.5 25.5 1995 24.1 22.4 21.3 20.7 20.3 18.2 16.7 14.5 13.2 12.1 11.2 10.1 Free market Price index of Consumer Goods 1987 22.0 7.9 7.4 14.2 15.6 20.1 16.9 20.0 16.5 19.9 22.6 20.8 1988 20.0 27.9 28.8 23.1 21.5 22.4 27.7 33.2 37.3 36.5 34.8 30.6 1989 27.5 26.9 19.2 21.0 20.1 15.0 14.9 9.1 3.3 0.9 -6.4 -6.6 1990 -5.1 -6.6 -5.1 -2.0 -5.7 -5.3 -7.3 -7.5 -4.4 -4.3 -3.8 -0.5 1991 -2.3 -0.8 -5.2 -6.9 -5.5 0.3 1.8 0.6 -0.2 1.7 1.0 0.8 1992 3.7 -0.3 2.0 1.6 2.5 -1.5 -0.2 2.5 3.1 6.5 3.7 3.1 1993 6.7 4.1 4.6 8.0 10.0 14.4 16.0 14.8 14.4 11.8 16.7 23.6 Sowv.: O,k,. bt~ftSi . Table 34: CHINA: Total Investment In Flxed Assets 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 (billions of yuan) Total fixed Investment .. .. 96.1 123.0 143.0 183.3 254.3 302.0 364.1 449.7 413.8 444.9 550.9 785.5 1,245.8 1,637.0 1,944.5 Stata-ownrd 69.9 74.6 66.8 84.5 95.2 118.5 168.1 197.9 229.8 276.3 253.5 273.3 337.8 476.8 765.8 932.2 1.082.2 Collective-owned .. .. 11.5 17.4 15.6 23.9 32.7 39.2 54.7 71.2 57.0 52.9 69.8 135.9 223.1 266.5 297.8 Individual-owned ,, .. 17.8 21.1 32.2 40.9 53.5 64.9 79.6 102.2 103.2 100.1 118.3 122.2 147.6 197.1 238.1 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 18.6 25.0 50.6 109.2 241.3 326.4 Fixed investment by CENTER & LOCAL CENTER .. .. .. .. .. ., .. .. .. 105.8 116.8 128.0 150.5 184.7 LOCAL .. .. .. .. .. .. .. .. ., 170.5 136.7 145.3 187.3 277.5 C3 (as a percantaga of total) Total fixed investment .. .. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 State-owned .. .. 69.5 68.7 66.6 64.7 66.1 65.5 63.1 61.4 61.3 61.4 61.3 60.7 61.5 56.9 55.7 Collective-owned .. .. 12.0 14.2 10.9 13.0 12.9 13.0 15.0 15.8 13.8 11.9 12.7 17.3 17.9 16.3 15.3 Individual-owned .. .. 18.5 17.1 22.5 22.3 21.0 21.5 21.9 22.7 24.9 22.5 21.5 15.6 11.8 12.0 12.2 Other .. .. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.2 4.5 6.4 8.8 14.7 16.8 Fixed investrnat by CENTER & LOCAL CENTER .. .. .. .. .. .. .. .. .. 38.3 46.1 46.8 44.5 38.7 LOCAL .. .. .. .. .. .. .. .. ,. 6t.7 53.9 53.2 55.5 58.2 Total tixed investmenVGDP (%) .. .. 19.8 23.2 24.1 25.6 28.4 29.6 30.4 30.1 24.5 24.0 25.5 29.5 36.1 36.4 Sn. Lnw by aCin--- Ots br aPsI; Own. Sial1a YVrboo IWS. p. 135 Ibr 1985s4; 150. p. 493 bcr 191e-54. Table 35: CHINA: Investment in Fixed Assets by State Owned Enterprises 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 (billions of yuan) Fixed Investment 66.9 69.9 74.6 66.8 84.5 95.2 118.5 168.1 197.9 229.8 276.3 253.5 273.3 337.8 476.8 717.3 935.5 CapitalConstnjucion 50.1 52.3 55.9 44.3 55.6 59.4 74.3 107.4 117.6 134.3 157.4 155.2 170.4 211.6 301.3 461.6 643.7 Technical Upgdating 16.8 17.8 18.7 19.5 25.0 29.1 30.9 44.9 61.9 75.9 98.1 78.9 83.0 102.3 146.1 219.6 291.9 Other 0.0 0.0 0.0 2.9 3.9 6.7 13.3 15.7 18.3 19.6 20.8 19.5 19.9 23.9 29.4 36.2 0.0 Fixed Investment by Sector 66.9 69.9 74.6 66.8 84.5 95.2 118.5 168.1 197.9 229.8 276.3 253.5 273.3 337.8 476.8 717.3 935.5 of which Rawmatenals .. .. .. .. .. .. .. .. .. .. 69.5 64.0 71.8 85.9 88.8 Energy .. .. .. .. .. .. .6 .. .. .. 84.5 70.6 82.4 95.7 114.9 Transport and communications .. .. .. .. .. .. ,. .. .. .. 28.5 22.9 26.9 40.7 75.7 Construcbon ind. geography .. .. .. .. .. .. .. .. .. .. 2.8 2.2 1.8 2.1 3.9 O Real Estate .. .. .. .. .. .. .. .. .. .. 18.8 14.8 11.3 16.7 26.5 (as a percentage of total) Fixed Investment .. .. .. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Capital Construction .. 66.4 65.7 62.4 62.7 63.9 59.4 58.4 57.0 81.2 62.3 62.6 63.2 64.3 68.8 Technical Upgdating .. .. .. 29.3 29.6 30.6 26.1 26.7 31.3 33.0 35.5 31.1 30.4 30.3 30.8 30.6 31.2 Other 4.4 4.7 7.0 11.2 9.3 9.3 8.5 7.5 7.7 7.3 7.1 8.2 5.0 0.0 Fixed Investment by Seclor 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 of which Rawmaterals .. .. ., .. .. .. .. .. .. .. 25.2 25.2 26.3 25.4 14.4 Energy .. .. .. ,. .. .. .. .. 23.3 27.8 30.1 28.3 24.1 Transport and communications .. .. .. .. .. .. .. .. .. .. 10.3 9.0 9.8 12.1 15.9 Construction ind. geography .. .. .. .. .. .. .. .. .. .. 1.0 0.8 0.7 0.6 0.8 Real Estate .. .. .. .. .. .. .. .. .. .. 6.8 5.9 4.1 4.9 5.6 So: Crh. Sa.l Y.a,b 1995, p. p4 b- 1a4:1a4laM r. 43 x, 1IN9144. Table 36: CHINA: Investment In Capital Constuction of State-Owned Enterprises by Sector 1978 1979 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 1990 1991 1992 1993 1994 (billions of yuan) All Sectors 50.1 52.3 55.9 44.3 55.6 59.4 74.3 107.4 117.6 134.3 157.4 155.2 170.4 211.6 301.3 461.8 643.7 Agriculture .. .. 5.1 2.9 3.4 3.5 3.7 1.7 1.6 2.0 2.3 2.0 2.6 3.3 4.4 4.6 5.7 Industry .. .. 27.6 21.6 26.1 28.2 34.2 44.6 53.2 68.3 81.3 82.2 95.3 114.7 145.8 200.4 276.2 Geology .. .. .. 0.3 0.3 0.3 0.4 2.6 2.6 3.0 2.9 3.6 4.6 5.9 8.2 9.8 12.1 Conatrucion .. .. .. 0.9 1.1 1.0 1.1 2.2 1.9 1.5 1.5 1.4 1.0 1.3 2.3 11.5 13.8 Transport .. .. 6.2 4.0 5.7 7.8 10.8 17.8 18.8 19.5 21.6 17.0 21.1 34.0 45.8 90.1 137.3 Commerce .. .. 2.9 2.8 3.6 2.9 3.5 4.0 3.5 4.2 5.0 4.2 3.9 6.4 13.7 20.3 25.5 Real Estate & Public Ut98es .. .. 3.4 1.3 2.0 1.9 2.4 11.8 11.0 9.3 13.4 11.2 8.2 12.2 21.0 44.3 73.4 Educabon, Heath, & Cufture etc. .. .. 3.5 3.4 4.1 4.9 6.6 7.8 9.2 9.7 10.0 10.0 10.3 11.9 15.1 20.4 26.2 Research .. .. 0.9 1.0 1.1 1.1 1.4 2.1 2.5 2.6 2.3 2.2 2.1 2.3 3.2 4.9 5.3 Banking & Insurance .. .. 0.3 0.3 0.6 0.3 0.3 0.7 0.8 1.3 1.9 1.6 1.5 1.9 3.0 6.7 9.8 Government Agencies & Other .. .. 4.5 5.8 7.8 7.3 10.0 9.8 10.1 10.0 12.0 17.0 18.3 20.0 34.3 41.8 49.4 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.3 2.5 2.8 3.2 2.8 3.5 -2.4 4.6 6.6 9.4 (as a percentage of total) All Setors .. .. .. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 f00.0 t00.0 100.0 Agnculture .. .. 9.2 6.5 6.1 5.9 4.9 1.6 1.3 1.5 1.5 1.3 1.5 1.6 1.4 1.0 0.9 Industry .. .. 49.3 48.8 46.9 47.5 46.0 41.6 45.2 50.8 51.6 53.0 55.9 54.2 48.4 43.4 42.9 Geology .. .. 0.0 0.6 0.5 0.6 0.5 2.5 2.2 2.3 1.8 2.3 2.7 2.8 2.7 2.1 1.9 Construction .. .. 0.0 2.1 1.9 1.7 1.5 2.0 1.6 1.1 1.0 0.9 0.6 0.6 0.8 2.5 2.1 Transport .. .. 11.2 9.1 t0.3 13.1 14.6 16.6 16.0 14.5 13.7 11.0 12.4 16.1 15.2 19.5 21.3 Commerce .. .. 5.1 6.3 6.5 4.9 4.7 3.7 2.9 3.1 3.2 2.7 2.3 3.0 4.5 4.4 4.0 Real Estate & Public Utilibes .. .. 6.0 3.0 3.6 3.3 3.2 11.0 9.4 6.9 8.5 7.2 4.8 5.8 7.0 9.6 11.4 Educabon, Health, & Culture etc. .. .. 6.3 7.7 7.4 8.2 8.8 7.3 7.8 7.2 6.4 6.5 6.0 5.6 5.0 4.4 4.1 Research .. .. 1.7 2.2 1.9 1.9 1.9 1.9 2.2 2.0 1.5 1.4 1.2 1.1 1.0 1.1 0.8 Baniung & Insurance .. .. 0.5 0.7 1.1 0.6 0.4 0.7 0.7 1.0 1.2 1.0 0.9 0.9 1.0 1.4 1.5 Government Agencies & Other .. .. 8.1 13.0 14.0 12.4 13.4 9.1 8.6 7.5 7.6 10.9 9.6 9.5 11.4 9.1 7.7 Other ,. .. .. 0.0 0.0 0.0 0.0 2.2 2.1 2.1 2.0 1.8 2.1 -1.1 1.5 1.4 1.5 sore C. SnUW Yua,auo INS . P. 148 fr raa4:; s95e, p. 493 for 1581u54. Table 37: CHINA: Foreign Direct Investment Intlows (millions of US dollars) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 TOTAL 916.0 1,418.9 1,958.7 2,243.7 2,646.6 3,739.7 3,773.5 3,754.9 4,666.6 11,291.6 27,771.0 33,945.8 HongKong&Macao 472.5 747.5 955.7 1,328.7 1,809.1 2,428.1 2,341.8 2,118.5 2,579.1 7,706.1 17,444.9 19,822.7 Japan 186.4 224.6 315.1 263.4 266.6 598.4 407.7 520.5 609.5 748.3 1,361.4 2,086.2 Korea .. .. .. .. .. .. .. .. .. 674.8 381.5 726.1 Taiwan (China) .. .. .. .. .. .. .. .. 471.9 1,053.4 3,139.1 3,391.3 United Kingdom 10.6 98.0 71.4 35.3 13.8 46.6 29.0 19.9 37.9 38.5 220.5 688.8 France 35.4 20.2 32.5 43.6 17.3 31.6 11.6 23.4 11.7 46.9 141.4 193.4 Italy 12.4 18.0 19.4 29.4 21.5 36.2 34.2 8.1 41.3 26.7 99.9 206.2 United States 83.1 256.3 357.2 326.2 271.3 244.4 288.2 461.2 330.7 519.4 2,067.9 2,490.8 RECEIVED BY PROVINCES Regional Total 576.6 885.5 1,320.6 1,741.7 1,782.7 3,149.7 3,437.3 3,436.2 4,425.8 11,291.6 27,770.9 33,94S.8 Beijing 75.6 35.5 88.8 149.7 105.8 503.2 320.2 279.0 245.0 349.9 666.9 1,371.6 _ Tianjin 12.0 22.9 63.8 134.8 133.1 61.2 31.4 36.9 132.6 107.8 613.7 1,015.0 °0 Hebei 4.5 10.2 55.9 51.4 10.3 19.1 43.7 44.5 56.6 113.1 396.5 523.4 Shanxi 0.0 0.0 0.5 0.2 4.9 6.5 9.8 3.4 3.8 53.8 86.4 31.7 Inner Mongolia 3.4 0.0 2.6 7.5 5.1 6.4 4.4 10.6 1.7 5.2 65.3 40.1 Liaoning 8.0 14.8 25.8 48.2 90.8 130.6 126.1 257.3 362.4 516.4 1,279.1 1,440.1 Jilin 0.0 2.8 4.9 24.2 7.4 9.7 99.9 17.6 31.6 75.3 275.3 241.9 Heilongjiang 0.9 1.0 4.0 24.5 14.0 69.3 57.4 28.4 20.9 72.2 232.3 347.6 Shanghai 10.7 42.4 108.8 148.9 214.0 233.2 422.1 174.0 145.2 493.6 3,160.3 2,473.1 Jiangsu 10.5 31.4 51.1 45.6 86.4 125.5 126.9 134.0 219.2 1,463.2 2,843.7 3,763.2 Zhejiang 2.5 7.9 26.6 24.8 36.3 43.8 54.0 49.1 92.3 239.8 1,031.8 1,144.4 Anhui 0.0 0.1 3.0 35.2 3.2 27.9 8.8 13.5 10.7 54.7 257.6 370.0 Fujian 16.3 50.6 118.6 62.5 55.4 145.5 348.0 319.9 471.2 1,423.6 2,874.4 3,713.2 Jiangxi 0.0 6.8 10.5 9.1 5.4 8.9 9.2 7.5 19.5 99.7 208.2 261.7 Shandong 2.8 4.4 35.6 65.7 65.0 89.7 163.3 185.7 216.4 1,003.4 1,874.1 2,552.4 Henan 0.1 0.0 8.3 10.7 13.5 64.2 46.1 11.4 38.0 53.2 304.9 366.7 Hubei 0.0 0.0 8.0 12.4 26.0 22.3 28.6 31.8 46.6 203.1 540.5 601.9 Hunan 2.1 2.7 31.0 28.5 2.9 12.9 23.3 14.2 25.4 132.7 437.5 331.1 Guangdong 400.0 650.1 651.3 862.7 736.9 1,251.1 1,323.2 1,582.3 1,942.9 3,701.1 7,555.8 9,463.4 Guangxi 6.2 22.7 30.9 49.2 45.1 20.9 53.0 35.6 31.9 182.0 884.6 836.3 Hainan 0.0 0.0 0.0 0.0 0.0 117.4 95.0 103.0 176.7 452.6 707.1 918.1 Sichuan 19.0 7.8 28.7 31.8 24.3 40.3 13.1 24.4 80.9 112.1 571.4 921.7 Guizhou 0.0 0.7 9.8 12.2 0.0 13.8 13.9 11.1 16.3 19.8 42.9 63.6 Yunnan 0.0 0.2 1.6 3.8 6.3 8.3 7.9 7.4 3.5 28.8 97.0 65.0 Tibet 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Shaanxi 2.5 6.5 15.6 37.2 72.9 111.7 97.2 47.3 31.8 45.5 234.3 238.8 Gansu 12.8 0.0 0.6 1.3 0.2 2.4 0.0 1.2 4.8 0.4 12.0 87.8 Oinghai 0.0 0.8 0.2 0.0 0.0 2.7 0.0 0.0 0.0 0.7 3.2 2.4 Ningxia 0.0 0.2 0.3 0.1 0.0 0.3 1.1 0.3 0.2 0.4 11.9 7.3 Xinjiang 0.0 2.2 10.9 14.0 17.7 5.0 0.9 5.4 0.2 0.0 53.0 48.3 Sour-a: Chkh Stsa Y-boeok 1995, pp. 555-557 ftr 19a.4; 1994, pp.S27, 530 tor 1292; prvis Wue or lariur yprs. Table 38: CHINA: Total Production and Consumption of Energy and Its Composition 1978 1979 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 1990 1991 1992 1993 1994 PRODCTION 627.? 645.8 837.4 632.3 667.8 712.7 778.8 855.8 881.2 912.7 958.0 1,016.4 1,039.2 1,048.4 1,072.8 1,070.0 1,140.1 (millions of tonts of coal equivalent) (as a percentage oI total) Coat 70.3 70.2 89.4 70.2 71.3 71.6 72.4 72.8 72.4 72.6 73.1 74.1 74.2 74.1 74.3 78.8 77.7 Crude oil 23.7 23.5 23.8 22.9 21.8 21.3 21.0 20.9 21.2 21.0 20.4 19.3 19.0 19.2 1 8.9 1 9.4 1 8.3 Natural gas 2.9 3.0 3.0 2.7 2.4 2.3 2.1 2.0 2.1 2.0 2.0 2.0 2.0 2.0 2.0 2.1 2.0 Hydro power 3.1 3.3 3.8 4.2 4.5 4.8 4.5 4.3 4.3 4.4 4.5 4.6 4.8 4.7 4.8 1.7 2.0 CONL&IITION 571.4 585.9 802.8 594.5 620.7 860.4 709.0 786.8 808.5 866.3 930.0 989.3 987.0 1,037.8 1,091.7 1,073.7 1,180.1 (as a percentage of total) Coat 70.7 71.3 72.2 72.7 73.7 74.2 75.3 75.8 75.8 76.2 76.2 78.0 76.2 76.1 75.7 75.8 78.0 C) ID ~~Crude oil 22.7 21.8 20.7 20.0 1 8.9 18.1 1 7.4 17.1 1 7.2 1 7.0 17.0 17.2 1 6.6 1 7.1 17.5 20.3 18.1 Natural gas 3.2 3.3 3.1 2.8 2.5 2.4 2.4 2.2 2.3 2.1 2.1 2.0 2.1 2.0 1.9 2.1 2.0 Hydro power 3.4 3.6 4.0 4.5 4.9 5.3 4.9 4.9 4.7 4.7 4.7 4.9 5.1 4.8 4.9 1.8 1.9 GDP (billion otlyuan) 669.7 720.5 776.7 811.7 880.7 970.5 1,118.0 1,289.0 1,380.7 1,540.8 1,714.9 1,785.2 1,853.1 2,025.4 2,313.0 2,625.3 2,935.1 (constant 1990 prices) Eoergy consumption 0.9 0.8 0.8 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.5 0.5 0.4 0.4 (million ton per blillion yujan) No.s.. Euclding bioranergy, soa,goth-rrl and nuclear energy. All fuel. are conarrd ino. atdrd fooal wih therma aqui-alent of 7.000 k,loroiao Par kilogra Tha concraina I kg of coo (50 InWl) 0.714 kg of tfederd fuel. 1 kgof cnJedlfc (1,ooliI =143 kg .f arodedfoet. Io..r -oter of ostu,Wl pa (oars0 1,ell f.33 fkg of 0.efaJsd fu.l. The onesnof hydropower i.nfoadard fuel is calulated o- the keel. of the co...umptior quota of etendrd coal tot thor-re power geneOio for tha year. Souce Cfthr Sn,fWfka YVatook 19NS. p 1s9. Table 39: CHINA: Freight Traffic 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 (billion ton-km) Rail 534.5 559.8 571.7 571.2 612.0 664.6 724.7 812.6 876.5 947.1 987.8 1,039.4 1,062.2 1,097.2 1,157.6 1,195.5 1,245.8 Road 27.4 74.5 76.4 78.0 94.9 108.4 153.6 190.3 211.8 266.0 322.0 337.5 335.8 342.8 375.5 407.1 448.6 Domestic waterways 129.2 139.3 152.1 150.7 170.8 181.1 196.1 240.0 270.0 288.9 310.4 349.8 345.1 396.5 422.2 472.7 1,568.7 Pipelines 43.0 47.6 49.1 49.9 50.1 53.4 57.2 60.3 61.2 62.5 65.0 62.9 52.7 62.1 61.7 60.8 61.2 Civil aviation 0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.4 0.5 0.7 0 7 0.7 0.8 1.0 1.3 1.7 1.9 OVERALL 734.2 821.3 849.4 850.0 928.0 1,007.7 1,131.9 1,303.7 1,420.0 1,565.2 1,686.0 1,790.3 1,806.6 1,899.7 2,018.4 2,137.7 3,326.1 Ocean shipping 248.7 317.1 353.2 364.3 376.9 397.7 437.4 532.9 594.8 657.6 696.6 768.9 814.1 899.0 903.4 913.4 (as a percentage ol total) Rail 72.8 68.2 67.3 67.2 65.9 66.0 64.0 62.3 61.7 60.5 58.6 58.1 58.8 57.8 57.4 55.9 37.5 _ FRoad 3.7 9.1 9.0 9.2 10.2 10.8 13.6 14.6 14.9 17.0 19.1 18.9 18.6 18.0 18.6 19.0 13.5 C Domestic waterways 17.6 17.0 17.9 17.7 18.4 18.0 17.3 18.4 19.0 18.5 18.4 19.5 19.1 20.9 20.9 22.1 47.2 Pipelines 5.9 5.8 5.8 5.9 5.4 5.3 5.1 4.6 4.3 4.0 3.9 3.5 3.5 3.3 3.1 2.8 1.8 Civil aviation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 OVERALL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (growth rates) Rail .. 4.7 2.1 -0.1 7.1 8.6 9.0 12.1 7.9 8.1 4.3 5.2 2.2 3.3 5.5 3.3 4.2 Road .. 171.8 2.6 2.1 21.7 14.2 41.7 23.9 11.3 25.6 21.0 4.8 -0.5 2.1 9.6 8.4 10.2 Domesuc waterways .. 7.8 9.2 -0.9 13.4 6.0 8.3 22.4 12.5 7.0 7.5 12.7 -1.3 14.9 6.5 12.0 231.9 Pipelines .. 10.7 3.2 1.6 0.4 6.6 7.1 5.4 1.5 2.1 4.0 -3.2 -0.3 -1.0 -0.6 -1.5 0.7 CMI aviation .. 26.8 14.6 20.6 16.5 15.7 35.8 33.4 15.9 35.1 12.3 -5.5 18.8 23.2 32.9 23.8 11.9 OVERALL ,, 11.9 3.4 0.1 9.2 8.6 12.3 15.2 8.9 10.2 7.7 6.2 0.9 5.1 6.3 5.9 55.6 Ocean shipping .. 27.5 11.4 3.1 3.5 5.5 10.0 21.8 11.6 10.6 5.9 10.4 5.9 10.4 0.5 1.1 Sou.-.: Chi. Satid Y..abook 1995, p. 468s9. Table 40: CHINA: Passenger Traffic 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 (billion passenger-km) Rail 109.3 121.6 138.3 147.3 157.5 177.7 204.6 241.6 258.7 284.3 326.0 303.7 261.3 282.8 315.2 348.3 363.6 Road 52.1 60.3 73.0 83.9 96.4 110.6 133.7 172.5 198.2 219.0 252.8 266.2 262.0 287.2 319.3 370.1 422.0 Domestic waterways 10.1 11.4 12.9 13.8 14.5 15.4 15.4 17.9 18.2 19.6 20.4 18.8 16.5 17.7 19.8 19.6 18.4 Civil aviatlon 2.8 3.5 4.0 5.0 6.0 5.9 8.4 11.7 14.6 18.2 21.7 18.7 23.0 30.1 40.6 47.8 55.2 OVERALL 174.3 196.8 228.1 250.0 274.3 309.5 362.0 443.6 489.7 541.1 620.9 607.5 562.8 617.8 694.9 785.8 859.1 (as a percentage of total) Rail 62.7 61.8 60.6 58.9 57.4 57.4 56.5 54.5 52.8 52.5 52.5 50.0 46.4 45.8 45.4 44.3 42.3 Road 29.9 30.6 32.0 33.6 35.1 35.7 36.9 38.9 40.5 40.5 40.7 43.8 46.6 46.5 45.9 47.1 49.1 Domestic waterways 5.8 5.8 5.7 5.5 5.3 5.0 4.2 4.0 3.7 3 6 3.3 3.1 2.9 2.9 2.9 2.5 2.1 Civil aviation 1.6 1.8 1.7 2.0 2.2 1.9 2.3 2.6 3.0 3.4 3.5 3.1 4.1 4.9 5.8 6.1 6.4 OVERALL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100 0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (growth rates) Rail .. 11.2 13.7 6.5 6.9 12.8 15.2 18.1 7.1 9.9 14.7 -6.8 -14.0 8.2 11.5 10.5 4.4 Road .. 15.7 20.9 15.0 14.9 14.7 20.9 29.0 14.9 10.5 15.4 5.3 -1.6 9.6 11.2 15.9 14.0 Domestic waterways .. 13.3 13.3 6.7 4.9 6.5 -0.3 16.4 1.9 7.6 4.1 -7.7 -12.4 7.5 11.9 -1.0 -6.6 Civil aviation .. 25.4 13.1 26.8 18.6 -0.9 41.6 39.8 25.4 24.4 19.2 -13.9 23.4 30.7 34.8 17.6 15.5 OVERALL 12.9 15.9 9.6 9.7 12.8 17.0 22.5 10.4 10.5 14.7 -2.2 -7.3 9.8 12.5 13.1 9.3 So... China Sraftcn. YVabkook 1995, p. 41i89. Table 41: CHINA: Average Shipping Distance 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 (kilometers) Rail 485 500 514 530 539 559 584 636 646 673 681 686 705 718 734 735 791 Road 32 20 20 21 25 19 22 31 34 37 44 46 46 46 48 48 50 Waterways 873 1,056 1,184 1,241 1,236 1,285 1,351 1,216 1,042 1,174 1,128 1,281 1,447 1,554 1,433 1,415 1,465 Pipelines 416 420 467 457 449 459 456 442 413 413 416 402 398 399 417 409 406 Civil aviation 1,521 1,539 1,573 1,809 1,961 1,983 2,074 2,128 2,143 2,183 2,226 2,226 2,218 2,234 2,330 2,393 2,241 OVERALL 395 212 220 232 238 244 219 243 236 234 243 258 270 284 279 274 282 (growth rates) Rail .. 3.1 2.8 3.1 1.7 3.7 4.5 8.9 1.6 4.2 1.2 0.7 2.8 1.8 2.2 0.1 7.6 Road .. -37.5 0.0 5.0 19.0 -24.0 15.8 40.9 9.7 8.8 18.9 4.5 0.0 0.0 4.3 0.0 4.2 Waterways .. 21.0 12.1 4.8 -0.4 4.0 s.1 -10.0 -14.3 12.7 -3.9 13.6 13.0 7.4 -7.8 -1.3 3.5 Pipelines .. 1.0 11.2 -2.1 -1.8 2.2 -0.7 -3.1 -6.6 0.0 0.7 -3.4 -1.0 0.3 4.5 -1.9 -0.7 Civil aviation .. 1.2 2.2 15.0 8.4 1.1 4.6 2.6 0.7 1.9 2.0 0.0 -0.4 0.7 4.3 2.7 -6.4 OVERALL -46.3 3.8 5.5 2.6 2.5 -10.2 11.0 -2.9 -0.8 3.8 6.2 4.7 5.2 -1.8 -1.8 2.9 So-rr.. Chi,,. Str.6.6.I Y-..book 1995, p. 488-9. A 1 0LLII JILLFI Ut China Financial & Economic WodC Bank Publications Yozmot Literature Ltd. New Market Isdatelstvo