-w I j 5- s~~~~~~~ i 7 r_ 0~4 v ^'o' 4-'~~ 57 *$q'm ..E_94 .. .~~~~~~~~~~~~~~- . ~~~~~~~~* -% X - . ~ ~~~ . . 3 -~ ~ ~ ; $ v t . 4~ ~~4 TH WO L BANK'' C HINA 20209 China 2020: Development Challenges in the New Century Clear Water, Blue Skies: China's Environment in the New Century At China's Table: Food Security Options Financing Health Care: Issues and Options for China Sharing Rising Incomes: Disparities in China Old Age Security: Pension Reform in China China Engaged: Integration with the Global Economy 0T H E W CO R L D B A N K W A S H I N G T O N D C C CH INA D E V E L O P M E N T C H A L L E N G E S I N T H E N E W C E N T U R Y T H E W O R L D B A N K W A S H I N G T O N D . C. Copyright © 1997 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing September 1997 The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemina- tion of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. Cover photograph by Dennis Cox/China Stock. Cover insets (from left to right) by Vince Streano/Aristock, Inc.; Claus Meyer/Black Star; Serge Attal/Gamma Liaison; Dennis Cox/China Stock; Joe Carini/Pacific Stock; Erica Lansner/Black Star. ISBN: 0-8213-4042-5 Contents Acknowledgments vii Chapter 1 Understanding the Present I Swift growth 2 High savings 4 Structural change 6 Pragmatic and incremental reforms 8 Initial conditions 12 Chapter 2 Divining the Future 17 Growth challenges 18 Growth possibilities 19 Chapter 3 Laying the Foundations 23 Restoring and reshaping government finances 24 Making room for markets 28 Making markets work 36 Chapter 4 Shaping a Competitive but Caring Society 43 Making labor markets flexible 44 Protecting the vulnerable 50 v Chapter 5 Feeding the People 61 Removing constraints to domestic production 62 Projecting grain balances 67 Using international trade 67 Chapter 6 Protecting the Environment 71 Deteriorating environmental conditions 72 Pollution prospects 74 Formulating policies for a cleaner future 76 Chapter 7 Integrating with the World Economy 83 Deepening trade integration 84 Deepening financial integration 90 Sharing the benefits of China's growth 92 Chapter 8 Setting the Agenda 97 Two visions for 2020 98 China's agenda to 2020 99 The world and China 103 Conclusion 104 Annex 1 Accounting for China's Growth 105 Preliminaries 106 Data deficiencies 106 Differences in technology 106 Structural change and the growth residual 107 Annex 2 ModeLing Growth and Structural Change 109 Nontechnical overview 110 The model 110 Parameterization 111 Results 113 Annex 3 Projecting Poverty and InequaLity 115 Counting the poor 116 Scenarios for reducing poverty 116 Statistical appendix 119 This report uses Hong Kong when referring to the Hong Kong Special Administrative Region, People's Republic of China. vi China 2020: Development Challenges in the New Century Acknowledgments his report was written by a team led by ~ Vikr~am Nehru and comprising Aart Kraay and Xiaoqing Yu. Consultants to the team were Athar Hussain (London School of Economics, STICERD) and Barry Naughton (University of California, San Diego). The team was helped by summer interns Jean Imbs and David Ng. The peer reviewers were Dwight Perkins (Harvard Z-University), Gregory Chow (Princeton University), Peter Harrold, Homi Kharas, and Gene Tidrick. The task assis- tant was Janet Wyse. The team owes Nicholas Hope (former Director of the China and Mongolia Department at the World Bank) a special debt of gratitude for conceiving the study and for unceasing support. Other World Bank staff to whom the team is grateful for their contributions and comments are Halsey Beemer, Natasha Beschorner, Eduard Bos, Pieter Bottelier, Tilly Chang, Dipak Dasgupta, Yuri Dikhanov, Sandra Erb, Joseph Goldberg, Daniel Gunaratnam, Bert vii -t 0; Hofman, Janet Hohnen, Shaikh Hossain, Gordon Jingping (State Statistical Bureau); Guo Xiaomin, Xiao Hughes, E.C. Hwa, Todd Johnson, Bert Keidel, Kathie Xuezhi (National Environmental Protection Agency); Krumm, Anjali Kumar, Nathalie Lichtenstein, Feng Liu, Liu Peilong (Ministry of Health); Sun Ling (State Kseniya Lvovsky, Tamar Manuelyan-Atinc, Will Education Commission); Wang Donghong (State Martin, Andrew Mason, Hena Mukherjee, Richard Customs Administration); Chi Jianxin (State Newfarmer, Al Nyberg, Alan Piazza, Klaus Rohland, Development Bank); Wang Loulin, Zhang Zhuoyuan, Helen Saxenian, Lyn Squire, Lee Travers, Jagdish Yang Shengming, Pei Changhong, Wang Zhenzhong, Upadhyay, Michael Walton, and Shahid Yusuf. Wang Tongsan, Li Yang, Lu Zheng, Han Jun, Jiang The World Bank team benefited from fruitful discus- Xiaojuan, Chen Zhensheng, Zhao Jingxing, Yu sions with many Chinese government officials and acad- Yongding, Zhang Yuyan, Zheng Yisheng, Yu Dechang, emics who were generous with their time and knowledge. Xu Gengsheng, Li Chenggui, Dong Yisheng (Chinese The mission is especially grateful to Zhu Xian, Ding Academy of Social Sciences); Fan Gang (National Xianjue, Du Jian, Pan Xiaojiang, Wang Zhen, Wang Economic Research Institute); Hu Angang (Chinese Weixin, Wu Jinkang, Liang Shuchun, Shi Yaobin Academy of Sciences); Wang Chuanlun, Tao Xiang (Ministry of Finance); Zheng Xinli, Dai Guiying, Cao (People's University); Yi Gang (Peking University); and Yushu, Liu He, Wang Xiduo, Yang Qingwei, Yao Hong, Andrew Sheng, Chad Leechor, Jim Wong, Lin Shoukang Zhao Shihong, Wang Jianjun, Wu Qiang, Zhao Shijun, (Hong Kong Monetary Authority). The team also bene- Lu Jiaxiang, Yu Peng, Ma Xiaohe, Li Yulin, Hu Chunli, fited from discussions with participants at the State Ning Jizhe, Xu Lin (State Planning Commission); Wang Planning Commission-sponsored seminar on "China: Dayong, Jing Xuecheng, Yang Zaiping, Xie Ping, Yao Striving Toward the Year 2020" held March 19-21, Keping, Pei Chuanzhi, Zhao Xianfeng, Chen Xin, Yang 1997 in Beihai, China. Huisheng, Zheng Yaodong (People's Bank of China); The team would like to express its thanks to the Wang Zixian, Zhu Zhiping, Liu Yajun, Wang Yi, Chen Canadian International Development Agency for a gen- Xin, Deng Li, Zhang Liyong, Liu Tianmin, Zou Xiaomin erous grant to finance three background papers by Hu (Ministry of Foreign Trade and Economic Cooperation); Angang (Tsinghua University), Cai Fang (Chinese Wang Huijong, Li Boxi, Li Shantong, Ding Ningning, Academy of Social Sciences), and the State Science and Zhao Jinping, Ge Yanfeng (Development Research Technology Commission. Center); Li Keping, Wang Haijun, Deng Xianhong, Guo Liu Dusheng (World Bank Resident Mission in Xiangjun, Jiang Xiaoyun, Deng Ran, Chen Yuyu (System China) provided coordination and logistical help, while Reform Commission); Ming Ruifeng, Wang Yadong, Liu Mei Hong, Fan Wenzhong, and Pan Wenxin (World Danhua, Li Jinghu, Lao Yujun, Li Zhengyu, Lu Yulin Bank Department, Ministry of Finance) coordinated (Ministry of Labor); Song Yuzhong, Wei Dong, Qin arrangements on the government side. Yongfa, Wang Xu, Liu Dongsheng, Zhou Shuanghu Rupert Pennant Rea edited the report. Bonita Brindley (State Economic and Trade Commission); Song Tingmin provided editorial guidance. Jennifer Solotaroff helped (Ministry of Internal Trade), Ma Lin, Zheng Hua, Jin with production. Meta de Coquereaumont, Paul Holtz, Dongsheng (State Tax Bureau); Feng Juping, Huang and Glenn McGrath of the American Writing Division of Hongbo (State Administration of Foreign Exchange); Liu Communications Development Incorporated handled Beihua (Ministry of Agriculture); Xuan Zengpei (State production and layout of the report, and Kim Bieler Science and Technology Commission); Ye Zhen, Zheng designed it. viii China 2020: Development Challenges in the New Century 4$ ~~~ ~hina is in the thiroes of two transi- be underestimated, neither should China's tions: from a commnand economy strengths-relative stability, a remarkably -, ~~to a marker-based one and from a high savings rate, a strong record of prag- J rural, ~agricultural society to an urban, indus- matic reforms, a disciplined and literate -trial'one. So far both transitions have been labor force, a supportive Chinese diaspora, spectacularly successful. China is the fastest- and a growing administrative capacity. growing economy in the world, with per These strengths have driven China's growth 4 capita incomes more thani quadrupling since for the last two decades of this century. They 1978. In two generationis it has achieved what could do the same in the first two decades of tok other countrie etuis For a country the next. whose population exceeds that of Sub- But to nurture these strengths and use SAArai Africa and Latin America combined, them effectively, reforms must develop in this has been a miost remarkable development, three related areas. First, the spread of mar- B;t every silver lining has a cloud. Swift ket forces must be encouraged, especially v ^ g.r.wthu and structural change, whiie resolv- through reforms of state enterprises, the mg -many problems, have created new chal- financial system, grain and labor markets, m 'lengespt employment insecurity, growing and pricing of natural resources. Second, ,inequality, stubborn poverty, mounting the government must begin serving markets environmental pressures, and periods of by building the legal, social, physical, and afilcroeconomic instability stemming from institutional infrastructure needed for their in 1complete reforims. Unmet, these chal- rapid growth. Finally, integration vith the , Ie',ges could underminie the susainability of world economy must be deepened by low- owth, and China's promnise couild fade. ering import barriers, increasing the trans- Tis report argues thelt China can meet parency and predictability of the trade thee i ch'allenges and suistain rapid growth. regime, and gradually integrating with Althouigh the difficulties ahead should not international financial markets. I:> ['Understanding the Present W; C hina is in the midst of two historic transitions: from a rural, agricultural society to an urban, -X 4j~industrial one and from a command economy to a market-based one. The first transition would be unre- markable were it not for China's vast size, its past control of urbanization, and the unprecedented speed of its indus- trialization. Its population easily exceeds the combined total of Latin America and Sub-Saharan Africa, and its S0 0 industrial growth is nearly an order of magnitude greater. Its transition to a market economy has also been unique, with a combination of experimentation and incremental reforms leading to rapid progress in some areas and slow progress elsewhere. The interplay and synergy between these two transitions have sparked rapid growth. The Chinese economy expanded more than fourfold in the past fifteen years. Between 1978 and 1995 real GDP per capita grew at the blistering rate of 8 percent a year and lifted 200 million W000 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 Chinese out of absolute poverty.1 Economic reforms, averaged 8 percent a year between 1978 and 1995; begun in 1978, have advanced China's integration with other estimates suggest growth of 6-7 percent. Still, the world economy, maintained a strong external pay- whatever the precise figure, China's growth has been ments position, essentially privatized farming, liberal- almost unprecedented: only the Republic of Korea and ized markets for many goods and services, intensified Taiwan, China, have grown at comparable rates. competition in industry, and introduced modern China's growth since 1978 is also outstanding in his- macroeconomic management. torical perspective (figure 1.1). Performance during the At the same time, the confluence of these two transi- nineteenth century and the first half of the twentieth tions has generated powerful vortices and cross-cur- century could hardly have been more disappointing: the rents that are potentially destabilizing and always country registered no improvements in living standards difficult to predict. Transition from command to mar- between 1820 and 1870 and only modest growth over ket alone can be treacherous: witness the period of eco- the next three decades.3 During the tumultuous first half nomic collapse in Eastern Europe and the former Soviet of this century per capita incomes actually fell as China Union. Similarly, transition from a rural, agricultural saw the collapse of a 3,000-year-old imperial tradition, society to an urban, industrial one also carries many weathered a period of anarchy and warlordism, and risks. In the rich industrial economies this transition survived foreign occupation and civil war. The rest of took centuries. In China the process is being telescoped the world, though, managed respectable growth rates into one or two generations. during this period despite the upheaval of two world So it is hardly surprising that China's rapid growth wars. As a result, China's share in global GDP fell from and structural change, while resolving many problems, a high of 30 percent in 1820-the largest economy in have also given rise to new challenges: periods of macro- the world at the time-to barely 7 percent in 1950. economic instability stemming from partially complete Since then China has been recovering some of this reforms; increased employment and income insecurity; lost ground. Postwar recovery under communist rule mounting environmental pressures, especially in urban saw a resumption in growth, although the Great Leap areas; rising costs of food self-sufficiency; growing Forward and the Cultural Revolution caused consider- inequality and stubborn poverty levels; and a prickly, able economic disruption and waste. By 1978, when occasionally hostile world environment. These are for- China took its first tentative steps toward reforms, it midable challenges. Unmet, they could undermine the sustainability of growth, and China's promise could fade. FIGUR 1.1 This report argues, however, that China has the capac- China's growth has been outstanding ity to meet these challenges. While the difficulties ahead in the second hatf of this century should not be underestimated, neither should China's Average annual per capita GDP growth strengths-relative stability, a remarkably high savings (percent) rate, a strong track record of pragmatic reforms, a sup- 6 - China * Latin America portive Chinese diaspora, and a growing administrative 5 m Western Europe capacity. These strengths have driven China's impressive - United States growth in the last two decades of this century. They will 4 be equally necessary for rapid, sustainable growth in the first two decades of the next. To improve China's chances 3 of success, these strengths will need to be supplemented 2 by three other factors: skilled economic management, a supportive world economy, and domestic social stability. 1 a Swift growth 0 -1 Measuring China's GDP growth is tricky (box 1.1).2 1820-70 1870-1900 1900-50 1950-78 1978-92 Source: Maddison i995. Official statistics show that per capita GDP growth 2 China 2020: Development Challenges in the New Century BOX 1.1 How fast is China groing? Accord t ofic tt ina ta fc r o 1978-94 cent a_year (in.real terms between 17 d1995. Thsie A_a pftu -Wl 6D o growth may overstate China's performance, however, ecausethe official - p- et) consmptin ad investment efators used to crwvert-nominal -~consunendutoc at:====--0 = fivf>~ L -==--; ==;- into real GDP have increased mucb "ore slowly thai aternaiv measures, such as te consumer- price inde or rce indexes -or capitalgoods. If the aternative indexes are btter measures of- pr increases, they -can e used to= deate no0mi nal =p= to ..arnve at-a more accuatem es ofreaimprovemnentsin liVing stndards. .- ; fa :- -:- X-E- :X-- : .?- Using reasonable alternative mheasure5s of pie increases to deflate nominalGO mindicates- that per-capiti growth may be 1.2~ pecntg pont ;=we tha is, inicte by ofica statis-=S.-C-=,'--',; --tics-(see-table). M-st of the bdiscrepa fbetween ihe two esti- matesaise in thesecond half of the reform period (1986 95\. tow significant are these djt ts n the one=.h=and, - #ite =ta-tes mismeasuring 60 Pgrowt.h by I or more percentage points over long penods will result in large errors in per capita income lev- els. Butqevern after datadeficienes arertaken into acnt , Topt: =tengrowthperformancies- China's growth performance remains stetlar(sfr BY any cisima fflcfai) 8.0% measure, China' remains comfortablyv among thew ten( 6.=% fastest-growing eo nonmies. -0 = i0; 0 - 00= - ; = = . :; - .0 .0; :.=- . - . =.:=- = n a = :6.3°°ba . Del tin hina's growth (nnual per capita G9P grwth, percent) --0;;= L=-;f;~-ij1978-95 197- 886 ; 1986-95: = ---_ 0-= - -- Using official deflators 8.0 7 .8 7-.9 Using altentv deflators 6.8 7.46. Note: See note 2 at en, of chapter. - 1 I- -_ - ~ - -l 0 I 2 3 ~ 4 z5 6 7 8 Sovrce Chinia Stotsto Yerok aus issues, World Bankstaff estimates. Sore ol aisafestimates. remained a desperately poor, rural, and agricultural concerns about regional disparities, the benefits of economy. Sixty percent of China's 1 billion citizens sur- growth have been widely shared among China's coun- vived on less than $1 a day, the international poverty try-size provincial economies. Although the coastal standard. provinces grew faster than average at 9.7 percent a year, The rest, as they say, is history. The introduction of the other provinces also fared well. Indeed, if China's agricultural reforms was the first sprinkling that rejuve- thirty provinces were counted as individual economies, nated the parched economy, launching a growth the twenty fastest-growing economies in the world process that has transformed the face of China. The tor- between 1978 and 1995 would have been Chinese. rid growth rate set over the next seventeen years helped The second notable feature is the sharp cyclical pat- the Chinese double their per capita income every ten tern of economic growth. Although the ups and downs years, faster than almost any country in recent history of China's postreform business cycles pale in compari- (figure 1.2).4 son with the wild swings in GDP growth seen during the Three features of China's rapid growth are especially Great Leap Forward and the Cultural Revolution, they noteworthy. The first is its regional dimension. Despite nevertheless have been wide enough to concern policy- Understanding the Present 3 makers (figure 1.3). These growth cycles have been But even after these adjustments, the fact remains that accompanied by similar fluctuations in the rate of infla- China's growth has come from much more than the tion, revealing fault lines in macroeconomic manage- mere accumulation of factors of production. ment stemming from partially completed reforms in the China's remarkably rapid growth since 1978 has fiscal, enterprise, and banking systems. been driven by four factors: The third noteworthy feature of China's growth * A high savings rate, which has supported vigorous since 1978 is its reliance on productivity growth. rates of investment and capital accumulation. Relative to other rapidly growing Asian economies, * Structural change, which has been both a cause and China's growth has been less dependent on volume an effect of growth. increases in inputs of capital and labor. Consider, for * Pragmatic reforms, which were well suited to China's example, growth in the stock of physical capital (table unusual circumstances and enjoyed broad support. 1.1). In most countries growth in capital inputs exceeds * Economic conditions in 1978, which were especially GDP growth, often by a substantial margin.5 In China receptive to reform; China's economy could be the reverse occurred, suggesting that factors other than described as a dry prairie, parched by years of planning, capital accumulation have been important determi- awaiting the first sprinklings of market reform. nants of GDP growth. Each of these factors is considered in turn. In fact, a conventional technique to account for the sources of growth in China reveals that growth in capi- High savings tal inputs explains just 37 percent of growth (annex 1). Another 17 percent can be attributed to improvements The most striking feature of China's remarkable perfor- in the quantity and quality of the labor force. Thus mance since 1978 is its savings rate. Savings, as much as nearly half of China's GDP growth-4.3 percentage growth, is China's real economic miracle. According to points a year-is due to other factors. Data deficiencies official statistics, China's savings rate averaged 37 per- along the lines of those discussed in box 1.1 can reduce cent of GDP between 1978 and 1995, although more the absolute size of this residual component of growth conservative estimates place it at 33-34 percent.' Even slightly, as can differing methodological assumptions. so, this rate is among the highest in the world. No less important, the savings rate was remarkably FIGURE 1.2 Xstable, even as reforms and structural change were China doubled its per capita income at a reshaping the economy. Contrast this with the collapse remarkabLe rate of savings in the transition economies of Eastern Europe Years taken to double and the former Soviet Union (figure 1.4). In fact, the sta- per capita incomes United Kingdom FIGURE 1.3 (1780-1838) The ups and downs of China's growth, 1953-93 United States Annual real GDP growth (1839-86) (percent) Japan Postwar recovery The CuLturaL The postreform (1885-1919) and the Great Revolution era Korea, Rep. of Leap Forward (1966-77) 20 China _\ (1978-87) -10 China -20 (1987-96) _ -30 0 10 20 30 40 50 60 1953 1958 1963 1968 1973 1978 1983 1988 1993 Source: World Bank 1991. Source: Chow 1993; WorLd Bank 1996. 4 China 2020: Development Challenges in the New Century TABLE 1.1 Accounting for China's growth (percent) GDP growth Average annual growth explained by UnexpLained Physical Human Labor sectoraL share Country Period GDP capitaL capital force reallocation of growth China 1978-95 9.4 8.8 2.7 2.4 1.5 29 Comparators United States 1820-1913 4.1 5.5 1.6 2.8 n.a. 14 United States 1950-92 3.2 3.2 1.1 1.6 0.03 35 Japan 1960-93 5.5 8.7 0.3 1.0 0.26 30 Korea, Rep. of 1960-93 8.6 12.5 3.5 2.4 0.34 21 Note: Human capital is defined as stock of years of education per worker. SectoraL reaLlocation captures the shift of resources from low- to high-productivity sectors. In China it also includes reallocation from state to nonstate industry. See annex 1 for a complete description of methodoLogy, data sources, and adjustments made to official Chinese data. Source: Annex 1 of this report. bility of the high savings rate was one of the primary suc- were kept artificially low and final goods prices artifi- cesses of the reform path chosen by the Chinese. cially high. This concentrated profits in state enter- Although China's savings performance sets it apart prises, which invested them under the direction of the from other transition economies, it fits more comfort- central and local planning apparatus. Between 1965 ably in the mold of other dynamic Asian economies. and 1978 savings remained at 33 percent of GDP, and All had rapidly rising savings rates in the periods investment strongly favored heavy industry. Household immediately following takeoff, contributing to virtu- savings were of little importance, averaging just 1 per- ous circles of high growth and high savings. China cent of GDP. appears to be following this pattern, although its Since reforms began in 1978, however, the roles of extremely high savings rate at a very low income level enterprises and households have been reversed. The makes it an exception even within this select group household savings rate exploded from about 1 percent (figure 1.5). before reforms to 21 percent since then (figure 1.6). What accounts for China's high savings rates? Under Households now contribute half of total savings. central planning high savings rates were engineered through the plan. Agricultural and raw material prices FIGURE 1.5 China's savings rate: Apart, even from a FIGURE 1.4 select crowd China's other miracLe: Savings during Gross domestic savings rate transition (percent) Gross domestic savings rate 50 (percent) Malaysia Singapore 45 ~~~~~~~~~~~~~~~~~China 40 Thailand China/ / - 35 30 ong KongJp 25 Former Soviet Union 3 2 Korea, Rep. of Eastern Europe 100 4,000 8,000 12,000 16,000 15 Per capita GDP (U.S. dollars, purchasing power parity) -10 -5 Years0 5 10 15 Note: Figure plots gross domestic savings rates against average per capita Years since reforms GDP for six five-year penods beginning in 1965. Source: World Bank data. Source: Summers and Heston 1991 (and updates); World Bank data. Understanding the Present 5 Why are Chinese households so thrifty? No single taken several decades. Consider employment patterns. In explanation seems adequate. Certainly, for many the eighteen years since 1978, agriculture's share of the Chinese, rising incomes have brought an end to subsis- workforce dropped from 71 percent to about 50 percent. tence consumption. Rising incomes have also been It took the United States fifty years and Japan sixty years accompanied by rising aspirations, as households set to achieve a similar structural shift (figure 1.7). their sights on buying their own house or apartment, "Push" and "pull" factors accelerated the flow of acquiring previously unavailable consumer durables, labor out of agriculture. Low incomes from farming and giving their children a better education. Since and widespread poverty in rural areas encouraged households could not borrow much to finance these farmers and their families to leave.9 At the same time, purchases, they saved more instead. the demand for labor increased sharply in industry and Another factor is China's changing demographics.7 services-especially among collectively owned enter- Life expectancy today is ten years longer than it was in prises-that had achieved rapid productivity growth. 1970, and it continues to rise. A typical Chinese baby The shift out of agriculture did not mean massive can now look forward to living for more than seventy migration to cities. Cities' share of the population years. Because city dwellers retire at 55, they have increased from 18 percent in 1978 to just 29 percent in strong incentives to save for their retirement, especially 1995 (box 1.2). Compared with the period before when they know that pension benefits may be inade- reform, however, urbanization was rapid. Between quate. Furthermore, declining fertility has reduced the 1957 and 1978, when official policy discouraged traditional form of support in old age-children. urbanization, the share of the population living in Finally, institutional factors have also helped boost urban areas climbed only 3 percentage points, from 15 household savings. Of these, two stand out: the implicit to 18 percent. public guarantee of deposits in the banking system and The drift away from agriculture also facilitated a the proliferation of new ways to invest in China's fledg- transformation in patterns of ownership, especially in ling securities markets. industry. The first wave of industrialization took place after the establishment of the People's Republic and was Structural change concentrated in state enterprises. Since 1978, however, these enterprises have grown relatively slowly, so their With swift growth came rapid structural change. In this share in aggregate output and employment has been respect China followed the path of many other coun- falling swiftly. The second wave of industrial growth tries.8 Where China differed was in the pace of change: it was in collectively owned and township and village compressed into a few years a process that has normally enterprises. In the past few years a third wave of indus- trialization has been building: mostly privately and China's thrifty households Rapid transition out of agricuLture Household savings as a share of income Years taken to reduce the share of agriculture in the laborforce (percent; five-year moving average) from 70 percent to 50 percent 35 30 China 25 RuraL savings rate 1978-95 25 IKorea, Rep. of 20 1950-70 15 Urban savings PhiLippines 10 rate 1950-80 United Statess O 182 0-70 0 X~.ef'' Japan _51 xv - 1870-1929 1953 1958 1963 1968 1973 1978 1983 1988 1994 0 10 20 30 40 50 60 Source: China Statistical Yearbook, various issues. Source: Maddison 1995; China Statistical Yearbook, various issues; ILO data. 6 China 2020: Development Challenges in the New Century BOX 1.2 FIGURE 1.8 How urbanized is Chin? Provincial growth, structural change, and inequality Despite the recerntexpansion of cities and towns, China's urban Faster growth in the provinces meant faster structural popuLation-29 percent of the total, according to official sta- change ... tistics-is still below the 35 percent norm for countries with Per capita GDP, 1994 (1985=100) similar per capita incomes (calculate on a:purchasing power 350 parity basis). But Chinas urban population statistics are based5 on administratively defined boundaries, some of which include 300 Low popuLation-density areas engaged in farming. At the same u* time, large tracts of coastat China's so-calted rural areas are 250 developing a new, ipersed pattern of -urbanization. In three regions-the Pearl River delta, the tower Yangtze, and the 200 U a Beiiing-Tianjin-Tanshan 'metropolitn -areas-industriat and commerciaL acivities are transforming the landscape, forming i . urban and periurban corridors linking core cities. If regions with high poputation densities-are considered urban areas, 00 China's tevel of urbanization could be as high as 50 percernt, 0 5 10 15 20 significantly above that of the typical low-ine country. - Change in nonagricultural share of GDP, 1985-94 (percent) Source: Cai 1996. ... which, in turn, widened rural-urban disparities ... Urban/rural relative income, 1995 (1985=100) individually owned enterprises, supplemented by joint 200 ventures and foreign-funded enterprises.10 180 If anything, the size of the private sector is larger than a * official statistics suggest. Many private firms have rea- 160 * a , son to underreport their production and employment, a Moreover, many collectively owned enterprises func- 140 a tion as private enterprises in virtually every respect but n find it convenient to operate under the banner of town- 120 ships or villages-a practice known as "wearing the red 100a cap." Doing so may help the enterprises obtain access 0 5 10 15 20 to credit or licenses and avoid social or political stigmas Change in nonagricultural share of GDP, 1985-94 (percent) that may still cling to private activity in China. . . . that were responsible for most of the increase in Structural change has given an extra boost to China's income inequality growth over the past eighteen years. Since a large por- Theil index tion of the agricultural labor force was underemployed. 0.35 productivity leaped as workers moved from low-pro- 0.30 ductivity agriculture to more productive employment in 0.25 industry and services. Between 1978 and 1995 this Rural-urban process contributed about 1 percentage point a year to 0.20 inequality GDP growth. The changing pattern of ownership also 0.15 contributed about 0.5 percentage point a year to Itara growth, as employment shifted to the collective and pri- 0.10 inequahlty vate sectors, where productivity was higher (annex 1). 0.05 Intrarural The process of structural change varied across inequality provinces, exacerbating interprovincial and especially 0 1985 1995 rural-urban income differences (figure 1.8).11 In Note: See note 11 at end of chapter. provinces that industrialized faster, higher wages in Source:WorLdBankstaffestimates. Understanding the Present 7 urban and periurban areas opened a growing gap two decades, with the start of the Great Leap Forward between urban and rural workers. Restrictions on and through the Cultural Revolution. Against this rural-urban migration helped maintain this gap, which tumultuous backdrop the years leading up to 1978 were was responsible for much of the sharp increase in relatively tranquil. income inequality over the past decade. Today urban The Chinese leadership was, therefore, eager to see incomes are as much as four times rural incomes, once improvements in living standards but had no appetite subsidies enjoyed by urban residents are taken into for dramatic changes in policy. Growth was important, account. Such rural-urban gaps are very high by inter- but not at the expense of stability. The concern with national standards. Evidence from thirty-six countries growth initially focused on restoring incentives for agri- shows that the ratio of urban to rural incomes tends to cultural production but soon broadened to encourage be below 1.5 and rarely exceeds 2.0.12 In China the gulf investment by firms, households, and local govern- between rural and urban residents explains 60 percent ments. These measures were introduced incrementally of overall income inequality. In contrast, regional and involved decentralizing authority over capital income disparities have contributed relatively little to spending. A favored approach was for the central inequality (figure 1.9). authorities to experiment with new policies in selected Still, China is more egalitarian than most countries in provinces, prefectures, counties, and even firms. If the Africa, Latin America, and even East Asia. But China's experiments worked, they were quickly replicated. If steep rise in inequality is exceptional in international they did not, the costs of failure tended to be contained perspective (figure 1.10). In the early 1980s China's and limited. Reforms were occasionally reversed if the income inequality was well below average in a sample government believed that growth was not being served of forty countries for which data are available. By the or stability was being jeopardized. 1990s it was above average. Pragmatism and incrementalism were also behind the government's evolving objectives. When the reforms Pragmatic and incremental reforms began in 1978, it is not clear whether the authorities had reached a consensus on any final objectives other China's economic reforms in 1978 were triggered by than high growth. New reform objectives emerged as neither economic crisis nor ideological epiphany. The old ones were achieved. In the first few years of reform country had endured much hardship over the previous IGURE 1.9 tChina's inequality was below average in the Regional disparities account for a small 1980s, but is above average in the 1990s share of inequality, 1985-95 Gini coefficient in 1990s Theil index 60 1980s average 0.40 55 0.35 ~~~~~~ActuaL 5 0.35 inequaLit 5 0.30 45 * * a 0.25 40 China * % 0.20 35 * 1990s average 0.15 30 0.10 25 Contribution of regionaL disparities 0.05 20 20 25 30 35 40 45 50 55 _______________________________________________ Gini coefficient in 19805 R. RI) 0 A) -"IV 1_` 0@ ) Note: The sample of countries was restricted to those designated as having ' > '* '' '> ' ' ' ' A high-quaLity data, with observations in the early 1980s and earLy 1990s. Source: World Bank staff estimates. Source: Deininger and Squire 1996. 8 China 2020: Development Challenges in the New Century BOX 1.3 FIGURE 1.11 Theevolving objectives of reform Rising grain yields Index of yields 1978-79 A planned ecotnoythat is the "law of market (1978 =100) exchange value'- 200 1979-84 A pLanned economy supplemented by market Average regulation = : growth 1984-87 A planned commodityveconomy 150 1987-89 An economy in which the state regulates the 1.8/ market and the market regutates enterpnses 1989-91 An economy with organic integration of a 100 57% planned economy and market regulation 1993-present A socialist market economy with Chinese 2.90 characteristics 50 5.3/ Source: Cao, Fan, and Woo 1995. 0 1952 1960 1970 1978 1984 1995 the objectives were modest. With success, they became Source: China Statistical Yearbook, various issues. more ambitious. In 1979, for example, the government called for the development of "a planned economy sup- But the most important feature of agricultural plemented by market regulation." By 1993 the goal had reform was the introduction of the household responsi- matured to the creation of a "socialist market economy bility system, under which collectively owned land was with Chinese characteristics" (box 1.3). assigned to households for up to fifteen years. The cen- These features of China's reforms-decentralization, tral government had banned the system, which trans- incrementalism, and pragmatism-are best illustrated ferred profits and production decisions from communes in four key areas where reforms did much to stimulate to households. But local governments encouraged it, growth: agriculture, rural industry, trade, and state and in late 1981 the central government signaled its enterprises. approval (figure 1.12).4 The household responsibility system went on to become the cornerstone of reforms in Agriculture agriculture and arguably in the whole economy. It is hardly surprising that China's policymakers focused FIGURE 1.12 I - their initial reform efforts on agriculture. In the decade Expansion of the rural household before 1978 they had been repeatedly disappointed by the responsibility system performance of communal agriculture. Grain yields, after Percentage of households participating at year end rising rapidly during the 1960s, had slowed markedly 100 98% 99% despite increased investments in agriculture (figure 1.11). 100 This slowdown, combined with a long tradition of con- 80% _0 cern for food self-sufficiency and social stability in rural 80 areas, made agricultural reforms a natural starting point. 60 Agricultural reforms were launched with large 45% increases in the procurement prices for grains. In addi- 40 tion, farmers were allowed to sell above-quota produc- tion at market prices, a practice that had already started 20 14%*/ in some communes."3 The government lowered grain quotas, increased grain imports, loosened restrictions 0_ on private interprovincial trade, and introduced special 1979 1980 1981 1982 1983 1984 Source: [in 1992. programs to increase production of cotton. Understanding the Present 9 Despite their partial and incremental nature, these Individually and privately owned enterprises have steps proved very successful. Growth in agricultural become the driving force for industrial expansion as yields accelerated, and the pattern of production changed government policies toward these types of ownership as regions were able to specialize in crops of their choos- have softened. ing. By one estimate the introduction of the household responsibility system alone contributed nearly half of the The great leap outward growth in agricultural output between 1978 and 1984.15 The decentralization of authority evident in policies Rural industry toward agriculture and rural industry was mirrored in China's economic relations with the world. By 1978 The agricultural reforms initiated in 1978 were closely earning more foreign exchange had become a priority. tied to the boom in rural industry that followed. Before Government foreign exchange reserves were negative, 1978 rural industrialization had been an important fea- and the country faced a foreign exchange crisis."8 It ture of the commune-based system of agricultural needed to import grains and fertilizer to support the development. But commune- and brigade-run enter- agricultural reforms, and plant and equipment to close prises did not produce consumer goods and were not the widening technological gap with its neighbors. geared to market demand. They were often simply China's economy opened to the outside world along workshops for agricultural machinery, designed to sup- three avenues. First was reform of the trade system. The port agricultural production. government abandoned its reliance on a few foreign Agricultural reforms created the conditions for a rural trade corporations, and within a few years thousands of industrial boom that continues to reverberate today. corporations were allowed to trade internationally, First, agricultural price increases and the production many of them sanctioned by local, not central, govern- response that followed increased rural incomes substan- ment. Planning, too, was trimmed back. Until 1979 the tially. As a result higher rural savings could be invested in state plan set procurement targets for 3,000 export rural industries, which generated higher returns than products. By 1985 that number had shrunk to 100 (and farming.16 Second, the reforms boosted agricultural pro- today it is zero). The plan was replaced by import ductivity, which freed surplus labor previously concealed licensing, which was gradually relaxed as the foreign in the commune system and so provided a steady supply exchange constraint eased. Tariffs on imports were of workers for rural industry. Third, higher rural incomes steadily lowered. Nontariff barriers, however, still created a ready market for rural industry. Fourth, these affect a wide range of products, although they too have new commercial activities were legitimized by changes in been reduced in scope and severity. political philosophy and attitudes. Second, to stimulate exports, the heavy hand of gov- Official government support for these changes came ernment in allocating foreign exchange gave way to a only in 1984, six years after rural industrialization had lighter touch. Exporters were allowed to retain a por- begun. The government eased state controls on buying tion of their foreign exchange receipts, and individuals agricultural materials, making them available to rural were gradually given more freedom to hold foreign enterprises for processing. Urban firms were encour- exchange. The right to import was liberalized as foreign aged to subcontract work to rural enterprises. More exchange markets developed with official support. generally, production restrictions were relaxed, taxes Today's sophisticated interbank market for foreign were low, and enterprises were allowed to pursue what- exchange bears little resemblance to its earliest prede- ever activity they chose. cessor-the foreign exchange adjustment centers of The new policies helped maintain the momentum of 1985. Other banks were permitted to erode the Bank of growth of collectively owned enterprises through the China's monopoly on foreign exchange transactions. 1980s. These enterprises accounted for 22 percent of Perhaps most important, the government maintained a industrial output in 1978. Their share reached 30 per- realistic exchange rate policy. It almost halved the cent by 1984, without any overt central support, and exchange rate at the outset of the reforms and devalued climbed to 36 percent by 1988, where it has remained.17 the currency on four later occasions (figure 1.13).19 10 China 2020: Development Challenges in the New Century FIGURE 1.13 Most of the zones were in coastal provinces and con- tributed significantly to the provinces' higher than aver- Sustained reaL depreciation age growth rates. One study found that the extra growth US dollar-yuan exchange rate enjoyed by China's coastal cities in the late 1980s can be (index: 1978 = 100) I explained entirely by the extra foreign investment they 120 were able to attract.21 Foreign companies introduced 100 < \advanced transport and electronics technology and NominaL helped upgrade key services, such as hotels. These new 80 skills, together with China's ability to assimilate them, 60 Rea \\ helped improve international competitiveness.22 40 State enterprises 20 The new policies put great pressure on state enterprises, which had been the mainstay of the economic system 1978 1980 1982 1984 1986 1988 1990 1992 1995 before 1978. Fed a diet of state subsidies for decades, Source: WorLd Bank data. many lacked the ability to adapt and innovate. With reforms, their dependence on public subsidies began to increase. The government's desire to contain its budget Third, the government gradually relaxed regulations deficit meant that the state banking system became their on foreign direct investment. It established special eco- main source of financial support. nomic zones that offered foreign investors special fiscal, Beginning in 1980 many enterprises acquired infrastructural, and financial incentives. The first four increasing autonomy over their operations. New free- special economic zones were created in 1980 and a fifth, doms included a slowly rising share of profits that could in Hainan, was added a decade later. The zones' success be retained for wage bonuses and new investment, in attracting foreign investment, stimulating trade, and greater autonomy over production decisions and invigorating growth soon led to demands from other wages, adoption of the "management responsibility towns and provinces for similar arrangements. By 1993 system" (seen as a counterpart to agriculture's house- more than 9,000 economic zones had been established hold responsibility system), and in some cases recruit- throughout China.20 They came in all shapes and ment of new management (table 1.2). Central and local sizes-economic and technological development zones, governments usually negotiated these new freedoms hi-tech development zones, open coastal cities, export firm by firm. As a result the operational environment processing zones, free trade zones, a financial zone, and varied enormously between firms, across regions, and free ports. across sectors. In 1984 the Enterprise Bill of Rights for- TABLE 1.2 Increased autonomy for state enterprises during the 1980s (percent) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Base retention ratea 7 19 22 30 34 37 39 38 39 39 Marginal retention rateb 11 12 11 14 17 17 19 23 26 27 Autonomy in production decisionsc 7 8 10 14 25 35 40 53 64 67 Wage discretionc 1 1 1 2 5 9 12 20 32 35 Management responsibility systemc 0 0 0 1 2 4 8 42 83 88 New management appointed after 1980c 9 9 15 25 40 40 61 75 85 94 Note: Based on a 1991 retrospective sampLe survey of state enterprises by the Chinese Academy of Social Sciences. a. Portion of profits that could be retained if profits did not exceed a specified base level. b. Portion of profits that could be retained if profits exceeded the base Level. c. Share of firms in the sample. Source: Xu 1996. Understanding the Present 11 malized these changes and created an additional that of the Great Leap Forward, had undone many of the impetus for growth. early economic benefits following the founding of the The increased autonomy of state enterprises allowed People's Republic. One study estimates that without the them to benefit from China's dual-track pricing system, Great Leap Forward and the Cultural Revolution, out- also introduced in the early 1980s. Under this system put per capita in 1993 would have been double its actual planners typically set a price for a commodity but level.26 In 1978 real incomes in rural areas had been stag- allowed all above-plan output to be sold at market nant for more than a decade. The country was running prices. Since the volume of planned output barely short of foreign exchange to purchase essential imports. changed, enterprises sold more and more in the open The widening technological gap between China and the market. Thus all growth and development occurred at rest of the world had become too large to ignore. Perhaps market prices, which almost certainly improved resource most important, China's neighbors in East Asia had allocation.23 Because no enterprise was made worse off demonstrated the potential for growth when high-sav- and some were clearly made better off, the reforms ings economies adopted market principles. received enthusiastic support.24 Today more than 95 per- Second, somewhat ironically, China enjoyed the cent of industrial output is sold at market prices. "advantages" of backwardness (box 1.4).27 More than The decentralization of management decisions two-thirds of the population lived in the countryside. boosted the productivity of firms.25 But relative to the They had no income guarantees and, despite rising rest of the economy, state industrial enterprises lan- guished, with slow growth and declining profits. In part this was because state enterprises, unlike their nonstate The "ad oF b rdness competitors, were required to provide job security and a range of social services, such as housing, education, ntraial exience sowdifferences and health care. Yet slackening performance also in(oexmedci aad savings rtes, reflected a deeper malaise rooted in the poor investment count e g stes This is clear decisions of the past and in an "iron rice bowl" system f t h reao that did not penalize low productivity. cting for differences in educational attae svns In the past several years, however, lower subsidies, grot in o n e v tighter credit, and growing competition have begun to r 1978 hastbeen unmask the poor financial condition of many state for a vr poo country. enterprises, prompting new approaches to enterprise reform, especially at the local level. Examples include Chieas gowth 1978-94: mergers, leases, corporatization, management con- Growth tracts, worker and management buyouts, and bank- Korea. ruptcies. At the same time, the center is focusing on c Repof o ng Kong reforming and revitalizing 1,000 (from more than Taiwan, 100,000) state industrial firms that will form the core of China's modern enterprise system. Initial conditions Reforms in China spurred an economic response that continues to astound the world. High savings and struc- tural change were undoubtedly helpful. But several fea- tures of the Chinese economy in 1978 made it Injticincome particularly ripe for change. First, China was simply ready for reform. The eco- Note See n 27 a end of chapter nomic disruption of the Cultural Revolution, and before 12 China 2020: Development Challenges in the New Century yields, for more than two decades their average incomes labor-intensive industries from Hong Kong and had barely grown. For them, the uncertainties of reform Taiwan, China, to the mainland, helped by a common were less alarming than the difficulties of the present language and a tradition of business through family system. And agriculture's surplus labor meant that rural connections. The Chinese diaspora brought more than industry could achieve rapid, uninterrupted growth for money: it also contributed commercial expertise, almost two decades without facing wage pressures. knowledge of foreign markets, new approaches to man- Third, contrary to popular perception, planning was agement, new ideas on economic policies, and the latest less entrenched in China than it had been in other tran- labor-intensive technologies. sition economies. In the 1970s central government agencies in the Soviet Union physically allocated about N otes 60,000 different commodities through the plan. In China in 1978 the number was about 600, unchanged 1. World Bank (1996). 2. The alternative GDP growth rate derived in box 1.1 is obtained from 1965.28 Not even the most determined planners by redeflating the expenditure components of GDP using aLternative could oversee an economy of the size and complexity of deflators, as foLLows. For consumption, we use the consumer price China's. Even at the height of planning, about 30,000 index (CPI). ALthough a nationaL CPI was not avaiLabLe untiL 1986, one can be inferred from data on reaL and nominaL per capita consumption rural markets continued to operate, albeit with restric- growth reported in China Statistical Yearbook 1996, table 9.2. For tions.29 Smuggling was rife. So when commercial activ- investment, we use the price index for buiLding materials in Chino ities were legalized, Chinese entrepreneurs needed little Statistical Yearbook 1996, tabLe 8.12. An aLternative approach is to examine the deflators for the components of GDP by sector of origin, encouragement to expand. which leads to similar concLusions. For exampLe, Woo (1995) suggests Fourth, China had always had a strong administra- that the factory-gate price of industriaL output is a better measure of tive capacity, especially at the provincial level. Over cen- price increases in industry. This approach results in a similar reduc- tion in per capita GDP growth of about 1 percent. Finaly, Summers tunies China had developed a sophisticated system of and Heston, in their widely used database on per capita incomes at local government to raise revenues and store grain as purchasing power parity, somewhat arbitrariLy assume that consump- insurance against famine.30 This tradition of local gov- tion growth is overstated by 30 percent and investment growth by 40 percent, further Lowering estimates of per capita GDP growth. ernment became stronger under communist rule. So 3. Maddison (1995). For China since 1950, Maddison uses the when reforms required administrative and financial Summers-Heston GDP estimates, resuLting in a GDP growth rate since decentralization, provincial governments were able to 1978 that is substantially Lower than officiaL statistics. 4. OnLy two countries, Japan and Korea, have grown faster in the take on the new responsibility. Moreover, the central post-WorLd War II era. bureaucracy, severely weakened in the throes of the 5. Nehru and Dhareshwar (1994). In onLy eight of the ninety-three Cultural Revolution, quietly acquiesced to the shift in countries covered in the Nehru-Dhareshwar data set do GDP growth rates exceed capitaL stock growth rates. economic power away from the center. 6. World Bank (1994). Fifth, China had a skilled and disciplined labor force. 7. See Yusuf (1994). Despite disruptions to education during the Cultural 8. See Chenery and Syrquin (1975) for a cLassic reference on the internationaL experience. Revolution, literacy was high by the standards of most 9. In some areas the predominant outflow of young maLe migrants developing countries. The average worker had 3.6 years has contributed to a 'feminization" of agricuLture, Lowering the weL- of primary education, almost half a year more than the fare of women who now have to toiL on the farm and continue with their househoLd responsibiLities (especiaLLy chiLd rearing). developing country average of 3.2 years.3' A relatively 10. Recent officiaL statistics on the size of the nonstate, noncoL- large portion also had a secondary education. The share Lective sector may be somewhat misLeading because some corporatized of technicians and engineers in the industrial labor force state enterprises may be cLassified in this category. 11. Figure 1.8 is constructed as follows: Data on provinciaL per was higher than in many newly industrializing economies capita GDP and the nonagricuLturaL share of GDP underLying the top of Southeast Asia. figure are drawn from provinciaL statistical yearbooks. The other two Finally, the Chinese diaspora extended to virtually all figures use data on urban and ruraL incomes from China's househoLd survey, adjusted to correct for varous deficiencies as discussed in corners of the world. Chinese minorities in several World Bank (1997). First, urban incomes are scaled up by a time-vary- Southeast Asian countries had considerable economic ing factor averaging 1.5, reflecting the vaLue of in-kind incomes as power, and they figured prominently in the explosive estimated by the urban household survey team of the State Statistical growth of forei n direct investment in China. Over te , Bureau and an estimate that urban costs of Living are 15 percent higher growth of foreign direct ivestment in Cna. Over the than rural. Since in-kind incomes have an equaLizing effect on income past ten years there has been a wholesale movement of distribution (they account for a Larger share of the income of poor Understanding the Present 13 households), the urban TheiL index is scaLed down by a factor of 0.6. Cao, Y.Z., G. Fan, and WT Woo. 1995. "Chinese Economic Rural incomes are adjusted by extending the results of RavaLlion and Reforms: Past Successes and Future Challenges." Paper pre- Chen (1997) for four provinces to the entire country. Prior to 1990 sented at the meeting of the Asia Foundation Project Economies ruraL incomes are scaLed up by a factor rising from 1.06 to 1.14, reflect- in Transition, Ho Chi Minh City, Hanoi, Beijing, and Ulan Bator. ing the undervaLuation of income from grain produced by ruraL house- Chenery, H., and M. Syrquin. 1975. Patterns of Development, hoLds for personaL consumption. Since this adjustment aLso has an 1950-70. New York: Oxford University Press. equalizing effect, the ruraL TheiL index is scaLed down by a factor that China State Statistical Bureau. Various years. China Statistical falls from 0.86 to 0.69 in 1989. We assume that changes in the house- Yearbook. Beijing. hoLd survey since 1990 fuLLy correct for the probLems of ruraL grain Chow, G. 1993. "Capital Formation and Economic Growth in undervaLuation. The inequaLity measure is the TheiL index, which can China." Quarterly Journal of Economics 108(3): 809-42. be decomposed into rural-urban inequality, which captures the varia- Chow, G., and Y. Kwan. 1996. "Estimating Economic Effects of tion of nationaL average ruraL and urban per capita incomes around the Political Movements in China." Journal of Comparative the national mean; intraurban inequality, which captures the variation Economics 23(2): 192-208. of per capita incomes within urban areas; and intrarural inequality, Deininger, K., and L. Squire. 1996. "A New Data Set Measuring which captures the variation of per capita incomes within ruraL areas. Income Inequality." The World Bank Economic Review 12. WorLd Bank (1997). 10(3):S6S-91. 13. Quota prices for most agricultural products were increased by Lardy, N.L. 1992. Foreign Trade and Economic Reform in China. an average of 17.1 percent. Above-quota procurement commanded a New York: Cambridge University Press. 30-50 percent premium. The weighted average price increase was 22.1 Lau, L., Y. Qian, and G. Roland. 1996. "Pareto-Improving percent (Lin 1992). Reforms through Dual-Track Liberalization." Stanford 14. This discussion draws heaviLy on Lin (1992). Lin notes that University, Department of Economics, Stanford, Calif. nearLy half of China's agricuLturaL communes had been disbanded by Lin, J.Y. 1992. "Rural Reforms and Agricultural Growth in the time the practice was authorized by the centraL government. China." American Economic Review 82(1):34-51. 15. Lin (1992). Maddison, A. 1995. Monitoring the World Economy. Paris: 16. See Peng (1994) for a discussion of the reLiance of township Organisation for Economic Co-operation and Development. enterprises on Local ruraL sources of finance. Naughton, B. 1995. Growing Out of the Plan: Chinese Economic 17. China Statistical Yearbook, various issues. Reform, 1978-93. New York: Cambridge University Press. 18. WaLL, Boke, and Yin (1993, table 12.1, p. 102). Nehru, V., and A. Dhareshwar. 1994. "TFP Growth in Industrial 19. Lardy (1992). and Developing Countries." Policy Research Working Paper 20. Wall, Boke, and Yin (1993, p. 5). 1313. World Bank, International Economics Department, 21. Wei (1993). Washington, D.C. 22. Yusuf (1994). Nehru, V., E. Swanson, and A. Dubey. 199S. "A New Database 23. Naughton (1995, p. 8). on Human Capital Stock: Sources, Methodology and Results." 24. Lau, Qian, and RoLand (1996). Journal of Development Economics 46(3):379-401. 25. Xu (1996). Peng, Y. 1994. "Capital Formation in Rural Enterprises." In C. 26. Chow and Kwan (1996). Findlay, A. Watson, and H. Wu, eds., Rural Enterprises in 27. The figure in box 1.4 plots the partiaL correLation between ini- China. New York: St. Martin's Press. tial per capita income and subsequent growth based on the foLLowing Qian, Y., and C. Xu. 1992. "Why China's Economic Reforms standard cross-country growth regression: Differ: The M-Form Hierarchy and Entry/Expansion of the g = .039 - .012Ln(Vy) + .012Ln(i/y) - .022(n + 8 + x) + .0081n(sec) Non-State Sector." The Economics of Transition 1(2):135-70. (.037) (.002) (.003) (.014) (.002) Ravallion, M., and S. Chen. 1997. "When Economic Reform Is where g is average annual per capita GDP growth between 1960 and Faster Than Statistical Reform: Measuring and Explaining the 1990, y° is per capita GDP in 1960 (1978 for China), i/y is the period Inequality in Rural China." World Bank, Policy Research average investment/GDP ratio, n is the popuLation growth rate, 8 + x Department, Washington, D.C. is the rate of depreciation plus productivity growth set equaL to 0.5, Summers, R., and A. Heston. 1991. "Penn World Tables (Mark and sec is the secondary school enroLLment rate in 1960. Numbers in 5): An Expanded Set of International Comparisons, parentheses are standard errors. The sample covers ninety-two coun- 1950-1988." QuarterlyJournal of Economics 106(2): 327-68. tries. China's growth is for 1978-94; initial income is for 1978. Wall, D., J. Boke, and X. Yin. 1993. China's Opening Door. 28. Naughton (1995, p. 42). Qian and Xu (1992) argue that the London: Royal Institute of International Affairs. Soviet Union incLuded 25 miLLion commodities in its economic pLans, Wei, S.J. 1993. "Open Door Policy and China's Rapid Growth: whiLe China incLuded about 1,200. Evidence from City Level Data." NBER Working Paper 4602. 29. Naughton (1995, p. 38). National Bureau of Economic Research, Cambridge, Mass. 30. WiLL and Wong (1991). Will, P., and R.B. Wong. 1991. Nourish the People: The State 31. Nehru, Swanson, and Dubey (1995). Civilian Granary System in China, 1650-1850. Ann Arbor: University of Michigan. Woo, W.T. 1995. "Chinese Economic Growth: Sources and References Prospects." University of California at Davis, Department of Economics. Cai, E 1996. "Long-term Urbanization and Key Urban Policy World Bank. 1991. World Development Report 1991: The Issues in China." Background paper prepared for this report, Challenges of Development. New York: Oxford University with financial support from the Canadian International Press. Development Agency. . 1994. "China: GNP Per Capita." Report 13580-CHA. 14 China 2020: Development Challenges in the New Century China and Mongolia Department, Washington, D.C. Flow Rights and Management: A Theoretical and Empirical . 1996. Poverty in China: What Do the Numbers Say? Analysis of the Chinese Industrial Reforms." World Bank, Washington, D.C. Washington, D.C. - 1997. Sharing Rising Incomes: Disparities in China. Yusuf, S. 1994. "China's Macroeconomic Performance and Washington, D.C. Management During Transition." Journal of Economic Xu, L.C. 1996. "The Productivity Effects of Decentralizing Cash Perspectives 8(2):71-92. Understanding the Present 15 Divining the Future he strength of the Chinese economy over the ~past ~two decades does not guarantee that China will continue to grow rapidly in the future. After all, for most countries past growth is a poor predictor of future performance.1 Even the Asian "tigers," whose growth has been spectacular for many years, show signs of fading as their economies mature. China has some real advantages, however. Its high sav- ings rate, relative stability, large domestic market, and record of reform bode well for future growth. Even so, the future will be challenging-probably increasingly so. Moreover, rapid economic growth is not the government's sole economic objective nor should it be. Growth must also be sustainable and its benefits must reach the poor and the vulnerable. And growth should protect the envi- ronment for future generations and ensure women their equal place in society. 17 These concerns are reflected in China's Ninth Five- completing the transition. To accomplish this task Year Plan and its Fifteen-Year Perspective Plan (box China needs an effective government, not a large one. 2.1). The two plans focus not just on the future pace of An effective government will create more room for growth but also on the entire direction of development. markets to operate and distinguish between the roles of They differ from previous plans because they focus on the market and those of the state. Indeed, a recurrent strategies, policies, and programs and place less empha- theme in the Ninth Five-Year Plan is the importance of sis on physical and quantifiable targets. Together, the firmly differentiating the basic role of the market (allo- plans lay out the government's approach to achieving cating resources) from that of the state (providing rapid and sustained growth well into the twenty-first macroeconomic control and a policy framework in line century. with China's strategic needs and objectives).2 These twin concerns-the pace and sustainability of Pressing ahead with reforms to complete the transi- China's growth-are also the themes of this chapter and tion to market is an immediate priority for China. This indeed this entire book. This chapter also examines book therefore deals with it first (in chapter 3), laying out China's growth potential over the long term using a the issues and long-term agenda for developing the fiscal, simple model of growth and structural change. It does financial, enterprise, and legal systems that will form the not try to predict China's future, but it does illustrate foundations for a strong market-based economy. what China could achieve if it stays the course. * A deteriorating environment. Achieving ambitious growth targets would be a hollow victory if it were not Growth challenges accompanied by improvements in people's physical environment. Along with the rapid economic growth, The various forces playing on China's growth rate are urbanization, and industrialization of the past two summarized in figure 2.1. The strengths and advantages decades has come a dramatic increase in air and water have already been analyzed; but they are opposed by a pollution. In the future, needs for water and energy will formidable array of risks and challenges. have to be balanced by concerns for the environment. * Incomplete foundations. China is midstream in its Rapid urbanization should be accompanied by pro- transition to a market economy. The government's role grams that ensure clean air and water for city dwellers. in laying the institutional, social, physical, and legal Achieving these objectives will require a complex mix foundations for market development will be crucial in of regulations and market-based incentives. Chin's Nnth ive-ear lan 19962000 andFiften-Yar 'piIlr" idusties:machnery eletroncs,metrohemials,auto onlyif Cina ompltes wo fndamntaltrasitins: rom tra ecoomicgrowh ad tagete pubic ependture.urtals ditinal plnne ecnomyto soialst arkt ecnom an inend tomakepriaryheath areandcineyeas no,copud growth (driven by improvements in efficiency). In addition to securityirobeneents. ment is determined to contain inflationary pressures through ments in rural infrastructure,and a0 rag of7 other t measurs budgetary ahind 202e0a: y restrnt, suppoented by fiscal and ftnane New Penturotectiyg the environment. Recognizing th edonmen 18 China 2020: Development Challenges in the New Century FIGURE 2.1 : China's opposing forces High "Advantages" of Literate Relative Administrative Chinese savings backwardness Labor force stability strength diaspora Strengths and advantages Growth Growth Risks and chaltenges I I I I I I Incomplete Deterorating Income Rising Food Trade transition environment insecurity inequality securty frictions Source: World Bank staff. * Income insecurity. China has made great strides in for agricultural production and distribution, closer introducing market forces into the economy. But the integration with world food markets, more rural infra- bracing effects of competition are being accompanied structure, greater efficiency in water use, and better by increased risks, especially to employment and flood control. income. As China grows richer, it will require policies * Trade frictions. Although rapid export growth and institutions that ensure a caring yet competitive sys- worked for many countries in the second half of the tem to help the vulnerable manage these risks and to twentieth century, it may work less well for China in the promote human potential in all dimensions. twenty-first century. China is an enormous country with This will require the creation of entirely new social a potential capacity for more exports. Increasing structures for the twenty-first century. Changing exports, however, will require adjustments by both trade employment patterns and foreseeable shifts in the age competitors and partners. Their governments may be structure of China's population call for a fresh look at more sensitive to trade issues today than they were in the policies and institutions affecting labor markets, the 1950s. But the choice for China remains clear. Greater welfare of the poor, the financial security of the elderly, openness and transparency in its trade regime could and equal access for all (especially girls and women) to enhance domestic production and allocative efficiency, jobs, health care, and education. facilitate the acquisition of new technology, and increase * Foodgrain security. China's concerns about food the flow of manufacturing and marketing information. security are as perennial as the harvest. Policymakers, And greater integration of China with the world econ- facing a growing and prospering population and a dif- omy would yield significant benefits for its major trad- ficult international environment, are acutely aware of ing partners in East Asia, Europe, and the Americas. these concerns. Indeed, food security tops the list of five priorities for "promoting sustained, rapid, and sound Growth possibilities development of the national economy" in the Ninth Five-Year Plan and the Fifteen-Year Perspective Plan.3 China's Five-Year Plan for 1996-2000 targets GDP Some of China's food security concerns are the inevi- growth of 8 percent a year. In 1996, the first year of the table consequences of geography. To be agriculturally plan, GDP growth reached 9.5 percent. To achieve the self-sufficient, China must find a way to feed 20 percent plan target by 2000, China will need to grow by an of the world's population using just 7 percent of the average of 7.6 percent a year over the next four years. world's arable land.4 The government is exploring ways By the standards of recent years, such growth does not to achieve this objective-including stronger incentives seem unduly ambitious. Divining the Future 19 But what about the longer term? Could China keep of growth and structural change to examine China's growing so rapidly, not just for the next four years but growth potential over the next quarter-century.5 for the next twenty-four? In particular, will high savings, Even modest variations in savings and productivity structural change, and policy reform continue to be as growth have powerful effects, resulting in growth rates powerful a combination as they have been since 1978? ranging from 4 percent to 8 percent a year (table 2.1). Projecting long-term growth is not for the fainthearted. The cumulative effect of that gap amounts to more than There is always the possibility of nonlinear change, as key a twofold difference in per capita incomes by 2020. variables start to behave quite differently. For China non- What do these alternative scenarios imply for policy? linearities may be especially pronounced, given the rapid The links between the fundamental determinants of changes in the country's structure, the scale of its econ- growth and the policies of government are many and omy, and the underlying complexity of its growth dynam- complex. After all, the bulk of China's savings is the ics. The World Bank has often been accused of result of decisions by households and enterprises, not overestimating the growth potential of its clients. In by the government. Similarly, many efficiency gains China, however, past Bank projections have tended to underpinning growth will be generated by individuals underpredict growth, often substantially (figure 2.2). In and firms pursuing their self-interest in competitive fact, China's GDP in 1995 was nearly double that pre- markets, rather than directly by actions of the state. dicted by the World Bank in 1985, the last time the Bank Even so, the government's actions are not irrelevant to published a long-term study on the Chinese economy. long-term growth. The twin thrusts of the government's Nevertheless, projecting the future can be a useful exer- program-deepened reforms and continued stability- cise, if only to highlight the constraints that a particular will profoundly shape the environment in which house- path of savings and productivity growth place on long- holds and enterprises operate (figure 2.3). Successful term economic growth. The government is well aware of reforms will increase efficiency gains by creating incen- these constraints. Its Ninth Five-Year Plan emphasizes the tives for work and innovation and by establishing the imperative of more intensive growth, recognizing the fun- essential foundations of the rule of law and secure prop- damental importance of further productivity and effi- erty rights. A stable macroeconomic environment and ciency gains for sustained, rapid development. financial system will enable savings to be channeled to Accordingly, this section uses a simple supply-side model their most productive uses. Finally, growth will be accompanied by further dramatic changes, especially in FIGURE 2.2 the structure of the labor force, that the government has TraiLing in the wind: World Bank projections a responsibility to manage in an orderly way. All this of China's GDP compared with actual points to the importance of the government pressing outcomes ahead with efforts to deepen reforms and maintain sta- GDP level (in logs) bility in a large and rapidly changing economy. 5,000 To examine the prospects for growth more closely, consider a scenario in which China's savings rate 4,000 1992 declines from around 40 percent to a still-robust 35 per- 3,000 ActuaL GDP, 9 TABLE 2.1 1985 GDP growth, 1995-2020: ALternative scenarios (annuaL percentage growth) 2,000 ^ Total factor productivity growth Savings/GDP ratio 1 1.5 2 1,000 .983 20 4.2 4.9 5.5 25 48 55 . 30 ________________________ 35 4M 6. 7. 1980 1984 1988 1992 1996 2000 2004 40 6.4 7.2 7.9 Source: World Bank staff estimates. Note: Shaded area indicates likely growth rates. Source: World Bank staff estimates. 20 China 2020: Development Challenges in the New Century FIGURE:2.3: ff:=0;X- 3: fff :; XV - - - f - X :X2-0 X 2020 (table 2.2). Three forces are expected to con- tribute to this decline. The first is demographics. From policies to growth Projections indicate that by 2020 the labor force will Efficiency gainsA \ essentially have stopped growing as a result of slower (TFP) Growth population growth and a changing age structure. Second, just 10 percent of China's expected capital stock in 2020 is in place today. As capital accumulates, 8% each additional unit can be expected to contribute less Reforms%6% to output-the economic law of diminishing returns. Households Third, as the economy matures, structural change will and / . provide a smaller boost to growth because resources in terprises Savings the economy will be more efficiently allocated. In par- Stability ticular, China will reap fewer benefits from transferring surplus labor out of agriculture and from one-shot effi- ciency gains. And as China narrows the technology gap with other economies, its impetus for technical progress will ease. Source: World Bank staff. From a sectoral perspective the decline in projected GDP growth is partly a consequence of lower industrial cent over the next ten years, while productivity growth growth (see table 2.2). Here, much will depend on the fades slightly, to a more modest 1.5 percent a year. In pace of reforms. If the government falters in its com- this scenario GDP growth would be 8.4 percent a year mitment to a dynamic nonstate sector (which provided between 1996 and 2000 (comfortably in line with the the foundation for recent growth) and slows reform of Ninth Five-Year Plan target) and would average 6.6 state enterprises, the drop in industrial growth may be percent over the twenty-five years until 2020. By 2020 even steeper. Even so, industry will continue to account per capita incomes in China would be approaching for a much larger share of GDP than is the norm for those of Portugal today but would still be less than half low- and middle-income countries-the legacy of a those in the United States (figure 2.4).6 planning system that emphasized rapid industrial As the numbers suggest, the pace of GDP growth will growth above all else (figure 2.5). slow over time, from 9-10 percent today to 5 percent in Agriculture is expected to grow at about the same rate as it has in the past. But even keeping up this pace i;$FIGU:RE 2.4 - ;0 h ;-0 f ;t = - tt-000X will be a major challenge (see chapter 5). The agricul- tural commitments in the Ninth Five-Year Plan could A long way to go: China's per capita GDP boost the sector's growth in the short term, but some in 2020 slowdown is likely thereafter 1994 U.S. dollars Services are expected to be by far the most dynamic 0 10,000 20,000 30,000 sector of the economy. Despite strong growth in the China today * TABLE 2.2 China 2020 SectoraL underpinnings to GDP growth (percent) ActuaL Projected U.S. today 1985-95 1996-2000 2001-10 2011-20 1995-2020 GDP 9.8 8.4 6.9 5.5 6.6 Portugal today Agriculture 4.2 3.1 4.2 3.7 3.8 Industry 13.1 9.2 6.6 5.4 6.6 Note: GDP caLcuLated at purchasing power parity. Services 9.8 9.7 8.1 6.0 7.6 Source: World Bank staff estimates. Source: World Bank staff estimates; China Statistical Yearbook 1996. Divining the Future 21 In human terms this transformation of the labor force Growth will be accompanied by changes in is staggering: for agriculture alone it will fundamentally the structure of GDP and employment change the lives of 200 million people. Managing this Percent transition, and the inevitable pressures it will place on GDP urban infrastructure, labor market institutions, and 100 social programs, is one of the biggest challenges the gov- ernment faces. But the transformation should be viewed 80 as an opportunity, not a threat. China's surplus labor is 60 one of its greatest resources. Efficiently handled, it will provide a powerful impetus to growth. 40 Industry = These scenarios paint a complex picture of China's future. Rapid growth over the next quarter-century is 20 clearly possible. But achieving needed savings rates and Aoricu_ture productivity growth will require maintaining the 0 China China TypicaL lower- TypicaL upper- momentum of reforms and skilled macroeconomic and 1995 2020 middle-income middLe-income country today country today sectoral management. These themes of supportive Employment reform and successful management of change are 100 < p < X .woven throughout this book. 80 ~~~~~~~~Notes 60 1. Easterly and others (1993). 2. Li (1996, p. 10 in the EngLish translation). 40 3. Li (1996, p. 10). The remaining priorities are adjustments in industriaL structure, deveLopment of regional economies, macroeco- 20 Agriculture nomic stability, and rising living standards. 4. China Statistical Yearbook 1996. ArabLe Land figures refer to total 0 cropLand in 1995, which was about 95 miLLion hectares, or 7 percent China China TypicaL Lower- TypicaL upper- of the worLd's 1,450 milLion hectares. 1995 2020 middle-income middle-income 5. See annex 2 for a complete description of the model. country today country today 6. This comparison is based on the standard practice of appLying Source: World Bank staff estimates. Source:_Wor_d_Bank_staff_estimates. reaL (projected) LocaL currency growth rates to current WorLd Bank esti- mates of per capita GDP at purchasing power parity (PPP). These pro- past decade, the share of services in China's GDP is still jections are subject to the same substantial margins of error as are estimates of China's current level of per capia GDP at PPP. well below that of a typical low-income (let alone mid- 7. Hu (1996). dle-income) country. This share could change dramati- cally over the next twenty-five years as China acquires References the characteristics of middle-income market economies. A key ingredient in this growth scenario is the trans- China State Statistical Bureau. Various years. China Statistical formation in the composition of the labor force. Yearbook. Beijing. Easterly, W., M. Kremer, L. Pritchett, and L. Summers. 1993. "Good Policy or Good Luck? Country Growth Performance and than half of total employment today to one-quarter in Temporary Shocks." Journal ofMonetary Economics 32:459-83. 2020, a share comparable to that in upper-middle- Hu, A. 1996. "Employment-Number 2 Task of China's income economies. The corresponding increase in the Development." Background paper prepared for this report, with financial support from the Canadian International nonagricultural labor force will be felt in services, Development Agency. whose share in total employment will rise by 18 per- Li, Peng. 1996. "Report on the Outline of the Ninth Five-Year centage points, as well as in industry, where the contin- Plan for National Economic and Social Development and the Long-Range Objectives to the Year 2010." Speech delivered at ued shift from state to nonstate enterprises will increase the Fourth Session of the Eighth National People's Congress, the labor intensity of production.7 March 5, Beijing. 22 China 2020: Development Challenges in the New Century Laying the Foundations 0 he past eighteen years in China have under- I > ; Xscored the importance of markets for growth and prosperity. But the country's transition from a command to a market economy is incomplete. Many parts of the Chinese economy still have an undesirable blurring of governmental and commercial functions, a holdover from the days of central planning. These poorly defined roles create conflicts of interest within government and ulti- mately could harm the economy. This chapter argues that further separating the roles of government and markets and clarifying rights and responsibilities will help to lay the foundations for sustained rapid growth and improve the quality of people's lives. Good markets start with good government. This is true because effective governments serve markets rather than make markets serve government. The primary instrument of an effective government is its budget. Strong govern- ment finances anchor macroeconomic stability and fund a 23 range of essential services that markets may fail to Budgetary difficulties have generated inflationary pres- deliver. In China strong government finances are also sures and imposed additional strains on the financial needed in the short term to underwrite costly reforms, sector. This situation cannot continue forever. and in the medium term to build the social, physical, Eventually, weak government finances will debilitate and institutional infrastructure for continued rapid the economy. growth. In the near term achieving these objectives will These fiscal pressures raise four long-term issues. require more government revenue. Over the longer First is the need to set priorities to ensure the best use of term it will require building fiscal institutions that bal- scarce government resources. Second is the imperative ance planners' priorities with people's preferences. of improving tax collection, including a search for new Next, the government must leave more room for types of taxation. Third is the urgency of establishing an markets to operate. Despite nearly two decades of effective mechanism of intergovernmental grants to reform, state and market remain intertwined. For redistribute resources from richer to poorer provinces. example, state enterprises still provide a wide range of Finally, there is a need to develop institutions that will social services to workers and their families. Similarly, make budget formulation more transparent to the pub- the four largest state commercial banks direct their lic and responsive to its needs. lending in support of the government's policy objec- tives. Transforming state enterprises and commercial Reshaping government expenditures banks into vibrant, market-oriented institutions, and so to nurture emerging private economic activity, is prob- Between 1978 and 1995 budgetary revenues tumbled ably the biggest challenge the government faces in the from 35 percent of GDP to 11 percent. Of this 24 per- near term. centage point drop, about 15 percentage points were But a diminishing role for state enterprises and state directly attributable to lower tax contributions from commercial banks does not mean that the government industrial state enterprises (figure 3.1),1 as price reforms should abdicate all responsibility for the development and more intense competition lowered their profits. of markets. On the contrary, it implies a changing role This decline in revenue, combined with the govern- for government as it reorients itself toward key services, ment's desire to keep the budget deficit modest, has sound institutions, and credible policies in support of brought a similar decline in government expenditures markets. These include such fundamentals as establish- as a share of GDP. Today, government expenditures are ing the rule of law, providing the institutional frame- about 12 percent of GDP, well below the developing work that guarantees a stable economic environment, country average of 32 percent.2 Investment has suffered and intervening in areas where markets fail to function the most, falling from 16 percent of GDP in 1978 to less adequately. than 3 percent in 1995 (see figure 3.1). In all three areas-restoring and reshaping govern- At first glance these trends seem consistent with ment finances, making room for markets, and support- China's move to a market economy. But such impres- ing the development of markets-the government is sions are deceptive. The reduction in direct financing of now midway through reforms. The close links between investment has been partly offset by increases in extra- the three make progress slow and often laborious. budgetary spending and government-directed bank Nonetheless, the overwhelming impression is one of credits. Together these off-budget and government- relentless forward movement. directed resources are more than five times as large as the investment financed through the budget (figure 3.2). Restoring and reshaping government Some extrabudgetary spending is financed from finances quasi-tax revenues raised through formal levies, such as those on electricity, vehicles, and railroad freight.3 Some Government finances have been weakening for several is funded by extraordinary levies imposed, sometimes years. The shortage of budgetary revenues has already arbitrarily, by provincial authorities. The rest represent hampered spending on essential services with long- the profits of state-owned enterprises controlled by term benefits for growth and the quality of life. local governments. There are few mechanisms to mon- 24 China 2020: Development Challenges in the New Century FIGURE 3.1 FIGURE 3.2 Reshaping government expenditures The budget finances a small share of government-controlted investment Budgetary revenues have dwindled ... Central County Foreign Percentage of GDP 50 40/0 4Ct r Bank Loans 40 F Revenue from industrial state enterprises Extra- D 390/ 35 ~~~~~Other budgetary 70t10/it M Revenues from goods taxes fiscaL 30 J resources 20 - =d ==. - < Sore Chn Pr- ~es O0 th/eor Budget 10 1i i1iiii 3 .eSores Chimats Investment and Const uct an Yearbook 1995; World Bank staff 5 1.978 1980 1982 1984 1986 1988 1990 1992 1994 will cost more n the future.5 Nor does it include possi- ble additional expenditures in support of future . .. and expenditures have followed economic reforms-spending on such items as unem- Percentage of GDP ployment benefits, redundancy payments, monetized 40 Subsidies housing benefits, or the costs of banking reform. 35 <~~~~2 Mitrtary This pattern of public expenditures-too much gov- 30 -;Q7| W Current einment-controlled investment in state enterprises and 25 = S |||1 1|l too little government support for high-priority areas- 20 . . , Ex r h m eis inconsistent with China's move to a market economy 15 M Subsiand inimi cal t o sustained, rapid growth. Altering this 10 pattern is essential. Many options are possible, but the 5 | | | | | | | | || | || | |basic features would be the same: devoting additional 01978 resources to social programs and the environment ade- 1980~ 19218 .9618819 9219 quately funding key reforms, and scaling back govern- Source: World Bsak staff estimates using China Statistical Yearbook, various issues. ment control of investments. itor these funds or the effectiveness with which they are BOX 3.1 One undesirable result is that the system discrimi- Unhealtthy ternmendsup i fo t la - nates against projects that may be socially and econom- Budgety -expenditures On heath (oexcluding outlays for the ically important but financially unprofitable. Thus government o nsurance programcovering cvil servants) ifell spending on health, education, poverty alleviation, pen- from is pesrcent of GDP i p the i980sto 0.5 percent in 1993.h sions, infrastructure and the environment has not kept But the actual:declne was much greater. In the-years before- pace with needs (box 3.1). It is neither a healthy nor a reform,runralncogectives were largely a responsgble forb ealth exopendituresand seviectes i=n rural areas; mostYof these expen- hopeful sign when schools and hospitals are forced to res eoutsidethe nbudt.hebolitonofruralcol- scramble for extrabudgetary funds to pay their bills. Iectives, rurat communites lost the ability to:-finance Local Such conditions inevitably undermine the quality and governmIent functions, especially basic health and education. quantity of public goods and services, with undesirable Itn 1y81, whm drural collecives stil existed, 71 percent of the implications for rapid, high-quality growth. a eChinese population had access to government health faciities. The overall expenditure shortfall in these high-prior- = vmBy 1993 thisfigurehadshrunk to= 2 percent, mostlY in urban ity areas has been estimated at 4.6 percent of GDP ares .a percent of G in th 0s t 0.5 p r 1 (table 3.1) .4 This is a conservative figure, however, : Source: WorudrBank 1e997b.ti f w ; $: resp :i 0 f heatth because it does not include therpossibilitythat services Laying the aoundations 25 TABLE 3.1 consistent with China's stage of development and Proposed additional expenditures and financing, potential for growth. 1994 Percentage of Restoring revenues Expenditure GDP Acpenditualrbudgetary expenditure1 After several years of decline, tax revenues as a share of Actuat budgetary expenditures 14.1 Extrabudgetary expenditures 3.8 GDP stabilized in 1996, following wide-ranging tax Proposed additionaL expenditures 4.6 reforms two years earlier. Now the authorities face the Education 0.9 Health 1.4 even harder task of reversing the earlier decline. Poverty aLLeviation 0.2 Achieving this goal will require better tax administra- Environment 0.2 tion, a broad tax base, and new taxes that combine Infrastructure 1.0 SociaL insurance 1.0 social, economic, and revenue objectives. In the short Total proposed expenditures 22.5 run improving compliance would likely do the most to Financed by boost revenues; phasing out the plethora of tax exemp- Budgetary revenues 12.4 tions for domestic and foreign firms would also help. In Extrabudgetary revenues 4.1 Additionol revenue required 6.0 the long run the government could consider further tax Source: World Bank 1996b. policy changes in support of reforms in environmental and social policy and could do a better job of taxing Reducing its role in capital spending will allow the nonstate enterprises. government to focus on a narrower range of interven- Compliance can be improved in three areas in par- tions that would contribute most to economic develop- ticular. First, China has the capacity to raise the com- ment. Outside this narrower range, capital spending pliance rate for the value added tax (VAT), which would be financed through the internal funds of enter- accounts for almost half of government revenues, from prises, the banking system, or capital markets, based on roughly 70 percent today6 to 85 percent by 2000 and to standard commercial criteria. This approach would 90-95 percent by 2010, putting it in the same league as help banks and enterprises commercialize faster, the top tax performers among developing countries. strengthen their financial position, and improve their Second, by 2000 China could double revenues (as a competitiveness in domestic and international markets. share of GDP) from personal income taxes by keeping Over the next several years, however, government- the exemption level constant in nominal terms. Third, directed investments will continue to exceed budgetary the government could merge domestic and foreign resources. Like reforms in other sectors, adjustments corporate income tax rates, a change now under con- may have to be made gradually. As the government sideration. Special rates for foreign enterprises are no redefines its role in the economy, arrangements will be longer needed to attract foreign investors and should be needed to smooth the transition. eliminated. China's policy banks have been created for precisely In the medium term the government could combine this purpose. They are essentially fiscal institutions cre- its reform and revenue objectives. For example, a ated to free the banking system from the yoke of gov- pollution tax would discourage the use of coal and ernment-directed investments. In a year or two the petroleum and encourage the development of pollution- government expects all government-directed invest- reducing technologies. Similarly, some form of social ments outside the budget to be financed through the security contributions will be needed to finance the policy banks. basic pension pillar for (urban) workers. International But this should be just an interim goal. A longer-term experience suggests that payroll contributions for a gen- goal could be to fold all government investments into erally accepted purpose such as pensions tend to meet the budget. This could be achieved by 2010, certainly little taxpayer resistance. by 2020. It will take debate and discipline to restrict Over the long term doing a better job of taxing non- government investments to high-priority areas. It will state enterprises is an extremely high priority. They are, also mean boosting government revenues to levels more after all, the fastest growing segment of the economy. 26 China 2020: Development Challenges in the New Century But many of them keep poor accounts (if they keep ously welcome transfers from the center. But richer them at all), so it will take some innovative approaches ones would also benefit. Transfers would ease pres- to tax them fairly. Other longer-term measures to con- sures for migration from poorer to richer provinces sider include taxpayer self-assessment, efficient audit and strengthen the infrastructure of poorer provinces, procedures, computerized information systems, reorga- which would help open markets in the interior and nization of tax administration, improved incentives for integrate it with the economic mainstream. The same tax collection, close cooperation of national and local benefits would flow from transferring resources to the tax services, improvement in presumptive taxation poorest counties, much as happened with the govern- methods, and implementation of a streamlined system ment's 8-7 Plan, aimed at eliminating poverty by of stiff but fair monetary fines for tax offenses. 2000 (see chapter 4). Together these measures could raise incremental rev- enues equivalent to 6 percent of GDP by 2000 and an Building transparent, responsive fiscal institutions additional 4 percent of GDP by 2020 (table 3.2). These measures would bring total government revenues- The demands and priorities of government finances inclusive of extrabudgetary revenues-to about 24 per- change over time, so it is important that fiscal institu- cent of GDP. But achieving even this relatively modest tions be able to react quickly to new situations. That ratio will require a monumental effort by the tax kind of agility requires institutions that are transparent authorities. and responsive. International experience shows that transparency in Expanding intergovernmentaL transfers budgetary procedures affects overall fiscal perfor- mance. China's system for setting aggregate spending is There will always be a revenue gap between China's far from transparent. As noted earlier, a significant por- poorer and richer provinces. Without an effective sys- tion of expenditures is financed from extrabudgetary tem for transferring revenues, underlying inequalities sources and through the banking system.7 The one-year will be reinforced by unequal spending on health, edu- planning horizon for public investments encourages cation, environmental protection, and other public services. FIGURE 3.3 The current system permits few fiscal transfers fromichetooorerprovncesor cou s. EPer capita provincial government expenditures from richer to poorer provinces or counties. Each vary with provincial income region is required to be more or less fiscally indepen- Provincial public expenditure per capita dent, tailoring its public expenditures to the revenues (1994 yuan) it can collect. As a result per capita expenditures vary 2,000 widely across provinces, in line with per capita incomes (figure 3.3). Poorer provinces would obvi- 1500 TABLE 3.2 Estimated increase in revenues by 2000 1,000 from recommended tax measures AdditionaL expected 500 revenue in 2000 Measure (percentage of GDP) . V VaLue added tax 1.1 o Personal income tax 0.8 0 5,000 10,000 15,000 20,000 Corporate income tax 1.2 GDP per capita (1994 yuan) PoLLution Levies 1.0 Social security contribution 0.9 Note: Data on budgetary and extrabudgetary provincial government Improved tax administration 1.0 expenditures are drawn from various provincial yearbooks. Extra- budgetary expenditures are estimated as being equaL to nonstate TotaL 6.0 enterprise-related extrabudgetary revenues. Source: Zhang and Zou 1996; World Bank staff estimates. Source: WorLd Bank 1996b; WorLd Bank staff estimates. Laying the Foundations 27 overinvestment by state-owned units, and banks find it many new financial institutions in recent years, four hard to resist pressures to lend. As a result consolidated large state commercial banks still account for two- government deficits are much larger than the formal thirds of the assets of the entire financial sector. budget deficit.8 Between 1986 and 1994 the consoli- As industrial state enterprises have faced stiff domes- dated deficit may have averaged from 4.9 to 5.7 percent tic competition and liberalized market prices, their of GDP-more than twice the 2.2 percent deficit in the losses have mounted. The government has propped official budget.9 them up with subsidies and cheap credit, and the red ink The government recognizes these problems. It has of state enterprises has seeped into the portfolios of been reviewing all extrabudgetary expenditures and has banks. Sluggish state enterprises erode the credibility of already incorporated quasi-tax revenues from electric- China's reforms and frustrate the development of mar- ity, vehicles, and railroad freight into the 1997 budget.'0 kets in industry and finance. Furthermore, the state commercial banks should reduce There is little disagreement in China about the need and eventually eliminate the practice of financing gov- to reform state enterprises and the financial system. The ernment-directed investments. Another important step challenge is to introduce the reforms while maintaining would be for the government to plan its expenditures, rapid growth and economic stability. In the case of state especially investments, within a medium-term eco- enterprises the government is concerned about the con- nomic framework. To discourage overinvestment, sequences of reform for unemployment and social explicit rules could set spending limits and penalize peace. In the financial sector the concern is with pro- agencies that overspend. To make the process more tecting the integrity of financial institutions and pre- transparent, the government could publish figures com- serving depositor confidence while markets are given a paring planned spending limits with actual expendi- bigger role. tures. Another area requiring improvement is the alloca- Reforming enterprises tion of expenditures among priority uses. More should be done to build consensus on priorities and then to China has 305,000 state enterprises, 118,000 of which stick to them. The government already devotes consid- are industrial. Some are performing well, even in the erable attention to developing a strategic outlook global marketplace. But several indicators point to the through its five-year plans and fifteen-year perspective generally poor performance of state industrial enter- plans. But the links between these plans and annual prises relative to nonstate firms. State firms have lagged expenditure allocations are blurred. in output, employment, and productivity growth. Their To increase clarity, all government spending (includ- return on assets is estimated at just 6.0 percent, com- ing extrabudgetary items) should be incorporated in the pared with 8.4 percent in collectives and 9.9 percent in budget, together with information on project details joint ventures. This share of loss-makers has grown and tradeoffs between projects. It would also be useful from 26 percent of the total in 1992 to 50 percent in to set out the rules for project selection, such as finan- 1996; as a group these weak performers reported oper- cial, economic, and social rates of return. Exposing gov- ating losses in 1996 equivalent to 1 percent of GDP.'2 ernment plans to wider public discussion, culminating As a result the role of state enterprises in many indus- in a debate in the National People's Congress, would tries has dwindled to the point where state ownership in help strike a balance between planners' priorities and China today resembles that in France in the 1980s people's preferences. (table 3.3). The agenda for reforming state enterprises is long Making room for markets and difficult. It is still hard to obtain reliable financial information on their performance. They do not have The state still plays a big role in China's economy. State adequate market-based autonomy and risk-reward enterprises account for one-third of industrial output, incentives. The erosion of government authority over two-thirds of urban employment, and more than half of many enterprise decisions has provided opportunities investment in fixed assets." And despite the entry of for asset stripping and opportunistic behavior by man- 28 China 2020: Development Challenges in the New Century agers, workers, and sometimes even government offi- Under the right conditions such insider-dominated cials. Although there have been some recent bankrupt- firms could still be efficient. But as other transition cies, government (especially local government) is economies have found, such firms also harbor many reluctant to shut down enterprises that have little hope risks-asset stripping, poor investment decisions, and of financial viability. Bankruptcy procedures are time- decapitalization through excessive increases in wages consuming and costly, and the government does not and other private benefits (box 3.2). Enterprise assets want to exacerbate urban unemployment. could gradually be siphoned into private pockets, leav- But progress has been slow. These are, after all, com- ing the government to assume the liabilities. plicated reforms. The most crucial is the transfer of pen- Asset stripping and excessive wage compensation are sion, health, and education obligations from state widespread in Chinese state enterprises. A 1994 survey enterprises to government bodies. True, some munici- of 124,000 state enterprises found that asset losses and palities are pooling pension obligations across firms and unaccountable expenses accounted for 11.6 percent of earmarking payroll taxes for pension, unemployment, the assets of the firms sampled.'3 One estimate puts the and health benefits. Some local authorities are taking annual loss of state assets at 30-100 billion yuan, or over schools and hospitals previously run by enter- 2-9 percent of annual capital investment by state- prises. And some state enterprises are reducing housing owned units.14 Half of the new limited liability compa- subsidies by raising rents (and wages, to compensate). nies established in Sichuan and Shanghai in the past few But these examples are the exception rather than the years are in the financial sector, which suggests the rule. And they have not fundamentally affected most widespread creation of "shell" companies to drain enterprises. assets. The simple truth is that the authorities have neither This situation presents a dilemma for the Chinese the administrative capacity nor the appropriate infor- authorities. Managers need autonomy to improve effi- mation to effectively oversee the sprawling state enter- ciency, but the government has neither the information prise empire. Absent effective oversight by their nor the administrative capability to ensure that man- "owners," many state enterprises are controlled com- agers are pursuing that objective. So rather than pletely by their managers. Even in corporatized enter- reforming all state enterprises at once, the central prises the same people often serve as senior executives authorities are focusing on 1,000 large state firms and of the firm and members of the board of directors. on plans to invigorate them and make them the core of modern enterprise. About 880 of the firms are in the TABLE 3.3 Sectoral composition of pubLic ownership, China BOX 3.2 and France $-f-= -- N=- =-X;X--; t'<=5=4> (percent) The privatization o asets and tne socializa- (tion of costs: Entqrp#S_e reforms in utgaia China France Industry group 1994' 1986 After the faltl of the eln- Wall, a coalition government in Resource extraction 71 32 S XBugarnr c sweeping reforms. Although swift pDnvati- Utilities 65 86 zation was part othe pr m hange indministo in Scale intensive 1991 blocked this movefofurye urng this the MetaLLurgy 59 67 :0XBulgarian gtovernment ost much of its capaity to monitor ChemicaLs 49 31 state enterprises, including the Largest. Managers diverted - Transport machinery 51 46 assets and cash flow to theselves, -leaving the enteprises Contestablec with the liabilities. State etrpse tosses mounted, reaching Food and textiles 43 1 12 percentof Pin 199-. 1he losses w ered by-bank ELectronics 28 1t0as, leaing evenually tea bankn crisis_ ii 1995. By then Other 22 10 banks' fnonperforming assets h-ad reachedan astonishing 80 A[L industry 40 29 percentofa l;oans. a. State ownership in gross output. b. Public enterprise share of saLes. Source; World Bank 1997a. c. Industries in which entry is relatively costLess. Source: China Statistical Yearbook 1995; Blanc and Brule 1993. Laying the Foundations 29 industrial sector, accounting for two-thirds of the assets ernment should consider diversifying ownership so of industrial state enterprises and the majority of their that firm-level changes are based on purely commer- sales, tax receipts, and profits. cial criteria and that risks are spread across many A key element necessary for the invigoration of these shareholders. Since change is inevitable, delays will 1,000 enterprises is an improvement in their gover- only add to costs, force defensive adjustments under nance, especially in two areas: market pressures, and contribute to the bad debts of * Clarity on rights to assets and assignment of liabili- banks. ties among owners (the government), managers, and If the government will be stretched in managing the creditors. This adjustment will require a clear separa- priority 1,000 state enterprises, what of the remaining tion between firms and the government, legally and 304,000? It has stated its intention to loosen controls operationally. over them, implicitly granting them the freedom to * Organizational structures that provide a reasonable organize leases, mergers, sales, and (if all else fails) liq- balance of interests among owners, creditors, and uidations. But it could go further, withdrawing com- managers. pletely from small and medium-size firms. It has already Until passage of the State-Owned Enterprise Law in pulled back a long way: small and medium-size state 1988, distinguishing the rights and obligations of the enterprises contributed only 6 percent of industrial out- government (as owner) from those of the firm, firms put in 1994, down from 36 percent in 1978. In many belonged to the government and were even part of gov- industries state enterprises contribute less than a fifth of emnment departments; their losses were covered gross output (figure 3.4). through budgetary allocations or directed bank loans. Diversifying ownership would not require the gov- The government has begun separating some commer- ernment to sell its entire ownership stake at once. cial activities from government bureaus, though much Initially, it could dilute its holdings and become a remains to be done. In particular, inefficiencies must no minority shareholder, leaving management to the new longer be financed explicitly or implicitly through the nonstate owners. For the government this would be a banking or budgetary systems. win-win solution as it shifts from being the sole owner As for organizational structure, the government has of loss-making enterprises to being part owner of prof- chosen to adopt the modern corporate form, in which itable ones. To maintain credibility, this move should be the owner elects a board of directors to oversee the daily accompanied by a strict policy forbidding new state operation of the firm by professional managers.15 The enterprises in contestable sectors (box 3.3).16 government has also set up an elaborate state asset The government could also proceed faster. In two management system to monitor the performance of counties-Zhucheng in Shandong Province and Shunde state enterprises and ensure that their assets are pre- in Guangdong Province-most state enterprises have served. But progress has tended to lag behind principles. already been transferred to the nonstate sector. Progress The state asset management system is short on qualified elsewhere has varied, with coastal provinces ahead of staff, budget, and motivation. None of its institutions most others. Areas that lag will find that the costs of receives timely, accurate financial information. It is not state ownership grow, eventually corroding the founda- clear whether, even with time, the new arrangements tions and credibility of reforms. will ensure that enterprises are properly managed in an increasingly competitive environment. Transforming the banking system The government has little time to improve the effi- ciency and competitiveness of the 1,000 large enter- Intertwined with state enterprises is China's large finan- prises. Many will be exposed to international cial system (box 3.4). Its core consists of four state com- competition once China joins the World Trade mercial banks that together account for more than 90 Organization (see chapter 7). Still, it is best to make percent of bank assets and two-thirds of financial assets. tough decisions now, while firms still have time to cut The condition of these banks affects the health of the costs, reconfigure their operations, and improve com- entire economy. So it is cause for concern that their petitiveness. Here more than anywhere else, the gov- financial performance is weakening; their accounting, 30 China 2020: Development Challenges in the New Century FIGURE 3.4 risk management, and credit analysis systems are woe- fully inadequate; and the quality of their portfolio is Ubiquitous state enterprises unknown. What is more, their capital-asset ratios are Percentage share of state-owned enterprises in gross output low and declining. If, as the government estimates, their by industrnal subsector nonperforming assets are equivalent to about 20 per- 0 20 40 60 80 100 cent of their portfolios,17 their net worth is actually oil negative. Tobacco Unfortunately, this state of affairs is unlikely to Refining and cooking improve for two reasons. First, despite recent reforms, Water supply state banks are not yet completely free to lend accord- Logging ing to commercial criteria. About a third of their Coal investment lending is allocated to projects selected by Electric power the State Planning Commission, and the rest is subject Gas utiLities to considerable informal government influence, espe- Ferrous metallurgy cially in the provinces. As a result the creditworthiness Nonferrous mining of borrowers and the commercial viability of projects Transportation machinery are often not important considerations in lending Pharmaceuticals decisions. Nonferrous metallurgy Second, interest rates are controlled, and the spread ChemicaLs between deposit and lending rates is limited by central Beverages bank decree. Consequently, even according to official Specialized machinery statistics, the rate of return on banks' assets has been Food processing falling and turned negative for the first time in 1996. Food manufacturing This deterioration occurred despite the fact that many Printing banks treat accrued (but often unpaid) interest as paid Textiles income, make negligible provisions for bad debt (based Rubber products on instructions from the Ministry of Finance), and raise Machinery earnings through various unofficial add-on fees and ser- Chemical fibers vice charges. Over time, the result has been a steady Instruments decapitalization of the banks. Ferrous mining Transforming the state banks into genuine com- mercial banks is crucial if China is to avoid a major Electronics Paper bank insolvency and if market forces are to shape the allocation of financial resources in China. Many of the NonmetaL products Electric equipment necessary steps are incorporated in the government's Electric equipment long-term strategy (box 3.5). It calls for a phased NonmetaL mining transfer of government-directed lending to the policy Other banks, whose decisions will hew to government imper- Lumber products atives. Phasing will give state enterprises time to adJust Metal products to the new regime, but it should not extend beyond Education and Sports 2000. Plastic But the most important policy change required is a Leather reduction in government influence over the allocation Garments of loans. This would permit more competition between Furniture banks, creating pressure to improve the quality of loans and increase the efficiency of intermediation. A nucleus Source: Chlina Statistical Yearbook 1996. of potential competition already exists in the five Laying the Foundations 31 nationwide commercial banks (including the recently T g established Hu a Xia Bank and Ming Shen Bank) and 1 li c enterprises 1983-95 eight re lonally based comm ercial banks. But the gov- Per0t ernrnent should consider expanding the field of com- ha st the petitors. More new entrants could be licensed, provided 113, 100a: a they satisfy the central bank's strict requirements. The andtarypoicy government could als o con sider splitting the largest state commercial banks into several entities, perhaps f 60 could, over the longer term, gradually permit the entry ><<,9 China Note: If adjusted for the market capitalization of tradabLe shares, hostage to progress in the development of a sound and the ratios for Shanghai and Shenzen woutd be 800-1,000 percent. competitive banking system. Source: IFC 1996; Xu and Wang 1997. Administrative constraints tend to affect primary markets more than secondary markets. Even so, sec- sibility for securities markets is splintered functionally, ondary markets have problems of their own. Share institutionally, and regionally and is divided between prices are very volatile in the Shanghai and Shenzhen municipal and central authorities. As a result some reg- stock exchanges, and trading volumes are unusually ulations-for corporate bond trading, securities deal- high relative to the size of market capitalization (figure ers, and institutional participants-are not overseen by 3.7). This is because both markets are young, with an any government institution. underdeveloped legal and institutional infrastructure. Resolving these problems quickly is important, and Like other emerging markets, they suffer from low liq- there is no time to lose. Even if capital markets grow uidity, limited disclosure, bunching of public offerings, at more than twice the rate of projected GDP growth insider trading, and a circumscribed role for competi- (in real terms), by 2020 the value of stocks and bonds tive underwriters and primary dealers. relative to China's economy would only approach Compounding these shortcomings is the limited par- that in India's capital market today (74 percent of ticipation by wholesale and institutional purchasers of GDP). securities. China's contractual savings are equivalent to Capital markets could play a major role in China's about 3 percent of GDP, well below the 18 percent in financial and economic development: the Republic of Korea, 48 percent in Malaysia, and 78 * Through capital markets, investors can monitor and percent in Singapore. The insurance industry has only a control the corporate users of their capital. Such over- short history in China, and pension funds are small sight is an essential element in state enterprise reform because of the preponderance of pay-as-you-go because it helps dilute government ownership and schemes. transfers a portion of the risks from banks to the new Finally, government oversight of the capital market is owners. The example of "red chip" companies in Hong weak. Although securities laws and regulations are Kong also shows how listings on other stock exchanges guided by international principles, several crucial hold state enterprise managers in China to increased aspects of capital markets still require codified rules scrutiny, higher management standards, and greater (table 3.4). To make matters worse, regulatory respon- transparency.19 34 China 2020: Development Challenges in the New Century TABLE 3.4 Gaps in China's securities legislation Established securities Insider Securities and exchange Disclosure Listing trading Compensation Takeover Country law commission reguLation requirements regutation fund reguLation Argentina * * 0 0 0 0 0 Brazil 0 0 0 0 0 0 0 ChiLe 0 0 0 0 * * 0 Korea, Rep. of 0 0 * * * O Malaysia 0 0 0 0 0 0 0 Mexico * 0 0 0 0 0 0 Thailand 0 * * 0 0 0 0 China Oa 0 O 0 0 O 0 a. Elements of a securities law are covered in other laws and regulations. Source: WorLd Bank 1997c. * Flourishing capital markets would be a significant FIGURE 3.8 intermediary for long-term investment, especially for infrastructure. Chapter 4 describes how the introduc- Bonds-the least deveoped segment of China's capital markets tion of a new pension system would mobilize massive amounts of investable funds. How efficiently (and Total bond issues have tagged behind investment... safely) they are invested will depend largely on the depth, stability, and efficiency of the capital market. Billions of yuan 1,200 Investment by state-owned units T Thriving capital markets would provide savers with ' Capital investment by state-owned units new savings instruments, helping them to diversify risk 1,000 o ALL bond issues and boost returns. Such instruments would be an important piece in the mosaic of policies designed to 800 encourage the savings that are so essential for sustain- 600 able growth (see chapter 2). Well-functioning capital markets would improve the 400 pricing of financial assets, contributing to greater effi- 200 *'. ciency in the allocation of resources. In this regard China's capital markets could be far more valuable than 0 9 c ; their relative size would indicate. N N N; N N Bonds are the least developed part of China's capital ... and enterprise bond issues have been espedally small markets (figure 3.8). Developing the bond market will Billions of yuan be crucial for tapping China's massive domestic savings 350 m Treasury bonds and matching savings to its equally large infrastructure 300 Enterprise bonds needs. Other developing countries-Chile, Malaysia, 250 Thailand-have shown how these goals can be achieved. First and foremost, bond issuers must meet 200 minimum standards of capital structure, financial 150 strength, corporate governance, and management qual- 100 ity. Second, these companies should be rated by rep- utable credit rating agencies. Third, institutional 50 investors should be encouraged to buy bonds, possibly by allowing them to invest in blue-chip corporate bonds Source: Kumar 1996. up to specified limits and certainly by making corporate Laying the Foundations 35 bonds fully tradable. Fourth, bond issues could be auc- Making markets work tioned, so that financial institutions can become whole- sale buyers. Reforming state enterprises and state commercial China is on the threshold of exciting developments banks involves a gradual government withdrawal from in infrastructure financing. With the help of multilateral direct interventions in product and financial markets. institutions, including the World Bank Group, it is But in no sense should this withdrawal be construed as developing the legal and competitive framework an abdication of responsibility for markets, because the required to issue asset-backed securities. Doing so will government has a new obligation to provide the insti- allow an increasing portion of its infrastructure needs tutional and policy frameworks that help markets to be financed from limited recourse private capital, work. Partnership and complementarity with markets domestic and foreign. The potential is enormous. A need to supplant command and control. recent World Bank study estimates future demand for Four areas are of particular importance. First, estab- infrastructure in China to be as much as $75 billion a lishing a rule of law that is supportive of market insti- year over the next decade-well above the stock of out- tutions and protective of property rights. Second, standing enterprise bonds today of about $2 billion.20 developing the capacity to ensure macroeconomic and To accelerate the growth of project financing, the financial stability, even as potentially destabilizing government should also consider using credit enhance- reforms are implemented. Third, promoting competi- ments, targeted risk and policy guarantees, partial sub- tion in product markets to encourage innovation, effi- sidies, and (occasionally) direct participation. Another cient resource allocation, and financial discipline. And innovation that could be tried is infrastructure develop- fourth, harnessing new technology in ways that work ment funds that purchase securities from a pool of with markets, not against them. infrastructure projects. Pakistan's Private Sector Energy Development Fund and Jamaica's Private Sector Energy Establishing the rule of law Fund are examples. Housing finance also promises to grow rapidly in As the government extricates itself from markets, legal China in the next century. In high-income countries norms and procedures must substitute for direct gov- mortgages are one of the largest segments of capital ermnent control over economic decisions. Simply put, markets. China still has little or no mortgage lending. economic reforms have made legal rules matter. Once it has a high-quality primary market for mort- China has made considerable progress in developing gages, secured though legally backed collateral and legal norms that correspond to the needs of a market based on market interest rates, this market could be economy. Indeed, the process has accelerated in recent supplemented by a thriving secondary market. years, with as many laws (152) scheduled for consider- Such a development would bring many benefits. ation in the 1993-98 session of the National People's International experience suggests that specialized hous- Congress as were enacted between 1949 and 1992. At ing finance institutions have weaknesses of their own.21 the same time, there has been a rise in the use of the judi- The risks associated with liquidity and concentrated cial system to resolve disputes, an emergence of a legal portfolios are best dealt with through an efficient sec- profession, and a growing respect for the independence ondary market. Increasingly, countries are creating sec- of the judiciary. ondary mortgage markets to allow banks to offload Yet much remains to be done. It may take decades their mortgages and spread their risks (Australia, for the rule of law to establish a firm foothold in China. Malaysia, and Thailand are examples in the Asia- Doing so will require a legal infrastructure that can Pacific region). Furthermore, the securitization of mort- impartially implement the evolving legal framework, gages helps deepen and develop capital markets by control corruption, and foster a legislative system based matching long-term savings with long-term borrowing. on public participation and consent. In many ways the secondary mortgage system could Ten years ago China's economic laws were few and mirror developments in the pension and insurance sys- the gaps many. Today the maturing of the legal system tems, as both come together to deepen the debt market. is reflected by laws so numerous they defy easy sum- 36 China 2020: Development Challenges in the New Century mary. Yet the system operates poorly. The reason is not BOX 3.6 a lack of laws. It is inadequate enforcement. Enforcing N hns the law is the biggest challenge that China's legal system will face in the next century. In key areas of recent leg- In 1723 Emperor Yongzheng faced widespread corruption in his islation the law of the land is quite different from the tax administration. As part of sweeping fiscal reforms, he law on the ground. imposed a surcharge on basic land taxes and used the revenue One remedy is to develop the legal profession. The to finane largesala increases for revenue officiats. These new Lawyers Law, which went into effect in January nbonuses were knownas yang han-money to nourish honesty. 1997, could give a strong impetus to growth of the pro- fession. The law aims to promote a better national qual- compete with government in delivering public goods ification and licensing system, continuing legal and services. Such approaches give citizens a choice and education, a self-regulating bar, and rules of ethics. The curb the discretionary power of public officials. most radical change is that lawyers are no longer state * Increasing transparency in governmentfinances. The legal workers in advisory offices. They can now orga- more transparent and streamlined are government pro- nize as state-funded, cooperative, or partnership law cedures, the fewer the opportunities for corruption. firms, law offices, or sole practitioners. A recent count Transparency helps keep government officials account- identified 7,200 firms nationwide, most of them orga- able for their actions. For example, making unaudited, nized as partnerships. unsupervised extrabudgetary funds available to offi- The next big step will be to improve legal education, cials invites misappropriation. The danger can be mini- which was revived in 1978 after more than a decade of mized by better oversight, better information on targets inactivity. Today numerous full-time law faculties and and achievements, and better channels for listening to other institutions provide legal education and training. citizen groups. But a large portion of China's tens of thousands of * Building an honest and competent civil service. lawyers have no formal legal training. Thus training Choosing new recruits carefully based on academic and needs include more extensive legal education, modern- professional qualifications will pay handsome divi- ized curriculums, and practical and ethical training in dends, as will reducing salary differentials between the the actual implementation of laws. civil service and the rest of the economy (box 3.6). It Corruption-the use of public office for private might also be useful to establish an independent statu- gain-is a growing problem in China. In light of inter- tory institution, such as Hong Kong's Independent national evidence that corruption may be as damaging Commission Against Corruption, to act as watchdog. to growth as political instability,22 the government's concern about corruption is entirely appropriate.23 In Ensuring stability 1996 alone 65,424 people involved in embezzlement and bribes were prosecuted, including many senior offi- To flourish, markets need a background of macroeco- cials in the government and the Party. nomic stability. Since 1978 the government has usually More could be done. The war against corruption will relied on direct, administrative measures to cool the need to be waged on several fronts. One is through economy when it threatened to overheat. Similarly, the criminal prosecution, to increase the risk of detection stability of financial institutions was ensured through and punishment. But China will also have to eliminate direct support by the central bank. In the future, how- or reduce incentives for corrupt practices, including: ever, the government faces the more difficult task of * Reducing the discretionary power of government maintaining macroeconomic and financial stability officials by increasing market competition. Inter- using indirect, market-friendly measures. Success will national experience suggests that countries with heavy depend on the extent to which banks and enterprises government intervention and little competition tend to have become responsive to market signals. be more corrupt.24 Where possible, the government The central bank's ability to control monetary aggre- should use market-friendly, competitive approaches to gates has been enhanced by the Central Bank Law, provide public services. Nonstate companies could which forbids lending and overdrafts to the govern- Laying the Foundations 37 ment. In addition, the People's Bank of China has occa- already been made on these fronts, but there is still a sionally recalled loans to financial institutions, refined long way to go. its reserve requirements to suit individual banks' needs, Good supervision will provide the added benefit of opened a rediscount window to refinance strategic pro- ensuring the safety and soundness of the financial sys- jects, and called for special deposits. These develop- tem. Training for supervisors at all levels would make a ments allowed the bank to begin limited open market valuable contribution. The frequency of onsite inspec- operations in April 1996. tions will also need to be increased at the provincial, Improving the central bank's monetary management city, and even county levels. All banks will have to is central to future economic stability. The erosion of implement accounting and auditing standards. the credit plan as an effective instrument of monetary control means that the central bank will need other Making markets more competitive ways to control monetary aggregates. It already uses reserve ratios, asset-liability ratios, and the rediscount Perhaps the most important reason the Chinese econ- facility to affect the liquidity of the financial system. It omy performs so well is that many goods markets are will also need to make more extensive use of open mar- quite competitive. Some observers have also argued that ket operations. In doing so, it will have to guard against "market-preserving federalism" has encouraged com- sudden and excessive withdrawal of liquidity from the petition between provinces by motivating local govern- financial system. To increase the availability of securi- ments to foster local prosperity.25 tized assets for sale, the central bank could consider Still, more could be done to intensify competition. securitizing its large stock of loans to the government Provincial governments could phase out remaining bar- and selling these on the market. Doing so may have riers to interprovincial trade-especially in agriculture, budgetary consequences if government interest pay- where state enterprises control the bulk of distribution ments have to rise. and sales (see chapter 5). Similarly, provincial govern- The introduction of open market operations and uni- ments could remove any restrictions requiring local fication of the interbank market are already producing state enterprises to buy from other local enterprises. greater flexibility in short-term interest rates. The gains from extra interprovincial trade could be Controlling aggregate demand more effectively will comparable to the benefits of additional international require these interest rate changes to ripple through the trade. maturity spectrum of bank assets and liabilities. In addi- The benefits of competition are readily apparent in tion, enterprises must be motivated to keep costs sectors with low barriers to entry and exit. Their down-which means they must not receive subsidies if growth rates have been uniformly higher than in indus- they operate at a loss. tries dominated by state firms. The government could As the financial system changes, there is always the take steps to encourage the entry of nonstate compa- danger that risky activity by banks and nonbank finan- nies, domestic and foreign, into manufacturing and cial institutions will generate systemic shocks. The infrastructure. Phasing out the tax advantages that for- collapse of the Shanghai International Securities Cor- eign investors enjoy, especially in special economic poration and, more recently, the China Agricultural zones near the coast, would level the playing field for Development Trust and Investment Corporation were domestic and foreign investors and encourage invest- warning signs. To improve the health of banks and non- ments in the interior, western provinces. Similarly, elim- bank financial institutions, their managers and their inating the setting of interest rates by class of ownership official supervisors must pay more attention to pruden- would remove one of the advantages enjoyed by state tial norms and less to traditional compliance with key enterprises at the expense of nonstate firms. targets and ratios. This shift in emphasis will require China's current industrial policy emphasizes support modern accounting systems and new financial reporting for "pillar" industries (box 3.7). However, it is often methods, a uniform risk-based loan portfolio classifica- difficult to say what this policy really means. The gov- tion system, and a focus on the overall risk borne by ernment uses many instruments to influence the pattern individual financial institutions. Some progress has of industrial production: controlled interest rates, pro- 38 China 2020: Development Challenges in the New Century BOX 3.7 This is not a setting in which activist, wide-ranging industrial policies are likely to be successful. Indeed, in a -- China's "pittar" irndustries ; f 00= t t0 4=::fast-changing international environment such policies Anewindustrial poticyannouncedon March25, 1994, enpha- could do more harm than good. China has discovered sized the development of "pillar" industries. The- Chinese that when the ambition of industrial policies outstrips arrived at the definition of pillar industries by analyzing the government capability, the results can be costly and diffi- stages of industrialization along the lines identified ;b cult to undo. In the one area in which it has aggressively Chenery and Syrquin. (1915) Thus light industries constitute the first- stage of indusialin, basic heavy industries the pursued an idustral polcy-automobles-Cha has second,andpillar industries the t hi r, found itself burdened with significant excess capacity The gove has designated five pillar industries: and large numbers of small, inefficient plants. Having machinery7 electronics, petrochemicals, automnobilds,and con- been burnt, it is reassessing its approach toward indus- struction. These industies were chosen because- they are trial development. The focus appears to be shifting expectedtoface a high income elasticityof:demand, enjor sub toward policies with a lighter touch-especially policies stantial economies of scale, result in significant backw and t forward productionlinkages, possess potential for high produc- that are iexpensive and that support nonstate develop- tivity growth, and reflec Cina's comparate advantageThe ment. These include regulatory policies that create a level hop they t wil eventualty account fo percent of GP0 playing field for all firms and the provision of intraindus- (or 8percentof industrialtoutput} increasetheirsharein inter- try public goods such as information, infrastructure, national markets, reach internation ts s quickly, quality standards, and industry associations. These and becomneprofitable. f: = C: f X0 0=X; ;: ; 0 0; 0 t;0; X actions, if implemented, would be steps in the right direc- tion, and their benefits should not be underestimated. tection against import competition, tax and price poli- cies, rules on procurement, and even unofficial levies. Harnessing new technology The combined effect of these measures is difficult to assess, but it is quite likely that they work at cross-pur- Apart from measures to intensify competition, industrial poses and in unintended ways that distort development. policy can help develop and harness technology. In the Government officials recognize that China may not long term rapid growth will depend heavily on China's be able to follow the role models of Japan and the ability to acquire, adapt, and master new technology. Republic of Korea for industrial policy. For one, entry China's Ninth Five-Year Plan and Fifteen-Year into the World Trade Organization will constrain their Perspective Plan emphasize the importance of intensive freedom to direct credit or budgetary subsidies to spe- growth, which involves increasing productivity, lowering cific industries, and protection from import competition costs, and introducing higher-quality products. Chinese can only be very limited. Trading partners today are con- planners recognize the power of technology in sustaining siderably less tolerant of such practices than they were in growth over the long term and the importance of gov- the 1950s and 1960s. For another, China possesses nei- ernment's role in ensuring that the promise of technology ther the capabilities nor the conditions that Japan and Korea enjoyed. China's government structure, for exam- TABLE 3.5 ple, is complex and compartmentalized, discouraging Lawsuits on intelLectuaL property rights in China, communication across ministries and complicating 1991-95 coordination across tiers of government. Administrative decentralization has rekindled an earlier bias toward Lega[issue Lawsuits Prosecutions provincial self-sufficiency, so provincial goals often con- Patent 3,083 2,737 Copyright 2,600 2,429 flict with national goals. Procedures and instruments of Trademark 907 789 indirect management have not yet fully replaced those of Technology transfer 6,812 6,805 ComnmerciaL know-how 2,141 2,100 direct management. The fiscal position is fragile, and the Criminal offenses, 1,690 1,676 banking system is delicate. The tender shoots of a gen- Foreign reLatedb 192 170 uine private sector, although sprouting in increasing a. Cases where criminal action or vioLence was a factor. h. Cases where one of the parties was a foreign entity. numbers, have yet to take hold and mature. Source: Supreme Court of China, Intellectual Property Rights Office. Laying the Foundations 39 is fulfilled by developing a market for ideas and support- make their ideas available. Some ideas have long gesta- ing it when it fails to operate effectively. tion periods, and their benefits are not readily apparent Firms and individuals will make less of a technolog- for many years. Government intervention may be ical effort than is desirable if they are unable to reap the needed to ensure that there is an appropriate supply of benefits. Thus protecting intellectual property rights is new ideas and technologies. of prime importance. China has enacted and revised To remedy such market deficiencies, China's govern- laws on patents, trademarks, and copyright, and has ment has focused on basic research. Its "climbing" pro- done much to enforce them. The number of lawsuits gram for fundamental research is designed to keep pace and prosecutions under these laws has grown substan- with world advances in key areas of information tech- tially (table 3.5), and there are now specialized intellec- nology, life sciences, and genetic engineering. Policy- tual property courts throughout the country. makers have invited high-technology firms to locate in The government has also acted to create a market for more than 100 science and technology parks that pro- ideas, "plunging the scientific community into the sea of vide infrastructure, priority access to finance and markets."26 Before reforms, the administrative appara- imports, and tax privileges. Today more than 13,000 tus transmitted findings from research units free of enterprises are located in such parks, employing over 1 charge. But technology has now been redefined as a million people. In addition, in 1995 the government "commodity" in China. To establish markets for this established sixty-nine national engineering centers as a commodity, the government has encouraged technol- link in commercializing research findings. These centers ogy trade fairs at which producers of research and are funded by the public sector, but the intention is development can sell their wares to potential buyers. In eventually to make them commercially independent. 1995 the country held 939 such fairs at which 14,686 contracts were signed for a value of 5.8 billion yuan. Notes Of course, the market for ideas does not stop at China's borders. In many cases it will be more econom- 1. Strictly speaking, the reference here is only to in-budget indus- trial enterprises. ical to acquire new commercial technology from 2. Comparative data are from Levin (1991), who used a sampLe of abroad than to develop it at home. Much of this tech- eighteen industrial countries and twenty-two developing countries for nology is embodied in capital equipment, such as which data on general government expenditures are available in the InternationaL Monetary Fund's (IMF) International Finance Statistics. turnkey projects or imported capital goods. In other Data are averages over three years ending in 1987 or 1988. instances it is packaged along with equipment finance 3. As mentioned later in this chapter, the three quasi-tax revenues and management, as in foreign direct investment. And were incorporated into the budget in 1997. 4. World Bank (1996b). in others technology comes "unbundled," through 5. The relative price of services tends to rse with higher real per technical assistance or technology licenses. capita incomes. The government should ensure that the costs of 6. This estimate was provided by the State Tax Administration and was based on the 1992 input-output table. acquiring foreign technology are as low as possible and 7. Extrabudgetary expenditures are recorded in data pubLished by that the technology is disseminated domestically as effi- the State StatisticaL Bureau. But other government expenditures ciently as possible. Lower barriers to importing capital escape recording and quantification altogether, at both the national cientl as pssibl. Lowe barrers t imporing cpital and provincial Levels. goods would help by encouraging equipment invest- 8. The consolidated government deficit is defined as the sum of ment and technology imports, which in other countries the budget deficit and the voLume of Lending by the central bank tend to be associated with faster growth.27 More trans- specificaLly to finance government-directed investments. The author- ities have indicated that this deficit can range from 60 to 80 percent parent and streamlined foreign investment procedures of total lending by the centraL bank to the banking system. would also encourage new foreign investors. And more 9. Hofman (forthcoming). liberal rules on technology licensing agreements would 10. Some extrabudgetary expenditures-such as hospital expendi- tures financed from cost recovery-need not be incorporated into the encourage closer links between technology suppliers budget. abroad and producers at home. 11. These figures refer to all state enterprises, not just industriat In many cases, though, the market for ideas func- state enterprises. 12. WorLd Bank (1996a). Only part of this increase in Losses can tions imperfectly. The owners of ideas may not be com- be exptained by the adoption of a new accounting system. pensated for the goods they provide, so are reluctant to 13. Jiang (1995). 40 China 2020: Development Challenges in the New Century 14. Qian and Weingast (1997) Kumar, A. 1996. "China's Domestic Bond Market and 15. World Bank (1997a). Infrastructure Investment." Paper presented at the seminar on 16. As noted earlier, a contestabLe sector is one in which there is Mobilizing Domestic Resources for Infrastructure Financing, reLatively costLess entry and exit. ALthough most Chinese industries Government of China and the World Bank, November 12, are contestable, the government initia[Ly may want to focus on such Beijing. industnes as speciatized machinery, pnnting, rubber products, Levin, J. 1991. "Measuring the Role of Subnational machinery, chemical fibers, instruments, electronics, paper, nonmetat Governments." IMF Working Paper 91-8. International products, electrc equipment, lumber products, metal products, edu- Monetary Fund, Washington, D.C. cationat and sports products, pLastic products, Leather, garments, and Li, Peng. 1996. "Report on the Outline of the Ninth Five-Year furniture. Plan for National Economic and Social Development and the 17. According to PeopLe's Bank of China Governor Dai XiangLong, Long-Range Objectives to the Year 2010." Speech delivered at 8 percent of outstanding loans at state banks are more than three the Fourth Session of the Eighth National People's Congress, years overdue and another 12 percent are less than three years over- March 5, Beijing. due (Faison 1996). Mauro, P. 1995. "Corruption and Growth." Quarterly Journal of 18. King and Levine (1993). Economics (August):681-712. 19. 'Red chip" companies are mainland Chinese state enterprises Mody,A.,and K.Tilmaz. 1991. "CostReductionthroughlmports registered in Hong Kong and listed on the Hong Kong stock exchange. of Capital Goods." World Bank, Industry and Energy 20. World Bank (1996c). Department, Washington, D.C. 21. World Bank (1997d). Qian, Y. 1995. "Enterprise Reform in China: Agency Problems 22. Mauro (1995). and Political Control." Stanford University, Department of 23. Li (1996). Economics, Stanford, Calif. 24. World Bank (1997e). Qian, Y., and B. Weingast. 1997. "Institutions, State Activism, 25. Qian and Weingast (1997). and Economic Development: A Comparison of State-Owned 26. China State Science and TechnoLogy Commission (1996). vs. Township-Village Enterprises in China." In M. Aoki, H-K 27. Mody and Tilmaz (1991). Kim, and M. Okuno-Fujiwara, eds., The Role of Government in East Asian Economic Development: Comparative Institutional Analysis. New York: Oxford University Press. References World Bank. 1996a. "China: Reform of State-Owned Enterprises." Report 14924-CHA. China and Mongolia Blanc, J., and C. Brule. 1993. Les nationalisations francaises en Department, Washington, D.C. 1982. Paris: La Documentation Franqaise. . 1996b. The Chinese Economy: Fighting Inflation, Caprio G. Jr., and D. Klingebiel. 1996. "Bank Insolvency: Bad Luck, Deepening Reforms. A World Bank Country Study. Washington, Bad Policy, or Bad Banking?" In M. Bruno and B. Pleskovic, eds., D.C. Annual World Bank Conference on Development Economics . 1996c. Infrastructure Development in East Asia and 1996. Washington, D.C.: World Bank. Pacific: Toward a New Public-Private Partnership. Washington, Chenery, H., and M. Syrquin. 1975. Patterns of Development, D.C. 1950-70. New York: Oxford University Press. . 1997a. China's Management of Enterprise Assets: The China State Science and Technology Commission. 1996. State as Shareholder. A World Bank Country Study. Washington, "Technology Policy in China." Background paper prepared for D.C. the World Bank. Washington, D.C. . 1997b. Financing Health Care: Issues and Options for De Long, J. B., and L. H. Summers. 1991. "Equipment Investment China. Washington, D.C. and Economic Growth." Quarterly Journal of Economics 106 . 1997c. The Road to Financial Integration: Private Capital (2): 445-502. Flows to Developing Countries. A World Bank Policy Research Faison, S. 1996. "Inflation Curbed but not Growth, China Report. New York: Oxford University Press. Asserts." New York Times, July 16. . 1997d. "Strategic Framework for the World Bank Group Hofman, B. Forthcoming. "Fiscal Decline and Quasi-Fiscal for the Financial Sector." Presented to the World Bank Response: China's Fiscal Policy and Fiscal System, 1978-94." Executive Directors by the Financial Sector Department, April In OECD/CEPII/CEPR, Different Approaches to Market 21, Washington, D.C. Reforms: A Comparison Between China and the CEE Cs. Paris. . 1997e. World Development Report 1997: The State in a IFC (International Finance Corporation). 1996. Emerging Stock Changing World. New York: Oxford University Press. Markets Factbook. Washington, D.C. Xu, X., and Y. Wang. 1997. "Ownership Structure, Corporate Jiang, Q. 1995. "State Asset Management Reform: Clarified Governance, and Corporate Performance: The Case of Chinese Property Rights and Responsibilities." In H. Broadman, ed., Stock Companies." World Bank Policy Research Working Policy Options for Reform of State-Owned Enterprises. Paper 1794. World Bank, Economic Development Institute, Washington, D.C.: World Bank. Washington, D.C. King, R.G., and R. Levine. 1993. "Finance, Entrepreneurship, and Zhang, T., and H. Zou. 1996. "Determinants of Provincial Growth.' Journal of Monetary Economics 32:513-42. Income Growth in China." World Bank, Washington, D.C. Laying the Foundations 41 Shaping a Competitive >L. but Caring Society haping a competitive economy requires market forces. Shaping a caring society requires govern- ment leadership. Striking the right balance between com- petition and compassion depends largely on a country's circumstances, traditions, and culture. In China economic reforms have led to impressive growth in incomes. But they have also led to steep increases in social and income inequality, with limited improvements in living standards for the poor. Looking ahead, China will need market forces to ensure that resources and people combine in ways that support continued and sustainable improve- ments in income and welfare. It will also need an active government to help its people manage the increased risks and uncertainties generated by the market, and to build support mechanisms for the most vulnerable. The next twenty-five years will bring tumultuous change to China. If growth runs at the government's pro- jected average of 6-7 percent a year, the economy will 43 W: expand sevenfold. Thus China would experience in * Financial security for the elderly. Because state enter- twenty-five years an economic transformation similar prises are finding it increasingly difficult to meet their to that in Latin America over the past sixty-five years pension obligations, families are doing more to support and in OECD countries over the past eighty. their elderly members. But these informal arrangements Such big changes, compressed into so short a time, are becoming a financial strain. The one-child policy will stretch China's social fabric to the limit. Hundreds means that a working couple usually has to support of millions of people will move in search of better jobs four retired parents, one child, and sometimes grand- from agricultural to nonagricultural occupations and parents-an extraordinary burden, especially when from rural to urban areas. Urban labor markets will people have to move in search of jobs. Without more also have to handle huge structural change within formal arrangements, China may not be able to main- industries, especially shifts between state and nonstate tain its traditional reverence for the old. firms. By 2020 a typical worker in China will not be a * Access to affordable bealth care. Public health facili- self-employed farmer but a wage employee on a ter- ties are being squeezed by budgetary pressures, and the minable contract in either industry or services. Flexible cost of health care is rising rapidly. Almost all health rural labor markets and efficient rural-urban migration insurance is for urban residents, especially government will be essential, particularly since growth of the labor and state enterprise employees. Rural areas are force will be slowing considerably. neglected, with the old, the young, and the poor suffer- Greater mobility between jobs, sectors, and occupa- ing the most. tions will also require greater flexibility in education. * Biases against women. By international standards, Upgrading skills by increasing investments in general the status of women in China's labor market is rela- education and on-the-job training will ease structural tively favorable. But international experience also change. And greater access to education in rural areas shows that market reforms tend to hurt women dispro- (especially for girls) will be central to reducing poverty portionately. This may be occurring in China as well. and bringing the untapped potential of the poorest peo- * High and prolonged unemployment. As the "iron ple into the economic mainstream. rice bowl" of a job for life in state firms crumbles in the The speed and size of these employment changes will face of market reforms, structural unemployment will foster both hope and uncertainty. Hope-of better jobs increase and strain the unemployment insurance and rising incomes-is already real and palpable. But system. unemployment, migration, old age, and illness will pre- sent new challenges for China's people. Those who Making labor markets flexible were most protected in the past-mainly urban work- ers in state-owned units-will find it especially difficult There have been few formal reforms of the market for to adjust to the new reality. labor. But structural change and competition are pro- As they grow richer, all societies demand formal foundly affecting the way labor markets work in China, mechanisms to manage such risks. In China this especially in rural areas. The rapid growth of jobs in demand will grow very quickly, and will probably township and village enterprises during the 1980s was center on five issues where government action is forged largely by market forces and with little govern- needed: ment oversight. Similar pressures are now playing an * The living standards of the absolute poor. There has increasing role in urban markets, but the difficulties of been a remarkable reduction in the number of poor state enterprises have made the transition more people since reforms started. But eliminating poverty is difficult. becoming increasingly difficult. The absolute poor are Thus it is unlikely that China's labor market will usually entire communities that live in isolated, upland become much more flexible unless a determined effort regions of interior provinces with few if any natural is made to change policies and institutions. The market resources. Bringing them into the mainstream of eco- could even become more segmented, with widening nomic development will require new approaches and income inequalities across skills, regions, genders, and better targeting. firms. But if policies and institutions are designed to cre- 44 China 2020: Development Challenges in the New Century ate a flexible and integrated labor market, the outcome time, it may lose its allocated land. Another reason to will be good for growth and for workers. remain on the farm is to fulfill the annual grain quota set by the authorities (although purchases from the Easing restrictions on rural-urban migration open grain market are increasingly accepted in lieu of own production). One good indication of how labor markets function in Despite these barriers to mobility, the stream of China is the estimated 120-140 million "surplus" rural-urban migrants in the 1980s has turned into a workers in agriculture-roughly 35 to 40 percent of the flood. Recent estimates put the number of migrants in agricultural workforce. These workers could earn sig- urban areas at around 80 million,' although genuinely nificantly more in nonagricultural activities (box 4.1), long-term migrants are nearer to 44 million.2 A tempo- but for various reasons are constrained from doing so. rary migrant typically stays in the city for about 200 Perhaps the main factor inhibiting migration to days and then goes home.3 Among longer-term towns and cities is the urban welfare system. Migrants migrants, peasant women in the Pearl River Delta work find it difficult to qualify for health, education, and for as much as three to five years before returning per- housing facilities, which (like other benefits in urban manently to their villages. areas) are tied to state enterprise employment. For About two-thirds of all migrants, temporary or per- example, state enterprises and government agencies manent, work in the same province as their home vil- control almost 80 percent of the urban housing stock lage.4 Three-quarters are rural-urban migrants; the rest and allocate almost all of that to their employees. are rural-rural. Large, prosperous coastal cities- Migrants are also acutely aware that their legal sta- Beijing, Shanghai, and Tianjin-attract the largest share tus is ambiguous. As a result they often do not report of immigrants, while provinces with low land-popula- unsafe conditions or illegal practices at work. Their tion ratios and high concentrations of state enterprises inner-city townships are occasionally torn down, have the highest emigration rates. More than half of all adding even greater uncertainty to their already precar- migrants came from farms of less than 0.33 hectares ious existence. They face great difficulty in formally reg- (table 4.1). istering as urban residents, although some cities are Labor migration lubricates the rasping process of beginning to issue "blue cards" or temporary permits. China's structural change. It is one of several human Once these expire, however, the prospect of eking out a dimensions in the transition from an agricultural to an marginal existence in the city often encourages migrants industrial economy and from a rural to an urban soci- to return to their villages. ety. It is also an essential element in the economy's con- Would-be migrants are also deterred from moving by tinued rapid growth. For example, the steady flow of conditions at home. For example, under the household skilled workers to urban industry keeps real wages low responsibility system local authorities periodically real- even as growth remains strong, supporting China's con- locate land among households. If a family is away at the tinued competitiveness in international markets. Migrant workers earn 70 to 80 percent of what their BOX 4.1 Moving ff thE farM TABLE 4.1 Migrant workers usually come from small farms Laring`thei tand 'can be -attractive A ietent stud ndog MShare of rura[ migrant Labor by farm size of migrant househoLd, 1994 ro nce'sZouingountfd thotteingw ioa (percent) gXg ticulrat acttiies was -seven.tie What famrsear Iji six v9ia of Xiayu -Cot Irovince, the ret Farm size - ingWe im agriculture were near zero, but significant in other (hectares) Share activities. A su o ht fon that the-marginat 0.00-0.33 51.1 0.34-0.66 31.4 returns fromwoing inague were considerably l0.34-0.6 79.7 than e from ruHn=usy or migraton. ===1.00-1.33 5.0 Source; Cookis 1996; Hare and Shukai 19; Kni9ht and Song 1995 More than 1.33 3.2 Source: Ministry of Agriculture, State Statistical Bureau (reported in Asian Development Bank 1996). Shaping a Competitive but Caring Society 45 urban counterparts make, and their social overhead labor markets with high wages would be surrounded by costs (education, health care, unemployment insurance, a rural sea of informal labor markets with low wages. pension benefits) are almost nil. The combination would not have an immediate, cata- More important, the opportunity to migrate gives strophic effect on China's development. But its impact poor rural workers and their families a chance to escape on economic performance would be felt gradually as the vicious cycle of poverty. Urban migrant workers restrictive policies sapped the market's capacity to effi- earn several times more in their new urban jobs than ciently allocate labor resources. they would back home. In some cases their remittances average 1,200 to 1,500 yuan a year-two to three times Making urban labor markets more flexible the poverty line in poor provinces.5 Assuming there are 40 million migrants, total remittances could amount to Although migrants have spurred the development of more than $7 billion, or 1.2 percent of GDP. The fami- labor markets on the fringes of cities, they have had lit- lies of migrants use the money for many things, includ- tle effect on labor markets in cities themselves. These ing food, fertilizer, agricultural inputs, school fees, and continue to be rigid and distorted, paralyzed by the health charges. Despite all these benefits, the government is con- ,i i cerned that uncontrolled migration could increase the tw toIs ma beat D s 10 t size of city slums, strain the finances of city govern- a r a bn at ments, and lead to social ills such as crime and prosti- tution. But the government also recognizes that China n doesnjsdbtres dties ." is set to urbanize rapidly (figure 4.1). Thus its emphasis s ee tgove t is on managing the process, not least by supporting the rapi development of hundreds of small towns and encour- omercent pinrn986. aging migrants to go to them (box 4.2). a i t icapacity of At the same time, however, local governments in P treempha- some provinces and counties are introducing regula- the needat de er of small towns in an tions that discriminate against migrants. This is a dis- ood turbing development, since it could fracture China's cdi tid h labor market into several parts. Urban islands of formal i A ptect th evironment." F1GURE 4.1 Suiso raiainso htcte rwbcuete China's growing cities tivo Urban share of population n activities. Bi u, sc as macroeconomi (percent)anprcnpoiisinutalzto,adnwtaepot- 60 niis1a9ndru9oenen5fot ostmlt ml 1960 China 920 1980e 1990l2000p2010e2pee aln iml tow d m p Source: WorLd Bank staff estimaFoctsenfrastrcture nvestmnttonnownsvtatiarealread 46 China2020: Deelopmen Challenes in th New Cethecur soytefuue problems of state enterprises and government concern Beyond that, many nonwage issues will arise. For exam- with rising urban unemployment. Official unemploy- ple, workers often encounter health risks on the job. ment in urban areas climbed from 2.3 percent in 1991 According to the International Labour Organization, in to 3.0 percent at the end of September 1996.6 But in industrial countries occupational injuries and deaths many cities workers are retained on the rolls of enter- can cost as much as 4 percent of GNP. No equivalent prises even though they are not paid. If their numbers data are available for China, but the costs are likely to are included, government officials estimate the real be much higher. In a market economy there is a valid unemployment rate to be close to 7.5 percent.7 For concern that, without government intervention, example, in five large cities recently surveyed (Beijing, employers may not reveal the full extent of risks that Chongqing, Guangzhou, Shanghai, and Shenyang) the workers face. Even if they do, workers may still accept unemployed and the furloughed together account for dangerous conditions for fear of losing their jobs. 13 percent of the labor force.8 Even this probably China has many labor laws and regulations stipulat- understates true unemployment in urban areas, since ing health and safety standards in the workplace. But many workers are probably not really needed in the their enforcement, especially in the sprawling nonstate enterprises in which they are employed. Government sector, is weak. Rather than more stringent laws, the officials estimate that 15-20 percent of state enterprise emphasis should be on better enforcement and work- employees could be released without affecting the out- place design. Other measures can also be effective and put of their firms. cheap: for example, a government information pro- Many factors discourage state enterprises from lay- gram on the risks of toxic chemicals, or civic organiza- ing off staff. As noted earlier, these enterprises provide tions that enforce legal standards for safety. In many their employees with various social services, including other countries trade unions also play that kind of role, housing. Managers often need permission to lay off which makes them affordable and effective. workers, though many formally have autonomy on hir- Indeed, the experiences of other countries hold many ing and firing. Local officials tend to grant such permis- lessons for China to consider. First, workers bodies sion retuctantly because they are worried about the (such as free trade unions) are useful in organizing social implications of rising unemployment. workers into a single group with a collective bargaining The missing ingredient, of course, is for workers who power that matches the power of employers. At their lose their jobs to find employment. In a dynamic econ- best, these organizations help balance the need for omy such change is entirely normal, and the govern- enterprises to remain competitive with the aspirations ment is making arrangements to facilitate the process. of workers for higher wages and better conditions. The Ministry of Labor runs 2,700 retraining centers to Second, for market forces to work effectively in allo- upgrade the skills of redundant workers, and 31,000 cating and rewarding labor, it is important that enter- employment service centers to help displaced workers prises operate in a competitive environment. Competition locate jobs. The retraining programs have reached 1.2 tends to force managers and unions to reach wage agree- million people already, on top of the 3.2 million who ments that match productivity with pay. are being retrained in schools and universities. But these Third, the best framework for achieving positive eco- offices cannot cope with the demand for their services. nomic effects is wage bargaining between unions and As for the employment information offices, they are managers at the enterprise level. China can learn from hamstrung by inadequate funding and often outdated Hong Kong or Japan in this regard, where unions are information, are slow to respond to individual needs, organized along enterprise lines and operate under and are not integrated into a citywide (let alone nation- strong competition in product markets. wide) network. Finally, there ought to be a balance between protect- As more workers move into the nonstate sector, the ing the rights of unions and limiting their potential government's concern will shift to the longer-term issue monopoly power. Decentralized bargaining requires of workers'rights in a market economy. China needs to strong guarantees of union rights. If the system is develop institutions and mechanisms for conducting abused by employers, industrial relations could deteri- wage negotiations between workers and employers. orate and worker unrest could grow. Shaping a Competitive but Caring Society 47 Expanding education 4.4). Boys were given priority in education, and the gender gap began to narrow only when the male illit- Education plays a central role in the smooth function- eracy rate had dropped to a low level. The rapid ing of labor markets. Higher literacy rates in rural decline in female illiteracy after 1964 was the cumula- areas, especially among women, spur the movement of tive result of earlier government literacy programs tar- workers from agricultural to nonagricultural activities. geted at women. And the next phase of economic development will Although China has a wide education base, the apex require managerial and financial skills that only a well- of the education pyramid is much narrower than in established tertiary education system can provide. other low-income Asian economies with much weaker China's earlier investments in education paid hand- education records. Nearly all Chinese children spend a some dividends as the economy was gradually liberal- relatively short period at school: 5.6 years on average, ized. In 1990 China's illiteracy rate of 22 percent was similar to that in India but well short of China's East about average relative to other countries (figure 4.2), Asian neighbors. Of 1,000 children starting school and it has been declining steadily. In the 25-54 age today, only 275 will stay on past lower-middle school, group-those who went to school after 1949-illiter- and almost as many will not make it past primary acy is only 16 percent, well below the 62 percent among school (figure 4.5). The government's Ninth Five-Year those 55 and older. More impressive still, illiteracy Plan sets a target of achieving the norm of nine years of among 10-24 year olds is only 5 percent (figure 4.3). As schooling by 2000. Reaching this target will require the the more literate younger generations grow older, aver- participation rate in lower-middle schools to rise by 50 age illiteracy will continue falling. There is a danger, percent, and the dropout rate to fall. It might be helpful however, that rural children who do not move on to to eliminate examinations at the end of primary school, lower secondary school will actually lose literacy skills, as has already been done in parts of China. Doing so so the government should continue its efficient and would encourage students to enter secondary school effective adult literacy program. and would benefit girls in particular, since they tend to This creditable record has one blemish: the wide drop out in greater numbers at this stage of their edu- gap between female and male literacy rates (figure cation. f2m=FIGURE 4 ;'00 <\<0S @\f \\\S; dyt00> a0000FIGURE 4.3 China's illiteracy rate is in line with rates ... and it declines sharply with age in comparator countries ... Percentage of age cohort Percentage of population older than 15 years, 1990 80 70 70 FemaLe 60 60 50 50 40 Male 4 30 30 20 20 10 10 0~~~~~~~~~~~~~~~~~ Birth cohort Source: WorLd Bank 1996c; China Populotion Yearbook 1995. Source: China Population Yearbook 1995. 48 China 2020: Development Challenges in the New Century FIGURE 4.4 FIGURE 4.5 Illiteracy among women remains high Destined to learn Ratio offemale to male illiteracy Projected educational attainment of 1,000 entrants 5 to primary school in 1995 Number of students 4 ~~~~~~~~~~~~~~500 448 400 3 300 262 2 234 200 I 100 0, N - 15 41 O, O, c)OO, , z (h )> ,~) ,1 0 None Primary Lower Upper Higher Birth cohort (0-6 middle middLe (12+ years) (6-9 (9-12 years) Source: China Population Yeorbook 1995. years) years) Educational attainment Upper-middle schools are not only restricted to a Source: WorLd Bank staff estimates based on data from the China Statistical small portion of children, but are also heavily biased Yeorbook 1996. toward vocational and technical education. The emphasis on vocational and technical education in gest that a science curriculum that stresses experimenta- China is driven by three concerns: keeping unemploy- tion and scientific inquiry and a mathematics curriculum ment among school leavers low through a closer fit that encourages problem-solving make school leavers between supply and demand, expanding secondary more receptive to on-the-job training. China could ben- schooling without increasing pressure on the tertiary efit from a more flexible approach to curriculum devel- level, and upgrading the technical skills of the labor opment, with the State Education Commission force. involving employers and ministries in its plans. These concerns are less compelling in a market sys- As far as higher education is concerned, the echoes of tem where demand for skills and occupational cate- the Cultural Revolution will continue to be heard for gories is changing rapidly. The new concern is not some time. During that period most universities were whether school leavers can slot into a job immediately, closed and the number of graduates declined (figure but whether they can adapt to changes in job require- 4.6). Students who did graduate had received a poor ments throughout their working lives. A better balance education. Today, more than a quarter of China's grad- between vocational and technical education and gen- uates between the ages of 25 and 64 are older than 50 eral education has merits that are underscored by inter- and will have retired by 2010. Merely replacing them in national experience. Vocational and technical the workforce will require substantial increases in education enrollments in the Republic of Korea, higher education enrollments. There is some evidence Malaysia, and Thailand are declining as employers and that this has been happening, especially since 1991 (fig- students recognize that general education equips people ure 4.7). Even so, by 1994 only 2.4 percent of the uni- for the demands of a modern economy integrated with versity age cohort (18-22 years old) was enrolled in the world trading system. higher education.9 That compares with 9 percent in As the emphasis changes, general education pro- Thailand, 10 percent in Indonesia, 20 percent in Hong grams in secondary schools need to emphasize quality Kong, 39 percent in Taiwan, China, and 51 percent in and creativity. The experiences of other countries sug- Korea.10 Shaping a Competitive but Caring Society 49 EducationaL echoes of the Cultural Revolution EnroLlment in higher education has grown Number of people with higher edcuation for every 1,000 sharply in recent years in their age cohort 1985 = 1.0 30 u 1.5 Revrs whon202yerol 25 1.4 1.3 20 1.2 15 10 1.0 5 0.9 0 ~~~~~0.8 (o (0 N ~~~~~~~~~~ ~~~ Source: China Statistical Yearbook 1996. Years when 20-24 yeors old Source: China Population Yearbook 1995. Protecting the vulnerable Inside China's higher education institutions there is a A caring society has formal mechanisms that help vul- strong bias toward engineering, which accounts for 39 nerable people cope with structural change and market percent of all enrollments. This emphasis can lead to reforms. Although there are many such people in high unit costs. China's public spending per student in China, here we focus on five groups who are particu- higher education is 175 percent of GDP per capita; the larly vulnerable to the effects of markets. average in other East Asian economies is 98 percent. Yet evidence suggests that a significant portion of engineer- The poor ing students eventually work in occupations that do not require engineering training. A key challenge for the Rapid growth has helped lift 200 million Chinese out of future is to design a flexible education system that sup- poverty since 1978. But most of the reduction occurred plies skills in line with changing needs and shifting in the first six years, when agricultural incomes soared employment patterns. For example, the government following the introduction of the household responsi- could place more emphasis on science, mathematics, bility system. Progress stalled in the mid-1980s, but has and humanities programs to supply more qualified picked up since 1992. In 1996 about 6 percent of the graduates to the growing services sector. population-some 70 million people-were living Although the case for new and additional expendi- below the government's absolute poverty line. Against tures on education is compelling, it is equally important the World Bank's international poverty line of $1 a day, to consider where these resources will come from. The however, the poor make up 22 percent of China's pop- government (including local government) already foots ulation (figure 4.8).11 87 percent of education expenditures; most of the rest In most cases the poorest people are entire commu- comes from state enterprises or tuition fees. The gov- nities living in isolated, upland regions of the interior ernment's budget will remain under pressure, and state with few if any natural resources. Although they have enterprises are going to shed their social obligations. So rights to land, the land is usually so poor that it is the main source of extra revenues for education will impossible to produce enough food to survive. Thus, have to be a combination of higher tuition fees, student unlike most farmers in China, these groups are net pur- loans, and financial aid programs (box 4.3). chasers of food, and so are hurt whenever the relative 50 China 2020: Development Challenges in the New Century BOX 4.3 have become the target for coordinated poverty reduc- tion programs by government agencies. Fi-ancing aeditionaL :-pendtures i- higher 0 As the numbers of the poor have dwindled, further education reductions have been increasingly difficult to achieve. According to one scenanro exploTed by theWorld Bank, China's Continued progress will require more careful targeting, expenditures on higher education could grow by2percent a perhaps concentrating on individual townships and vil- year (in real terms) until 2020. This proiection rests on the C=eX=;- =EnAS -u::-Wn-: zV - ; lages. That approach will help the government to rather-strong assurmptions that unit costs can be significanitly Xreduced(throgh higher staffstudentratiosandmoreeient minclude in its programs people who do not live in the use of buildings) even as the qualit of education imriv designated poor counties but who account for about considerably. Under this scenario the share of pubtic expendi- half of the poverty total. Careful targeting will also turesfaUsfrom 74percentin 1994to 51 perc 2020,while mean differentiating between the chronic and the tran- the share of student fees rises from 9 percent to 31 percent and sient poor. About 40 percent of poor people live in the share of institution-generated income from 14 percent to h 1S =; :0:f;00~fiSX004=-A ;:=::-0 z0?FX-=: households that are not poor on average, but that have 18f X u X 0 - X pe t. t: - tf - ;-f f; V; 00 : - X -~ - -suffered a temporary decline in incomes.12 Programs to Sore:S World Bank 1997&a i help these households would differ significantly from those designed for the chronically poor. price of food rises. Moreover, the poor tend to be less Apart from better targeting, poverty programs may educated, less healthy, and have more dependents for need other changes of emphasis. Many poor people each working-age person. In several of the poorest vil- undoubtedly benefit from investments to improve rural lages at least half the boys and almost all the girls do not infrastructure, agricultural productivity, and off-farm attend school and are unlikely ever to be literate. employment. But the returns from such investments will Most of China's poor households lack the physical decline once the bulk of the poor are in remote areas with and human assets to benefit much from the mainstream few natural resources. These people will benefit from a forces of growth. For this reason, in 1986 the govern- renewed emphasis on basic health and education, com- ment established a Leading Group for Poverty bined with assistance to find employment elsewhere. Reduction to develop coherent policies for the poor. By 1996 the group had identified 592 poor counties (on the The elderly basis of average per capita incomes in 1992), and they China is going through a profound demographic tran- FIGURE 4= =sition. A stringent birth control policy has brought an F1GURE 4.8 : f X a- = X X extraordinarily steep decline in the fertility rate. This Sharp drop in poverty drop has transformed the age structure of the popula- Incidence of poverty tion, which is now somewhere between the patterns of (percent) high-income and low-income economies (figure 4.9). 70 One major consequence of this change is that the 60 elderly account for an increasing portion of the popula- tion. Today, their share is over 6 percent, but by 2020 it 50 is expected almost to double to 11 percent (table 4.2). 40 Higher In today's high-income economies a similar aging took e povterty line more than a century. Even by the standards of other 30 developing economies, China's population will age very 20 Abso[ute quickly. By 2020 the share of the elderly in China's pop- 10 poverty line ulation will be half as much again as in, say, India, 10 povertylbn Indonesia, Malaysia, or Vietnam. 1 Ensuring the financial security of the elderly will be a 1981 1983 1985 1987 1989 1991 1993 1995 major challenge because labor force growth is slowing. Source: WorWd Bank 1997c. Indeed, by 2030 the total workforce is projected to start Shaping a Competitive but Caring Society 51 FIGURE 4.9 TABLE 4.2 China's age pyramid is a mix of ... China's demographic profile, 1995 and 2020 China, 1995 Indicator 1995 2020 Age PopuLation (thousands) 1,200,241 1,425,288 bracket Labor force (thousands) 811,402 987,778 75+ Fertility rate (percent) 1.95 2.00 70-74 Life expectancy (years) 69 73 65-69 FemaLe M 60-64 Male Children/population 26.0 19.9 gggoX 55-59 =Elderly/population 6.4 10.8 45-49 Dependency ratioa (percent) 47.9 40.9 40-44 a. Ratio of nonworking-age population to working-age population. 35-39 Source: World Bank data. 30-34 25-29 20-24 declining in absolute numbers. Today there are ten peo- agWMMEM~15-19 10-14 ple of working age for every pensioner.'3 By 2020 there 5-9 ________________ 0-4 will be six, and by 2050 only three. 70 60 50 40 30 20 10 0 Millions0 10 20 30 40 50 60 70 More immediately, China is already facing a pension crisis in its state enterprises. Although employment in ... that of high-income economies ... those enterprises is growing slowly, the number of their High-income countries, 1995 pensioners is rising rapidly. Some enterprises have more pensioners than workers. With these firms in a weak Age bracket financial position, managers occasionally have been 75+ forced to stop pension payments. 9M~Kdg 70-74 fre oso es Female. fm: 60-64 Male The problem lies in the pension system inherited =(JX = j;:39 550-54 from the era of central planning. It is a pay as you go MM MO 45-49 _ system with defined benefits that cover mainly the :c S : ~~40-44 -0-UMM ORRU: 35-39 retired employees of state firms in urban areas. In non- m2 9a fm o a is tr ' fmp30-34 t 3>300 Notes 10 megawatts 1. This chapter draws heavily on WorLd Bank (1997). 0 ------ 2. NatonaL environmentat poLices and regutatons are formuLated Number of Power2.Ntoaeniomnapoiisadrgltosrefmutd pLants generated by the State EnvironmentaL Protection Commission, which reports Source: Beijing Economic Research Institute of Water Resources and Electrc directLy to the State CounciL. The commission is supported by the inde- Power. pendent National Environmental Protection Agency, which disseminates environmental poLicy and reguLations, collects environmentaL data, pro- vides training and support to LocaL environmental protection bureaus, China's power plants have a capacity below 100 and advises the commission on environmentaL poLicy. PoLLution controt megawatts, with lower energy efficiency and higher pol- poLicies are built on three fundamentaL principLes: prevention first, then prevention with control; poLluters pay; and a strong reguLatory frame- lution abatement costs than larger plants (figure 6.9). work. These principLes are given voice through a range of reguLatory Community participation could help improve the poLicies, incLuding environmental impact assessments, poLLution Levies regulatory process and reduce pollut . .Internaand discharge permits, and mandatory poltution controL programs. regulatory process and reduce pollution. International 3. World Bank (1997, chapter 5). experience shows that community pressures can be a 4. China National Environmental Protection Agency (1996, pp. 7-23). powerful force for reducing pollution, even in the 5. The WorLd Heatth Organization (WHO) recently eLiminated its absence of formal environmental regulation.6 ~ standard for totaL suspended particuLate emissions because there is no identifiabLe threshold beLow which heaLth impacts are negLigibLe. Community participation does have two potential 6. Data on the relative contributions of various sources of Lead in drawbacks, however. Community pressures tend to rise air, soil, and water are not avaiLabLe for China. In addition to auto- mobiLes, mining, and Lead smeLting, the production and recycLing of with incomes, which may encourage pollution-inten- batteries and cabLes are beLieved to be the primary sources. sive industries to relocate to poorer areas with less 7. These estimates are drawn from a study in Chongqing that drew opposition. And community pressures tend to focus on on cross-sectionaL data on health and air quaLity in different zones of opposition. And community pressures tend to focus on the city. An increase of 100 micrograms per cubic meter of particu- visible and prominent cases of pollution and may ignore Lates was associated with a 40 percent increase in mortaLity rates from less visible but equally harmful pollutants.17 chronic obstructive puLmonary disease, whiLe an increase of 100 micro- grams per cubic meter of suLfur dioxide Lead to a 23 percent increase In summary, a cleaner future is well within China s in mortality. See World Bank (1997). reach. Well-designed policies that harness market 8. WorLd Bank (1997). forces, encourage investment in alternatives, and use 9. In 1990 four water-reLated diseases (diarrhea, hepatitis, tra- choma, and intestinaL worms) accounted for 1.5 percent of totaL China's strong administrative and regulatory capacity deaths. These diseases cost 0.01 disability-adjusted Life-year per will produce a cleaner environment for future genera- capita in China, compared with 0.02 in Latin America, 0.04 in India, tions. As with all reforms, these efforts will involve both and 0.06 in Sub-Saharan Africa (World Bank 1993). 10. WorLd Bank (1997). public and private adjustment costs in the short term. 11. Box 6.1 provides estimates of the costs of various sources of But these costs pale in comparison with both the costs power, including wind power. Somewhat more optimistic estimates of ofnanthe quality of life the economic viability of wind power may be found in WorLd Bank of inaction and the improvements in the quaSty of hfe (1996). ALso see Johnson and others (1996, pp. 28-30). that a cleaner environment brings (table 6.2).18 12. Grossman and Krueger (1995). 80 China 2020: Development Challenges in the New Century 13. China State CounciL (1994, chapter 4). Environmental nationaL China State Council. 1994. China's Agenda 21: White Paper on accounts are intended to augment standard national accounts by China's Population, Environmentand Development inthe21st deducting the costs of environmentaL degradation from measures of Century. Adopted at the 16th executive meeting of the State nationaL income and the depLetion of nonrenewable natural resources Council. Beijing. from measures of national weaLth. Dasgupta, S., and D. Wheeler. 1997. "Citizen Complaints as 14. In 1995 steam coal delivered to noncoal-producing coastaL Environmental Indicators: Evidence from China." Policy cities (incLusive of the value added tax) cost about $40 a ton at mar- Research Working Paper 1704. World Bank, Policy Research ket exchange rates. The spot price of Australian coaL exports fluctu- Department, Washington, D.C. ated between $38 and $48 a ton. Grossman, G., and A. Krueger. 1995. "Economic Growth and the 15. WorLd Bank (1997). Environment." Quarterly Journal of Economics 110(2): 16. Hartman, Huq, and Wheeler (1997). 379-406. 17. Dasgupta and WheeLer (1997). Hartman, R., M. Huq, and D. Wheeler. 1997. "Why Paper Mills 18. The returns to investment in pollution abatement presented in Clean Up: Determinants of Pollution Abatement in Four Asian tabLe 6.2 represent conservative estimates, as they do not take into Countries." Policy Research WorkingPaper 1710. World Bank, account the effect of future reLative price changes on the valuation of Policy Research Department, Washington, D.C. costs and benefits. If these are taken into account, the returns are Johnson, T., J. Li, Z. Jiang, and R.P. Taylor, eds. 1996. China: substantiaLLy higher. Issues and Options in Greenhouse Gas Emissions Control. World Bank Discussion Paper 330. Washington, D.C. World Bank. 1993. World Development Report 1993: Investing References in Health. New York: Oxford University Press. -_____ 1996. "China: Renewable Energy for Electric Power" China National Environmental Protection Agency. 1996. Selected Report 15592-CHA. China and Mongolia Department. Documents from the Fourth National Environmental . 1997. Clear Water, Blue Skies: China's Environment in Conference. Beijing: Environmental Science Press. the New Century. Washington, D.C. Protecting the Environment 81 Integrating with the World Economy -- he opening of China's economy was an Ol : - Fintegral part of its economic reforms and a cen- tral element in its growth. Between 1978 and 1995 the value of exports and imports as a share of GDP tripled and China became the world's second-largest recipient of for- eign direct investment (FDI) after the United States. The links between trade, FDI, and China's high savings rates have been a key factor in its rapid growth.1 These links will also be crucial for future growth. Deepening integration with the world trading system will bring further benefits of China's comparative advantages and provide clearer domestic signals on where to allocate resources. Increasing integration with the international financial system will help lower the cost of capital and deepen domestic financial markets. Sustaining FDI will bring new management know-how, the latest technologies embodied in capital equipment, and the most recent tech- niques in international marketing. 83 Accelerating the virtuous circle of trade and growth lowest ratios in the world. Since then China's trade has will require a firm timetable for reducing trade restric- surged to more than 30 percent of GDP (figure 7.1).2 In tions to acceptable international levels, supplemented U.S. dollar terms, trade increased nearly tenfold by better procedures for resolving trade disputes. It will between 1978 and 1995, from $36 billion to $300 bil- also require further improvements in the climate for lion. As a result China is now the world's tenth-largest FDI and observing international legal norms on the pro- trading nation, accounting for 4 percent of world trade. tection of property rights. There are four noteworthy features of this change. The government has committed itself to this path in the First, China has merely caught up with global norms Ninth Five-Year Plan and Fifteen-Year Perspective Plan. following a long period of autarky (figure 7.2). Large At the same time, the authorities recognize that further countries naturally trade less across their borders than trade liberalization will require difficult and costly adjust- smaller countries, precisely because they contain a ments in parts of domestic industry: steel, machinery, wider diversity of resources offering opportunities for chemicals, automobiles, and consumer electronics-all trade within their b6rders. industries that tend to be dominated by state enterprises. These adjustments could temporarily increase unemploy- ment. They may also weaken the banking system. Serious though such consequences would be, they Outward and upward can be planned for and dealt with, and should not deter (Trade-GDP ratios in 1987 prices) the authorities from continued trade liberalization. The China's openness to trade has caught up with other long-term growth benefits of a more liberal trading sys- large deveLoping countries ... tem far outweigh the short-term costs of adjustment Percent (which, as other countries have learned, are usually 50 lower than was initially thought). Chinese industries Other Large will improve their international competitiveness signif- 40 developing countres icantly if they gain access to high-quality imports, espe- 30 cially capital equipment. Closer links with international P partners and competitors will also be vital to long-term 20 success in export markets. And the pressure of world 0 competition will encourage Chinese firms to adopt best 10 practices and capture scale economies. 0 China's international integration is important to the 1965 1970 1975 1980 1985 1990 1995 rest of the world too. Its trading partners will benefit from exporting to its vast and largely untapped markets. More ... although its performance has been unremarkable intensive trade will benefit all, just as a rising tide raises all compared with the rest of East Asia ships. Moreover, foreign investors will be interested in Percent China's sea of skilled and disciplined workers. Over the 80 next several decades industrial countries will likely have unprecedented surpluses of long-term private capital 60 East As seeking a safe and productive haven. Marrying this sur- plus capital to China's surplus labor could unleash pro- 40 ductive power of enormous significance in the twenty-first 4___ century, to the mutual benefit of China and the world. 20 57 Deepening trade integration 0 1965 1970 1975 1980 1985 1990 1995 During the late 1970s China's imports and exports Note: Other Large developing countres (apart from China) are Brazil, India, Indonesia, and Ruaaia. accounted for about 13 percent of GDP-one of the Source: World Bank staff estimates. 84 China 2020: Development Challenges in the New Century Second, these indicators of openness are somewhat Protecting domestic industry from imports deceptive. Roughly half of China's trade is imports processed into exports (usually by foreign-financed The Chinese authorities regulate imports through tar- firms) and has little effect on the domestic economy; for iffs, quotas, and licensing. Tariff rates are comparable example, it exerts few competitive pressures on state to those imposed by several other large developing enterprises that sell their output in the domestic market. countries (figure 7.4). At the November 1995 meeting If the figures on trade are adjusted to exclude process- of the Asia-Pacific Economic Cooperation (APEC), ing trade, then China is much less open than the global China announced that it would lower tariffs on a num- norm, even for a country of its size. ber of goods, including coal and gas, textiles, apparel, Third, China's external trade has been relatively leather, and other light and heavy manufactures. The diversified, in terms of both the commodities it trades net effect in 1996 was to reduce the simple unweighted and in its trading partners (figure 7.3). Exports are average tariff from 36 percent to 23.4 percent and the dominated by a wide variety of labor-intensive manu- weighted tariff from 28.1 percent to 19.8 percent. At factures, with primary products accounting for only a the November 1996 APEC meeting the authorities modest share of the total. As a result China has not announced further cuts. There are still many tariff con- experienced the vagaries of volatile commodity prices. cessions and exemptions, however: exemptions for Fourth, Hong Kong has played a crucial role as export processing covered 44 percent of merchandise China's window to the world. Since reforms started in imports in 1995 and 45 percent in 1996. the late 1970s, Hong Kong has done much to channel Turning to nontariff barriers, thirteen commodities goods and capital in and out of China. As a result the are subject to import quotas. These commodities were two economies were closely integrated well before their selected on the grounds that excessive imports could political unification (box 7.1). hinder the development of domestic industry or China's integration with the rest of the world has threaten the balance of payments. In addition, the been remarkably swift. But the process has left China Machinery and Electronics Import and Export Office with a complex set of trade and foreign investment poli- cies administered by a range of occasionally overlap- FIGURE 7.3 ping ministries and agencies (box 7.2). China's trade has been diversified Exports and imports by economy of destination and origin, 1995 FIGURE 7.2 (percent) Exports After rapid growth, China's trade ratio has Other Hong Kong reached large-country norms 28% 24% Trade volume as a percentage Taiwan, China IIIiiiŽ of GDP, average 1978-94 2% 200 Singapore 180 Germany Japan 40/ Korea, United 19% 160 Rep. of States 140 * . 4% 17% 120 Imports 100 *Ohr Hong 80 . 0o *0 ~~~~~~~~~~~~~~~~~thr Kong 80° + .><+_ .. - . . 310/0 Japan 60 . ~~~~~~~~~~~~~~China22/ 40 00109950 t 20 ~hina. 01 (1978 30 35 40 45 50 Taiwa ited Size (tn GDP*population) Ch% Singapore Germany Korea, States Size (In GDP*populotian) ~~~110/ 3O 60/ Rep. of 12%/ Note: Figure plots the cross-country relationship between country size and 80/0 trade ratios for a sample of 104 developing countries. Source: World Bank staff estimates. Source: Chino Statistical Yearbook 1996. Integrating with the World Economy 85 Evenafte uniicaton wth hina Hon Kon's eonoic prfor tio notonl hasspured gowthon he minlad abu salshha and abraindrai, as ome ad fered,Hong ong ontines t centr fo intenatinal tademndnfianciltserices try, two-system" framework within which Hong Kong will remain trade.China continue to deepen integration in the coming decades.estimated at25percentof thevaluer ofthemerichcanedXaiese have boostd thegrowt of Hng K ng' serviesetor.i og og HXng Kopg under the Basic Law * Hong Kong is the maIn conduit of foreisgin ptal for Cohnea The Basicnawpse by20 thev Natopm ntCalPole'gs Cogesin 1990 neee Ce t hrouhHnyog bu 0pecnfsniaeon flftyeas afer nifiatin. Acoring o tis aw, he ong ong HongKon's bnkig sstemowe $39bilion o tbnks mnaCina Special dministrtive Regon will:and had laims onChinese anks andnonbankigoentitis of $4 prises, and freign investmnts. China s the second argest "forei n" ineso in Hon Kong. * ReaintheHon Kon dolaras ega tener,ensre ull on- domsti stck mrke (Bshaes)anda deeonpteHng Kon astock and ehnjo exclusievelyoth e nepot quoaslande taiff prefNerecsi C hinat n19.MoetaurmlinminadrvistdHn BOX 7.1, continued Hong Kong and China: Ties that bind Hong Kong's service sector has a lot to offer Tapping Hong Kong's human capitat, 1995 Percentage of GDP (1995) 100 Category Hong Kong China Hong Kong 84 Professional staff (per 100,000) 80 Accountants 35a 4 Lawyers 62a 7 60 Share of loborforce (percent) 48 Trade and commerce 44 12 Finance and insurance 16 2 40 China Transport and communications 7 6 31 Services (total) 71 24 21 a. Data are for 1996 or March 1997. 20 Soure Hon Kon Maryh 1 9 Cc . 1l ~~~~~~~~~~~~~~~~Source Hong Kong Monetary Authonty 1997b. Chino Stotistical Yearbook 1996 Services Agnculture Industry regulatory system transparent-factors that have been crucial to Source China Sratistical Yearbook 1996, Hong Kong Monetary Auuionty 1997a its success. It is in the interests of both China and Hong Kong to maintain Hong Kong's distinctive features. At the same time, market ranks ninth. Hong Kong has about 1,300 accounting firms being part of China will provide Hong Kong with a competitive and 3,000 management consulting firms (see table). It is the edge over its strong Asian rivals. regional headquarters of nearly 800 foreign companies. This con- Hong Kong's return to Chinese sovereignty wilt have equally centration of professional skills could benefit China's financial profound consequences for the mainland economy. Hong Kong, as sector reform and development. China's window to the world, will become an increasingly impor- Hong Kong has established a responsive, lean government and tant source of knowledge and expertise for China in private and sound legal system. Information is freely accessible and the public sector management. BOX 7.2 Who's who in China's trade policy Under the State Council, eight major institutions with overlap- Tariff and nontanff bariers. The Customs Tariff Commission, ping responsibilities formulate and administer trade policy. reporting to the State Council, sets tariffs. The Customs General Policy formulation. The State Planning Commission and the Administration administers the trade regime, including tariffs and Ministry of Foreign Trade and Economic Cooperation jointly nontanff barriers. The Ministry of Foreign Trade and Economic formulate national foreign trade policies. The ministry negotiates Cooperation also has direct responsibility in this area. international trade agreements. Direct trading rights. The Ministry of Foreign Trade and Economic Quota and license allocation. The State Planning Commission Cooperation grants trading rights to enterprises that meet certain allocates import and export quotas for goods that are deemed criteria. Foreign trade corporations, under the ministry's administra- essential to China's economy and people's livelihood. The tion, are allowed to trade in all products except for a small number Machinery and Electronics Import and Export Office coordinates that can be handled only by designated foreign trade corporations. and administers imports and exports of pnncipal machinery and Foreign exchange control. The State Administration of Foreign electronic products. The Ministry of Foreign Trade and Economic Exchange, which reports to the People's Bank of China, is respon- Cooperation issues import and export licenses. sible for carrying out foreign exchange policies. applies quotas to fifteen machinery and electronic prod- ing monopolies. Although automatic import registra- ucts, such as automobiles and refrigerators.3 tion is not intended as a nontariff barrier, it risks having Automatic import registration covers a wide range of the same effect. Importers must demonstrate a market imports, including oil, nonferrous metals, polyester, and need for the goods and prove that they can pay for them. cotton. Some of these imports are subject to quotas and But since firms would not attempt to import unless they licenses, and some can be traded only through state trad- had decided that imports would meet their needs better Integrating with the World Economy 87 than domestic supplies, it is not clear why a government to the rest of the world could be twice as great (table department is better qualified to make this judgment 7.1). Lowering trade barriers will create new opportu- than the managers of the importing firm. The financing nities for increased specialization and gains from trade. requirement appears similarly redundant-if the firm Reducing the variability of tariffs across sectors will does not have the finance, it will not import. ease distortions-their standard deviation will fall from Of course, effective rates of protection differ signifi- 23 percent in 1995 to 12 percent in 2005. Furthermore, cantly from nominal tariffs. The difference is particularly greater transparency in trade rules will reduce distor- pronounced for machinery and equipment (figure 7.5).4 tions and eliminate unproductive rent seeking. At the same time, however, the authorities need to Reducing protection anticipate the domestic consequences of further import liberalization, which are likely to be concentrated in China's eventual accession to the World Trade capital-intensive, scale-sensitive industries where prof- Organization (WTO) will result in further reductions in its are high (figure 7.7).6 Such industries include steel, tariffs. If its current formal WTO offer is implemented, automobiles, machinery, electronics, and heavy chemi- weighted average tariffs will fall from 19.8 percent cals. Many of these industries are concentrated in today to 16.2 percent by 2005.5 These reductions will regions where unemployment is already high. particularly benefit manufactures exporters such as Moreover, any financial difficulties they may have Japan, Korea, and the European Union, which as recently as 1995 faced tariffs ranging from 30 to 40 per- 7= 5 cent. Raw material exporters to China will gain less, Nominal and effective rates primarily because the tariffs they face are already lower. Nominal rates of protection . WTO accession will also involve big reductions in Percent nontariff barriers for China, eliminating almost all Processed rice except those on food and certain other primary prod- OiL ucts (figure 7.6). Wheat If China implements its WTO offer and industrial Nonferrous metaLs ChemicaLs, rubber, and ptasticss countries, in turn, abolish quotas under the Multi-Fibre Phemicals, rube, an plasts PetroLeum and coal products Arrangement (MFA), the welfare gains to China by Nonmetallic mineral products 2005 could reach $116 billion a year, and the benefits Machinery and equipment 2995 Fabricated metaL products FIGURE7A Lumber and wood Declining tariff barriers Transport industry _ Percent 0 100 200 300 400 500 600 60 M 1980-83 ... differ substantiaLly from effective rates of protection 0 1991-93 50 I Post-Uruguay Round Processed rice OiL 40 Wheat Nonferrous metals 30 ChemicaLs, rubber, and pLastics Petroleum and coaL products 20 NonmetalLic mineral products Machinery and equipment 199 10 2005 Fabricated metal products 0 Lumber and wood China India Indonesia Malaysia Thai[and Transport industry __ Note: Data for China take into account 1996 tariff reductions and the effects of China's most recent WorLd Trade Organization accession offer. -100 O 100 200 300 400 500 600 Source: UNCTAD 1994; Finger, Ingco, and Reincke 1996. Source: World Bank staff estimates. 88 China 2020: Development Challenges in the New Century would quickly affect the fragile financial system (see alization far outweigh the adjustment costs. Around the chapter 3). A lack of data prevents an accurate assess- world, there is growing consensus among policymakers ment of the possible shock, but it could be much larger and academics that trade liberalization is one of the key than the current portfolio problems of state commercial ingredients for higher growth. China's experience over banks. the past two decades attests to this view. Should the prospect of these difficulties deter the authorities from liberalizing trade? No-for two rea- FIGURE 7.7 sons. First, experience in other countries has shown that Highly protected industries are the costs of adjustment, while significant, are usually less moderately capital intensive . . . than was first thought. Economies tend to adjust posi- Fixed assets per employee tively and rapidly to steady, determined reductions in (thousands of yuan) trade barriers. In the long run the gains from trade liber- 60 50 40 FIGURE 7.6 Proposed nontariff barriers under World 30 Trade Organization accession 20 Percent 10 Rice Negative Low High .___________________________________ effective rate effective rate effective rate Wheat of protection of protection of protection Nongrain crops . . . earn high profits . . . Livestock Pretax profit rate Other food products (percent) ______________________ ~15 Natural resources 1996 After the WTO phase-in 12 TextiLes Light manufactures 9 Transport industries 6 Machinery and equipment 3 Basic heavy manufactures 0 Total Negative Low High effective rate effective rate effective rate 0 20 40 60 80 100 of protection of protection of protection Note: Data refer to China's current WTO offer and show the share of imports affected by nontariff barriers, using 1992 trade weights. . . . and account for a substantial share Source: World Bank staff estimates using UNCTAD TRAINS data and data from of assets the Ministry of Foreign Trade and Economic cooperation. Share of total assets (percent) 50 TABLE 7.1 Projected welfare gains from trade liberalization 40 Coletively owned (average annual benefit, in billions of 1992 dollars) enterprises 30 -e With WTO offer and eLimination 20 .8 Economies With WTO offer of MFA quotas 10 China 83 116 Rest of the worLd 340 332 0 Negative Low High European Union 71 81 effective rate effective rate effective rate United States, Canada, and Mexico 38 44 of protection of protection of protection Japan 61 62 Source: China Office of the Third Industrial census 1996; World Bank staff estimates. Source: WorLd Bank staff estimates. Integrating with the World Economy 89 Second, the government can prepare plans to deal Much FDI has been in special economic zones, under- with the adjustment costs. One way is to continue pinning the rapid growth of trade. In 1995 one-third of reforming banks, state enterprises, and labor markets China's exports and half of its imports involved joint (see chapters 3 and 4). The more that is done in these ventures between Chinese and foreign partners. areas, the easier it will be for the economy to adjust to the The bulk of FDI inflows have come from the Chinese changes in relative prices brought on by trade liberaliza- diaspora in Hong Kong, Singapore, and Taiwan, China. tion. In addition, the government will have to finance In addition, some of the inflows have been domestic cap- some of the adjustment costs through unemployment ital that has "roundtripped" its way through Hong Kong benefits, payments to pensioners of failed enterprises, and back to the mainland to take advantage of the tax and recapitalization of state banks (but only once they privileges available to foreign investors.9 FDI goes largely are fully commercial). Meeting these costs will require to coastal regions-the nine coastal provinces and three further efforts to collect taxes, reduce the budget deficit, municipalities have consistently attracted more than 85 and shift government spending toward social invest- percent of the total-and has been concentrated mainly ments and measures that support reforms. on tradable manufactures. Recently, however, the range In any case, considerable efficiency gains can still be of investing countries has widened, and some FDI has wrung from further trade liberalization. Developing been going into import-substituting activities. countries such as China can boost productivity by Over the long term sustaining FDI and improving its importing a larger variety of intermediate products and efficiency will require China to face three challenges. capital equipment embodying foreign technology.7 Since First, China will need to maintain macroeconomic sta- 96 percent of the world's research and development is bility, which international evidence indicates is the most done in industrial countries, their technical progress can important determinant of FDI inflows. Stability should be captured relatively cheaply by liberalizing imports of be supplemented by efforts to reform the regulatory and such goods. More important, imported technology tends institutional framework for FDI, especially at the to spread rapidly across the domestic economy (see chap- provincial and county levels, and to enhance the trans- ter 3). The productivity benefits for domestic investment parency of tax and foreign exchange rules. are sometimes several times greater than the benefits Second, China must weigh the benefits and costs of acquired directly through the imports themselves. incentives to promote FDI. China recently unified the tax regime for foreign and domestic enterprises, elimi- Deepening financiaL integration China's rapid growth in trade has been accompanied by F 7.8 big increases in capital inflows (figure 7.8). A World A tidal wave of capital inflows Bank index shows that China's financial integration Billions of U.S. dollars with the world economy has grown sharply since the 60 mid-1980s.8 China now accounts for 40 percent of FDI to developing countries and is the largest recipient of 50 Portfo[io investment FDI after the United States. It also receives 15 percent of new cross-border commercial debt acquired by devel- 40 Private debt f[ows oping countries, and has begun to tap the growing pool 30 of portfolio investment. 20 Foreign direct investment 10 Before 1979 China attracted almost no FDI. By 1995 net inflows had reached $38 billion, accounting for 13 o percent of domestic investment, 13 percent of industrial 1990 1991 1992 1993 1994 1995 1996 output, 12 percent of tax revenues, and 16 million jobs. Source: World Bank Debtor Reporting System. 90 China 2020: Development Challenges in the New Century nated duty exemptions on imported capital goods, and To ensure that its external liabilities remain managable restricted tax incentives from provinces and cities. These and that it maintains easy access to international capital steps could slow the growth of FDI because they could markets, China needs to continue displaying prudence in discourage roundtripping. They are unlikely to deter its foreign borrowing program. In the past, foreign bor- genuine FDI, however, because the overwhelming evi- rowing bolstered foreign exchange reserves. But these dence worldwide is that tax and other incentives have reserves now cover more than eight months of imports. In only marginal effects on the location decisions of firms. the near future, China does not need to borrow much. Third, the government wants to shift FDI toward Even within this conservative framework, however, infrastructure (especially in the interior) and away from fundamental reforms are still possible. For example, manufacturing and real estate. Foreign investors typi- before state enterprises are allowed to borrow abroad cally have shied away from infrastructure projects, on their own account, they should be subject to certain partly because they have found themselves negotiating new criteria, including a modern corporate structure in with both the central government and the provinces and accordance with the Company Law, use of the new the procedures are inconsistent from one project to the accounting system, accounts audited according to inter- next. In addition, investors have not received assurance nationally accepted standards, profitable operations on performance obligations from their Chinese coun- over the previous three years, demonstrated ability to terparts, and have been deterred by China's underde- service foreign debt, and so on. veloped legal and regulatory system. Over the long term three other issues merit careful Many of these issues are being resolved. The legal consideration by the government: framework is being developed. Pricing reform, espe- * Monitoring short-term debt more effectively, cially for utilities, has made power investments more through timely and thorough supervision of the com- attractive. New financing techniques are available, mercial banks by the People's Bank. often offered in conjunction with multilateral financial * Developing a clear framework for foreign borrowing institutions such as the World Bank. for infrastructure, including the use of selective perfor- As a result the number of FDI transactions in infra- mance guarantees. The World Bank could assist this structure is increasing (see chapter 3). Foreign investors effort through its expanded guarantee program. are involved in a dozen power generation projects, each * Integrating external debt management with a public with a capacity of over 100 megawatts, as well as in ports, finance framework that considers the total financing highways, and railways. Several provinces are packaging requirement (domestic and external) of the consolidated publicly financed assets into ventures, selling shares to public sector. As other countries have shown, this may foreign investors, and using the proceeds to finance new require the government to rearrange the way that exter- projects. In China, this is known as "cascading finance." nal debt management is coordinated between ministries. It might be used to finance a series of dams being planned on the Yellow River (among other projects), though this Portfolio flows would require establishing a comprehensive river basin authority to coordinate the involvement of the provinces. The potential for portfolio investment is huge. So far, inflows into China have been equivalent to less than 0.5 External debt percent of GDP; the sixteen developing countries that attracted most developing country portfolio flows in Foreign commercial lending has expanded as market 1995 averaged about 2 percent of GDP. perceptions of China's creditworthiness have improved. Portfolio flows into China are limited to buying By the end of 1996 external debt totaled about $130 those equities that can only be subscribed by and traded billion, with both the debt to exports ratio (85 percent) among foreigners (including Hong Kong residents).10 and the debt to GNP ratio (20 percent) standing at less These are the designated B shares on the Shanghai and than half the developing country average and among Shenzhen stock exchanges; A shares are reserved for the lowest in Asia. Even the currency composition of Chinese residents. B shares, introduced in 1992, have China's debt has been diversified. attracted about $2 billion of portfolio investment in Integrating with the World Economy 91 sixty stocks so far. In addition, some Chinese companies bonds and equities have increased more sharply in are listed on the Hong Kong and New York stock recent years, and are now 30 percent of the total.12 exchanges.11 By 1995 about $4 billion in equities had This worldwide expansion presents great opportuni- been issued in overseas markets by Chinese companies. ties for China. For example, competition from foreign The segmentation of China's stock market between banks could promote the efficiency of domestic banks. domestic and foreign investors was introduced to Similarly, portfolio inflows could increase liquidity in assuage concerns about the volatility of private capital domestic capital markets and encourage improvements flows. Mexico's 1995 peso crisis reinforced this cautious in market infrastructure and the regulatory framework. approach. Because the B share market is relatively illiq- But China must overcome numerous hurdles to uid (table 7.2), the shares tend to sell at a discount, and achieve the preconditions for full financial integration arbitrage opportunities generate some illegal transac- and currency convertibility on the capital account. tions. Nevertheless, B share prices are poorly correlated International experience shows that unrestricted capital with A share prices, suggesting that the segmentation is inflows can strain macroeconomic stability. Moreover, broadly effective. a weak financial sector magnifies the risks associated with capital inflows if competition from foreign banks Intensifying financial integration prompts domestic banks to lend to less creditworthy clients. Domestic banks are also exposed to new instru- Financial integration with the rest of the world is still ments, such as derivatives, with which they have little unfolding in China. At the same time, technological experience. progress, financial innovations, and deregulation have On balance, the benefits and risks of financial inte- spurred considerable private inflows. Not all of these gration suggest a cautious approach to liberalizing cap- inflows are legal. For example, Hong Kong dollars are ital flows. But procrastination is not the answer, since the widely used in parts of southern China, and sizable cap- forces of markets and technology will bring unrelenting ital flows are rumored to move between the mainland pressure for cross-border capital flows. It is better to and Hong Kong each day. China's official figures show actively harness these forces to promote the economy a large errors and omissions component in the balance and the overall soundness of the financial system than to of payments, a sign of heavy unrecorded movements. allow government inactivity to spawn unpredictable So integrating China financially with the world econ- and potentially destabilizing movements of capital. omy is not a choice for policymakers to make. Markets are making it for them. The issue for the government is Sharing the benefits of China's growth how to manage the forces of integration for the overall benefit of the economy, and how to prevent the virtuous By 2020 China's exports are projected to be nearly 10 per- cycle of good policies and high growth from being dam- cent of the world's total, ahead of Japan but still behind aged by destabilizing capital flows. North America and the European Union."3 This rapid Moreover, international private capital flows have integration with the world economy will have different- grown explosively in recent years, responding to cross- but mostly favorable-effects on the rest of the world. border opportunities and driven by deregulation in Industrial countries will benefit unequivocally from many countries. Although FDI is still the biggest com- China's rising demand for capital- and knowledge- ponent of private capital flows, cross-border sales of intensive manufactures and primary products and from significant terms of trade gains. Only their labor-inten- sive manufacturing will face a squeeze, but much of that The B shares market is less liquid structural change would have happened anyway, with (turnover as a share of market capitalization) or without China. Share type 1995 1996 Among developing countries the effects of China's A shares 9.18 27.71 integration will depend on how much they trade B shares 3.93 9.56 directly with China and how closely they compete in Source: China Security Regulatory Commission data. third markets. Countries that trade heavily with China 92 China 2020: Development Challenges in the New Century but are not close competitors (such as Korea) will likely endowed with land and physical capital, and its stock of gain substantially. Low- and middle-income countries human capital (particularly in terms of years of higher that are close competitors (India, Indonesia, the education) is also lagging (table 7.3).14 These weak- Philippines, and Thailand) will experience some terms nesses are likely to persist. of trade losses on their exports of labor-intensive man- Looking at indexes of revealed comparative advantage ufactures. But their total trade will keep growing, and across 129 industries for a set of large developing coun- perhaps their world market shares as well. Regions with tries, China's pattern most closely resembles that of India, fewer trade ties to China (Latin America, Sub-Saharan Indonesia, and Thailand.15 Moreover, their trading struc- Africa, Eastern Europe, Central Asia) will neither make ture has grown more like China's over the past decade. significant gains nor suffer major losses. In the future China's comparative advantage is expected to shift toward intermediate technology man- Effects on industrial economies ufactures and away from low-technology clothing. By 2020 China is projected to gain 10 percent market share China's growth and internationalization should have in light manufactures (leather, fabricated metal prod- three main effects on industrial economies. First, they ucts, and miscellaneous manufactures) and 8 percent in will see faster growth in demand for capital- and knowl- edge-intensive products. The World Bank projects that I .9 their exports to China will grow at 8 percent a year, Employment in garment manufacturing in boosting ovexporal epo rt C owth from abt 2 percent a yindustrial economies declined before boosting overall export growth from about 2 percent a Chinese exports expanded year (without China) to 2.5 percent. While most of this Penetration rate of Employment in clothing increase will involve knowledge- and capital-intensive Chinese exports manufacturing products, exports of primary products (such as food- (percent) (thousonds) grains) will also rise. United States Second, this rapid growth in demand for industrial 12 1,200 country exports will raise their prices relative to those 10 EmpLoyment 1,000 of labor-intensive products. By 2020 the cumulative terms of trade gain will total 6.5 percent for Japan, 4.0 8 800 percent for North America, and 1.4 percent for Western 6 600 Europe. Combined with the extra volume growth, the overall effect will be to enhance income growth in 4 Penetration rate400 industrial countries. 2 200 Finally, many observers argue that global integration damages the jobs and incomes of unskilled workers in 1975 1980 1985 1993 industrial countries. From this some conclude that European Union China's vast size and the rapid growth of its trade will Ep U1,200 exacerbate the damage. Historical evidence suggests 10 otherwise, however. In industrial countries most of the 8 EmpLoyment 1,000 decline in employment in labor-intensive industries 800 such as clothing occurred well before Chinese exports 6 had significantly penetrated these markets (figure 7.9) 600 4 400 Effects on developing economies 2 Penetration rate 200 China is expected to maintain its specialization in labor- I l o intensive manufacturing and gradually lose market 1975 1980 1985 1993 Note: The penetration rate of Chinese garment exports in the United States share in resource-intensive products. Compared with is their share in total U.S. consumption of clothing. other major developing cuntries, China is poorly Source: U.N. Industrial Development Organization and World Bank data. Other major developing countries, China is poorly 93 Integrating with the World Economy 93 TABLE 7.3 Compared with most large deveLoping economies, China is poorly endowed with land, capital, and educated workers Physical capitaL Area under crops (thousands of U.S. Secondary education Tertiary education (hectare per worker) dollars per worker) (years per person) (years per person) Country 1995 2020 1995 2020 1995 2020 1995 2020 China 0.12 0.10 0.16 13.15 4.22 5.94 0.18 0.36 BraziL 0.61 0.58 9.56 31.22 1.76 3.83 0.12 2.08 India 0.30 0.29 1.68 8.20 3.92 4.38 0.45 1.30 Indonesia 0.19 0.18 2.70 21.94 2.34 6.20 0.51 1.59 Korea, Rep. of 0.07 0.06 21.48 115.17 5.65 6.44 3.03 6.75 Malaysia 0.42 0.40 15.84 139.62 3.78 5.70 0.53 2.20 PhiLippines 0.20 0.19 2.99 27.17 3.48 6.17 2.74 5.02 Source: Ahuja and Fitmer 1995; World Bank staff estimates. transport equipment and other machinery. Its fast- petition with China. Other countries-in Sub-Saharan growing Asian neighbors-Indonesia, Malaysia, and Africa and Latin America-will make small gains and suf- Thailand, for example-are also expected to gain mar- fer only minor changes in their terms of trade (table 7.4). ket share. In highly capital-intensive heavy manufac- To summarize, China's rapid growth and continued tures (chemicals, rubber, plastics, paper, iron and steel, liberalization will be an opportunity for the world econ- nonferrous metal) China is projected to increase its omy, not a threat. However, much will depend on market share by 4 percent, but industrial countries will whether China's largest export markets remain open. maintain their dominance. Rapid export growth worked for Japan and Korea in As for clothing, China and Hong Kong could lose as the 1950s and 1960s, but it may prove more difficult for much as 16 percent of the world market by 2020. China in the twenty-first century. Trade issues have Industrial countries are expected to lose an additional become more sensitive and complicated. If China's trad- 19 percent, while India, Indonesia, the Philippines, and ing partners were to raise barriers to its exports and Thailand will have the biggest boost to market share. China were to retaliate, the losses to China-and the Neither Latin America nor Sub-Saharan Africa is likely rest of the world-could be large. to gain much from this shift in trading patterns. China To avoid this, China's accession to the WTO becomes is also projected to lose market share in some agricul- imperative. Not only will trade relations be easier to tural products-rice, other grains, livestock, and processed food. The gainers will be some industrial TABLE 7.4 countries (Australia, Canada, the United States) and Projected changes in trade shares and terms of some Asian neighbors (notably India, Indonesia, trade in developing economies Malaysia, and the Philippines). Change in world market Cumulative change in The expected rapid rise in China's manufactured shares for all sectors, terms of trade, 1992-2020 1992-2020 exports will tend to depress their relative prices. Economies (percentage points) (percentage points) Meanwhile, its rising imports of machinery and transport Asian economies that equipment will make these products relatively more trade with China but are expensive. Thus the terms of trade changes for any coun- not major competitors' 1.0 to 3.0 -3 to -9 try will depend on its specialization in these two cate- Asian deveLoping countries with endow- gories. Economies that are ahead of China in industrial ments similar to Chinab 0.3 to 2.8 -8 to -13 development (Korea, Malaysia, and Taiwan, China) Other developing could make moderate gains and suffer small losses in economies -0.2 to 0.1 -3 to 4 terms of trade. The same is broadly true of East Asian and a. RepubLic of Korea, MaLaysia, and Taiwan, China. b. India, Indonesia, Philippines, and ThaiLand. South Asian developing countries that are in direct com- Source: WorLd Bank staff estimates. 94 China 2020: Development Challenges in the New Century handle within that context, China itself would also ben- 8. The index uses a weighted average of three variabLes: country risk efit from aratings, which measure a country's access to internationaL financiaL mar- kets; ratio of weighted pnvate capital flows to GDP, which reflects a and intellectual property rights, ensuring an open and country's abiLity to attract private financing; and composition of private transparent trade regime, reducing its import barriers, capital flows, which captures the diversification of inflows. 9. According to some estimates, 'roundtripping" accounted for and resolving disputes through the neutral mechanisms about 20 percent of recent FDI inflows (UNCTAD 1995). of the WTO. 10. Overseas investors are excLuded from the domestic bond market. 11. New York Stock Exchange Listings of Chinese company shares, caLLed N shares, are in the form of American depository receipts (ADRs). Notes 12. World Bank (1997b). 13. This section reports resuLts from a large-scaLe computabLe gen- 1. This chapter draws on WorLd Bank (1997a). eraL equiLibrium globaL trade model. The assumptions behind the 2. Two measurement issues are of key importance in comparing the modeL are Laid out in WorLd Bank (1997a). LeveL and pace of China's integration with the worLd. First, as discussed 14. The RepubLic of Korea is the onLy country with Less Land per in chapter 1, China's GDP may be understated by a considerabLe mar- worker, but it is aLready more specialized in knowLedge-intensive gin. Since these measurement issues have littLe effect on the mea- industries, with higher wages. surement of trade, this impLies that China's trade to GDP ratio may be 15. The reveaLed comparative advantage index is defined as the considerabLy overstated. The second point reLates to the growth of ratio of the share of a product in a country's total exports to the share China's trade to GDP ratio. The figures cited in the text refer to the of that product in worLd exports. A value greater than one indicates reaL growth of the trade to GDP ratio, measuring both variabLes in con- that a country has a revealed comparative advantage in exporting that stant 1987 prices. But the increase in China's nominaL trade ratio is product. even more rapid, from 10 percent in 1978 to over 45 percent in 1995. This more rapid rate of increase reflects primariLy the sustained reaL exchange rate depreciation (that is, the increase in the reLative price References of traded goods) in China during this period. 3. The administrative procedures used by the Machinery and Ahuja, V., and D. Filmer. 1995. "Educational Attainment in Electronics Import and Export Office to aLLocate these quotas appear Developing Countries." Policy Research Working Paper 1489. to be extremely compLex. Importers submit applications to their Local World Bank, Office of the Vice President Development administering bodies, which submit them to the office for approval. Economics, Washington, D.C. The office issues certificates of quotas that importers can use to obtain China Office of the Third Industrial Census. 1996. Summary of import Licenses from the Minstry of Foreign Trade and Economic the Third Industrial Census of the People's Republic of China- Cooperation. Customs cLears the imports on presentation of the import 1995. Beijing: China Statistical Publishing House. Licenses. Coe, D.T., E. Helpman, and A.W. Hoffmaister. 1995. "North- 4. CalcuLation of the effective rates of protection used tariff and South R&D Spillovers." NBER Working Paper 5048. National nontariff data from Beijing CDS Information Consulting Company, the Bureau of Economic Research, Cambridge, Mass. China Ministry of Foreign Trade and Economic Cooperation, and the De Long, J.B., and L. Summers. 1993. "How Strongly Do United Nations Conference on Trade and DeveLopment. The tariff equiv- Developing Economies Benefit from Equipment Investment?" alents of nontariff barriers were obtained by price comparisons using Journal of Monetary Economics 32(3): 395-415. data from UniruLe Institute (1996) and the InternationaL Comparison Finger, J.M., M. Ingco, and U. Reincke. 1996. "The Uruguay Programme. For goods protected by both tariff and nontariff barriers, Round: Statistics on Tariff Concessions Given and Received." the higher vaLue was chosen. Input-output coefficients obtained from World Bank, International Economics Department, the 1992 Global Trade Analysis Project input-output tabLe (HerteL 1997) Washington, D.C. were used to caLcuLate the effective rates of protection. Grossman, G.M., and E. Helpman. 1993. Innovation and Growth 5. The anaLysis was carried out using the GlobaL Trade AnaLysis in the Global Economy. Cambridge, Mass.: MIT Press. Project modeL and database. Hertel, T. 1997. Global Trade Analysis: Modeling and 6. For figure 7.7 effective protection rates for manufacturing sectors Applications. Cambridge: Cambridge University Press. in the GLobaL Trade AnaLysis Project modeL were mapped into manufac- Hong Kong Monetary Authority. 1997a. "The Economic turing sectors reported in China Office of the Third Industrial Census Integration of Hong Kong and China." Background paper pre- (1996). Sectors with negative effective rates of protection are food pro- pared for this report. cessing, food production, beverages, tobacco, textiLes, apparel, and . 1997b. Hong Kong Annual Digest of Statistics 1996. Leather and fur processing. Sectors with moderate effective rates of pro- UNCTAD (United Nations Conference on Trade and tection (Less than 50 percent) are paper, petroLeum, basic chemicaLs, Development). 1994. Directory of Import Regimes, Part I: chemicaL fibers, rubber, plastics, nonmetaL products, ferro-alloy pro- Monitoring Import Regimes. New York. cessing, and nonferrous processing. Remaining sectors have high effec- - . 1995. World Investment Report, 1995. Geneva. tive rates of protection (more than 50 percent) and include wood Unirule Institute. 1996. "Measuring the Costs of Protection in processing, furniture, pharmaceuticals, metaL products, machinery and China." Paper prepared for the Institute of International equipment, transport equipment, and eLectronics. Assets refer to the net Economics. Washington, D.C. vaLue of fixed assets. Profit rates refer to pretax profits as a share of net World Bank. 1997a. China Engaged: Integration with the Global assets. Tobacco is excLuded from all figures because of the unusuaLLy Economy. Washington, D.C. high profits reported in this sector (more than 100 percent). . 1997b. Private Capital Flows to Developing Countries: 7. See Coe, HeLpman, and Hoffmaister (1995); Grossman and The Road to Financial Integration. New York: Oxford Helpman (1993); and De Long and Summers (1993). University Press. Integrating with the World Economy 95 Setting the Agenda hina is embarked on an extraordinary voyage of 0 C change. Its breathtaking speed and sweep promise new economic horizons and fresh hope for China's huge population. China has telescoped into one generation what other countries took centuries to achieve. In a country whose population exceeds those of Sub- Saharan Africa and Latin America combined, this has been the most remarkable development of our time. But China is in uncharted waters. No country (let alone one of continental proportions) has tried to accomplish so much in so short a time. China's unique attempt to com- plete two transitions at once-from a command to a mar- ket economy and from a rural to an urban society-is without historical precedent. The complexity of the inter- actions between these two transitions, the often unpre- dictable results they bring, the enormous canvas of China itself, and the repercussions for the rest of the world-all make this a task of unparalleled difficulty. 9 7 Two questions present themselves. Can China cope? This path would lead to "Sinosclerosis," and much of And can the world cope with China? Because so much China's promise would have faded by 2020. It would is at stake, the answer to both questions must be "yes." remain a low-income economy with a diminishing pres- Eliminating poverty in the most populous nation on ence in world markets. Slow growth and increasing earth will be a triumph not only for the Chinese but for inequality would become a vicious circle, seriously dam- all humanity. Ensuring a higher standard of living and a aging China's efforts to reduce poverty (figure 8.1).i Not better quality of life for all Chinese will be a victory for only would poverty increase in the countryside but it development and a force for stability. Ensuring a would also grow in urban areas among the elderly living cleaner environment will be a legacy for future genera- on inadequate pensions, migrants excluded from the tions and will produce benefits far beyond China's bor- urban welfare system and jobs in modern enterprises, and ders. Integrating with the global economy through the unemployed unable to find work in a lethargic econ- trade and finance will be for the greater good of China omy. With growing rural-urban and interprovincial dis- and the world. parities, the prospects for eliminating poverty in poor China has much to gain from the world, and much provinces would recede far into the future (figure 8.2). to offer it. But fulfilling this potential will not be easy. In Cities would become a tinderbox of tensions, with grow- China, it will require bold and imaginative leadership, ing numbers of poor living in proximity to an increasingly a clear sense of direction, and an unswerving resolve to rich elite that manipulated the laws and systems to its ben- bring China's two transitions to a successful conclusion. efit. The gap between coastal and interior provinces In the world, accommodating China's emerging eco- would grow, as would differences between city and coun- nomic power in a smooth and orderly way will call for tryside and between men and women. Foreign investment vision and statesmanship among the major economic would be deterred by the opacity of China's trade, legal, powers, and the active and constructive involvement of and investment systems and by growing instability. international institutions. Moreover, without evidence of increased openness and transparency in trade, frictions could arise with trading Two visions for 2020 partners and increase the possibility of retaliatory action. But there is another vision of China in 2020, and it is The interrelated risks that will challenge China's long quite different. This China would be competitive, car- march into the twenty-first century give pause for ing, and confident, having eliminated poverty as it is thought. Impressive as China's strengths are, they do known today and promising a bright and healthy future not guarantee success. The risks and challenges are for its children. It would be engaged with the rest of the strong and varied enough to threaten progress (box world as an equal and responsible partner in trade and 8.1). International experience is littered with examples finance, built on modern institutions and the rule of law. of economies that have enjoyed prolonged periods of It would be a middle-income country with per capita rapid growth only to be followed by setback and stag- incomes equal to those of Argentina, the Republic of nation (box 8.2). Conceivably, China might become the Korea, and Portugal today, enjoying rapid and sustain- first East Asian victim of this phenomenon. It could able growth based on markets and private enterprise. therefore take either of two very different forms by In this vision, state enterprises would have a crucial 2020. Much will depend on the ability and resolve of role delivering public goods and services, sometimes in the authorities to maintain the momentum of reforms. competition with private firms. Similarly, state banks Two consequences would follow if reforms slow or would account for a small share of total bank assets come to a standstill. First, growth would moderate as the with the rest held by dynamic nonstate banks, several of cumulative costs of maintaining increasingly inefficient which could be foreign. Improved fiscal management state enterprises undermine the budget and the banks, and closer partnership with nonstate entities would burden the rest of the economy, and reduce international produce adequate resources for investments in people, competitiveness. And second, the pattern of growth the environment, and infrastructure. China would be would reflect rising disparities between regions, rural and cleaner and richer, its people qualified to meet interna- urban areas, and state and nonstate employment. tional competition into the twenty-first century. Fluid 98 China 2020: Development Challenges in the New Century BOX 8.1 The rnsks immediately ahead This report has hightighted key risks China's economyfaces-n'sks could widen further. This will stimulate migration into towns and that arecomplex, immediate, and fundamentaL What is more, sev- cities, with migrants -able to find only low-wage employment in eral of these risks are interrelated and could derail the economy. nonstate firms. Together with emerging biases against women, the * First is the Link between banks and state enterprises. As the effect would be to segment labor markets further aLong regional performance of state enterprises has weakened, so has the finan- and gender lines. As inequalgrew, China could begin to look Less ciat condition of the state banks. Although the full weight of the like its East Asian neighbors and more like Latin America. government behind the state banks precludes the possibility of a * Third, delayed enterprise reforms couLd slow growth and ham- banking collapse, the cost of bailing out the banks is high and -per efforts to cLean the environment. The slower growth is, the rising. The-government may have to borrow for this purpose, so harder it becomes to repLace the existing stock of capitaL with its debt service =payments could increase. That would mean fewer capital stock that embodies the latest environmental standards. resources for investing in health, education, infrastructure, and And without reforms, enterptises witl have little incentive to the environment, and for financing the reform of pensions. reduce pollutants. Pollution (of both air and water) could rise * Second is the nexus between state enterprise reforms, labor sharply, exacerbating mortality rates and the environmental markets, and inequality. Rising unempLoyment in some cities may problems of neighborincg countries (and perhaps the world). discourage the from pursuing state enterprise reforms * Fourth is the governments fiscal position and the system of grul Unreformed state serps gwill g opaying exces- intergovernmentat transfers. Without reform, a broad range of sive wages to an excessivety large workforce, supplemented by var- needed public expenditures in health, education, infrastructure, ious social benefits. Again, this witl impose a large fiscaL burden on and the environment would be jeopardized, as wetl as the gov- society. In addition, grain prices would have to be suppressed to emrmentfs capacity to influence rural-urban and interprovincial subsidize urban fuod consumption. This would mean a decline in income disparities. The same would be true of =the other areas of agricultural incomes retative to urban remuneration. RuraL-urban reforms requiring government financial support, such as pensions, disparities, already the biggest contributor to inequality in China, banking, and state enterprises. labor markets would absorb the massive structural China's agenda to 2020 changes in the economy, giving firms and workers free- dom to negotiate wages and conditions. China's agenda to 2020 should build on the country's By 2020 this China would be the second largest trad- strengths-a remarkably high savings rate, a strong ing nation in the world and a major force in grain and record of pragmatic reforms, relative stability, a disci- energy markets. Its legal system would protect the plined and literate labor force, a supportive diaspora, rights of foreign as well as domestic owners of physical and a growing administrative capacity. These strengths and intellectual property. In financial markets, integra- have driven China's growth in the last two decades of tion would bring a larger share of foreign investment this century. They could do the same in the first two and portfolio flows. China would have correspondingly decades of the next. greater weight and voice in international institutions. To nurture these strengths and use them to good These two visions of China in 2020-Sinosclerosis or effect, China's agenda will need to develop along the lines an agile, modern, and adaptable economy-represent suggested in the earlier chapters. Broadly, they span three the two extremes on a broad spectrum of possibilities. comprehensive and interrelated principles. First, to Where China goes on this spectrum will depend largely encourage the spread of market forces, especially on its ability to maintain the momentum of reforms. So through reforms of state enterprises, the financial system, far, China's leaders have chosen reform over inaction. We and labor markets. Second, to deepen integration with have every reason to think they will continue to do so. the world economy by lowering import barriers, increas- But if problems became more complicated, it is not ing the transparency and predictability of the trade inconceivable that resolve could waver and hesitation set regime, and gradually integrating with international in. If this happens, it is important to step back and recon- financial markets. Third, to redirect government toward sider the options. To restore a reformer's determination, making markets work better by building the legal, social, there is nothing like staring occasionally into the abyss. physical, and institutional infrastructure of the economy. Setting the Agenda 99 thr~kssons from two~~~ giantsGrowth is important for poverty reduction ... Number of poor Latin Aerica-Brail and Mexico. Both eje =LRurapiand growh a 350 Number of poor had between 950 and1980, ony to stgnate laer (seetable).there been no growth Their stagnation was triggered15by externalifactors-theatworoil 300 ~~~~~~~~~~~~~~~~~2005 , S~ priceshcs ling omditrcs and tedebte carieis of< 20 theiariabilit stoadjst enepointesad tommnernal failngs that haa0 bovernmen t uidingsfor severablyears. mnretrospimmediat, adi o the reaso Actual number of absolute poor tnot hfard tongfind. Goefrnmens in bohicona.Triesgvrmn: 0s o ciee vnb 05i is cnro 314Followed stron impoth susigtudretion. poiieuht initall 100adtercn rpdepnino riaeyadidvd nestiultoed growth but evntualyibecam aho soure oful iexpose ual5 we0im aeeiec fth nrosltn cieo y orruption and rentseknaiong. coptto.Js s eegC fCiasdnmcadetrrsn epe h *i Expoanded pubi ownership inouldbediversified theeoeos d o1981 1983 1985 1987 1989 19ig 1993 1995 largeoisaold andeficits, hentavterna debt,uhighination. T candt b Source: World Bank 1997. criplingibad debtsgh wihinthbankin systuem.e ihvbat ntefnnil etrti en oeneta l *cAm inistieread kypriaefrs tha exacetrbated inequaities, FIGURel 8.2dso nefeigi h edigdcsoso consumption. ~~~~~~~... but growth alone is not enough Those thatlweakened thccess Bo ans and Mxiclan eonomies.roes st2025 Year by which poverty would be eliminated if: t00 Chismeanthat the0: samevfatel its China?llotnegessarily, espe~ U Past inequality trends continue ciall if Cina mintais itsmomenum oneconoic reorms.2020 Regions grow equally fast 2015 URural and srban areas grow equally fast Real GOP growth in Brazil and Mexico ~ ~ ~~~~~ Both regions and rural-urban areas grow equally fast (onnuol percentoge change) ~~~2010 1950-80 1980-95 ~ 199 Extend and deepen markets N0 ' (- A Separating state enterprises and commercial banks from government is arguably temost immediate and impor- Note: Year in which the incidence of poverty falls below 5 percent of the the ~~~~~~~~~~~~population. tant of all ongoing reforms in China. The government's a. Target is not achieved even by 2025 in first scenario. decision to focus on developing 1,000 of the largest state Source: Annex 3 of thin report. enterprises while loosening controls on the remaining 314,000 is a step in the right direction. But much more and the recent rapid expansion of privately and individ- needs to be done. All enterprises should be fully exposed ually owned firms are evidence of the enormous latent to domestic and international competition. just as energy of China's dynamic and enterprising people. The important, their ownership should be diversified toward government must recognize this potential and design households and nonstate institutions. This cannot be policies to support and shape it. emphasized enough. China's future lies with vibrant, In the financial sector this means government at all competitiive, and private firms in industry and services, levels should stop interfering in the lending decisions of The earlier success of township and village enterprises state commercial banks. Loans to state enterprises need 100 China 2020: Development Challenges in the New Century to be subjected to the same scrutiny and incorporate the curement of total marketed grain from 75 percent today same safeguards as loans to other borrowers. Banks must to 25 percent by 2020, leaving room for retail and begin to build trust, relationships, and information chan- wholesale markets to develop and for nonstate compa- nels with nonstate firms. They must establish systems for nies to expand their purchasing and retail networks. management information, risk evaluation, creditworthi- Similarly, the government could meet environmental ness analysis, and provisioning for bad debts. If they objectives through greater use of market mechanisms. It manage all this, state banks will be reinventing them- could phase in coal taxes to reflect social costs more selves as commercial institutions with strong portfolios closely and to encourage conservation and coal-wash- and an adequate capital base. The government could ing technologies. Higher taxes on gasoline and diesel stimulate the transformation by gradually liberalizing would also help promote fuel economy and protect the interest rates and encouraging competition (initially with environment. Finally, large increases in air and water domestic banks and eventually with foreign ones too). pollution levies could yield large returns. In addition, a flourishing capital market is needed to It might be tempting for the Chinese to design indus- allocate resources, diversify risk, and raise returns to trial policies in the way Japan and Korea did in the investors. It will be a channel for the government to 1950s and 1960s. It is debatable whether that would be dilute its holdings in state enterprises and an intermedi- wise; what is certain, however, is that it would be diffi- ary for long-term investment, especially in infrastruc- cult. Freedom would be circumscribed by demanding ture. The experience of "red chip" shares traded in standards for entering the World Trade Organization Hong Kong shows how successful such a strategy could and the watchful eye of trading partners. So rather than be.2 One key to strong capital markets is a strong bank- using protection or subsidies to encourage growth in ing system. Beyond that, the government needs to con- key subsectors, the government should focus on devel- tinue its efforts to strengthen the regulatory oversight of oping sound competition and technology policies that primary and secondary equity markets, develop the reward innovation, risk taking, and good management. fledgling corporate bond market, and install a legal framework for the issuance of asset-backed securities to Integrate with the world economy finance infrastructure projects. However determined is the reform in state enter- There is no better way of intensifying competition and prises and the financial sector, it will be less effective if encouraging the spread of technology than open trade not matched by continued reform of labor markets. In in goods and services. In an era of rapid globalization, urban areas, delinking social security benefits from with huge advances in technology and the information employment in state enterprises will separate the com- revolution, the countries that open their doors to fresh mercial decisions of managers from the social concerns ideas and new concepts will be the ones that prosper. of government and free workers to switch jobs without Since 96 percent of the world's research and develop- fear of losing their pensions, homes, and access to ment is undertaken in industrial countries, much tech- health and education. More information on employ- nical progress can be captured cheaply by importing ment opportunities and better retraining of laid-off their capital goods. Competition and the free flow of workers will improve the economy's ability to match economic information can spread the benefits of the demand for labor with supply. And gradually imported technology quickly throughout the economy, removing restrictions on migration will help the poor multiplying its initial benefits. find better income-earning opportunities, while pro- Accelerating this virtuous circle of trade, technologi- tecting the rights of migrants will shield them from pos- cal progress, and growth would require a firm timetable sible abuse by unscrupulous employers. for reducing trade restrictions to acceptable interna- Earlier chapters also described how markets can be tional levels. It will need to be supplemented by better deepened in individual subsectors of the economy. In trade administration, dispute resolution, and protec- agriculture, for example, there is a need to inject com- tion of intellectual property rights. petition into the procurement and distribution of grain. Easier said than done. The authorities recognize that The government could aim to gradually reduce its pro- import liberalization will impose short-term costs, as Setting the Agenda 101 firms will meet import competition by laying off work- opment, environmental protection, and support for vul- ers and investing in new equipment. Those that do not nerable groups in society; and second, the development adjust will have to close. Unfortunately, many of them of transparent and participatory institutions that pro- will be capital-intensive and scale-sensitive-and in mote the rule of law and a stable economic environ- regions where unemployment is already high. But the ment. prospect of difficulties in the future should not deter the authorities from acting now. In rapidly growing coun- Reshaping government expenditures. In the future tries, adjustment tends to be quicker and less disruptive. the government should redirect public resources away Moreover, whatever the short-term costs, they will be from subsidies and investments in state enterprises and far outweighed by the long-term benefits of an open toward delivering more and better public goods and economy that derives its strengths from flexibility, com- services that only it can provide. This report has identi- petitiveness, and the strong foundation of comparative fied many potential candidates that deserve the govern- advantage. ment's attention when preparing its future budgets. As China proceeds with trade liberalization, the gov- These include: ermient should not lose sight of integration with the * Additional education spending to reduce the burden international financial system. Increased portfolio flows of school fees borne by the rural poor; to ensure that would help lower the cost of capital and deepen domes- girls have access to education, especially in rural areas; tic financial markets. And more foreign direct invest- to meet the government's target of nine mandatory ment would bring management know-how, the latest years of schooling by 2000; and to expand university capital equipment, and new techniques in international education to support China's need for professional marketing. managers and higher-level skills. Moreover, markets are already integrating China * More spending on health, making the rural poor the into the world financial system. Large amounts of pri- main beneficiaries, and focusing on immunization, vate capital flow into and out of China, sometimes ille- infectious and parasitic diseases, noncommunicable gally. The issue for the government is how the forces of diseases, and the prevention of injuries at work and on integration can be managed for the benefit of the econ- roads. omy and how high growth can avoid being damaged by * Substantially more spending on agricultural research destabilizing capital flows. Considering all the benefits and extension to boost grain yields. and the risks of financial integration, it would be wise * Infrastructure investments in flood control and irri- to proceed cautiously. But procrastination is no answer gation, natural gas distribution, public transit, munici- either. Government inactivity is a sure way to spawn pal water treatment facilities, and rural roads unpredictable and potentially destabilizing movements (especially in interior provinces). of capital. * Protection of the poor and the old, with special emphasis on the welfare of women; for the poor, a Redirect government to make it more effective renewed stress on basic health and education, com- bined with assistance to find employment in neighbor- "More market" does not mean less government. It ing, fast-growing provinces; for the elderly, financing means different government. Milton Friedman once the transition from pay as you go pensions to a three- said that China had "both too much government and pillared scheme. too little"-too much in production and investment The expenditure shortfall in these high-priority areas controls and too little in the rule of law, macroeconomic has been estimated at 4.6 percent of GDP. This is con- management, and the provision of public goods and servative because it does not include extra spending to services.3 This has to change. Government energies support future economic reforms-such as redundancy need to shift away from direct involvement in produc- payments for laid-off workers of state enterprises, mon- tive activities and toward two areas in particular: first, etized housing benefits, or the costs of reforming the more spending on such priority areas as education, banking system. Raising revenues to cover these needs health care, agricultural research, infrastructure devel- will require a huge improvement in tax collection. Even 102 China 2020: Development Challenges in the New Century if that is achieved, taxation as a share of GDP will still In summary, China's policy agenda to 2020 calls for be below the level in most other countries. further transition and transformation. Naturally, as the economy progresses, the complexities of the issues will Building institutions. Over time, direct government increase. But so will the ability of the government to deal control of economic decisions must be replaced by legal with them. There is no single model that China could or norms and procedures, and the role of institutions. should pursue. It has learned from the experience of Simply put, reforms mean that laws and institutions other countries and adapted policies to suit its unique now really matter. circumstances. And increasingly, it can look to its own Laws in China have shown the same rapid growth as experience to identify policies that promote rapid and GDP. As many were scheduled for consideration in the sustainable development. Indeed, the essence of market 1993-98 session of the National People's Congress as economies-that the pursuit of individual self-interest, were enacted between 1949 and 1992. Yet the legal sys- combined with open trade and minimalist (but effective) tem operates poorly because laws are not yet properly government, can unleash astonishing progress-is enforced. One step will be to develop the legal profes- embodied in one of China's regions: Hong Kong. sion; another will be to improve legal education. Corruption is a growing problem in China. The gov- The world and China ernment has moved quickly to contain it, but much remains to be done. Prosecuting the corrupt (including The transformation of an economy as large as China's, the corrupter) will help. China will also have to reduce from low- to middle-income status, from rural to urban, incentives for corrupt behavior by lessening the discre- from agricultural to industrial (and services), will tionary power of officials, increasing transparency in inevitably cause ripples in the world economy. By 2020 public finances, and building a competent and honest China could be the world's second largest exporter and civil service. importer. Its consumers may have a purchasing power Transparent and responsive institutions will also be larger than all of Europe's. China's involvement with invaluable in the preparation and implementation of world financial markets, as a user and supplier of capi- economic policy. The budget should include many rev- tal, will rival that of most industrial countries. enues and expenditures that are now extrabudgetary. The emergence of China as a force in world markets Exposing official plans to wide public discussion will is often described as unprecedented. Is it? In fact, the strike a balance between planners' priorities and peo- world has seen this happen twice before: the United ple's preferences. The budget, and its record of imple- States in the late nineteenth century, and Japan in the mentation, should be publicly available. Government twentieth. If China's trade were to expand as projected agencies should be required to stay within explicit in this report, its incremental share of world trade in the spending limits-and held accountable if they fail. twenty-first century would be no different from what Also important for markets and growth are the insti- those two countries achieved (figure 8.3). tutions that ensure macroeconomic stability. Of these, the It is revealing that the United States and Japan most important is the central bank. Improving its capac- emerged as trading powers in a world economy with few ity to manage monetary conditions using indirect, mar- trade barriers. The second half of the nineteenth century ket-friendly instruments is central to the economy's future was a halcyon era of open markets that supported the stability. So is its capacity to supervise banks and other expansion of U.S. trade. The second half of the twenti- financial institutions. As the financial system changes, eth century was little different, helping Japan become an there is always a danger that risky activity by financial industrial giant. During both periods world economic intermediaries will produce systemic shocks. Examples of growth was buoyant. Benefits from increased trade were bank collapses abound in other countries, often resulting reflected in higher incomes and standards of living. in huge costs in forgone economic growth. China has The emergence of the United States and Japan as trad- already experienced some isolated problems of this kind ing powers was not merely good for their own and can ill afford repetition on a larger scale as it navigates economies. It was good for the world. The same should the treacherous waters of financial sector liberalization. hold true for China. Indeed, the world is better equipped Setting the Agenda 103 V1R 8.3In summary, China's rapid growth and liberalization When giants emerge will be an opportunity for the world economy, not a Share of world exports threat. It would be ironic, then, if China were to be (percent) denied the same open markets and world conditions 18 U. that Japan and the United States enjoyed. But trade 16 U S (1870-1913)v issues have become more sensitive and complicated, so 14 E rapid export growth in the next century may prove 12 Japan (1952-95) more difficult for China. If China's trading partners lo .: , were to raise barriers to its exports and China were to 8 / ~ ," retaliate, the losses to everybody could be large. To 6 / + # < avoid this, China's accession to the World Trade 4 ^ ^ + Organization is imperative. Trade relations will become Chinhin a (1978-2020) easier to handle, and China's engagement with its trad- 2 hina (1978-2020) ing partners in a multilateral setting will strengthen dia- 0 5 10 15 20 25 30 35 40 logue and encourage cooperation. Number of years Source: Maddison and others 1995; World Bank data. Conclusion to handle the emergence of a major trading nation than The past two decades have seen sustained, rapid mod- it was 50 or 150 years ago. Stronger trading links, more ernization unlike in any other period in China's long sophisticated financial institutions, and far superior history. The next two decades promise more of the communications make it easier for economies today to same. The huge risks that China faces could yet take the adjust to shifts in global conditions. The experience of shine off this potential. But with resolute leadership at the two oil shocks in the 1970s showed how open home and statesmanlike policies from the world's economies coped better than closed ones. Closing mar- industrial powers, China can overcome these chal- kets to China now may hurt its growth prospects, but lenges. One-fifth of humanity would then have within more important, it will damage other countries' capac- its grasp the power to break free of the shackles of ity to adjust and benefit from China's dynamism. poverty and underdevelopment and accomplish what Provided markets remain open, China's rapid inte- could become the most remarkable economic transfor- gration with the global economy will have differing- mation the world has ever seen. but mostly favorable-effects on the world. Industrial countries will benefit unequivocally from China's rising Notes demand for capital- and knowledge-intensive manufac- tures, and through significant terms of trade gains. Only 1. WorLd Bank (1997). 2. "Red chip" shares traded on the Hong Kong Stock Exchange are their labor-intensive industries will face a squeeze, but the shares of mainland Chinese state enterprises registered in and much of that structural change has already occurred. managed from Hong Kong. Among developing countries the effects of China's 3. Quoted in Rohwer (1996, p. 141). integration will depend on how much they trade directly with China and how much they compete in References third markets. Countries that trade heavily with China Maddison, A. and others. 1992. Brazil and Mexico: Political (such as Korea) will gain significantly. Low- and mid- Economy of Poverty, Equity, and Growth. New York: Oxford dle-income countries that are close competitors with University Press. Maddison, A., and others. 1995. Monitoring the World Economy, China (such as India and Indonesia) will experience 1820-1992. Paris: Organisation for Economic Co-operation some terms of trade losses, but their total trade will and Development. keep growing, and perhaps their world market share of Rohwer, J. 1996. Asia Rising. London: Nicholas Brealey Publishing. keep growing, and perhaps thelr world market snare of World Bank. 1997. Sharing Rising Incomes: Disparities in China. labor-intensive manufactures as well. Washington, D.C. 104 China 2020: Development Challenges in the New Century | S :2triSSi:t00:d:V40 :D0:Sz S - - Accounting for China's Growth his annex describes the growth accounting Pmethodology underlying table 1.1.1 It first pre- sents the basic growth accounting framework that gener- ates the conclusion that a large share of China's growth cannot be explained by increases in inputs. It then consid- ers the following three questions: *Does China's large growth residual reflect deficiencies in the data such as those discussed in box 1.1? * Can differences in technology account for China's large growth residual relative to comparator countries? *How much of the growth residual can be attributed to the process of structural change discussed in chapter 1? 105 PreLiminaries increases suggests that real growth in these variables may be overstated. These difficulties also have implica- The basis of growth accounting is an aggregate value- tions for the measurement of the capital stock, which is added production function, Y = F(A, K, H, L), which measured as the cumulation of past investment flows. If expresses value added Y as a function of primary inputs, investment is overstated, growth in the capital stock such as physical capital K, human capital H and raw will be overstated as well.5 The net effect of these data labor L, and an unobserved factor A. Differentiating this deficiencies on the growth residual is unclear, since out- production function results in the following expression put growth may be overstated and growth in capital relating growth in output gy, to growth in inputs (gK, gH, input may also be overstated. and gL), and growth in the unobserved factor, gA: Table A1.1 summarizes the net effect of the data defi- ciencies discussed in box 1.1 on the unexplained por- gy PK gK + PIH H + PL gL + PA gA tion of growth in China. The alternative GDP growth rate is obtained in the same manner as described in box The parameters, PK' PH5 PL' and PA, are known as the 1.1; the growth rate of the capital stock reflects the "output elasticities" of the various factors of production alternative, lower investment rate implicit in the GDP and measure the percentage increase in output resulting growth rate adjustment.6 The last row reveals that the from a percentage increase in inputs. As such, they sum- unexplained portion of growth is essentially unaffected marize the production technology available to a country. by data concerns, since the decline in the GDP growth Since the first three factors of production (physical rate is offset by lower growth in capital input. capital, human capital, and labor) are in principle observable, the first three terms in the above expression Differences in technology correspond to the portion of growth that can be ".explained" by increases in inputs. The fourth term, Estimates of the output elasticities, which summarize which consists of the portion of GDP growth accounted the available production technology are very difficult to for by to increases in the unobserved factor, A, is the obtain. One approach is to assume that the production unexplained "growth residual." This residual may be function exhibits constant returns to scale and that per- interpreted narrowly as productivity growth or more fect competition prevails.7 In this case, economic theory broadly as a "measure of our ignorance."2 predicts that the output elasticities are equal to the The basic growth decomposition presented in table shares in value-added payments to the factors of pro- 1.1 is based on data from readily available sources on duction. This presents two obvious difficulties: how to GDP, capital stocks, the labor force, and human capital.3 justify the theoretical assumptions and how to obtain The output elasticities of the three factors of production reliable data on factor payments, especially wages by are assumed to be 0.4, 0.3, and 0.3, respectively.4 As indi- skill level (to control for differences in human capital). cated in table 1.1, this decomposition suggests that 46 An alternative approach is to estimate the output percent of growth, or 4.3 percentage points of growth elasticities econometrically.8 This approach assumes per year, is due to factors other than increases in primary that the fourth term in the growth accounting equation inputs. Since this unexplained portion of China's growth is unusually large in comparison with other countries TABLE A1.1 (both as a share of growth and in absolute terms), it is Output and input growth, 1978-95 useful to ask how robust this finding is. (percent per year) Measure Official Alternative Data deficiencies GDP 9.4 8.2 PhysicaL capital 8.8 7.9 Data deficiencies cloud the measurement of GDP Human capital' 2.7 2.7 Labor forcea 2.4 2.4 growth in China. In particular, the unusually slow growth of national accounts deflators for consumption Unxlieshrofgwt(pcn) 463 growth of ntnacua. Growth rates calcuLated over the period 1978-93. and investment relative to other measures of price Source: World Bank staff estimates; see note 3 at end of chapter. 106 China 2020: Development Challenges in the New Century can be treated as the residual term in a regression equa- tion, so that the other three output elasticities can be esti- TaB aint Can increasing returns account for the growth mated using regression methods. The advantage of this residual? approach is that it requires far fewer restrictions on the (percent) form of the production function. However, it raises new Unexplained share difficulties. In particular, the right-hand side variables in of growth such a regression will be correlated with the residual Constant Increasing term (since, for example, one would expect the capital Country/period returns returns (1.3) stock to increase in response to increases in productiv- China 1978-95 46 30 ity). Unless suitable instruments can be found, this will Japan 1960-93 30 9 result ibadsmeoteRepublic of Korea 1960-93 21 -2 result in biased estimates of the output elasticities.9 Source: World Bank staff estimates. In light of these difficulties, this report takes the more pragmatic approach of simply assuming plausible val- clear that increasing returns cannot account for the dif- ues for the output elasticities and then examining the ference in the unexplained portion of growth between extent to which the conclusions depend on reasonable China and, for example, the Republic of Korea, unless variations in these parameters. In tables 1.1 and A1.1 one is willing to argue that increasing returns are much the output elasticities of physical capital, human capi- stronger in China than in Korea. tal, and labor were assumed to be 0.4, 0.3, and 0.3, respectively. Here, we briefly examine whether the main Structural change and the growth conclusion of table 1.1-that China's growth residual is residuaL unusually large-depends on this assumption. Consider, for example, the possibility of increasing China's two transitions can explain some of its large returns to scale in the production function (which growth residual. The process of transition has been a implies that the output elasticities sum to a value greater potent source of growth as factors, especially labor, have than one). Kim and Lau (1994, 1995) have argued that been transferred from sectors in which their marginal it is important to allow for this possibility because in the productivity was relatively low (agriculture, state-owned presence of increasing returns, increases in inputs lead industry) to sectors in which their marginal productivity to more than proportional increases in outputs, so that is high (industry and services, nonstate industry). more of output growth can be "explained" by increases Estimates of the growth contribution of factor reallo- in inputs. In their econometric estimates of production cation are presented in table 1.1. According to World functions Kim and Lau find evidence of substantial Bank estimates, the reallocation of labor out of the state- increasing returns in the Asian economies but not in the owned sector contributed roughly 0.5 percentage points G-5 economies, indicating that the effect is empirically to GDP growth between 1985 and 1994, while the trans- important. fer of labor out of agriculture over the same period con- Can increasing returns account for China's large tributed an additional 1.0 percentage point to growth.10 growth residual? A simple way to answer this question is Similar calculations reveal that about 0.3 percentage to scale up the three output elasticities by a constant cor- points of growth in Japan and the Republic of Korea responding to the degree of increasing returns. For exam- between 1960 and 1993 can be attributed to the reallo- ple, Kim and Lau (1995) find evidence that suggests that cation of labor out of agriculture in these countries. In the the extent of increasing returns is about 1.3 in a sample United States, labor reallocation across broad sectors of other Asian economies (that is, a 1 percent increase in since 1960 contributed little to growth. Data on the sec- all factors of production leads to a 1.3 percent increase in toral composition of GDP in the United States in the last output). Although allowing for increasing returns century are not available, preventing the calculation of reduces the growth residual significantly-from nearly the benefits of labor reallocation over this period. half to roughly one-third of growth-the basic conclu- However, it is reasonable to assume that factor realloca- sion that there is a substantial unexplained portion of tion played an important role in growth in the U.S. econ- growth remains unchanged (table A1.2). Moreover, it is omy over this period of rapid structural change. Accounting for China's Growth 107 N otes extrapoLate this over the entire period since 1978. Although the period from 1978 to 1986 saw less labor realLocation across ownership forms, 1. This annex draws substantialLy on Kraay (1996). there was more reallocation of labor out of agriculture during this 2. ALthough conventional, this decomposition is somewhat arbi- penod. trary, as it does not take into account the fact that at least some of the growth in factor inputs is in response to the productivity growth References captured by the residual. For a discussion, see Barro and Sala-i-Martin (1995). 3. Data for the comparator countries in table 1.1 were obtained as Barro, Robert, and Xavier Sala-i-Martin. 1995. Economic fottows. For Japan and the RepubLic of Korea, data on physicaL capi- Growth. New York: McGraw Hill taL, human capital (measured as average number of years of education Burnside, Craig. 1996. "Production Function Regressions, of the working-age popuLation), and the working-age popuLation are Returns to Scale and External Effects." Journal of Monetary drawn from Nehru and Dhareshwar (1993). and Nehru, Swanson, and Economics 3(2): 177-201. Dubey (1995). Data on the United States are from Maddison (1995). Hu, Zuliu, and Mohsin Khan. 1996. "Why is China Growing So 4. This assumption may be justified based on the empirical work Fast?" International Monetary Fund, Washington, D.C. of Mankiw, Romer, and WeiL (1992). As discussed in Kraay (1996), there Kim, Jong-il, and Lawrence Lau. 1994. "The Sources of is aLso a rough correspondence between these output elasticities and Economic Growth of the East Asian Newly Industrialized those obtained by Kim and Lau (1994, 1995), and Young (1995) using Countries." Journal of the Japanese and International very different methods. Economies 8(3): 235-271. 5. In addition to the flow of investment, the growth rate of the - 1995. "The Role of Human Capital in the Economic capital stock depends crucially on two other factors: the rate of Growth of the East Asian Newly Industrialized Countries." depreciation and the initiaL vaLue of the capital stock. In compara- Asia-Pacific Economic Review 1(3): 3-22. tive studies it is standard practice to assume that the rate of depre- Kraay, A. 1996. "A Resilient Residual: Accounting for China's ciation is constant and equal across countries, so that variation in Growth Performance in Light of the Asian Miracle." World capital stock growth rates is not tainted by variations in this diffi- Bank Policy Research Department. Washington, D.C. cuLt-to-measure variabLe. The initiaL value of the capitaL stock is Maddison, A. 1995. Monitoring the World Economy. Paris: more difficult-and also more important-to determine, since a Organisation for Economic Co-operation and Development. given flow of investment results in a larger capital stock growth rate Mankiw, N. G., David Romer, and David Weil. 1992. "A the smaller is the initial capitaL stock. However, as discussed in Contribution to the Empirics of Economic Growth." Quarterly Kraay (1996), China's capital-output ratio in 1978 is comparabLe to Journal of Economics 107(2): 407-37. that of the Soviet Union in 1939, after both countries had pursued Nehru, V., and A. M. Dhareshwar. 1993. "A New Database on twenty years of Soviet-style industrialization. This suggests that the Physical Capital Stock: Sources, Methodology and Results." initial capitaL stock figures for China are of the right order of Revista de Analisis Economico 8(1): 37-59. magnitude. Nehru, V., Eric Swanson, and Ashutosh Dubey. 1995. "A New 6. Alternative measures of GDP growth are as described in box 1.1. Database on Human Capital Stock in Developing and The revised investment figures are cumulated assuming a depreciation Industrial Countries: Sources, Methodology and Results." rate of 4 percent a year to arrive at revised capitaL stock growth rates. Journal of Development Economics 46(2): 379-401. 7. See Zuliu Hu and Mohsin Khan (1996) and Young (1996) for World Bank. 1996. The Chinese Economy: Fighting Inflation, applications of this methodology to China. Deepening Reforms. Washington, D.C. 8. See Kim and Lau (1994, 1995) for applications of this method- Young, Alwyn. 1995 "The Tyranny of Numbers: Confronting the oLogy. Statistical Realities of the East Asian Growth Experience." 9. See Burnside (1996) for examples of the fragility of such pro- Quarterly Journal of Economics 100(3): 605-640. duction function regressions when the instrument sets are varied. . 1996. The Razor's Edge: Distortions, Incremental Reform 11. See WorLd Bank (1996). Although the anaLysis in this report and the Theory of the Second Best in the People's Republic of covers onLy the period from 1986 to 1994, it is not unreasonabLe to China. Boston: Boston University. 108 China 2020: Development Challenges in the New Century t-V the equations of the model. The following section dis- cusses how the model's parameters are obtained. The final section presents some additional results that sup- plement the discussion in the text. 109 Nontechnical overview and level of productivity inherited from the previous period, firms demand labor and intermediates in order The model presented here is a simple multisector ver- to produce output. Households supply their labor, sion of the Solow growth model. The Solow model con- demand goods for consumption, and turn their savings sists of the following essential elements: over to a capital goods sector, which uses them to pur- * A production function that relates output to primary chase goods used to construct capital goods for invest- inputs of capital and labor ment purposes. Prices adjust to clear the market for * A consumption-savings rule that determines how goods and labor. At the end of the period firms in each much of output is available for investment sector purchase capital goods, which they use to * An accumulation equation that describes the growth increase their capital stocks. The labor force and tech- of the capital stock as a function of investment and nology increase exogenously, and the next period depreciation. begins. With these three elements in hand, it is possible to In order to provide a more realistic picture of the describe the trajectory of output growth given an initial Chinese economy, frictions are introduced into the point. model that prevent labor and capital from being opti- In the long run there are only two sources of growth mally allocated across sectors. This is meant to capture, in the Solow model: growth in the labor force and labor- in a simple way, the effects of real-world barriers to augmenting technical progress.1 Along the transition to labor mobility, which have kept a substantial portion of this long-run growth rate, however, GDP growth is ini- the agricultural labor force underemployed, and distor- tially higher than its long-run value; it declines over time tions in the investment system, which bias investment as diminishing returns set in with the accumulation of toward industry at the expense of agriculture and ser- capital. During the transition the savings rate emerges as vices. As these frictions diminish over time, improve- an additional factor influencing the growth rate. Holding ments in the efficiency of factor allocation provides an constant initial conditions, the higher the savings rate, additional, albeit modest, source of growth. the higher the eventual long-run level of per capita GDP The structure of the model was deliberately kept very and the faster the economy grows along the transition simple in order to focus on growth fundamentals, such path in order to reach its long-run level of development. as savings, productivity growth, and factor realloca- The model presented here shares these features of the tion. Keeping the model simple necessarily meant that basic Solow model and is complicated only by the important factors, including trade and government, had assumption of a slightly more elaborate production to be ignored. By assuming that the economy is closed, structure. Instead of a single good, there are N sectors the model cannot capture the (poorly understood) effect in the economy, each producing a different good. The N of trade on growth or the contribution of foreign sav- goods are produced using primary factors of land, labor ings to domestic capital accumulation. The effects of and capital, and intermediates. These goods in turn are China's growth on world trade are analyzed in a sepa- used as intermediates in the production of other goods, rate, complementary exercise (chapter 7). The model for final consumption, and for investment. also ignores the fact that government has a crucial role In the model it is useful to think of the economy as to play in shaping the environment in which households populated by households and firms. Firms demand fac- and firms operate. Since modeling these complex inter- tors of production, which they use to produce the N actions in a convincing manner is difficult, these issues goods available in the economy. Households supply are addressed outside of the formal model. labor to firms and receive wages and the profits of firms (value added) as income. An exogenously given fraction The model of this income is consumed, and the remainder is used to purchase goods that are turned into capital goods At the beginning of each period the representative firm used for investment purposes.2 in sector j produces gross output (Q1) using a constant In each period the following events occur. Given elasticity of substitution (CES) production technology input and output prices and given their capital stock of the form: 110 China 2020: Development Challenges in the New Century household income. Since households receive labor income Qj= [(p1) (Fj,T) + (,K) (Kj ) + (f3) (AjLj)d + as well as the profits of firms, Y is equal to value added. The elasticity of substitution between goods in consump- (pMj) (Mjlt)] tion is a. Optimal behavior by households results in a set where j = 1..., N indexes the sectors of the economy. of N demands for goods for consumption purposes. F. is a fixed factor of production, K1 is the capital stock The representative firm in the capital goods sector uses inherited from the previous period, L, is labor input, households' savings to purchase goods from the N sec- and M. is a CES aggregate of the intermediate goods tors of the economy, I D, in order to produce a homoge- (that is, neous capital good using the following CES technology M. N [S+j (Xs E _] I = B [ itk Ij ] where Xi. is the intermediate use of good i by a firm in The elasticity of substitution between investment goods sector j). The elasticity of substitution between Fj, Kj, Lp at the sectoral level is . Optimal behavior by the capi- and M. is given by p, while e is the elasticity of substitu- tal goods firm results in additional N demands for tion between intermediates. The parameters fFj, tKj' PLj' goods for investment purposes. PM1 and 4ij vary across sectors. A, represents the level of Markets clear in two stages, as discussed above. the labor-augmenting state of technology, and the First, goods prices adjust to clear the goods and labor growth in A, corresponds to productivity growth. Given markets (the wage is the numeraire). Markets clear KY and A, at the beginning of each period the firm when the sum of the N labor demands is equal to the demands labor and intermediates in order to maximize exogenously given labor supply and the sum of the profits. Optimal behavior by firms results in a labor intermediate, final consumption, and investment use demand function and set of N intermediate demands demands for each of the N goods in the economy is for each of the N firms in the economy. equal to the corresponding supply. Dropping one of the In the absence of frictions, optimal firm behavior redundant market-clearing conditions yields a nonlin- implies that labor and intermediates will be efficiently ear system of N equations in N prices that can be solved allocated across sectors. Since this is an unrealistic numerically for the market-clearing price vector.3 approximation for China today, we introduce frictions Next, firms demand investment goods subject to into the labor market by multiplying each firm's labor convex adjustment costs and given the price of capital demand by a scalar that is greater than one in sectors in goods. Optimal behavior by firms results in a set of N which more labor than what would be optimal according first-order conditions equating the value of the marginal to the model is observed and smaller than one in sectors product of an additional unit of capital with the price of in which less labor than would be optimal is observed. capital goods: This scalar creates a wedge between marginal products of labor across sectors. As discussed in more detail below in PiQj' PKi [(1-6j) Ki + - g'(I/K,) = the section on parameterization, the initial values of these scalars were chosen to match the observed distribution of where 6 is depreciation of capital and g1(I/K1) = a1(I/Ki)2 is employment in China in the base period; these differen- the adjustment cost function. These N equations can also tials are allowedto erode exogenously overtime, be solved numerically for the optimal distribution of The representative household allocates its consump- investment. Finally, capital stocks accumulate according tion over the N goods available in the economy so as to to the investment decisions of firms, productivity and the maximize labor force grow exogenously, and the next period begins. C= [ZaI C 6]a , Parameterization subject to the constraint that total consumption expendi- In order to implement the model described above, four ture is equal to (1-s) Y, where s is the savings rate and Y is types of information are required: Modeling Growth and Structural Change 111 * Values for all the parameters of the production across sectors is the same as the distribution of factor functions and household preferences payments to capital across sectors. Fixing the level of * Information on the initial allocation of factors of the capital stock in 1992 at 6,000 billion 1992 yuan, production in a particular base year this yields a measure of capital input for each sector.4 * Values for the parameters that capture the frictions in The assumptions that permit the parameters of the the labor and capital market production side of the economy to be identified cannot * Reasonable assumptions on the path of savings rates be taken as literally characterizing the Chinese economy and productivity growth. in 1992. However, the parameters obtained are roughly These requirements are taken up in turn below. in line with the available microeconomic evidence. In the model, there are N=3 sectors: agriculture, Moreover, the broad picture that emerges from the pro- industry (including construction), and services. The jections is relatively insensitive to minor variations in parameters describing the production side of the model the parameters obtained. are derived directly from the 1992 input-output (IO) To parameterize the consumption side of the econ- table for China in the following manner. First, the 1992 omy, a unit elasticity of substitution in consumption is 10 table is aggregated into agriculture, industry, and assumed, and the ojs are identified as the expenditure services. Next, under the assumption of constant shares from the appropriate consumption column of returns to scale in production and a unit elasticity of the 10 table. This yields expenditure shares of .25 on substitution between factors and between intermedi- agriculture, .35 on industry, and .40 on services. Since ates, the output elasticities of labor, capital, and inter- tastes are likely to shift toward services over the course mediate goods are given by the parameters 'L' PK' and of development, the expenditure share on agriculture is PM' while fjj is the elasticity of the intermediate goods assumed to decline to .20, while that of services is aggregate in sector j with respect to intermediate good assumed to increase by the same amount over the i. Under the further assumption of perfect competition, twenty-five-year projection period.5 these parameters can be identified by the corresponding Finally, the capital goods technology is also assumed shares of factor payments in value added, which can be to have a unit elasticity of substitution, and the corre- obtained directly from the 10 table. In particular, sponding elements of the investment column of the 10 wL PM. M. ~ table are used to determine the expenditure shares for PL =p v L' = "and oij= Ppi investment. Using the appropriate entries from the and f3M, PjQm investment column of the 10 table as inputs and total Since there are constant returns to scale, 'K; = 1-PL1-fMj. investment, the scale parameter, B, of the investment To complete the parameterization of the production technology is obtained as a residual. side of the economy, values for the initial level of the Table A2.1 summarizes the parameters of the productivity parameters, A1, are needed. Since there is a model. Overall the parameters obtained in this manner measure of gross output for each sector (Q,) and all the appear to be plausible and in line with available micro other parameters of the production function are avail- evidence. In a few cases, as indicated in the table, the able, given information on the inputs of capital, labor, parameters obtained from the IO table were modified and intermediates in each sector, the A s can be com- slightly so that they were more consistent with our puted as residuals. Estimates of the labor force and its priors. sectoral allocation are readily available, and since the Next we turn to the problem of obtaining parame- wage is the numeraire, there is a measure of real labor ters that describe the rigidities that prevent labor and input for each sector. In the case of intermediates, no capital from being optimally allocated across sectors. information on the allocation of intermediates across For the labor market, the observed distribution of sectors other than the IO table is available. Accordingly, employment in 1992 and the production functions esti- the actual values of intermediate uses reported in the 10 mated from the 10 table were used to compute differ- table was used as a measure of intermediates, valued at ences in the marginal product of labor across sectors. 1992 prices. For capital, under the assumption that the The labor demands of firms were then scaled by con- returns to capital are equalized, the allocation of capital stants reflecting these differences. 112 China 2020: Development Challenges in the New Century TABLE A2.1 TABLE A2.2 Model parameters Parameterizing frictions in labor and capitaL markets Agricutture Industry Services (0=1) 0=2) (j=3) AgricuLture Industry Services Output elasticities of: (=1) 6=2) (=3) Capital (pK) .20a .20 .271 Labor market frictions Labor (PLj) *34a .09 .24b MPL scaLed by 1.92 .59 .50 Intermediates (M) .36 .71 .49 ImpLied MPL reLative 1.00 3.27 3.87 Fixed factor (lands (t,.) la 0 0 to agncuLture Intermediate eLasticity of: Capital market frictions Agrcutture (°I) .39 .10 .30 Parameter a in g(I/K)=a(I/K)2 400 0 300 Industry (%2j) .44 .72 .56 ImpLied MPK relative 1.00 0.33 0.37 Services (43j) .17 .19 .42 to agriculture Source: WorLd Bank staff estimates. Investment shares (X.) .04 .88 .08 Consumption shares (aj)c .25 .35 .40 growth declines from 5 percent in 1995 to its long-run a. IO table yields values of I3,=.1O and PL,=.54 and provides no information on F. value of 3.75 percent by 2000 and remains at this value b. I0 table yields values of PK3=31 and 01L3=.20. c. a, dectines to .20 over projection period, white a3 increases to .45. until 2020. Since the production function is Cobb- Source: World Bank staff estimates. Douglas given our unit elasticity assumption and since The same procedure cannot be used to estimate dif- the aggregate labor share in value added is about 0.4, ferences in the marginal product of capital, because the total factor productivity growth is 1.5 percent between distribution of the capital stock was obtained from the 2000 and 2020. Given China's experience with savings IO table, rather than from an independent source. As a rates and productivity growth (see chapter 1), these twc result, the marginal products of capital are equalized assumptions represent fairly conservative extrapolations across sectors by construction. Since some information of past trends. Variations in these assumptions, of course, on the distribution of investment in 1992 is available, the lead to large variations in the growth rate over the next initial values of the parameters of the adjustment cost twenty-five years, as indicated in table 2.1. function were chosen so that the model approximately matches the observed distribution of investment. As a ResuLts result, although the initial capital stock is optimally allo- cated across sectors, increments to the capital stock are The model's projections of long-run growth and struc- not optimally allocated in the sense that their pre-adjust- tural change are presented in the second half of chapter ment cost marginal productivities differ across sectors. 2. Here we briefly supplement these results with a dis- These calculations are summarized in table A2.2. The cussion of the contribution of factor reallocation to first row shows the actual values of the scalars multiply- growth as distortions in the labor and capital market ing the marginal products of labor; the second row shows decline in importance over the next twenty-five years. the implied differences in marginal products of labor As discussed in chapter 1 and annex 1, the process of across sectors. The third and fourth rows show the adjust- structural change has contributed to growth in China ment costs in the capital goods market. The third row since 1978, since it has resulted in the reallocation of shows the actual value of the parameter of the adjustment factors out of sectors in which their marginal produc- cost function; the fourth row shows the implied marginal tivity was low into sectors in which productivity was products of capital relative to agriculture. higher. Simple back-of-the-envelope calculations sug- The final input into the model is a set of assumptions gest that labor reallocation alone has contributed 1-1.5 on the future path of the savings rate and of productivity percentage points of growth between 1985 and 1994. growth. The savings rate is assumed to decline linearly Figure A2.1 summarizes the contribution of reallo- from 40 percent of GDP in 1995 to its long-run value of cation effects to growth over the projection period, 35 percent in 2005 and to remain there for the remainder decomposing the total factor reallocation effect into a of the projection period. Labor-augmenting productivity labor and a capital reallocation effect. Labor realloca- Modeling Growth and Structural Change 113 FIGURE A2.1 are substantial costs in terms of forgone growth associ- Factor realLocation and growth, 1995-2020 ated with policies that bias the investment system Contribution to growth (percentoge points of annuol overage toward industry. growth) 1.0 Notes 0.8 Labor 1. In economic jargon the very long run is referred to as the 0.6 realLocation "steady-state" of the model, in which the capitaL stock per effective worker is constant. For this steady state to exist, technicat progress . reaLLocation_, lU., t must be Labor augmenting. 0.2 2. Three key assumptions here keep the structure of the model sim- 0 / ple, aLbeit at the cost of some realism. First, the Labor suppLy is assumed to be exogenousLy determined, and hence the modeL cannot 0.2 apitai account for the cyclical variations in employment that lie at the heart -0.4 reallocation of economic fluctuations. However, since the modeL is concerned only -0.6 / with China's long-term growth possibiLities, the omission is not an important one. Second, savings are assumed to be exogenous, which -0.8 ^ prevents the (poorLy understood) feedback from growth to savings -1.0 from being modeled. This structure does, however, capture the effect 1995 2000 2005 2010 2015 2020 of savings on growth, as described in the text, and, moreover, has the Source: WorLd Bank staff estimates. advantage of greatLy simplifying the soLution of the model. Third, firms are assumed to be pureLy passive agents, so that the savings/invest- ment decisions of firms are identicaL to those of househoLds: that is, households 'pierce the corporate veil." tion continues to provide a modest boost to growth of 3. The model is programmed in Gauss, a matrix programming Lan- slightly more than 0.5 percentage points initially. guage for personal computers. However, this contribution to growth dwindles as the 4. Both the LeveL and the distribution of the initiaL capitaL stock are important ingredients for the model. The level of the capital stock barriers to the efficient allocation of labor diminish over matters because it determines how far China is from its steady state. time. The estimate of 6,000 bitLion yuan is based on Nehru and Dhareshwar Mor iteesinly caitlealoatoneffects .ni- (1993). Chow (1993) provides independent estimates of the sectoraL More interestingly, capital reallocation errects m1~ distribution of the capitaL stock, albeit onLy through 1985. tially provide a substantial negative contribution to SurprsingLy, Chow finds a distribution of the capitaL stock across the growth, because the barriers to investment (modeled as three sectors of 9 percent for agricuLture, 62 percent for industry, and 29 percent for services. The distribution impLied by the IO tabLe is sim- adjustment costs) result in incremental units of capital iLar, at 6 percent, 58 percent, and 36 percent. being inefficiently allocated to industry rather than to 5. Because of the unit eLasticity of substitution in production and agriculture or services, where their marginal productiv- consumption, these EngeL effects have minimal effects on the pattern ity is higher. Eventually, this negative contribution to of production measured in constant prices. growth also dwindles as barriers to the efficient alloca- References tion of investment decline over time. Although overall reallocation effects are fairly small Chow, G. 1993. "Capital Formation and Economic Growth in (ranging from -0.2 to 0.3 percentage points of annual China." Quarterly Journal of Economics 108(3): 809-42. growth), they point to the importance of a policy envi- Nehru, V., Eric Swanson, and Ashutosh Dubey. 1995. "A New Database on Human Capital Stock in Developing and ronment that facilitates the efficient allocation of fac- Industrial Countries: Sources, Methodology and Results." tors of production. In particular, they suggest that there Journal of Development Economics 46(2): 379-401. 114 China 2020: Development Challenges in the New Century Projecting Poverty and Inequality W his annex describes the methodology =employed in chapter 8 to project poverty and inequality. The projection framework is very simple and embodies no behavioral relationships. Rather, it consists of a set of assumptions on population and income growth that yield projections of average per capita income in rural and urban areas for China's thirty provinces, and a set of assumptions on the future distribution of per capita income in each region. Given these assumptions it is pos- sible to estimate the number of people falling below a specified poverty line in each region in order to arrive at a national projected poverty headcount, and to construct an estimate of overall income inequality. Although the frame- work is rudimentary, it dramatizes the importance of reducing regional and rural-urban growth disparities if China is to achieve its target of eradicating poverty and stemming increases in inequality. 115 The next section introduces notation and describes where F(P,t,u,) is the cumulative lognormal distribution the structure of the assumptions. The last section pre- distribution function with parameters sents four alternative scenarios. (Tii 2 ij Counting the poor sL,> = ln(y,]-) - (1/2) 6,.2 The first step in projecting regional poverty is to obtain Summing over all provinces yields an estimate of the projections of population and per capita incomes in number of people living below the poverty line in the rural and urban areas in China's thirty provinces. specified year. Define These projections can also be used to construct an estimate of future income inequality. First, the identity NJ = population of province j that relates the national mean log deviation of per yi = per capita income in province j capita incomes (t*) to the projected regional average per capita incomes and regional mean log deviations is Assume that overall population (per capita income) used: grows at the rate of gN (gy). Let rNi (rY1) denote popula- tion (per capita income) growth relative to overall t = Xp1ln(,Y,) + XXpq ln(yi) + ;p..t.. growth of that variable in province j (j=1,...,30). That is, provincial population (per capita income) growth is where i=u,r, j=1,...,30 provinces, y is the national average g,Nj = gjrN, (gy, = gy(r y)_ per capita income, Yu (YR) are urban (rural) average per To separate urban and rural projected provincial capita incomes, pr (PR) are the shares of the population populations and per capita incomes, define the overall living in urban (rural) areas, pi1 is the share of the popu- share of the population living in urban areas as u*, and lation living in region ij, and ti is the mean log deviation let r.. denote the urbanization rate of province j relative of per capita incomes in region ij. The resulting national to overall urbanization. The projected urban (rural) mean log deviation of per capita incomes is then trans- populations of province j, N . (N i-) are then given by lated into a Gini coefficient that can be used in interna- tional comparisons.' Clearly, the estimates of income N1 = U Yj NI inequality arrived at in this manner will represent upper Nrj. = (1_u* r -) N. bounds, since the projection framework does not capture the effects that interprovincial and rural-urban migration Let d - denote future urban/rural relative incomes in will have on regional income differentials. province j. Then, predicted urban (rural) per capita incomes yji* (yrjF) are given by Scenarios for reducing poverty yuj* = yj" N. I*(N + Nr/ IdI') The key components of the above projection framework y = y * N I/(N dI* + N ) are the initial values for population, per capita income, and the distribution of income in rural and urban areas Assumptions on the distribution of income around in China's thirty provinces and the assumptions that these average levels are required to arrive at the number yield the future values of these variables. The base year of people living below a specified poverty line P. The for the projections is 1995, the most recent year for distribution of income in each region is assumed to be which comprehensive data on rural and urban per capita lognormal and the mean log deviation of per capita income for China's thirty provinces are available. In all incomes is assumed to be tij, for i=u,r and j=1,..,30 scenarios we maintain the following assumptions. provinces. Hence, the number of poor in region ij is * National population grows at an average rate of 1 given by percent a year and real per capita income grows at an average rate of 5.5 percent a year, consistent with the NPoorij =Nij F(P,oij,aii) projections in chapter 2. 116 China 2020: Development Challenges in the New Century * Relative to national population growth provincial FI&URE : population growth rates remain constant and equal to G a P i their historical values over the period 197895. Growing apart? Projected income inequality x . ~~~~~under alternative scenarios * The urban share of the population grows at an aver- Gini coefficient age rate of 1.5 percent a year. 0.6 * Rural and urban income inequality in each province, Brazil, 1989 Past trends as summarized by the the mean log deviation of per capita conPtnue incomes, remains unchanged from its current level.2 Mexico, Regionat growth * The poverty line in 199S yuan is 561 yuan.3 1992 0.5 gaps eliminated Rural-urban Given these basic assumptions, we consider four growth gaps alternative scenarios. - eliminated 0.4 Both gaps are * Past trends continue. Provincial relative per capita United States, eliminated income growth rates are assumed to remain at their his- 1992 torical values over the 1978-95 period. Urban income India, 1992 growth is assumed to exceed rural income growth by 0.13985 1995 2005 2015 2025 3.5 percent, as it has over the 1981-95 period (that is, Source: WorLd Bank staff estimates; Deininger and Squire 1996. dI* grows at 3.5 percent a year from its 1995 base level). * Regional growth disparities are eliminated. Provincial intervals (figure A3. 1). Although by assumption within- per capita incomes are assumed to grow at the same rate group inequality remains unchanged, overall inequality (r,7=1 for all provinces). Urban-rural relative income changes markedly as regional and rural-urban per growth rates are assumed to continue to differ, as in the capita incomes diverge under the various scenarios. first scenario. * Urban-rural growth disparities are eliminated. Notes Urban-rural relative incomes are assumed to remain at their 1995 levels (that is, d' is constant and equal to its 1. This transLation is faciLitated by the additionat assumption that the aggregate distribution of per capita incomes is Lognormal. value in 1995), but regional growth disparities are 2. The most recent year for which a fuLl set of ruraL and urban assumed to persist at their historical levels. income distributions by province is avaiLable is 1992 (see World Bank * Regional and urban-rural growth disparities are 1997). We assume that the mean log deviation of rural and urban incomes in each province in 1995 is equaL to its LeveL in 1992, scaled eliminated. All provinces are assumed to grow at the up by a factor of 1.15 to capture the growth of inequaLity due to fac- same rate, and urban-rural relative incomes are tors other than rural-urban and regionaL growth disparities over the assumed to remain at their current levels. period 1992-95. The factor of 1.15 was chosen to ensure thatthe over- aLL poverty level in 1995 obtained by summing the rural and urban For each scenario the year in which the poverty rate poverty headcounts in each province was roughly equal to poverty fig- in each province [(NPooriR * + NPoorU* )/N.*] falls ures based on the avaiLable nationaL poverty figures. EvidentLy, the below 5 percent of the population is calculated. These assumption that within-group inequality does not change is optimistic in Light of past trends. Yet, as discussed in chapters 1 and 4, the main figures are plotted in figure 8.2. for the twelve provinces source of the increase in overaLL income inequatity has been differ- in which the incidence of poverty exceeds 5 percent of ences in provincial, and especially rural-urban income, growth rates. the population today. The 5 percent threshold is used 3. This figure is based on the Chinese absolute poverty line of 318 (1990) yuan, extrapoLated to 1995 using the ruraL CPI. See WorLd Bank because the key element in these projections is the rate at (1992). which the area in the tail of the lognormal distribution 4. Deininger and Squire (1996). declines as the mean of the distribution shifts upward. This elasticity becomes very large as the area in the tail References of the distribution becomes small, rendering the pro- ofcthe distyri tion bomes smll rendering t. henpro Deininger, K. and L. Squire. 1996. "A New Data Set Measuring jected poverty rate at low levels very sensitive to changes Income Inequality." The World Bank Economic Review 10(3): in mean income. The somewhat arbitrary threshold of 5 565-91. percent is used to minimize this source of sensitivity. World Bank. 1992. Strategies for Reducing Poverty in the 1990s. Int ad di th minimize Gii .c oeff icent asiatedi. Washington, D.C.: World Bank. In addition, the implied Gini coefficient associated ., 1997. Sharing Rising Incomes: Disparities in China. with each of these scenarios is computed, at five year Washington, D.C.: World Bank. Projecting Poverty and Inequality 117 Statistical Appendix National Accounts Table 1: National accounts: in current prices 121 Table 2: National accounts: in constant 1990 prices 122 Table 3: National accounts: implicit price deflators 1990=100 123 Table 4: National accounts: real growth rates 124 Balance of Payments Table 5: Balance of payments 125 Table 6: Services 126 Table 7: Transfers 127 Table 8: International reserves 128 Trade >'> Table 9: Commodity composition of merchandise exports 129 Table 10: Imports 130 External and Domestic Debt Table 11: External debt: disbursements and repayments 131 Table 12: External debt: interest and debt outstanding 132 Table 13: Domestic debt 133 Money and Credit Table 14: Monetary survey 134 Table 15: Operations of the People's Bank 135 Table 16: Banking survey 136 119 A': Table 17: Balance sheets of rural credit cooperatives 137 Table 18: Balance sheets of rural credit cooperatives 138 Fiscal Accounts Table 19: Consolidated government revenue 139 Table 20: Structure of consolidated government revenue 140 Table 21: Structure of government revenue (percentage of GNP) 141 Table 22: Structure of government expenditure 142 Table 23: Budget and its financing 143 Agriculture Table 24: Production of major crops 144 Table 25: Yield of major crops 145 Industry Table 26: Gross output value of industry 146 Table 27: Output of major industrial products 147 Wages Table 28: Total wage bill of staff and workers by employment category 148 Table 29: Average annual wage by sector and employment category 149 Employment Table 30: Social labor force by sector 150 Table 31: Social labor force by employment category 151 Prices Table 32: General price indices 152 Table 33: Annual rates of inflation by month 153 Investment Table 34: Total investment in fixed assets 154 Table 35: Investment in fixed sssets by state-owned enterprises 155 Table 36: Investment in capital construction of state-owned enterprises by sector 156 Table 37: Foreign direct investment inflows 157 Energy Table 38: Production and consumption of energy 158 Transport Table 39: Freight traffic 159 Table 40: Passenger traffic 160 Table 41: Average shipping distance 161 120 China 2020: Development Challenges in the New Century Table 1: National Accounts (billions of yuan, in current prices) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 GDPatmarketprices 896.4 1,020.2 1,196.3 1,492.8 1,690.9 1,854.8 2,161.8 2,663.8 3,463.4 4,662.2 5826.1 GDP at factor cost Agriculture 254.2 276.4 320.4 383.1 422.8 501.7 528.9 580.0 688.2 945.7 1199.3 Industry 386.7 449.3 525.2 658.7 727.8 771.7 910.2 1,170.0 1,642.9 2,237.2 2817.3 Miningandquarrying 10.9 13.9 15.0 18.4 22.2 24.7 28.0 33.6 45.8 62.3 81.5 Manufacturing 317.5 362.4 419.8 532.6 594.5 623.4 734.6 938.3 1,288.9 1,754.7 2193.4 Services 255.6 294.6 350.7 451.0 540.3 581.4 722.7 913.9 1,132.4 1,479.3 1809.4 Imports ofgoods & non-factor services 125.8 149.8 161.4 205.5 220.0 223.4 289.0 407.1 566.7 961.6 1130.3 Exports of goods & non-factor services 89.1 124.3 162.6 190.4 201.4 274.5 350.7 434.7 498.7 1,025.0 1220.7 Resource balance -36.7 -25.5 1.2 -15.1 -18.6 51.1 61.7 27.6 -68.0 63.4 90.4 Total expenditures 933.1 1,045.7 1,195.1 1,507.9 1,709.5 1,803.7 2,100.1 2,636.2 3,531.4 4,598.8 5735.7 Total consumption 594.5 661.1 762.9 958.4 1,100.0 1,159.3 1,348.4 1,672.6 2,031.6 2,739.6 3377.0 General government 118.4 136.7 149.0 172.7 203.3 225.2 283.0 349.2 450.0 598.6 712.3 Non-government 476.1 524.4 613.9 785.7 896.7 934.2 1,065.3 1,323.4 1,581.6 2,141.0 2664.7 Statistical discrepancy 17.2 6.9 17.8 22.4 44.3 22.8 33.7 77.4 13.4 18.0 -119.2 Gross domestic investment 338.6 384.6 432.2 549.5 609.5 644.4 751.7 963.6 1,499.8 1,859.2 2358.7 Gross domestic fixed investment 264.1 309.8 374.2 462.4 433.9 473.2 594.0 831.7 1,298.0 1,685.6 2055.4 Nonfinancial public sector 168.1 197.9 229.8 276.3 253.5 291.9 362.8 527.4 765.8 961.6 1089.8 Non-State sector 96.0 112.0 144.4 186.1 180.4 181.3 231.2 304.3 532.2 724.0 965.6 Changes in stocks 74.5 74.8 58.0 87.1 175.6 171.2 157.7 131.9 201.8 173.6 303.3 Grossdomesticsaving 301.9 359.1 433.4 534.4 591.0 695.5 813.4 991.2 1,431.8 1,922.6 2449.1 Net factor income 2.5 -0.1 -0.8 -0.6 0.9 5.0 4.5 1.4 -7.4 -8.9 -98.3 Net current transfers 0.5 0.9 0.9 1.5 0.9 1.1 2.4 4.4 5.1 7.2 11.7 Gross national saving 304.9 359.9 433.5 535.3 592.7 701.6 820.2 997.0 1,429.5 1,920.9 2362.4 Net indirect taxes 94.2 93.2 93.4 104.9 125.5 133.1 161.3 187.9 295.9 362.0 446.2 Indirect taxes 144.9 151.4 160.4 181.2 222.8 229.1 249.6 264.6 367.0 430.0 517.4 Subsidies 50.7 58.2 67.0 76.3 97.3 96.0 88.3 76.7 71.1 68.0 71.2 Gross national product 898.9 1,020.1 1,195.5 1,492.2 1,691.8 1,859.8 2,166.3 2,665.2 3,456.1 4,653.3 5727.7 Nominal official exchange rate (annual average) 2.94 3.45 3.72 3.72 3.77 4.78 5.32 5.51 5.76 8.62 8.35 GDP at market price (current million US$) 304,912 295,716 268,217 307,167 342,291 354,644 376,617 418,181 431,797 540,944 697614 Source: China Statistical Yearbook 1996, pp.42,46. I- Table 2: National Accounts (billions of yuan, in constant 1990 prices) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 GDP at market prices 1,270.2 1,381.9 1,542.2 1,716.5 1,786.9 1,854.8 2,025.4 2,313.0 2,625.3 2,956.1 3266.5 Net indirecttaxes 133.5 126.2 120.4 120.6 132.6 133.1 151.1 163.2 224.3 229.5 250.2 GDP at factor cost .. .. Agriculture 409.1 422.6 442.4 453.5 467.6 501.7 513.7 537.9 563.2 585.7 615.0 Industry 502.2 553.4 629.2 720.4 747.8 771.7 879.0 1,065.4 1,277.4 1,512.4 1725.7 Miningandquarrying 14.1 17.1 18.0 20.1 22.8 24.7 27.1 30.6 35.6 42.1 49.9 Manufacturing 412.3 446.4 503.0 582.5 610.9 623.4 709.4 854.4 1,002.2 1,186.2 1343.5 Services, etc. 358.9 406.0 470.6 542.6 571.5 581.4 632.7 709.8 784.8 858.0 925.8 Imports of goods & non-factor services 252.1 218.5 199.8 238.5 256.4 223.4 258.9 332.2 433.6 473.9 497.4 Exports ofgoods&non-factor services 156.3 182.5 202.8 228.3 244.5 274.5 316.7 365.3 399.0 510.9 559.9 Resource balance -95.8 -36.0 3.0 -10.2 -11.9 51.1 57.8 33.1 -34.6 37.0 62.5 Total expenditures 1,366.0 1,417.9 1,539.2 1,726.7 1,798.8 1,803.7 1,967.7 2,280.0 2,659.9 2,919.1 3204.0 Total consumption, etc. 886.2 896.9 982.0 1,094.9 1,154.7 1,159.3 1,263.4 1,489.6 1,673.8 1,829.0 1905.5 General government 181.7 187.5 196.4 202.6 222.9 225.1 271.6 326.2 373.3 402.4 388.7 Non-government 704.5 709.5 785.6 892.3 931.8 934.2 991.7 1,163.4 1,300.5 1,426.6 1516.8 Gross domestic investmentLa 479.8 521.0 557.2 631.8 644.1 644.4 704.3 790.4 986.1 1,090.1 1298.5 Gross domestic fixed investment La 374.2 419.6 482.4 531.7 458.5 473.2 556.5 675.8 833.1 980.0 1128.4 Nonfinancial public sectorLa 237.8 267.7 295.8 317.1 267.5 291.9 339.8 458.1 580.2 609.3 611.5 Non-State sector/a 136.4 151.9 186.6 214.5 191.0 181.3 216.7 217.7 252.9 370.7 516.9 Changes in stocks 105.6 101.3 74.8 100.2 185.6 171.2 147.8 114.5 153.0 110.1 170.0 Net factor income 2.0 -1.6 -3.2 -3.6 -2.0 5.0 3.7 2.1 -6.8 -7.7 -52.7 Net currenttransfers 0.7 1.2 1.2 1.8 0.9 1.1 2.2 3.8 3.8 4.6 6.5 Grossnational product 1,272.2 1,380.3 1,539.0 1,712.9 1,784.9 1,859.8 2,029.1 2,315.2 2,618.5 2,948.4 3213.8 Gross domestic saving 406.2 483.7 558.6 614.3 622.5 695.5 759.6 812.9 934.1 1,121.3 1338.2 Grossnational saving 409.0 483.3 556.6 612.5 621.4 701.6 765.4 818.9 931.1 1,118.2 1292.0 Capacity to import 178.6 181.3 201.2 221.0 234.8 274.5 314.2 354.7 381.5 505.2 537.2 Terms of trade adjustment 22.3 -1.3 -1.6 -7.3 -9.7 0.0 -2.5 -10.6 -17.4 -5.8 -22.7 Gross domestic income 1,292.4 1,380.7 1,540.7 1,709.2 1,777.2 1,854.8 2,022.9 2,302.5 2,607.9 2,950.3 3243.7 Gross national income 1,294.4 1,379.0 1,537.4 1,705.6 1,775.1 1,859.8 2,026.6 2,304.6 2,601.0 2,942.6 3191.0 ia 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 Slatistical Yearhook , p. 272) Source: China Statistical Yearbook 1996, pp.42,46. Table 3: National Accounts (implicit price deflators, 1990=100) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 GDPatmarketprices 70.6 73.8 77.6 87.0 94.6 100.0 106.7 115.2 131.9 157.7 178.4 Net indirect taxes 70.6 73.8 77.6 87.0 94.6 100.0 106.7 115.2 131.9 157.7 178.4 GDP at factor cost .. .. .. .. .. .. . .. Agriculture 62.1 65.4 72.4 84.5 90.4 100.0 102.9 107.8 122.2 161.5 195.0 Industry 77.0 81.2 83.5 91.4 97.3 100.0 103.6 109.8 128.6 147.9 163.3 Mining and quarrying 77.0 81.2 83.5 91.4 97.3 100.0 103.6 109.8 128.6 147.9 163.3 Manufacturing 77.0 81.2 83.5 91.4 97.3 100.0 103.6 109.8 128.6 147.9 163.3 Services, etc. 71.2 72.6 74.5 83.1 94.5 100.0 114,2 128.8 144.3 172.4 195.4 Importsofgoods&non-factorservices 49.9 68.6 80.8 86.2 85.8 100.0 111.6 122.5 130.7 202.9 227.2 Exports of goods & non-factor services 57.0 68.1 80.2 83.4 82.4 100.O 110.7 119.0 125.0 200.6 218.0 Terms of trade (Px/Pm) 114.2 99.3 99.2 96.8 96.0 100.0 99.2 97.1 95.6 98.9 95.9 Total expenditures 68.3 73.8 77.6 87.3 95.0 100.0 106.7 115.6 132.8 157.5 179.0 Total consumption, etc. 67.1 73.7 77.7 87.5 95.3 100.0 106.7 112.3 121.4 149.8 177.2 General government 65.2 72.9 75.9 85.3 91.2 100.0 104.2 107.1 120.6 148.8 183.2 Non-govemment 67.6 73.9 78.1 88.1 96.2 100.0 107.4 113.8 121.6 150.1 175.7 Gross domestic investment 70.6 73.8 77.6 87.0 94.6 100.0 106.7 121.9 152.1 170.6 181.7 Gross domestic fixed investment /a 70.6 73.8 77.6 87.0 94.6 100.0 106.7 123.1 155.8 172.0 182.1 Nonfinancial public sector 70.7 73.9 77.7 87.1 94.8 100.0 106.8 115.1 132.0 157.8 178.2 Non-State sector 70.4 73.7 77.4 86.8 94.4 100.0 106.7 139.8 210.4 195.3 186.8 Changes in stocks 70.6 73.8 77.6 87.0 94.6 100.0 106.7 115.2 131.9 157.7 178.4 Net factor income 123.7 4.9 24.9 16.8 -42.7 100.0 122.3 64.3 108.3 116.3 186.5 Net current transfers 68.3 73.8 77.6 87.3 95.0 100.0 106.7 115.6 132.8 157.5 179.0 Gross national product 70.7 73.9 77.7 87.1 94.8 100.0 106.8 115.1 132.0 157.8 178.2 Gross domestic saving 74.3 74.2 77.6 87.0 94.9 100.0 107.1 121.9 153.3 171.5 183.0 Gross national saving 74.6 74.5 77.9 87.4 95.4 100.0 107.2 121.8 153.5 171.8 182.8 /a In the absence of an official fixed investment deflator, the real investnent numbers are derived by employing the GDP deflator until 1991. Thereafter the fixed investment deflator is employed. ( ('hinaStaisilical Yearbook , p. 272) Source: Table I divided by Table 2. w Table 4: National Accounts (percentage growth rates in constant 1990 prices) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 G)P at market prices 13.5 8.8 11.6 11.3 4.1 3.8 9.2 14.2 13.5 12.6 10.5 Net indirect taxes .. .. .. .. .. .. .. .. GDP at factor cost .. .. .. .. .. .. .. .. Agriculture 1.8 3.3 4.7 2.5 3.1 7.3 2.4 4.7 4.7 4.0 5.0 Industry 18.6 10.2 13.7 14.5 3.8 3.2 13.9 21.2 19.9 18.4 14.1 Mining and quarrying 13.9 21.2 5.1 11.7 13.4 8.4 9.7 13.2 16.3 Manufacturing 18.1 8.3 12.7 15.8 4.9 2.0 13.8 20.4 17.3 18.4 13.3 Services, etc. 22.2 13.1 15.9 15.3 5.3 1.7 8.8 12.2 10.6 9.3 7.9 Importsofgoods&non-factorservices 53.7 -13.3 -8.6 19.4 7.5 -12.9 15.9 28.3 30.5 9.3 5.0 Exports ofgoods& non-factor services 7.6 16.8 11.1 12.6 7.1 12.3 15.4 15.3 9.2 28.1 9.6 Resource balance .. .. .. .. .. .. .. .. .. .. Total expenditures 20.0 3.8 8.6 12.2 4.2 0.3 9.1 15.9 16.7 9.7 9.8 Total consumption, etc. 17.7 1.2 9.5 11.5 5.5 0.4 9.0 17.9 12.4 9.3 4.2 General government 11.2 3.2 4.8 3.1 10.0 1.0 20.7 20.1 14.4 7.8 -3.4 Non-govemment 19.6 0.7 10.7 13.6 4.4 0.3 6.2 17.3 11.8 9.7 6.3 Gross domestic investment 24.5 8.6 7.0 13.4 1.9 0.0 9.3 12.2 24.8 10.5 19.1 Gross domestic fixed investment 12.8 12.1 15.0 10.2 -13.8 3.2 17.6 21.4 23.3 17.6 15.1 Nonfinancial public sector 28.6 12.6 10.5 7.2 -15.7 9.1 16.4 34.8 26.7 5.0 0.4 Non-Statesector -7.1 11.4 22.8 15.0 -11.0 -5.1 19.5 0.5 16.2 46.6 39.4 Changes in stocks 97.2 -4.0 -26.2 33.9 85.3 -7.7 -13.7 -22.5 33.6 -28.0 54.5 Net factor income .. .. .. .. .. .. .. .. .. Net current transfers .. .. .. .. .. .. .. .. .. Gross national product 13.2 8.5 11.5 11.3 4.2 4.2 9.1 14.1 13.1 12.6 9.0 Grossdomesticsaving 5.4 19.1 15.5 10.0 1.3 11.7 9.2 7.0 14.9 20.0 19.3 Grossnationalsaving 4.5 18.2 15.2 10.0 1.5 12.9 9.1 7.0 13.7 20.1 15.5 Capacity to import .. .. .. .. .. .. .. .. .. .. Terms of trade adjustment .. .. .. .. .. .. .. .. .. .. Gross domestic income 13.5 6.8 11.6 10.9 4.0 4.4 9.1 13.8 13.3 13.1 9.9 Gross national income 13.3 6.5 11.5 10.9 4.1 4.8 9.0 13.7 12.9 13.1 8.4 Source: Table 2 Table 5: Balance of Payments (billions of US dollars) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Exports of goods aid noni-factor services 28.2 29.6 39.1 45.9 47.8 57.3 65.8 78.8 86.5 118.8 147.2 153.7 Merchandise(fob) 25.1 25.8 34.7 41.1 43.2 51.5 58.9 69.6 75.7 102.6 128.1 128.5 Non-factor services 3A1 3.8 4.4 4.8 4.6 5.8 6.9 9.2 10.9 16.3 19.1 25.2 Inportsofgoodsandnoni-factorservices 41.1 37.5 38.9 50.0 52.7 46.6 54.3 73.8 98.3 111.5 135.3 141.3 Merchanidise (fob) 38.2 34.9 36.4 46.4 48.8 42.4 50.2 64.4 86.3 95.3 110.1 114.6 Non-factor services 2.9 2.6 2.5 3.6 3.9 4.3 4.1 9.4 12.0 16.2 25.2 26.7 Resotircebalance -13.0 -7.9 0.2 -4.1 -5.0 10.7 11.5 5.0 -11.8 7.3 12.0 12.4 Net factor income 0.9 0.2 -0.2 -0.1 0.3 1.0 0.9 0.3 -1.3 -1.0 -11.8 -10.4 Factor receipts 1.5 1.1 1.0 1.5 1.9 3.1 3.8 5.7 4.4 5.9 5.2 7.4 Factor payinents 0.5 0.9 1.2 1.6 1.7 2.1 2.9 5.4 5.7 6.9 17.0 17.8 Total interest due 1.2 1.1 1.8 2.2 3.2 3.1 3.7 3.4 3.4 4.8 6.0 Otherfactorpayments&disc. -0.6 -0.1 -0.6 -0.6 -1.5 -1.1 -0.8 2.0 2.3 2.1 11.0 17.8 Net current transfers 0.2 0.3 0.2 0.4 0.2 0.2 0.4 0.8 0.9 0.8 0.8 1.6 Current receipts 0.2 0.3 0.3 0.4 0.2 0.2 0.5 0.8 0.9 1.1 1.2 Workers remittances 0.2 0.2 0.2 0.1 0.1 0.1 0.2 0.2 0.1 0.4 0.4 Othercurrenttransfers 0.0 0.1 0.1 0.3 0.2 0.1 0.3 0.6 0.8 0.7 0.8 Current payments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.4 Current account balance before official grants -11.9 -7.5 0.3 -3.8 -4.5 11.9 12.9 6.1 -12.2 7.2 1.0 3.6 CurrentaccountbalanceasashareofGDP(percent) -3.9 -2.5 0.1 -1.2 -1.3 3.4 3.4 1.4 -2.8 1.3 0.1 0.5 Official capital grants 0.1 0.1 0.0 0.0 0.1 0.1 0.4 0.4 0.3 0.5 0.6 0.3 Currentaccountbalanceafterofficial.grants -11.8 -7.3 0.3 -3.8 -4.3 12.0 13.3 6.4 -11.9 7.7 1.6 3.9 Long termn capital inflows 5.0 6.3 7.8 9.1 8.7 9.0 8.0 18.4 35.9 41.6 46.7 39.9 Direct investment 1.0 1.4 1.7 2.3 2.6 2.7 3.5 7.2 23.1 31.8 33.8 38.8 Netlongtermborrowing 4.0 4.9 6.1 6.8 6.1 6.3 4.5 11.3 12.8 9.8 12.9 1.1 Disbursements 5.3 6.7 8.0 9.1 8.4 9.7 8.7 16.5 19.6 16.2 22.0 Repayments due 1.3 1.9 2.0 2.3 2.4 3.3 4.1 5.2 6.7 6.3 9.1 Total other items (net) 4.4 - 1.0 -3.3 -2.9 -4.9 -9.0 -6.7 -26.9 -22.3 -18.8 -25.9 -12.2 Net short-term capital 2.3 -2.3 0.2 0.1 -1.5 -3.2 0.4 -0.9 -3.9 -3.1 0.4 0.1 Capitalflowsnotelsewhereincluded 0.0 0.0 0.0 0.0 0.0 -2.6 -0.3 -17.8 -8.5 -5.8 -8.5 2.4 Errors and omissions 2.1 1.3 -3.5 -3.0 -3.3 -3.2 -6.8 -8.2 -9.8 -9.8 -17.8 -14.7 Changesinnetreserves 2A 2.0 -4.8 -2.4 0.5 -12.0 -14.5 2.1 -1.8 -30.5 -22.5 -31.6 Net credit from IMF 0.0 0.7 0.1 0.0 0.0 -0.4 -0.4 0.0 0.0 0.0 0.0 0.0 Reserve changes not elsewhere included 2.4 1.3 -4.9 -2.3 0.5 -11.6 -14.1 2.1 -1.8 -30.5 -22.5 -31.6 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 Grossreserves (excluding gold) La 12.7 11.5 16.3 18.5 18.0 29.6 43.7 20.6 22.4 52.9 75.4 107.7 Grossreserves(includinggold) /b 16.9 16.4 22.5 23.8 23.1 34.5 48.3 25.0 27.0 57.8 80.3 Exchange rates: Nominal official exchange rate (average) 2.9 3.5 3.7 3.7 3.8 4.8 5.3 5.5 5.8 8.6 8.4 8.3 Nominal official exchange rate (end-of-year) 3.2 3.7 3.7 3.7 4.7 5.2 5.4 5.8 5.8 8.4 8.3 8.3 Manufactures Unit Value Index (% change) 0.8 17.9 9.8 7.3 -0.7 7.8 2.2 4.3 -0.3 3.7 8.3 -2.5 Real effective exchange rate index 63.6 46.3 40.2 43.7 50.7 37.3 32.4 31.3 30.7 33.5 35.3 37.0 /a Smce August 1992 the wthontics havc defined gmss intemational reserves as the sum of only state foncign exehangc eserves (not total rescrves) gold, wrserve position in the Fund and SDR holdings. /k Gold valued at London pnees (Source: IFS) Soulrce: World Bank, I MF: lntervestiono/l F,nooc,snl Stot,ot,c, Table 6: Services (millions of US dollars) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 A. Shipmenit of freiglit Credit 671 705 904 1,308 1,061 1,937 1,179 1,294 1,391 2,065 2,478 Debit 1,224 850 1,186 1,387 2,382 2,139 2,193 3,876 5,134 6,926 8,727 B. Insurance Credit 196 229 252 345 332 227 342 486 452 1,700 1,852 Debit 69 82 142 214 187 84 214 274 362 1,880 4,273 C. Other transportation Credit 271 304 152 169 153 480 494 0 0 0 0 Debit 0 0 0 0 0 0 0 0 0 0 0 D. Port expenses Credit 360 306 289 304 300 289 338 368 245 760 874 910 Debit 300 670 456 889 370 1,106 314 449 345 695 799 910 E. Travel receipts Credit 979 1,227 1,693 2,078 1,707 1,738 2,346 3,530 4,683 7,323 8,730 10,200 Debit 314 308 387 633 429 470 511 2,512 2,797 3,036 3,688 4,430 F. Profits Credit 6 0 10 0 6 0 0 0 0 0 1 0 Debit 14 15 2 8 7 46 10 21 231 400 9,965 10,960 G. Interest Credit 484 216 177 427 247 667 747 610 535 928 1,104 1,870 Debit 68 298 457 644 394 480 870 1,890 2,079 2,506 3,150 2,940 H. Bank interest and charges Credit 897 685 789 1,042 1,641 2,350 2,972 4,985 3,855 4,809 4,086 5,560 Debit 464 611 732 978 1,264 1,536 1,999 3,436 3,364 3,868 3,850 3,900 1. Posts Credit 13 15 12 24 118 159 221 349 471 706 756 Debit 7 15 14 11 16 13 15 72 85 146 217 J. Interofficial Credit 130 215 204 137 151 107 115 141 201 266 700 Debit 263 251 150 277 337 239 184 227 473 518 588 K. Labor income Credit 91 199 51 35 53 52 74 60 47 117 Debit 0 0 0 0 0 0 0 20 22 98 L. Other services Credit 435 940 880 458 727 866 1,870 2,604 3,409 3,429 3,740 Debit 347 100 150 193 189 291 689 2,004 2,818 3,000 6,931 M. Total services Net 1,069 1,427 1,737 1,094 923 2,558 3,697 63 -2,421 -969 -17,868 -11,880 Credit 4,533 4,927 5,413 6,327 6,497 8,872 10,697 14,844 15,289 22,104 24,321 32,630 Debit 3,464 3,500 3,676 5,233 5,574 6,314 7,000 14,781 17,710 23,073 42,189 44,510 N. factor Services (F+G+H+K) Net 932 176 -164 -126 282 1,007 914 288 -1,259 -1,018 -11,774 -10,370 Receipts (credit) 1,478 1,100 I,027 1,504 1,947 3,069 3,793 5,655 4,437 5,854 5,191 7,430 Payments (debit) 546 924 1,191 1,630 1,665 2,062 2,879 5,367 5,696 6,872 16,965 17,800 0. Non-factor services (A+B+C+D+E+I+L) Net 137 1,251 1,901 1,220 641 1,551 2,783 -225 -1,162 49 -6,094 -1,510 Receipts (credit) 3,055 3,827 4,386 4,823 4,550 5,803 6,904 9,189 10,852 16,250 19,130 25,200 Payments (debit) 2,918 2,576 2,485 3,603 3,909 4,252 4,121 9,414 12,014 16,201 25,224 26,710 .9oarce: World Bank. IMF: Inernaliomot Fio..oiol Sni,l5f0. Table 7: Transfers (millions of US dollars) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Private unrequited transfers Net 171 255 249 416 238 222 444 804 883 836 810 1,580 Credit 180 266 260 428 247 233 484 821 901 1,095 1,170 Debit 9 11 11 12 9 11 40 17 18 259 360 Nonresidential remittances Net 177 205 163 125 73 119 189 213 93 376 350 Credit 180 208 166 129 76 124 207 228 108 395 350 Debit 3 3 3 4 3 5 18 15 15 19 0 Migrants' transfers Net -6 50 86 291 165 103 255 591 790 460 460 Credit 0 58 94 299 171 109 277 593 793 700 820 Debit 6 8 8 8 6 6 22 2 3 240 360 Public unrequited transfers Net 73 124 -25 3 143 52 387 351 289 501 625 300 Credit 260 250 129 140 230 143 406 385 389 674 657 Debit 187 126 154 137 87 91 19 34 100 173 32 International organizations Net 21 96 24 42 82 69 183 139 127 121 154 Credit 63 140 58 61 120 84 192 173 160 144 186 Debit 42 44 34 19 38 15 9 34 33 23 32 Grants and aid Net 52 28 -49 -39 61 -17 204 212 162 380 471 Credit 197 110 71 79 110 59 214 212 229 530 471 Debit 145 82 120 118 49 76 10 0 67 150 0 Total transfers Net 243 379 224 419 381 274 831 1,155 1,172 1,337 1,435 1,880 Credit 439 516 389 568 477 376 890 1,206 1,290 1,769 1,827 Debit 196 137 165 149 96 102 59 51 118 432 392. *9 .Source: World Bank, IMF: Iniernalional linancial Siansis,cs. Table 8: International Reserves (millions of US dollars) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Total reserves (minus gold) 12,728 11,453 16,305 18,541 17,960 29,586 43,674 20,620 22,387 52,914 75,377 107,652 SDR's 483 569 640 586 540 562 577 419 484 539 582 614 Reserve position with Fund 332 370 429 407 398 430 433 758 704 755 1,216 1,396 Foreign exchange reserves 11,913 10,514 15,236 17,548 17,022 28,594 42,664 19,443 21,199 51,620 73,579 10,500 Gold Gold(millionfinetroyounces) 13 13 13 13 13 13 13 13 13 13 13 Gold (National valuation) /a 486 541 629 594 587 623 634 610 612 646 660 637 Londongoldprice(US$peroz)/b 327 391 484 410 401 384 362 343 360 384 384 388 Gold at London price (US$ million) 4,153 4,964 6,148 5,210 5,093 4,871 4,600 4,361 4,569 4,880 4,879 Total reserves including gold 13,214 11,994 16,934 19,135 18,547 30,209 44,308 21,230 22,999 53,560 76,037 108,289 (National valulation) Total reserves including Gold 16,881 16,417 22,453 23,751 23,053 34,457 48,274 24,981 26,956 57,794 80,256 (London price) Za Frotn August 1992 onwards the authorities have defined gross intemationial reserves as the sum of only state foreign exchange reserves (not total reserves). gold, reserve position with the Fund and SDR holdings. At Gold valued at SDR 35 per fine ounce. Source: World Bank, IMF: International I'inancial Stafi.sIicxv. Table 9: Commodity Composition of Merchandise Exports (millions of US dollars, customs basis) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 PRIMARY GOODS 13,828 11,272 13,231 14,406 15,078 15,886 16,145 17,004 16,666 19,708 21,487 FOOD 3,803 4,448 4,781 5,890 6,145 6,609 7,226 8,309 8,399 10,015 9,954 Live animals chiefly for food 304 338 348 386 395 430 439 479 453 468 503 Meatand meat products 448 483 520 585 657 791 906 770 950 909 1,371 Fishes, shell-fish, molluscs etc. 283 491 721 969 1,039 1,370 1,181 1,366 1,254 2,320 2,853 Grain andgrain products 1,065 898 579 681 719 614 1,169 1,692 1,660 1,687 285 Vegetables and fruits 825 1,092 1,290 1,617 1,623 1,742 1,946 2,023 2,163 2,889 3,342 Coffee, tea, cocoa etc. 435 466 488 524 568 534 491 499 510 484 516 NON-FOOD 2,653 2,908 3,650 4,257 4,212 3,537 3,486 3,143 3,052 4,127 4,375 Oil seeds and oil-containing fruits 487 580 674 684 645 619 741 867 793 666 522 Textile fibersetc. 1,145 1,160 1,508 1,672 1,546 1,095 1,125 4,224 4,179 1,093 753 Animal and vegetable raw materials 398 486 645 724 845 809 705 606 617 1,136 1,351 MINERAL FUELS 7,132 3,683 4,544 3,950 4,321 5,237 4,754 4,693 4,109 4,069 5,335 Coal, coke and briquettes 349 455 536 594 680 755 829 .. .. 1,054 1,695 Petroleum, petroleum products etc. 6,777 3,224 4,003 3,350 3,633 4,460 3,975 .. . 2,789 3,243 OTHER 240 233 256 309 400 503 679 859 1,106 1,497 1,823 MANUFACTURED GOODS 13,522 19,670 26,206 33,110 37,460 46,205 55,698 67,936 75,078 101,298 127,283 CHEMICALS AND RELATED PRODUCTS 1,358 1,733 2,235 2,897 3,201 3,730 3,818 4,348 4,623 6,236 9,094 Organic 309 411 500 575 690 838 911 1,403 1,541 1,602 2,285 Inorganic 287 379 553 762 791 842 913 1,050 1,145 1,350 2,225 LIGHT INDUSTRY 4,493 5,886 8,570 10,489 10,897 12,576 14,456 16,135 16,392 23,218 32,243 Yam, fabrics, manufactured goods etc. 3,243 4,220 5,790 6,456 6,994 6,999 7,734 .. .. 11,818 13,919 Non-metallic minerals 227 317 439 579 792 1,316 1,668 .. .. 2,521 3,425 Metal products 426 553 797 1,006 1,210 1,283 1,669 .. .. 1,654 5,225 MACHINERYANDTRANSPORTEQUIPMENT 772 1,094 1,741 2,769 3,874 5,588 7,149 13,219 15,282 21,895 31,391 OTHER 3,486 4,948 6,273 8,268 10,755 12,686 16,620 34,234 38,781 49,937 54,548 Clothing and garments 2,050 2,913 3,749 4,872 6,130 6,848 8,998 16,883 18,325 23,732 24,049 PRODUCTS NOT CLASSIFIED ELSEWHERE 3,413 6,009 7,387 8,687 8,733 11,625 13,655 . .. 12 7 TOTAL 27,350 30,942 39,437 47,516 52,538 62,091 71,843 84,940 91,744 121,006 148,770 Note Data from 1955-91 are based on Standard Industrial Trade Classification (SITC). 1992-95 categories are based on the Harmonized System (HS). From 1992, Customs Statistics use new commodity catagories; products not otherwise Classified have been included in different categores of commodities .Source: (China Slaustlical Yearbxok 1996, p 58t. 0 Table 10: Imports (millions of US dollars, customs basis) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 FOOD 1,881 2,002 3,055 4,191 5,269 4,474 3,718 3,907 2,953 5,014 9,126 Food 1,553 1,625 2,443 3,476 4,192 3,335 2,799 3,143 2,206 3,137 6,131 Beverages 206 172 263 346 202 157 200 239 245 68 394 Animal fat 122 205 349 369 875 982 719 525 502 1,809 2,601 PETROLEUM (Mineral fuels) 172 504 539 787 1,650 1,272 2,113 3,570 5,819 4,035 5,127 INTERMEDIATE 19,175 17,552 16,769 23,391 23,415 18,325 23,189 34,237 40,042 43,955 52,066 Chemicals and related products 4,469 3,771 5,008 9,139 7,556 6,648 9,277 11,157 9,704 12,130 17,300 Crude materials (non-food) 3,236 3,143 3,321 5,090 4,835 4,107 5,003 5,775 5,438 7,437 10,158 Leather and Cork 770 851 728 842 747 938 1,267 1,626 1,859 2,943 3,020 Leather .. .. 184 224 280 374 642 206 263 1,902 1,993 Cork .. .. 544 618 467 564 625 1,420 1,596 1,041 1,027 Textile yarn (yarn, fabrics etc.) 1,607 1,632 1,848 2,388 2,845 2,748 3,689 3,690 3,145 9,347 10,914 Non metallic minerals 325 363 342 430 520 453 443 4,519 3,776 1,001 1,113 Iron and steel 7,120 6,741 4,787 4,624 5,797 2,852 2,694 5,051 13,896 9,438 6,878 Non-ferrous metals 1,648 1,051 735 878 1,114 579 816 2,420 2,224 1,659 2,683 CONSUMER GOODS 2,330 2,431 1,743 1,757 1,866 2,051 2,506 7,949 8,666 6,987 8,277 Paper (paper and related products) 428 554 727 610 634 745 969 1,771 1,741 1,923 2,157 Rubber 1,902 1,877 45 51 50 50 76 555 598 186 224 Furniture .. .. 42 61 68 72 49 178 218 111 90 Travel goods .. .. 3 8 6 6 7 302 327 50 42 Clothing .. .. 17 28 38 48 61 437 543 622 969 Footwear .. .. 1 2 3 9 11 506 513 325 341 Photo supplies .. .. 432 365 398 361 441 2,024 2,320 1,656 1,861 Miscellaneous .. .. 476 632 669 759 892 2,177 2,407 2,114 2,592 MANUFACTURED 18,694 20,415 21,110 25,150 26,940 27,223 32,264 30,922 46,479 55,624 57,481 Total 42,252 42,904 43,216 55,275 59,140 53,345 63,791 80,585 103,959 115,614 132,078 Note: Data from 1985-91 are based on Standard Industrial Trade Classification (SITC); 1992-95 categories are based on the Hannonized System (HS). Source: China Statistical Yearboo/k 1996, p. 581. Table 11: External Debt: Disbursements and Repayments (millions of US dollars) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 DISBURSEMENTS Public & publicly guaranteed long-term debt 5,280 6,732 8,044 9,065 8,442 9,665 8,659 16,308 19,229 16,151 21,411 Official creditors 1,166 1,444 1,123 1,847 2,761 2,578 2,649 3,103 5,501 4,200 8,373 Multilateral 599 620 717 1,124 1,169 1,158 1,455 1,523 2,252 2,558 2,838 ofwhich IDA 212 282 399 557 507 507 612 778 869 680 812 of which IBRD 354 324 303 553 604 591 668 552 977 1,380 1,457 Bilateral 567 824 405 724 1,592 1,420 1,194 1,580 3,248 1,642 5,535 Private creditors 4,114 5,288 6,921 7,218 5,681 7,087 6,010 13,204 13,729 11,951 13,038 Bonds 971 1,333 1,064 782 450 277 260 894 2,737 3,337 1,224 Commercial banks 700 1,782 4,605 4,470 2,016 3,247 2,623 5,062 5,624 2,380 4,977 Other private 2,443 2,172 1,252 1,967 3.206 3,564 3,127 7,248 5,368 6,234 6,837 Private non-guaranteed long-term 0 0 0 0 0 0 0 198 332 0 544 Total long-term disbursements 5,280 6,732 8,044 9,065 8,442 9,665 8,659 16,505 19,561 16,151 21,955 IMF purchases 0 701 0 0 0 0 0 0 0 0 0 Net short-term capital Total disbursements 5,280 6,732 8,044 9,065 8,442 9,665 8,659 16,505 19,561 16,151 21,955 REPAYMENT DUE Public & publicly guaranteed long-term debt 1,297 1,874 1,956 2,285 2,365 3,319 4,123 5,213 6,729 6,343 9,070 Official creditors 49 279 496 492 485 851 605 760 886 1,083 1,171 Multilateral 0 2 99 41 63 220 141 215 272 359 420 of which IDA 0 0 0 0 0 0 1 2 4 9 14 ofwhich IBRD 0 0 97 39 62 216 130 196 245 315 350 Bilateral 49 277 397 451 421 632 464 545 614 725 761 Private creditors 1,248 1,595 1,460 1,793 1,880 2,468 3,517 4,453 5,843 5,260 7,899 Bonds 0 0 0 11 33 325 236 1,095 831 461 1,451 Commercial banks 77 331 466 754 867 808 2,010 2,046 2,895 1,803 2,645 Other private 1,171 1,264 993 1,028 980 1,335 1,272 1,311 2,117 2,996 3,803 Private non-guranteed long-term debt 0 0 0 0 0 0 0 0 0 0 0 Total long-term repayments due 1,297 1,874 1,956 2,285 2,365 3,319 4,123 5,213 6,729 6,343 9,070 IMF repurchases 0 36 81 83 79 490 451 0 0 0 0 Total long-term repayment & IMF repurchase 1,297 1,910 2,037 2,368 2,444 3,809 4,574 5,213 6,729 6,343 9,070 NET FLOWS Official creditors 1,117 1,165 626 1,355 2,277 1,727 2,044 2,343 4,615 3,117 7,202 of which IDA 212 282 399 557 507 507 611 777 865 671 798 of which IBRD 354 324 206 514 542 376 538 357 732 1,065 1,107 COMMITMENTS IBRDcommitments 660 672 692 868 1,221 75 1,312 1,253 1,445 2,931) 2,495 of which fast disbursing 0 0 0 200 0 0 0 0 0 0 0 IDA commitments 433 448 613 594 539 878 1,310 612 870 1,090 355 of which fast disbursing 0 0 0 97 0 0 0 0 0 0 0 S;oNr,e World Bank W,,rIll)eb lahbles Table 12: External Debt: Interest and Debt Outstanding ( millions of US dollars) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 INTEREST DUE Ptiblic & ptiblicly giaranteed loig-tenn debt 586 645 1,125 1,611 2,511 2,534 2,953 2,708 2,618 3,818 4,623 Official creditors 172 262 402 434 457 531 635 678 827 1,131 1,288 Mtltilateral 30 76 126 143 179 226 263 319 376 480 619 ofwbicil IDA 4 8 12 15 14 19 23 29 34 41 49 ofwwhicliIBRD 26 66 ttt 126 161 200 227 264 299 364 460 Bilateral 142 187 276 290 278 305 372 358 450 651 669 Private creditors 414 382 723 1,178 2,054 2,003 2,319 2,030 1,792 2,687 3,336 Bonds 20 91 213 289 347 367 356 337 286 363 594 Commercial baniks 50 67 137 457 1,062 959 1,071 776 738 1,034 1,333 Other private 343 225 373 432 646 677 891 918 767 1,289 1,408 Private nioni-guiaraniteed lonig-tenn debt 0 0 0 0 0 0 0 0 12 26 33 Iiterest arrears 0 0 0 0 0 0 0 0 0 0 0 Reductioni in arrears (-) 0 0 0 0 0 0 0 0 0 0 0 'I'otal long-termi iterest dLe 586 645 1,125 1,611 2,511 2,534 2,953 2,708 2,630 3,844 4,657 IMF service cbarges 2 2 50 51 67 65 24 0 0 0 0 Iiterest oni sliort-tenn debt 594 417 640 534 628 547 707 697 809 948 1,340 Total initerest duLe 1,181 1,064 1,815 2,197 3,206 3,146 3,684 3,405 3,439 4,792 5,997 DEBT OUTSTANDING AND DISBURSED (DOD) Public & piblicly guaranteed long-term debt 9,937 16,571 25,963 32,620 37,118 45,515 49,479 58,463 70,076 82,391 94,674 Official creditors 4,724 7,028 9,496 10,536 12,039 14,514 17,073 19,105 24,339 28,973 36,282 Miltilateral 983 1,810 2,852 3,753 4,783 6,111 7,576 8,614 10,690 13,588 16,302 of wbich IDA 431 774 1,330 1,819 2,296 3,016 3,672 4,286 5,160 6,097 7,038 of whichi IBRD 498 965 1,427 1,831 2,330 2,865 3,494 3,752 4,549 5,933 7,209 Bilateral 3,741 5,218 6,644 6,783 7,257 8,403 9,497 10,491 13,650 15,385 19,980 Privatecreditors 5,213 9,544 16,467 22,085 25,079 31,001 32,406 39,358 45,737 53,418 58,393 Bonds 1,234 2,811 4,498 5,182 5,228 5,425 5,660 5,449 7,715 11,087 10,684 Commercial baniks 776 1,780 6,087 10,393 11,432 14,520 14,963 17,913 20,678 21,475 23,869 Other private 3,203 4,953 5,882 6,509 8,419 11,055 11,783 15,995 17,344 20,856 23,840 Private non-guaranteed long-term 0 0 0 0 0 0 0 200 556 583 1,090 Total long-term DOD 9,937 16,571 25,963 32,620 37,118 45,515 49,479 58,663 70,632 82,974 95,764 UseoflMFcredit 340 1,072 1,155 1,013 908 469 0 0 0 0 0 Short-tenm debt 6,419 6,076 8,221 8,806 6,907 9,317 10,780 13,765 15,296 17,483 22,325 Total extemnal debt 16,696 23,719 35,340 42,439 44,932 55,301 60,259 72,428 85,928 100,457 118,089 MEMORANDUM ITEMS %Debtonconcessionaltenns 25 22 20. 19 21 21 21 20 19 19 18 % Debt at variable interest rates 24 25 34 39 38 36 33 28 29 28 30 % Bilateral debt oi coticessional tenns 12 12 11 10 12 13 11 10 12 12 11 % Multilateral debt oni concessional tenns 3 3 4 4 5 6 6 6 8 8 8 Preferred creditor debt service 2 5 11 8 8 17 12 7 7 8 8 World Bank. W,,,/d I),hi 7,hi.,. Table 13: Domestic Debt (billions of yuan) Year TNc Issucd Aurouno issued I0 issued 19117 I918 19819 191) 1991 1992 1993 1994 1995 196 I9Y)7 199S I99Y) 200(01 191)2 T -asuv bonds EnIerp.ses 2.41 1.4S 1A41 (141 014S Treasur hoonds Households 2.1001 3') 1)39 10.39 1139 19S3 Trasuy honds EnIeprises 2 H) (142 0.42 01.42 W42 0.42 Trasury bonds Hohuscolds 2.1 Hl A.42 (.42 ( 42 ( 42 0.42 198)4 Trcusury honds Enterprises 2 (11 11 40 11.411 () 411 1)40 01.401 Treasuy bonds Hous-holds 2 211 (1 44 (1.44 0.44 0.44 11.44 1985 Treasuy bonds Eslepriscs 2 21) 2.18 Tea-suy bonds Households 3 111 3.75 19S6 TrDauy bonds Esurpfscsa) 3( 2.29 Treasuy bonds Households 4.()() 3 96 19S7 Treasuy bonds Enusprnses 2.301 2.26 Treasuy bonds Households 4.00 4.WI Kcy conseethion bonds Households 0.50( 0.5 Key eonstruclion bonds Enslopniss 4 90 4.90 1988 Tasuy bonds Enoropis. 3.5( 3.47 Tusuy bonds Households 5.7") 5.73 Key cosrnseioon bonds Households 3.11) 3.05 Fiseal bonds Finneisl instuliubns 6.60 6.(0 1989 Trasuy bonds Houscolds 5.60 5.601 Pncc-indexed bonds Houscholds 12.50 12.50 Special state bonds Enterprses 4.30 4.2S 1999 Treasury bonds Households 9.31 9.2S Sponial state bonds Enterri-ss 3.20 3 20 Finet bonds Fiounseul instioi-s 7.10 7.11 Conosrus- bonds Entropis-s 9.40 9.40 1991 Treasury bonds Households 19 94 19.94 Spenial stalbonds Enterpises 2.00 2.01 Finst] bonds Financial insliubs 7.10 7.() 11192 Treasury bonds Houschulds 14.90 14.90 Treasuy bonds Houscholds 24 711 24.70 1993 Treasuy bonds Households 22 64 22.64 Trensury honds Households S.84 1 14 Finsta bonds Financial instisuions 7.W1 7.00 1994 Troasuy bonds Entcrpnics 2.0.3 2 00 Treasuy bonds Households 1.24 1.24 Trasury bonds Households 2S.50 21 50 Trnasury bonds Houscholds 7.W1( 70.011 1995 Speisl stato bonds Fincisl insfitutins 3.00 3.00 Treasuy bonds Finuonial institutions 25 (W1 25 Trasury bonds Households 105.SS 10S.6S Treasuy bonds Houscholds 6.00 6.00 Treaury honds Fiounciul ins4ituliuns 11.S9 11I119 TOTAL AMOUNTMATURING 474.63 0.S7 1.71 2.55 23.53 IS.WI 26.04 10.12 24.22 52.65 110oS67 1149(1 145.52 2.W9 3.W) Treasuy bonds Households 0.39 0.81 1.25 5P0 1(1.55 10.46 9.72 19.94 24 70 22.64 14.9(W 1.4 0.00 01.W TrrurSy bonds Enterpises 0.48 0.90 1.30 3.4S 6.31 3.08 0.40 00.W 011 0.(N1 0.W1 af 0.WI (1.(11 0 (1 Key constroetio honds Entcrpnses 01.C0 0 N11 0.00 4 9Y 01.W1 0 11 ()0 Q()00 0.(N) 0.(1 00 0.1N) 0.()() 0.()() 0.1N) Key construItou bonds Households (1 0.W19 0.1N) 3.55 0.1m (.1N1 0.0) (1.1)1) 00.W (1( (.14) 00.100 (0INI (.19W Spoeial slal bonds Entrpri-ss °-.° °."( 0.1H) 6110 00 ((.W0) (I.I0N 4.28 3 20 2.W)1 1.(1 (0.1)( 1.00 (() Fisjul bonds Finaneialmlsitufi-s 0.W) 1,19) O((.I 661 (6.()01 ().()() 0.() 0.(1 7.11 7.00(1 0.1N) 6.C() ()s() 0.11) tua Conversion bonds Enterpises (.00 ().10 0W1) (01) (I)W) 0.W) (1.) (01N) 9.40 I1)W j.)(N (.W) 0.W) 0.0W Prie-indxed bonds Households 0.W) 0.W) 1).00 (1(() 0(1(1 12.5() (1(1) (.00 01)0 0.0(W 11.() 01) 0M (.Co .9nurer Mi-1sy or Fin.ne.. Table 14: Monetary Survey /a/Lb 1993 1994 1995 1996 March June Sept. Dec. March June Sept. Dec. (billions of yuan, end of period) Net foreign assets 222 506 508 503 541 637 729 801 871 951 Net domestic assets 3,107 3,976 4,290 4,566 4,882 5,188 5,495 5,777 6,084 6,410 Domestic credit 3,301 4,160 4,310 4,410 4,642 5,098 5,265 5,650 5,979 6,195 Loans to enterprises and individuals 3,158 3,937 4,081 4,239 4,449 4,871 5011 5,357 5,510 5,889 Net credit to govemment 118 131 129 77 100 131 173 212 201 216 Claims on nonmonetary financial institution 25 91 100 94 93 96 81 82 86 89 Other items (net) -194 -183 -20 156 240 91 230 126 287 215 Money plus quasi-money (broad money) 3,330 4,483 4,797 5,069 5,423 5,825 6,224 6,577 6,955 7,361 Money 1,628 2,054 2,103 2,142 2,248 2,399 2,391 2,462 2,634 2,851 Currency 586 729 727 700 737 789 817 767 841 880 Demanddeposits 1,042 1,325 1,376 1,442 1,511 1,610 1,574 1,695 1,793 1,971 Household demand deposits .. .. .. .. .. .. .. Enterprise deposits .. .. .. .. .. .. .. Official institutions . Quasi-money 1,702 2,429 2,695 2,927 3,175 3,426 3,833 4,115 4,321 4,510 (twelve-month percentage change) Net domestic assets 26.4 28.0 34.6 29.6 31.0 30.5 28.1 26.5 24.6 23.5 of which Domestic credit 22.6 26.0 23.5 19.9 19.9 22.5 22.2 28.1 24.9 21.5 Loans to enterprises and individuals .. .. .. .. .. .. .. Money and quasi-money (broad money) 24.0 34.6 35.4 32.4 30.6 29.9 29.7 29.8 28.2 26.4 of which: currency 35.2 24.3 24.6 21.1 14.9 8.2 12.4 9.8 14.1 11.6 La Covers the operations of the People's Bank, specialized and universal banks, rural and urban credit cooperatives, and the Agricultural Development Bank. Lb Level data from March 1993 have been revised on the basis of a new statistical methodology that includes an improved accounting system and expanded coverage. Growth rates from 1994 are based on these new statistics. Source: IMF. Table 15: Operations of the People's Bank /a (billions of yuan, end of period) 1993 1994 1995 1996 March June Sept. Dec. March June Sept. Dec. Net foreign assets 155 445 499 532 602 667 733 841 873 956 Gold and international financial institutions 12 19 15 13 17 16 15 18 19 23 Intemational reserves converted at exchange rate/b 123 434 487 520 579 611 671 719 792 872 Other 20 -7 -3 -1 5 40 46 105 62 62 Net domestic assets 1,160 1,277 1,260 1,197 1,269 1,409 1418 1,294 1,378 1,733 Domestic credit 1,165 1,230 1,202 1,102 1,160 1,298 1293 1,218 1,214 1,565 Claims on deposit money banks 961 1,045 1,030 999 1,037 1,151 1145 1,094 1,117 1,452 Claims on other financial institutions 25 27 31 20 18 18 17 12 12 12 Claims on central government (net) 111 85 67 8 35 61 62 45 18 36 Claims on nonfinancial sectors 68 73 74 74 70 68 68 67 67 66 Other items (net) -6 46 58 96 109 111 126 76 164 167 Reserve money 1,315 1,722 1,759 1,730 1,871 2,076 2,151 2,135 2,251 2,689 Annual change, in percenti_ 35.5 31.1 29.2 22.3 23.1 20.6 22.3 23.4 20.3 29.5 Liabilities to banks 558 745 789 767 835 932 1013 1,029 1,050 1,384 Required deposits 275 383 413 441 478 511 549 592 633 654 Other deposits 229 303 321 266 298 352 396 369 344 666 Cash in vault 54 60 56 59 59 69 68 68 73 63 Liabilities to nonbanks 766 976 970 963 1,035 1,144 1139 1,106 1,201 1,305 Currency in circulation 586 729 727 700 737 789 817 767 841 880 Deposits of financial institutions 50 61 50 59 74 104 60 65 66 115 other than deposit-money banks Deposits of nonfinancial institutions 129 187 193 204 225 251 262 274 294 310 Memorandum Items: Money multiplier /d 2.65 2.73 2.86 3.07 3.04 2.93 3.00 3.19 3.20 2.83 Ratio of excess reserves to deposits (%) /e 9.43 9.15 8.74 7.05 7.23 7.97 8.24 7.23 6.55 10.83 /a Data from March 1993 have been revised on the basis of a new statistical methodology that inciides an improved accounting system and expanded coverage. /b Reserves converted at official rate prior to 1994. /c In November 1996, a streitgtiening in the enforcement of reserve requirements over rural credit cooperatives was accomodated by an expansion in reserve money. The growth rate of reserve inoney excluding this operation wasjust over 20 percent for the year as a whole. /d Ratio of broad moniey, as reported in the banking survey, to reserve money. le Ratio of banks excess reserves to deposits reported in the banking survey. w Sotirce: IMF. Table 16: Banking Survey, 1993-96/1 (billions of yuan, end of period) 1993 1994 1995 1996 Mar. June Sep. Dec. Mar. June Sep. Dec. Net foreign assets 222 506 508 503 542 637 682 753 837 921 Net domestic assets 3,266 4,186 4,522 4,812 5,140 5,438 5,769 6,061 6,367 6,688 Domestic credit 3,481 4,310 4,484 4,604 4,844 5,294 5,612 6,049 6,205 6,641 Claims on Government (net) 118 133 131 79 102 132 175 214 203 218 Claims on nonfinancial sectors 3,363 4,177 4,353 4,525 4,742 5,161 5,437 5,835 6,003 6,423 Otheritems,net -215 -125 38 208 295 144 157 12 162 47 Broad money 3,488 4,692 5,030 5,315 5,681 6,075 6,451 6,813 7,204 7,609 Narrow money 1,628 2,054 2,103 2,142 2,249 2,399 2,391 2,462 2,634 2,851 Currency in circulation 586 728 727 700 737 789 817 767 841 880 Demand deposits 1,042 1,325 1,376 1,442 1,512 1,610 1,574 1,695 1,793 1,971 Quasi-money 1,860 2,638 2,927 3,173 3,432 3,676 4,060 4,351 4,571 4,758 Time deposits 125 194 220 265 310 332 372 430 467 504 Savings deposits 1,520 2,152 2,376 2,557 2,757 2,966 3,330 3,546 3,708 3,852 Other deposits 215 292 331 351 365 378 358 375 395 402 (Twelve-month change, in percent) Memorandum items: /2 Net domestic assets ... 28.2 35.2 30.2 30.9 29.9 27.6 25.9 23.9 23.0 Domestic credit ... 23.8 22.5 19.0 18.8 22.8 25.1 31.4 28.1 25.5 Broad money ... 34.5 35.9 32.7 30.6 29.5 28.3 28.2 26.8 25.3 Narrow money ... 26.2 27.9 21.2 18.3 16.8 13.7 14.9 17.1 18.9 Quasi-money ... 41.8 42.3 41.9 40.1 39.3 38.7 37.1 33.2 29.4 Currencyincirculation 35.2 24.3 24.6 21.1 14.9 8.2 12.4 9.4 14.1 11.6 / I Includes the operations of tie People's Baik of China, the deposit money banks, and other banks (or specific depository institutions). Data for March 1996 and later include, in addition, operations of two policy banks (the Export-import Bank and the State Development Bank). /2 Owing to a break in the series in 1993, growth rates for that year are not available. Source: Data provided by the Chinese authorities. Table 17: Balance Sheets of Urban Credit Cooperatives (billions of yuan, end of period) 1993 1994 1995 1996 March June Sept. Dec. March June Sept. Dec. Foreign assets (net) 0 0 0 0 0 0 0 0 0 0 Reserve assets 33 50 51 53 54 68 62 60 62 78 Required reserves 13 23 25 28 31 33 36 35 37 39 DepositswiththePBC 18 21 20 19 17 28 21 20 19 34 Cash in vault 2 3 4 4 4 5 5 5 6 4 Central bank bonds 0 2 2 2 2 2 0 0 0 0 Claims on central government 7 7 9 11 10 10 12 9 9 10 Claims on other sectors 78 144 162 174 187 207 218 224 241 263 Claims on nonmonetary financial institutions 0 14 15 17 18 19 19 20 21 24 Liabilities to nonfinancial sector 134 235 253 275 295 336 340 341 362 400 Demand deposits 62 100 99 103 105 117 107 99 103 117 Time deposits 7 20 25 30 36 41 41 42 44 47 Savings deposits 38 73 86 97 109 126 144 157 168 183 Other deposits 27 42 42 44 45 52 47 44 47 52 Liabilities to central bank 2 3 4 3 3 3 3 3 3 3 Liabilities to nonmonetary financial institutions 0 4 5 5 5 6 6 8 10 18 Bonds 0 0 0 0 0 0 0 0 0 0 Owners' equity 8 16 18 18 19 20 22 20 20 21 Paid-in capital 8 11 13 13 13 14 16 15 15 16 Other items (net) /I -27 -45 -42 -45 -52 -61 -61 -58 -62 -67 /a In keeping with the authorities' presentation, "other iterns, net" is shown as a negative entry on the liabilities side, rather than a positive entry on the assets side and does not net out bonds and owners' equity. Source: IMF. 00 Table 18: Balance Sheets of Rural Credit Cooperatives (billions of yuan, end of period) 1993 1994 1995 1996 March June Sept. Dec. March June Sept. Dec. Foreign assets (net) 0 0 0 0 0 0 0 0 0 0 Reserve assets 61 88 91 103 106 122 120 124 129 194 Required reserves 51 67 74 79 83 88 92 98 102 71 Deposits with the PBC 1 9 7 12 11 19 15 12 13 107 Cash in vault 9 12 11 12 12 16 14 14 15 16 Central bank bonds 0 0 0 0 0 0 0 0 0 0 Claims on central government 0 0 0 0 0 0 0 39 40 41 Claims on other sectors 314 417 464 477 502 523 564 595 628 636 Claims on nonmonetary financial institutions 0 0 0 0 0 0 0 0 0 0 Liabilities to nonfinancial sector 430 568 616 649 678 717 773 816 843 879 Demand deposits 68 81 75 77 81 89 79 85 89 101 Time deposits 4 6 6 7 9 9 9 11 11 12 Savings deposits 358 482 535 564 589 620 685 720 743 767 Other deposits 0 0 0 0 0 0 0 0 0 0 Liabilities to central bank 0 0 0 0 0 0 0 0 0 0 Liabilities to nonmonetary financial institutions 0 0 0 0 0 0 0 0 0 0 Bonds 0 0 0 0 0 0 0 0 0 0 Owners' equity 41 62 62 64 64 63 56 55 56 55 Paid-in capital 41 69 37 36 36 38 38 38 38 40 Other items (net) /a -96 -124 -123 -133 -134 -135 -145 -112 -101 -63 /a In keeping with the authorities' presentation, "other items, net" is shown as a negative entry on the liabilities side, rather than a positive entry on the assets side and does not net out bonds and owners' equity. Source: IMF. Table 19: Consolidated Government Revenue /a /b (billions of yuan) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Total revenue 228.3 244.6 257.6 280.3 326.4 355.0 367.2 392.8 475.9 558.4 654.1 771.9 Tax revenue 218.8 224.8 232.1 257.6 301.7 313.8 331.7 345.7 447.5 524.0 605.6 691.6 Taxeson incomeandprofits /c 73.9 73.4 71.7 76.4 78.9 84.7 82.1 81.1 80.5 94.0 111.0 129.6 Enterprises income tax 69.7 68.9 66.5 68.2 69.4 74.5 73.1 72.1 67.9 70.9 83.3 92.7 State enterprises 59.6 59.6 56.3 57.1 58.3 60.4 62.7 62.5 58.3 61.0 67.8 77.9 Collectives 10.1 9.3 10.2 10.5 10.5 13.3 10.4 9.6 9.6 9.9 15.5 14.8 Joint ventures .. .. .. 0.6 0.6 0.8 .. .. .. .. .. 19.4 Personal income tax (other) .. .. .. 0.8 1.0 1.4 .. .. .. .. .. 36.7 Agricultural income tax 4.2 4.5 5.2 7.4 8.5 8.8 9.0 9.0 12.6 23.1 27.7 36.9 Taxes on goods and services 96.3 106.7 111.9 130.8 158.2 164.0 175.5 206.6 287.8 346.5 399.0 461.8 General sales taxes 95.3 104.0 109.5 126.3 144.8 149.7 159.9 205.8 286.8 346.5 399.0 461.8 Product tax 59.4 54.7 53.9 48.1 53.0 58.t 62.9 69.3 82.1 48.7 54.0 61.6 Value added tax 14.8 23.2 25.4 38.4 43.1 40.0 40.6 70.6 108.1 230.8 258.6 295.9 Business tax 21.1 26.1 30.2 39.8 48.7 51.6 56.4 65.9 96.6 67.0 86.4 104.3 Urban maintenance and development tax .. .. .. .. 8.6 9.2 10.0 .. .. Real estate tax .. .. .. 2.2 2.6 3.2 3.8 .. .. Special tax on oil .. 1.6 1.5 1.4 1.2 1.1 1.0 .. 0.2 Salt tax 1.0 1.1 0.9 0.9 1.0 0.8 0.8 0.8 0.8 Customs tax 20.5 15.2 14.2 15.5 18.2 15.9 18.7 21.3 25.6 27.3 28.7 30.2 Other taxes 28.1 29.5 34.3 34.9 46.4 49.2 55.4 36.7 53.6 56.2 66.9 70.0 of which construction tax 2.3 2.4 3.0 2.6 2.8 3.8 3.1 3.2 3.8 4.3 5.3 6.3 Nontax revenue 9.5 19.8 25.5 22.7 24.7 41.2 35.5 47.1 28.4 34.4 48.5 80.3 Gross profit remittances from state owned enterprises Id 4.4 4.2 4.3 5.1 6.4 7.8 7.5 6.0 4.9 Depreciation funds Other 5.1 15.6 21.2 17.6 18.3 33.4 28.0 41.1 23.5 34.4 48.5 80.3 of which foreign grants (net) 0.2 0.4 -0.1 0.0 0.5 0.2 2.1 1.9 1.7 4.3 5.0 2.5 Memorandum item: Gross profit remittances from state owned enterprises 4.4 4.2 4.3 5.1 6.4 7.8 7.5 6.0 4.9 GNP in current prices 898.9 1,020.1 1,195.5 1,492.2 1,691.8 1,859.8 2,166.3 2,665.2 3,456.1 4,653.3 5,727.7 6,693.4 la According to the definition contained in IMF, Manual n G(overnment J,nance.S,il.sies (GFS), 1986. L't This includes all govcrnment revenue, with the exception of extrabudgetary receipts of the various levels of government. /c Begmining with 1985, profit taxes on state enterprises are included under tax revenue. As of 1988, onily banks and financial institutions are subject to remittance. ,Sounrce: IMF. Table 20: Structure of Consolidated Government Revenue (percentage of total revenue) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 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 Tax revenue 95.8 91.9 90.1 91.9 92.4 88.4 90.3 88.0 94.0 93.8 92.6 89.6 Iaxes on income and profits 32.4 30.0 27.8 27.3 24.2 23.9 22.4 20.6 16.9 16.8 17.0 16.8 Enterprises income tax 30.5 28.2 25.8 24.3 21.3 21.0 19.9 18.4 14.3 12.7 12.7 12.0 State enterprises 26.1 24.4 21.9 20.4 17.9 17.0 17.1 15.9 12.3 10.9 10.4 10.1 Collectives 4.4 3.8 4.0 3.7 3.2 3.7 2.8 2.4 2.0 1.8 2.4 1.9 Joint ventures .. .. .. 0.2 0.2 0.2 .. .. .. .. .. 2.5 Personal income tax (other) .. .. .. 0.3 0.3 0.4 .. . . . 4.8 Agricultural income tax 1.8 1.8 2.0 2.6 2.6 2.5 2.5 2.3 2.6 4.1 4.2 4.8 Taxes on goods and services 42.2 43.6 43.4 46.7 48.5 46.2 47.8 52.6 60.5 62.1 61.0 59.8 General sales taxes 41.7 42.5 42.5 45.1 44.4 42.2 43.5 52.4 60.3 62.1 61.0 59.8 Product tax 26.0 22.4 20.9 17.2 16.2 16.4 17.1 17.6 17.3 8.7 8.3 8.0 Value added tax 6.5 9.5 9.9 13.7 13.2 11.3 11.1 18.0 22.7 41.3 39.5 38.3 Business tax 9.2 10.7 11.7 14.2 14.9 14.5 15.4 16.8 20.3 12.0 13.2 13.5 Urban maintenance 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 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.2 .. Customs tax 9.0 6.2 5.5 5.5 5.6 4.5 5.1 5.4 5.4 4.9 4.4 3.9 Other taxes 12.3 12.1 13.3 12.5 14.2 13.9 15.1 9.3 11.3 10.1 10.2 9.1 of which: Construction tax 1.0 1.0 1.2 0.9 0.9 1.1 0.8 0.8 0.8 0.8 0.8 0.8 Nontax revenue 4.2 8.1 9.9 8.1 7.6 11.6 9.7 12.0 6.0 6.2 7.4 10.4 Gross profit remittances from state enterprises 1.9 1.7 1.7 1.8 2.0 2.2 2.0 1.5 1.0 0.0 0.0 0.0 Depreciation funds .. .. .. .. .. .. .. .. .. .. Other 2.2 6.4 8.2 6.3 5.6 9.4 7.6 10.5 4.9 6.2 7.4 10.4 of which foreign grants (net) 0.1 0.2 0.0 0.0 0.2 0.1 0.6 0.5 0.3 0.8 0.8 0.3 Memorandum item: Gross profit remittances from state owned enterprises 1.9 1.7 1.7 1.8 2.0 2.2 2.0 1.5 1.0 .. Source: Table 19. Table 21: Structure of Government Revenue (percentage of GNP) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Total revenue 25.4 24.0 21.5 18.8 19.3 19.1 17.0 14.7 13.8 12.0 11.4 11.5 Taxrevenue 24.3 22.0 19.4 17.3 17.8 16.9 15.3 13.0 12.9 11.3 10.6 10.3 Taxes on income and profits 8.2 7.2 6.0 5.1 4.7 4.6 3.8 3.0 2.3 2.0 1.9 1.9 Enterprises income tax 7.8 6.8 5.6 4.6 4.1 4.0 3.4 2.7 2.0 1.5 1.5 1.4 State enterprises 6.6 5.8 4.7 3.8 3.4 3.2 2.9 2.3 1.7 1.3 1.2 1.2 Collectives 1.1 0.9 0.9 0.7 0.6 0.7 0.5 0.4 0.3 0.2 0.3 0.2 Joint ventures .. .. .. .. .. .. .. .. .. .. 0.3 Personal income tax (other) .. .. .. 0.1 0.1 0.1 .. .. .. .. .. 0.5 Agricultural income tax 0.5 0.4 0.4 0.5 0.5 0.5 0.4 0.3 0.4 0.5 0.5 0.6 Taxes on goods and services 10.7 10.5 9.4 8.8 9.4 8.8 8.1 7.8 8.3 7.4 7.0 6.9 General sales taxes 10.6 10.2 9.2 8.5 8.6 8.0 7.4 7.7 8.3 7.4 7.0 6.9 Product tax 6.6 5.4 4.5 3.2 3.1 3.1 2.9 2.6 2.4 1.0 0.9 0.9 Value added tax 1.6 2.3 2.1 2.6 2.5 2.2 1.9 2.6 3.1 5.0 4.5 4.4 Business tax 2.3 2.6 2.5 2.7 2.9 2.8 2.6 2.5 2.8 1.4 1.5 1.6 Urban maintenance and development tax .. .. .. .. 0.5 0.5 0.5 .. .. Real estate tax .. .. .. 0.1 0.2 0.2 0.2 .. .. .. Special tax on oil .. 0.2 0.1 0.1 0.1 0.1 .. .. .. .. Salt tax 0.1 0.1 0.1 0.1 0.1 .. .. .. .. .. Customs tax 2.3 1.5 1.2 1.0 1.1 0.9 0.9 0.8 0.7 0.6 0.5 0.5 Other taxes 3.1 2.9 2.9 2.3 2.7 2.6 2.6 1.4 1.6 1.2 1.2 . 1.0 of which: Construction tax 0.3 0.2 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 Nontaxrevenue 1.1 1.9 2.1 1.5 1.5 2.2 1.6 1.8 0.8 0.7 0.8 1.2 Gross profit remittances from state owned enterprises 0.5 0.4 0.4 0.3 0.4 0.4 0.3 0.2 0.1 0.0 0.0 0.0 Depreciation funds Other 0.6 1.5 1.8 1.2 1.1 1.8 1.3 1.5 0.7 0.7 0.8 1.2 ofwhich foreign grants (net) 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.1 0.i Memorandum item: Gross profit remittances from state owned enterprises 0.5 0.4 0.4 0.3 0.4 0.4 0.3 0.2 0.1 .. .. . Source: Table 19. Table 22: Structure of Government Expenditure 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 (billions of yuan) Total expenditure and net lending 232.4 262.7 282.7 313.7 363.8 391.7 415.2 453.9 545.9 632.5 751.8 875.7 Current expenditure 168.1 187.5 207.1 237.6 288.2 306.9 328.5 364.0 424.3 538.4 624.0 734.1 Administration 14.4 18.2 19.5 23.9 28.5 33.3 34.3 42.5 53.6 72.9 87.2 105.5 Defense 19.2 20.1 21.0 21.8 25.1 29.0 33.0 37.8 42.6 55.1 63.7 72.0 Culture, education, public health, science & broadcasting 31.7 38.0 40.3 48.6 55.3 61.7 70.8 79.3 95.8 127.8 146.6 170.5 of which: education 18.4 21.4 22.7 27.9 31.6 35.3 41.0 45.3 55.8 Economic services 22.4 25.2 26.0 28.9 34.6 37.9 46.0 47.8 57.4 57.8 55.0 63.0 Geological survey 3.0 3.1 3.0 3.3 3.3 3.6 7.8 4.4 4.9 6.4 6.6 6.9 Agriculture 10.1 12.4 13.4 15.4 19.7 22.2 24.4 26.9 32.3 40.0 44.9 51.8 Operating expenditure for industry, communication & commerce 3.5 3.7 3.3 3.9 4.5 4.7 5.2 6.5 7.6 Development of new products 4.4 5.0 5.1 5.3 5.9 6.3 7.3 8.9 10.7 11.4 0.0 0.0 Working capital for state owned enterprises 1.4 1.0 1.2 1.0 1.2 1.1 1.3 1.1 1.9 .. 3.5 4.3 Social welfare relief .. 3.6 3.7 4.1 5.0 5.5 6.7 6.6 7.5 9.5 11.5 15.2 Subsidies 50.7 58.2 67.0 76.3 97.3 96.0 88.3 76.7 71.0 68.0 71.7 79,4 Daily living necessities 31.4 25.7 29.5 31.7 37.4 38.1 37.3 32.2 29.9 31.4 36.4 44.1 Agricultural inputs 1.3 .. .. .. .. . .. .. .. .. Operatinglossesofstateownedenterprises 18.0 32.5 37.5 44.6 59.9 57.9 51.0 44.5 41.1 36.6 35.3 35.3 Interest payments .. 1.9 2.8 3.0 2.8 4.4 7.8 14.2 9.7 16.7 35.6 48.9 Other 29.7 22.3 26.7 31.0 39.6 39.1 41.6 59.1 86.7 130.6 152.7 179.6 Capital expenditure 64.3 75.2 75.6 76.1 75.6 84.8 86.7 89.9 121.6 94.1 127.8 141.6 Capital construction 58.4 67.2 68.2 66.4 66.9 75.8 76.0 76.5 90.1 64.0 79.4 88.6 Developmentoftheproductivecapacityofexistingenterprises 5.9 8.0 7.4 9.7 8.7 9.0 10.7 13.4 31.5 30.1 48.4 53.0 (percentage of GNP) Memorandum items: Current expenditure 18.7 18.4 17.3 15.9 17.0 16.5 15.2 13.7 12.3 13.4 12.8 11.0 Subsidies 5.6 5.7 5.6 5.1 5.8 5.2 4.1 2.9 2.1 5 1.3 1.2 Daily living necessities 3.5 2.5 2.5 2.1 2.2 2.0 1.7 1.2 0.9 0.7 0.6 0.7 Operating losses of state owned enterprises 2.0 3.2 3.1 3.0 3.5 3.1 2.4 1.7 1.2 0.8 0.6 0.5 Capital expenditure 7.2 7.4 6.3 5.1 4.5 4.6 4.0 3.4 3.5 2.0 2.2 2.1 (as a percentage of total expenditure) Subsidies 21.8 22.2 23.7 24.3 26.7 24.5 21.3 16.9 13.0 10.8 9.5 9.1 Capital expenditure 27.7 28.6 26.7 24.3 20.8 21.6 20.9 19.8 22.3 14.9 17.0 16.2 Source: IMF. Table 23: Budget and Its Financing 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 (billions of yuan) Revenue 228.3 244.6 257.6 280.3 326.4 355.0 367.2 392.8 475.9 558.4 654.1 771.9 Expenditure 232.4 262.7 282.7 313.7 363.8 391.7 415.2 453.9 545.9 632.4 751.8 875.6 Deficit -4.1 -18.1 -25.1 -33.4 -37.4 -36.7 -48.0 -61.1 -70.0 -74.2 -97.7 -103.7 Financing 4.1 18.1 25.1 33.4 37.3 36.8 48.0 61.2 70.0 74.2 97.7 103.7 Domestic 10.1 12.8 18.3 22.0 26.0 23.7 38.0 46.1 41.9 67.0 101.0 103.7 Banking system 4.0 12.8 7.9 22.0 26.0 23.7 16.1 88.9 -31.6 14.9 -0.9 85.7 Nonbank 6.1 0.0 10.4 0.0 0.0 0.0 21.9 -42.8 73.5 52.2 101.9 18.0 Foreign -6.0 5.3 6.8 11.4 11.3 13.1 10.0 15.1 28.1 7.1 -3.3 0.0 Gross foreign borrowing .. 7.6 10.6 13.9 14.4 17.8 18.0 20.9 35.8 14.7 1.1 11.6 Amortization .. -2.3 -3.8 -2.5 -3.1 -4.7 -8.0 -5.8 -7.7 -7.6 -4.4 -11.6 (percentage of GNP) Revenue 25.4 24.0 21.5 18.8 19.3 19.1 17.0 14.7 13.8 12.0 11.4 11.5 Expenditure 25.9 25.7 23.6 21.0 21.5 21.1 19.2 17.0 15.8 13.6 13.1 13.1 Dcficit -0.5 -1.8 -2.1 -2.2 -2.2 -2.0 -2.2 -2.3 -2.0 -1.6 -1.7 -1.6 Financing 0.5 1.8 2.1 2.2 2.2 2.0 2.2 2.3 2.0 1.6 1.7 1.6 Domestic 1.1 1.3 1.5 1.5 1.5 1.3 1.8 1.7 1,2 1.4 1.8 1.6 Banking system 0.4 1.3 0.7 1.5 1.5 1.3 0.7 3.3 -0.9 0.3 0.0 1.3 Nonbank 0.7 0.0 0.9 0.0 0.0 0.0 1.0 -1.6 2.1 1.1 1.8 0.3 Foreign -0.7 0.5 0.6 0.8 0.7 0.7 0.5 0.6 0.8 0.2 -0.1 0.0 Gross foreign borrowing .. 0.7 0.9 0.9 0.9 1.0 0.8 0.8 1.0 0.3 0.0 0.2 Amortization .. -0.2 -0.3 -0.2 -0.2 -0.3 -0.4 -0.2 -0.2 -0.2 -0.1 -0.2 (percentage of total deficit) Financing 100.0 100.2 100.4 99.7 99.8 100.3 100.0 100.2 100.0 100.0 100.0 100.0 Domestic 246.4 70.9 73.1 65.8 69.5 64.6 79.2 75.5 59.9 90.5 103.4 100.0 Banking system 97.6 70.9 31.5 65.8 69.5 64.6 33.5 145.5 -45.2 20.1 -0.9 82.6 Nonbank 148.8 0.0 41.5 0.0 0.0 0.0 45.6 -70.0 105.0 70.4 104.3 17.4 Foreign -146.4 29.3 27.3 34.0 30.3 35.7 20.8 24.7 40.2 9.6 -3.4 0.0 Gross foreign borrowing .. 42.1 42.5 41.4 38.5 48.5 37.5 34.2 51.2 19.8 1.1 11.2 Amortization .. -12.7 -15.2 -7.5 -8.2 -12.8 -16.7 -9.5 -11.0 -10.3 -4.5 -11.2 Source: IMF. Table 24: Production of Major Crops 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 (millions of tons) Iotal food grains 379.11 391.51 402.98 394.08 407.45 446.24 435.29 442.66 456.49 445.10 466.62 Rice 168.57 172.22 174.26 169.11 180.13 189.33 183.81 186.22 177.70 175.93 185.23 Wheat 85.81 90.04 85.90 85.43 90.81 98.23 95.95 101.59 106.39 99.30 102.21 Corn 63.88 70.86 79.24 77.35 78.93 96.82 98.77 95.38 102.70 99.28 111.99 Tuber 26.04 25.34 28.20 26.97 27.30 27.43 27.16 28.44 31.81 30.25 32.63 Total oil seeds 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 6.66 5.88 6.17 5.69 5.36 6.37 6.30 5.95 8.42 9.68 10.24 Rapeseed 5.61 5.88 6.61 5.04 5.44 6.96 7.44 7.65 6.94 7.49 9.78 Cotton 4.15 3.54 4.25 4.15 3.79 4.51 5.68 4.51 3.74 4.34 4.77 Sugarcane 51.55 50.22 47.36 49.06 48.57 57.62 67.90 73.01 64.19 60.93 65.42 Beetroots 8.92 8.31 8.14 12.81 9.36 14.53 16.29 15.07 12.05 12.53 13.98 Cured tobacco 2.08 1.37 1.64 2.34 2.41 2.26 2.67 3.12 3.01 1.94 2.07 (millions of tons) Fruits 11.64 13.48 16.68 16.66 18.37 18.74 21.76 24.40 30.11 35.00 42.15 Apples 3.61 3.34 4.26 4.34 4.50 4.32 4.54 6.56 9.07 11.13 14.01 Citrus 1.81 2.55 3.22 2.56 4.56 4.86 6.33 5.16 6.56 6.81 8.22 Pears 2.14 2.35 2.49 2.72 2.57 2.35 2.50 2.85 3.22 4.04 4.94 Bananas 0.63 1.25 2.03 1.83 1.40 1.46 1.98 2.45 2.70 2.90 3.13 Source: (hina Stalistical Yearhook 1996, pp..371. Table 25: Yield of Major Crops (by sown area, kg/hectare) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Total food grains 3,480 3,525 3,615 3,585 3,630 3,930 3,870 4,004 Rice 5,250 5,340 5,415 5,280 5,505 5,730 5,640 5,803 Wheat 2,940 3,045 2,985 2,970 3,045 3,195 3,105 3,331 Corn 3,600 3,705 3,915 3,930 3,885 4,530 4,575 4,533 Soybeans 1,365 1,395 1,470 1,440 1,275 1,455 1,380 1,427 Tuber 3,030 2,910 3,180 2,985 3,000 3,015 2,985 3,141 Peanuts 2,010 1,815 2,040 1,905 1,815 2,190 2,190 2,000 2,492 2,564 2,687 Rapeseed 1,245 1,200 1,260 1,020 1,095 1,260 1,215 1,281 1,309 1,296 1,416 Cotton 810 825 870 750 735 810 870 660 750 785 879 Sugarcane 53,430 52,860 55,140 53,115 50,850 57,120 58,350 58,605 59,012 57,671 58,136 Beetroots 15,915 15,960 16,350 17,190 16,245 21,660 20,790 22,832 20,124 17,936 20,132 Cured tobacco 1,920 1,530 1,785 1,800 1,605 1,680 1,710 1,687 1,654 1,491 1,584 Source: China Sialislical Yearbook 1996, pp. 374. U, Table 26: Gross Output Value of Industry 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ( billions of yuan) Total 971.6 1,119.4 1,381.3 1,822.5 2,201.7 2,392.4 2,662.5 3,459.9 4,840.2 7,017.6 9,189.5 BY TYPE OF OWNERSHIP 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 3,122.0 Collective-owned 311.7 375.2 478.2 658.7 785.8 852.3 878.3 1,213.5 1,646.4 2,647.2 3,362.3 Township 76.1 98.1 128.4 184.7 219.4 244.1 240.1 353.4 537.4 810.2 1,193.2 Village 66.3 83.8 116.5 170.4 211.8 239.4 234.7 363.2 516.3 965.8 1,184.7 Joint urban-rural 15.2 24.8 31.6 43.9 49.6 53.9 56.9 87.0 132.2 261.1 213.4 Jointurban 0.0 2.1 3.0 3.9 5.0 5.5 6.9 10.2 15.6 33.8 Joint rural 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 79.0 105.8 129.0 128.7 200.6 386.1 708.2 1,182.1 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 .. .. Other 11.7 16.3 27.9 49.5 75.8 104.8 163.1 268.8 517.4 901.8 1,523.1 BY TYPE OF INDUSTRY Light 457.5 533.0 665.6 897.9 1,076.1 1,181.3 1,380.1 1,749.2 2,318.4 2,167.1 2,349.1 Heavy 514.1 586.4 715.7 924.5 1,125.6 1,211.3 1,444.7 1,957.4 2,950.8 2,968.2 3,145.6 (percentage of total) BY TYPE OF OWNERSHIP State-owned 64.9 62.3 59.7 56.8 56.1 54.6 56.2 51.5 46.9 37.3 34.0 Collective-owned 32.1 33.5 34.6 36.1 35.7 35.6 33.0 35.1 34.0 37.7 36.6 Township 7.8 8.8 9.3 10.1 10.0 10.2 9.0 10.2 11.1 11.5 13.0 Village 6.8 7.5 8.4 9.3 9.6 10.0 8.8 10.5 10.7 13.8 12.9 Joint urban-rural 1.6 2.2 2.3 2.4 2.3 2.3 2.1 2.5 2.7 3.7 2.3 Joint urban 0.0 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.3 0.5 Joint rural 1.6 2.0 2.1 2.2 2.0 2.0 1.9 2.2 2.4 3.2 Individual-owned 1.8 2.8 3.6 4.3 4.8 5.4 4.8 5.8 8.0 10.1 12.9 Urban 0.3 0.3 0.4 0.4 0.4 0.4 0.5 0.6 0.8 1.2 Rural 1.5 2.5 3.3 4.0 4.4 4.9 .. .. .. .. Other 1.2 1.5 2.0 2.7 3.4 4.4 6.1 7.8 10.7 12.9 16.6 BY TYPE OF INDUSTRY Light 47.1 47.6 48.2 49.3 48.9 49.4 51.8 50.6 47.9 30.9 25.6 Heavy 52.9 52.4 51.8 50.7 51.1 50.6 54.3 56.6 61.0 42.3 34.2 Nofe: For 1991-1994 different categories do not add up to total. Source: China.Statisfical Yearbook 1996, pp. 401. Table 27: Output of Major Industrial Products Product 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Coal (million tons) 872 894 928 980 1,054 1,080 1,087 1,116 1,150 1,240 1,361 Crude oil (million tons) 125 131 134 137 137 138 141 142 145 146 150 Naturalgas(billioncum) 13 14 14 14 15 15 16 16 17 18 18 Electricity (billion kWh) 411 450 497 545 585 621 678 754 840 928 1,008 Hydro power 92 95 100 109 118 127 125 131 152 167 191 Steel (million tons) 47 52 56 59 62 66 71 81 90 93 95 Rolled steel (million tons) 37 41 44 47 49 52 56 67 77 84 90 Cement (million tons) 146 166 186 210 210 210 253 308 368 421 476 Timber (million cu m) 63 65 64 62 58 56 58 62 64 66 60 Fertilizers (million tons) 13 14 17 17 18 19 20 20 20 23 26 ( growth rates) Coal 10.5 2.5 3.8 5.6 7.6 2.5 0.6 2.7 3.0 7.8 9.8 Crude oil 9.0 4.6 2.6 2.0 0.1 1.0 1.9 0.8 2.2 0.6 2.7 Natural gas 4.0 6.4 0.9 2.7 5.5 1.7 5.1 -1.8 6.2 4.7 2.2 Electricity 8.9 9.4 10.6 9.6 7.3 6.2 9.1 11.3 11.4 10.6 8.6 Hydro power 6.5 2.5 5.6 9.2 8.3 7.1 -1.6 4.8 16.1 10.3 13.8 Steel 7.6 11.6 7.8 5.6 3.6 7.7 7.0 14.0 10.6 3.4 3.0 Rolled steel 9.5 9.9 8.1 7.1 3.6 5.9 9.4 18.8 15.2 9.2 6.5 Cement 18.6 13.8 12.2 12.8 0.1 -0.3 20.5 22.0 19.4 14.5 13.0 Timber -1.0 2.8 -1.4 -3.0 -6.6 -4.0 4.2 6.3 3.5 3.5 -8.6 Fertilizers -9.5 2.8 23.0 4.1 4.6 3.3 5.3 3.5 -4.5 16.2 12.5 Source: (China Stalicsical Yearbook 1996 , pp. 433. Table 28: Total Wage Bill of Staff and Workers by Employment Category 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 (billions of yuan) Total wage bill 138.3 166.0 188.1 231.6 261.9 295.1 332.4 393.9 491.6 665.6 810.0 State-owned 106.5 128.9 145.9 180.7 205.0 232.4 259.5 309.0 381.3 517.7 608.0 Urban collectives 31.2 36.3 40.9 48.8 53.4 58.1 65.9 74.3 85.0 102.3 118.2 Other 0.6 0.8 1.3 2.2 3.4 4.6 7.0 10.6 25.4 45.6 63.8 Total wage bill 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 97.5 State-owned 77.0 77.6 77.6 78.0 78.3 78.8 78.1 78.5 77.6 77.8 75.1 Urban collectives 22.6 21.9 21.7 21.1 20.4 19.7 19.8 18.9 17.3 15.4 14.6 Other 0.4 0.5 0.7 0.9 1.3 1.6 2.1 2.7 5.2 6.8 7.9 (growth rates) Totalwagebill 22.0 20.0 13.3 23.1 13.1 12.7 12.6 18.5 24.8 35.4 21.7 State-owned 21.6 21.0 13.3 23.8 13.5 13.4 11.7 19.1 23.4 35.8 17.4 Urban collectives 23.0 16.2 12.8 19.2 9.6 8.7 13.4 12.8 14.4 20.4 15.5 Other 63.9 42.4 50.0 70.6 57.7 35.7 53.0 50.0 140.2 79.7 40.0 Percentage share of wage bill in GDP 15.4 16.3 15.7 15.5 15.5 15.9 15.4 14.8 14.2 14.3 13.9 Source: ('hinaMSialiwical Yearbook 1996, pp. It 5. Table 29: Average Annual Wage by Sector and Employment Category (yuan in current prices) Sector 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Staff and workers Total 1,148 1,329 1,459 1,747 1,935 2,140 2,340 2,711 3,371 4,538 5,500 Farming& forestry, etc. 878 1,048 1,143 1,280 1,389 1,541 1,652 1,828 2,042 2,819 3,522 Excavation 1,324 1,569 1,663 1,964 2,378 2,718 2,942 3,209 3,711 4,679 5,757 Manufacturing 1,112 1,275 1,418 1,710 1,900 2,073 2,289 2,635 3,348 4,283 5,169 Electric power, gas,and water 1,239 1,497 1,677 1,971 2,241 2,656 2,922 3,392 4,319 6,155 7,843 Geological survey 1,406 1,604 1,768 2,025 2,199 2,465 2,707 3,222 3,717 5,450 5,962 Construction 1,362 1,536 1,684 1,959 2,166 2,384 2,649 3,066 3,779 4,894 5,785 Transport& communications 1,275 1,476 1,621 1,941 2,197 2,426 2,686 3,114 4,273 5,690 6,948 Commerce& services etc. 1,007 1,148 1,270 1,556 1,660 1,818 1,981 2,204 2,679 3,537 4,248 Real estate 1,028 1,216 1,327 1,715 1,925 2,243 2,507 3,106 4,320 6,288 7,330 Social services 777 980 1,085 1,719 1,926 2,170 2,431 2,844 3,588 5,026 5,982 Health care, sports & welfare 1,124 1,343 1,446 1,752 1,959 2,209 2,370 2,812 3,413 5,126 5,860 Education, culture& arts etc. 1,166 1,330 1,409 1,747 1,883 2,117 2,243 2,715 3,278 4,923 5,435 Scientificresearch 1,272 1,492 1,620 1,931 2,118 2,403 2,573 3,115 3,904 6,162 6,846 Banking and insurance 1,154 1,353 1,458 1,739 1,867 2,097 2,255 2,829 3,740 6,712 7,376 Govemment agencies 1,127 1,356 1,468 1,707 1,874 2,113 2,275 2,768 3,505 4,962 5,526 Others 3,371 5,213 6,295 Staff and workers in state-owned enterprises Total 1,213 1,414 1,546 1,853 2,055 2,284 2,477 2,878 3,532 4,797 5,625 Famming&forestry, etc. 892 1,062 1,154 1,291 1,401 1,559 1,665 1,845 2,043 2,821 3,527 Excavation 1,384 1,638 1,734 2,038 2,449 2,763 2,982 3,239 3,856 4,863 5,944 Manufacturing 1,190 1,382 1,543 1,872 2,081 2,289 2,505 2,889 3,562 4,508 5,352 Electric power, gas,and water 1,272 1,518 1,692 1,994 2,248 2,648 2,883 3,354 4,317 6,124 7,734 Geological survey 1,408 1,607 1,773 2,025 2,199 2,463 2,718 3,235 3,729 5,476 5,987 Construction 1,532 1,731 1,882 2,192 2,419 2,667 2,924 3,406 4,182 5,498 6,512 Transporn& communications 1,383 1,610 1,773 2,140 2,423 2,697 2,967 3,452 4,604 6,212 7,572 Commerce& services etc. 1,087 1,268 1,398 1,737 1,851 2,028 2,201 2,478 2,933 3,856 4,568 Real estate 1,170 1,364 1,500 1,750 1,992 2,247 2,476 3,082 4,278 5,997 6,884 Social services 1,208 1,417 1,545 1,842 2,028 2,307 2,547 3,008 3,661 5,098 5,949 Health care, sports & welfare 1,164 1,376 1,481 1,793 1,999 2,263 2,417 2,883 3,494 5,267 6,009 Education, culture& arts etc. 1,184 1,344 1,422 1,764 1,899 2,134 2,257 2,732 3,292 4,944 5,457 Scientific research 1,268 1,494 1,624 1,935 2,123 2,411 2,580 3,130 3,898 6,212 6,835 Banking and insurance 1,234 1,427 1,540 1,842 1,960 2,200 2,355 2,967 3,885 7,017 7,595 Govemment agencies 1,133 1,361 1,472 1,709 1,875 2,115 2,277 2,774 3,512 4,967 5,528 Others 3,793 5,744 6,854 Staffand workers in urtan collective-owned enterprises Total 967 1,092 1,207 1,426 1,557 1,681 1,866 2,109 2,592 3,245 3,931 Farming & forestty, etc. 725 875 979 1,111 1,178 1,238 1,366 1,487 1,887 2,510 2,927 Excavation 852 945 1,016 1,208 1,433 1,844 1,960 2,000 2,327 2,793 3,680 Manufacturng 963 1,075 1,180 1,388 1,523 1,622 1,798 2,017 2,469 3,076 3,717 Electric power, gas,and water 667 875 1,250 1,294 1,625 2,133 2,588 2,737 3,539 5,734 7,461 Geological survey 900 1,286 1,333 1,500 1,000 1,212 1,765 2,188 2,843 3,692 4,294 Construction 1,101 1,232 1,380 1,597 1,763 1,935 2,216 2,554 3,182 3,936 4,677 Transport& communications 1,009 1,139 1,236 1,409 1,575 1,661 1,854 2,070 2,711 3,110 3,584 Commerce&servicesetc. 912 1,008 1,118 1,335 1,417 1,548 1,691 1,827 2,213 2,823 3,449 Real estate 1,050 1,238 1,130 1,602 1,967 1,969 2,432 2,763 4,006 5,290 6,706 Social services 806 1,057 1,167 1,333 1,521 1,638 1,905 2,082 2,727 3,754 4,707 Health care, sports & welfare 975 1,212 1,296 1,570 1,774 1,956 2,135 2,416 2,935 4,238 4,890 Education, culture& arts etc. 779 945 1,033 1,202 1,352 1,533 1,689 1,987 2,539 3,548 4,291 Scientific research 1,052 1,286 1,319 1,636 1,710 1,997 2,120 2,392 3,474 4,719 6,046 Banking and insurance 945 1,150 1,235 1,450 1,597 1,806 1,965 2,428 3,182 5,625 6,407 t-a Governmentagencies 1,046 1,227 1,368 1,648 1,860 2,042 2,206 2,565 3,071 4,411 5,314 .0. Others 2,547 4.067 4,935 % S;,-rce: ('b6nStcni.scnl- Y-r0book 1996. pp. t 17-124 Table 30: Social Labor Force by Sector (millions of workers) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Farmingforestry,animal husbandry,fishery&waterc 311.3 312.5 316.6 322.5 332.3 341.2 349.6 348.0 339.7 333.9 330.2 Excavation 8.0 8.1 8.2 8.3 8.4 8.8 9.1 9.0 9.3 9.2 9.3 Manufacturing 74.1 80.2 83.6 86.5 85.5 86.2 88.4 91.1 93.0 96.1 98.0 Electric power, gas and water 1.4 1.5 1.6 1.8 1.8 1.9 2.0 2.2 2.4 2.5 2.6 Geological survey & exploration 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.4 1.4 1.4 Construction 20.4 22.4 23.8 24.9 24.1 24.2 24.8 26.6 30.5 31.9 33.2 Transportation, posts& telecommunications 12.8 13.8 14.5 15.2 15.2 15.7 16.2 16.7 16.9 18.6 19.4 Commerce, catering trade, supply & 23.1 24.1 25.8 27.4 27.7 28.4 30.0 32.1 34.6 39.2 42.9 marketing of materials and warehouses Real estate 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.5 0.7 0.7 0.8 Social services 4.0 4.7 5.0 5.3 5.5 5.9 6.0 6.4 5.4 6.3 7.0 Public health, sports and social welfare 4.7 4.8 5.0 5.1 5.2 5.4 5.5 5.7 4.2 4.3 4.4 Education, culture, art, radio and 12.7 13.2 13.8 14.0 14.3 14.6 15.0 15.2 12.1 14.4 14.8 television broadcasting Scientific research, technical service 1.4 1.5 1.6 1.6 1.7 1.7 1.8 1.8 1.7 1.8 1.8 Banking and insurance 1.4 1.5 1.7 1.9 2.1 2.2 2.3 2.5 2.7 2.6 2.8 Governments, parties and organizations 8.0 8.7 9.3 9.7 10.2 10.8 11.4 11.5 10.3 10.3 10.4 Others 13.2 13.4 15.0 16.6 17.1 18.0 19.1 23.1 37.4 41.6 44.9 TOTAL 498.7 512.8 527.8 543.4 553.3 567.4 583.6 594.3 602.2 614.7 623.9 Agriculture 311.3 312.5 316.6 322.5 332.3 341.2 349.6 348.0 339.7 333.9 330.2 Industry 103.8 112.2 117.3 121.5 119.8 121.2 124.3 128.8 135.2 139.6 143.2 Service 83.6 88.1 93.9 99.4 101.3 105.0 109.8 117.6 127.4 141.2 150.6 Note: Agriculture consists of farming, forestry, animal husbandry, fishery and water conservancy; services are residual. Source: China Sialisfical Yearbook 1996, pp. 92. Table 31: Social Labor Force by Employment Category 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 (millions of workers) Total 498.7 512.8 527.8 543.4 553.3 567.4 583.6 594.3 602.2 614.7 623.9 583.6 Staffand workers 123.6 128.1 132.1 136.1 137.4 140.6 145.1 147.9 148.5 152.6 153.0 State-owned 89.9 93.3 96.5 99.8 101.1 103.5 106.6 108.9 109.2 112.1 112.6 Urban collective-owned 33.2 34.2 34.9 35.3 35.0 35.5 36.3 36.2 33.9 32.9 31.5 Other ownership 0.4 0.6 0.7 1.0 1.3 1.6 2.2 2.8 5.4 7.6 8.9 Urban individual laborers 4.5 4.8 5.7 6.6 6.5 6.7 7.6 8.4 11.2 15.6 20.5 Rural laborers 370.7 379.9 390.0 400.7 409.4 420.1 430.9 438.0 442.6 446.5 450.4 (percentage of total) Staff and workers 24.8 25.0 25.0 25.0 24.8 24.8 24.9 24.9 24.7 24.8 24.5 State-owned 18.0 18.2 18.3 18.4 18.3 18.2 18.3 18.3 18.1 18.2 18.0 Urban collective-owned 6.7 6.7 6.6 6.5 6.3 6.3 6.2 6.1 5.6 5.3 5.0 Other ownership 0.1 0.1 0.1 0.2 0.2 0.3 0.4 0.5 0.9 1.2 1.4 Urban individual laborers 0.9 0.9 1.1 1.2 1.2 1.2 1.3 1.4 1.9 2.5 3.3 Rural laborers 74.3 74.1 73.9 73.7 74.0 74.0 73.8 73.7 73.5 72.6 72.2 (growth rates) Total 3.5 2.8 2.9 2.9 1.8 2.5 2.9 1.8 1.3 2.1 1.5 Staff and workers 3.9 3.6 3.2 3.0 1.0 2.3 3.2 2.0 0.4 2.8 0.3 State-owned 4.1 3.8 3.4 3.4 1.3 2.3 3.1 2.1 0.3 2.7 0.4 Urban collective-owned 3.4 2.9 2.0 1.1 -0.7 1.3 2.2 -0.2 -6.3 -3.2 -4.2 Other ownership 18.9 25.0 30.9 34.7 36.1 24.2 31.7 30.6 91.5 40.7 17.6 Urban individual laborers 32.7 7.3 17.8 15.8 -1.7 3.4 13.4 10.5 33.3 39.3 31.4 Rural laborers 3.0 2.5 2.7 2.7 2.2 2.6 2.6 1.7 1.0 0.9 0.9 ,Sonrue: China.Slafislical Yearhook 1996 p. 90. to Table 32: General Price Indices (annual growth rates) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Overall Retail Price 8.8 6.0 7.3 18.5 17.8 2.1 2.9 5.4 13.2 21.7 14.8 6.2 Overall Retail Price Index 1990=100 61.7 65.4 70.2 83.1 97.9 100.0 102.9 108.5 122.8 149.4 171.5 182.1 Overall Consumer Price 9.3 6.5 7.3 18.8 18.0 3.1 3.4 6.4 14.7 24.1 17.1 8.3 of which Urban 11.9 7.0 8.8 20.7 16.3 1.3 5.1 8.6 16.1 25.0 16.8 8.8 Rural 7.6 6.1 6.2 17.5 19.3 4.5 2.3 4.7 13.7 23.4 17.5 7.9 Overall Farm and Sideline 8.6 6.4 12.0 23.0 15.0 -2.6 -2.0 3.4 13.4 39.9 19.9 Purchasing Price Overall Industrial Products Rural 3.2 3.2 4.8 15.2 18.7 4.6 3.0 3.1 11.8 17.2 14.7 Retail Price Overall Industrial and Agricultural -5.0 -3.0 -6.4 -6.3 3.2 7.4 5.1 -0.3 -1.4 -16.2 -4.4 Products Price Parity Source: (hina Slatisfical Yearbook 1996, p. 255; China Monthly Statistics. Table 33: Annual Rates of Inflation by Month (percentage change in the index over the previous 12 months) JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 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 1996 7.6 7.7 7.7 7.4 6.5 5.9 5.8 5.8 5.0 4.7 4.6 6.1 1997 3.3 2.9 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 1988 9.7 10.7 11.6 12.6 14.5 16.7 19.8 24.1 26.4 27.0 26.8 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 1996 9.0 9.3 9.8 9.7 8.9 8.6 8.3 8.1 7.4 7.0 6.9 7.0 1997 5.9 5.6 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 Source: China Monthly Stalisfics Table 34: Total Investment in Fixed Assets 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 (billions of yuan) Total fixed ii 254.3 302.0 364.1 449.7 413.8 444.9 550.9 785.5 1,245.8 1,704.3 2,001.9 State-ow 168.1 197.9 229.8 276.3 253.5 273.3 337.8 476.8 765.8 961.6 1,089.8 Collectiv 32.7 39.2 54.7 71.2 57.0 52.9 69.8 135.9 223.1 275.9 328.9 lndividu. 53.5 64.9 79.6 102.2 103.2 100.1 118.3 122.2 147.6 197.1 256.0 Other 0.0 0.0 0.0 0.0 0.0 18.6 25.0 50.6 109.2 269.8 327.1 Fixed investment by CENTER & LOCAL CENTEF .. .. .. 105.8 116.8 128.0 150.5 184.7 LOCAL .. .. .. 170.5 136.7 145.3 187.3 277.5 (percentage of total) Total fixed ii 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 State-ow 66.1 65.5 63.1 61.4 61.3 61.4 61.3 60.7 61.5 56.4 54.4 Collectiv 12.9 13.0 15.0 15.8 13.8 11.9 12.7 17.3 17.9 16.2 16.4 Individuw 21.0 21.5 21.9 22.7 24.9 22.5 21.5 15.6 11.8 11.6 12.8 Other 0.0 0.0 0.0 0.0 0.0 4.2 4.5 6.4 8.8 15.8 16.3 Fixed investment by CENTER & LOCAL CENTEF .. .. .. 38.3 46.1 46.8 44.5 38.7 .. LOCAL .. .. .. 61.7 53.9 53,2 55.5 58.2 .. Total fixed ii 28.4 29.6 30.4 30.1 24.5 24.0 25.5 29.5 36.0 36.6 34.4 Soulrce: China Slalislical Yearbook 1996, p. 140 for 1995; previous issues for earlier years. Table 35: Investment in Fixed Assets by State Owned Enterprises 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 (billions of yuan) Fixed Investment 168.1 197.9 229.8 276.3 253.5 273.3 337.8 476.8 765.7 961.5 1089.8 Capital Construction 107.4 117.6 134.3 157.4 155.2 170.4 211.6 301.3 461.6 643.7 740.4 Technical Upgdating 44.9 61.9 75.9 98.1 78.9 83.0 102.3 146.1 219.6 291.9 329.9 Other 15.7 18.3 19.6 20.8 19.5 19.9 23.9 29.4 84.6 26.0 19.5 Fixed Investment by Sector 168.1 197.9 229.8 276.3 253.5 273.3 337.8 476.8 765.7 961.5 1089.8 of which Raw materials .. .. .. 69.5 64.0 71.8 85.9 68.8 Energy .. .. .. 64.5 70.6 82.4 95.7 114.9 Transport and communications .. .. .. 28.5 22.9 26.9 40.7 75.7 Construction incl. geography .. .. .. 2.8 2.2 1.8 2.1 3.9 Real Estate .. .. .. 18.8 14.8 11.3 16.7 26.5 (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 Capital Construction 63.9 59.4 58.4 57.0 61.2 62.3 62.6 63.2 60.3 66.9 67.9 Technical Upgdating 26.7 31.3 33.0 35.5 31.1 30.4 30.3 30.6 28.7 30.4 30.3 Other 9.3 9.3 8.5 7.5 7.7 7.3 7.1 6.2 11.0 2.7 1.8 Fixed Investment by Sector 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 of which Raw materials .. .. .. 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 incl. geography .. .. .. 1.0 0.8 0.7 0.6 0.8 .. .. Real Estate .. .. .. 6.8 5.9 4.1 4.9 5.6 .. .. Source: China Slaisfical Yearbook 1996, p.l48 for 1985-95. Table 36: Investment in Capital Constuction of State-Owned Enterprises by Sector 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 (billions of yuan) All Sectors 107.4 117.6 134.3 157.4 155.2 170.4 211.6 301.3 461.6 643.7 740.4 Agriculture 1.7 1.6 2.0 2.3 2.0 2.6 3.3 4.4 4.6 5.7 7.7 Industry 44.6 53.2 68.3 81.3 82.2 95.3 114.7 145.8 200.4 276.2 323.6 Geology 2.6 2.6 3.0 2.9 3.6 4.6 5.9 8.2 9.8 12.1 16.6 Construction 2.2 1.9 1.5 1.5 1.4 1.0 1.3 2.3 11.5 13.8 14.6 Transport 17.8 18.8 19.5 21.6 17.0 21.1 34.0 45.8 90.1 137.3 158.8 Commerce 4,0 3.5 4.2 5.0 4.2 3.9 6.4 13.7 20.3 25.5 24.9 Real Estate& Social Services 11.8 11.0 9.3 13.4 11.2 8.2 12.2 21.0 44.3 73.4 67.3 Educaiton, Health, & Culture etc. 10.1 11.6 12.6 13.2 12.9 13.8 15.2 19.7 27.1 35.5 45.8 Research 2.1 2.5 2.6 2.3 2.2 2.1 2.3 3.2 4.9 5.3 6.8 Banking & Insurance 0.7 0.8 1.3 1.9 1.6 1.5 1.9 3.0 6.7 9.6 12.6 Government Agencies & Other 9.8 10.1 10.0 12.0 17.0 16.3 14.4 34.3 41.8 49.4 61.8 (percentage of total) All Sectors 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 1.6 1.3 1.5 1.5 1.3 1.5 1.6 1.4 1.0 0.9 1.0 Industry 41.6 45.2 50.8 51.6 53.0 55.9 54.2 48.4 43.4 42.9 43.7 Geology 2.5 2,2 2.3 1.8 2.3 2.7 2.8 2.7 2.1 1.9 2.2 Construction 2.0 1.6 1.1 1.0 0.9 0.6 0.6 0.8 2.5 2.1 2.0 Transport 16.6 16.0 14.5 13.7 11.0 12.4 16.1 15.2 19.5 21.3 21.4 Commerce 3.7 2.9 3.1 3.2 2.7 2.3 3.0 4.5 4.4 4.0 3.4 Real Estate& Social Services 11.0 9.4 6.9 8.5 7.2 4.8 5.8 7.0 9.6 11.4 9.1 Educaiton, Health, & Culture etc. 9.4 9.9 9.3 8.4 8.3 8.1 7.2 6.5 5.9 5.5 6.2 Research 1.9 2.2 2.0 1.5 1.4 1.2 1.1 1.0 1.1 0.8 0.9 Banking & Insurance 0.7 0.7 1.0 1.2 1.0 0.9 0.9 1.0 1.4 1.5 1.7 Government Agencies & Other 9.1 8.6 7.5 7.6 10.9 9.6 6.8 11.4 9.1 7.7 8.3 Source: China Sfalislical Yearbook 1996, p.148. Table 37: Foreign Direct Investment Inflows (millions of US dollars) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 TOTAL 1,958.7 2,243.7 2,646.6 3,739.7 3,773.5 3,754.9 4,666.6 11,291.6 27,770.9 33,945.8 37,805.7 of which, from Hong Kong&Macao 955.7 1,328.7 1,809.1 2,428.1 2,341.8 2,118.5 2,661.8 7,908.9 18,032.5 20,332.1 20,624.9 Japan 315.1 263.4 266.6 598.4 407.7 520.5 609.5 748.3 1,361,4 2,086.2 3,212.5 Korea .. .. .. .. .. .. .. 674.8 381,5 726.1 1,047.1 Taiwan (China) .. .. .. 471.9 1,053.4 3,139.1 3,391.3 3,165.2 United Kingdom 71.4 35.3 13.8 46.6 29.0 19.9 37.9 38.5 220.5 688.8 915.2 France 32.5 43.6 17.3 31.6 11.6 23.4 11.7 46.9 141.4 193.4 287.0 Italy 19.4 29.4 21.5 36.2 34.2 8.1 41.3 26.7 99.9 206.2 270.2 United States 357.2 326.2 271.3 244.4 288.2 461.2 330.7 519.4 2,067.9 2,490.8 3,083.7 RECEIVED BY PROVINCES Regional Total 1,320.6 1,741.7 1,782.7 3,149.7 3,437.3 3,436.4 4,425.8 11,003.3 27,341.7 33,267.7 37,215.5 Beijing 88.8 149.7 105.8 503.2 320.2 279.0 245.0 349.9 666.9 1,371.6 1,080.0 Tianjin 63.8 134.8 133.1 61.2 31.4 36.9 132.6 107.8 613.7 1,015.0 1,520.9 Hebei 55.9 51.4 10.3 19.1 43.7 44.5 56.6 113.1 396.5 523.4 546.7 Shanxi 0.5 0.2 4.9 6.5 9.8 3.4 3.8 53.8 86.4 31.7 63.8 InnerMongolia 2.6 7.5 5.1 6.4 4.4 10.6 1.7 5.2 85.3 40.1 57.8 Liaoning 25.8 48.2 90.8 130.6 126.1 257.3 362.4 516.4 1,279.1 1,440.1 1,424.6 Jilin 4.9 24.2 7.4 9.7 99.9 17.6 31,6 75.3 275.3 241.9 408.0 Heilongjiang 4.0 24.5 14.0 69.3 57.4 28.4 20.9 72.2 232.3 347.6 516.9 Shanghai 108.8 148.9 214.0 233.2 422.1 174.0 145.2 493.6 3,160.3 2,473.1 2,892.6 Jiangsu 51.1 45.6 86.4 125.5 126.9 134.0 219.2 1,463.2 2,843.7 3,763.2 5,190.8 Zhejiang 26.6 24.8 36.3 43.8 54.0 49.1 92.3 239.8 1,031.8 1,150.3 1,258.I Anhui 3.0 35.2 3.2 27.9 8.8 13.5 10.7 54.7 257.6 370.0 482.6 Fujian 118.6 62.5 55.4 145.5 348.0 319.9 471.2 1,423.6 2,874.4 3,713.2 4,043.9 Jiangxi 10.5 9.1 5.4 8.9 9.2 7.5 19.5 99.7 208.2 261.7 288.9 Shandong 35.6 65.7 65.0 89.7 163.3 185.7 216.4 1,003.4 1,874.1 2,552.4 2,689.0 Henan 8.3 10.7 13.5 64.2 46.1 11.4 38.0 53.2 304.9 386.7 478.6 Hubei 8.0 12.4 26.0 22.3 28.6 31.8 46.6 203.1 540.5 601.9 625.1 Hunan 31.0 28.5 2.9 12.9 23.3 14.2 25.4 132.7 437.5 331.1 507.7 Guangdong 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 10,260.1 Guangxi 30.9 49.2 45.1 20.9 53.0 35.6 31.9 182.0 884.6 836.3 672.6 Hainan .. .. .. 117.4 95.0 103.0 176.7 452.6 707.1 918.1 1,062.1 Sichuan 28.7 31.8 24.3 40.3 13.1 24.4 80.9 112.1 571.4 921.7 541.6 Guizhou 9.8 12.2 .. 13.8 13.9 11.1 16.3 19.8 42.9 63.6 57.0 Yunnan 1.6 3.8 6.3 8.3 7.9 7.4 3.5 28.8 97.0 65.0 97.7 Tibet............... Shaanxi 15.6 37.2 72.9 111.7 97.2 47.3 31.8 45.5 234.3 238.8 324.1 Gansu 0.6 1.3 0.2 2.4 0.0 1.2 4.8 0.4 12.0 87.8 63.9 Qinghai 0.2 0.0 0.0 2.7 0.0 0.0 0.0 0.7 3.2 2.4 1.6 Ningxia 0.3 0.1 0.0 0.3 1.1 0.3 0.2 0.4 11.9 7.3 3.9 Xinjiang 10.9 14.0 17.7 5.0 0.9 5.4 0.2 0.0 53.0 48.3 54.9 4Source: ('hina Slalislical Yearbook 1996 , pp. 598-600 for 1994-95; previous issues for earlier years Un co Table 38: Production and Consumption of Energy 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 PRODUCTION 855.5 881.2 912.7 958.0 1,016.4 1,039.2 1,048.4 1,072.6 1,110.6 1,187.3 1,287.3 (millions of tons of coal equivalent) (percentage of total) Coal 72.8 72.4 72.6 73.1 74.1 74.2 74.1 74.3 74.0 74.6 75.5 Crude oil 20.9 21.2 21.0 20.4 19.3 19.0 19.2 18.9 18.7 17.6 16.7 Natural gas 2.0 2.1 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.9 1.8 Hydro power 4.3 4.3 4.4 4.5 4.6 4.8 4.7 4.8 5.3 5.9 6.0 CONSUMPTION 766.8 808.5 866.3 930.0 969.3 987.0 1,037.8 1,091.7 1,159.9 1,227.4 1,290.0 (percentage of total) Coal 75.8 75.8 76.2 76.2 76.0 76.2 76.1 75.7 74.7 75.0 75.0 Crude oil 17.1 17.2 17.0 17.0 17.2 16.6 17.1 17.5 18.2 17.4 17.3 Natural gas 2.2 2.3 2.1 2.1 2.0 2.1 2.0 1.9 1.9 1.9 1.8 Hydro power 4.9 4.7 4.7 4.7 4.9 5.1 4.8 4.9 5.2 5.7 5.9 GDP (billion ofyuan, constant 1990 price) 1,136.7 1,255.7 1,421.8 1,595.9 1,654.3 1,721.7 1,874.3 2,149.9 2,401.0 2,726.6 3,016.3 Energy consumption 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.4 (million ton per billion yuan) Notes: Excluding bio-energy, solar, geothermal and nuclear energy. All fuels are converted into standard fuel with thenmal equivalent of 7,000 kilocalories per kilogram. The conversion is I kg of coal (5,000 kcal) = 0.714 kg of standard fuel. I kg of crude oil (10,000 keal) = 1.43 kg of standard fuel. I cubic meter ofnatural gas (9,310 kcal) 1.33 kg. of standard fuel, The conversion of hydropower into standard fuel is calculated on the basis of the consumption quota of stanidard coal for thenmal power generation for the year. Source: China Sia/isfical Yearhook 1996, p. 203. Table 39: Freight Traffic 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 (billion ton/km) Rail 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 1,287.0 Road 190.3 211.8 266.0 322.0 337.5 335.8 342.8 375.5 407.1 448.6 469.5 Domesticwaterways 240.0 270.0 288.9 310.4 349.8 345.1 396.5 422.2 472.7 1,568.7 1,755.2 Pipelines 60.3 61.2 62.5 65.0 62.9 62.7 62.1 61.7 60.8 61.2 59.0 Civil aviation 0.4 0.5 0.7 0.7 0.7 0.8 1.0 1.3 1.7 1.9 2.2 OVERALL 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 3,573.0 Ocean shipping 532.9 594.8 657.6 696.6 768.9 814.1 899.0 903.4 913.4 (percentage of total) Rail 62.3 61.7 60.5 58.6 58.1 58.8 57.8 57.4 55.9 37.5 36.0 Road 14.6 14.9 17.0 19.1 18.9 18.6 18.0 18.6 19.0 13.5 13.1 Domestic waterways 18.4 19.0 18.5 18.4 19.5 19.1 20.9 20.9 22.1 47.2 49.1 Pipelines 4.6 4.3 4.0 3.9 3.5 3.5 3.3 3.1 2.8 1.8 1.7 Civil aviation 0.0 .0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 (growth rates) Rail 12.1 7.9 8.1 4.3 5.2 2.2 3.3 5.5 3.3 4.2 3.3 Road 23.9 11.3 25.6 21.0 4.8 -0.5 2.1 9.6 8.4 10.2 4.6 Domestic waterways 22.4 12.5 7.0 7.5 12.7 -1.3 14.9 6.5 12.0 231.9 11.9 Pipelines 5.4 1.5 2.1 4.0 -3.2 -0.3 -1.0 -0.6 -1.5 0.7 -3.6 Civil aviation 33.4 15.9 35.1 12.3 -5.5 18.8 23.2 32.9 23.8 11.9 20.0 OVERALL 15.2 8.9 10.2 7.7 6.2 0.9 5.1 6.3 5.9 55.6 7.4 Ocean shipping 21.8 11.6 10.6 5.9 10.4 5.9 10.4 0.5 1.1 .. ,Source: China Sialisical Yearbook 1996, p. 504. 'C 0 Table 40: Passenger Traffic 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 (billion passenger/km) Rail 241.6 258.7 284.3 326.0 303.7 261.3 282.8 315.2 348.3 363.6 354.6 Road 172.5 198.2 219.0 252.8 266.2 262.0 287.2 319.3 370.1 422.0 460.3 Domestic waterways 17.9 18.2 19.6 20.4 18.8 16.5 17.7 19.8 19.6 18.4 17.2 Civil aviation 11.7 14.6 18.2 21.7 18.7 23.0 30.1 40.6 47.8 55.2 68.1 OVERALL 443.6 489.7 541.1 620.9 607.5 562.8 617.8 694.9 785.8 859.1 900.2 (as a percentage of total) Rail 54.5 52.8 52.5 52.5 50.0 46.4 45.8 45.4 44.3 42.3 39.4 Road 38.9 40.5 40.5 40.7 43.8 46.6 46.5 45.9 47.1 49.1 51.1 Domestic waterways 4.0 3.7 3.6 3.3 3.1 2.9 2.9 2.9 2.5 2.1 1.9 Civil aviation 2.6 3.0 3.4 3.5 3.1 4.1 4.9 5.8 6.1 6.4 7.6 OVERALL 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 18.1 7.1 9.9 14.7 -6.8 -14.0 8.2 11.5 10.5 4.4 -2.5 Road 29.0 14.9 10.5 15.4 5.3 -1.6 9.6 11.2 15.9 14.0 9.1 Domestic waterways 16.4 1.9 7.6 4.1 -7.7 -12.4 7.5 11.9 -1.0 -6.6 -6.4 Civil aviation 39.8 25.4 24.4 19.2 -13.9 23.4 30.7 34.8 17.6 15.5 23.5 OVERALL 22.5 10.4 10.5 14.7 -2.2 -7.3 9.8 12.5 13.1 9.3 4.8 Source: (hina Siaitical Yearbook 1996, p. 503. Table 41: Average Shipping Distance 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 (kilometers) Rail 636 646 673 681 686 705 718 734 735 791 807 Road 31 34 37 44 46 46 46 48 48 50 50 Waterways 1,216 1,042 1,174 1,128 1,281 1,447 1,554 1,433 1,415 1,465 1,551 Pipelines 442 413 413 416 402 398 399 417 409 406 386 Civil aviation 2,128 2,143 2,183 2,226 2,226 2,218 2,234 2,330 2,393 2,241 2,206 OVERALL 243 236 234 243 258 270 284 279 274 282 289 (growth rates) Rail 8.9 1.6 4.2 1.2 0.7 2.8 1.8 2.2 0.1 7.6 2.0 Road 40.9 9.7 8.8 18.9 4.5 0.0 0.0 4.3 0.0 4.2 0.0 Waterways -10.0 -14.3 12.7 -3.9 13.6 13.0 7.4 -7.8 -1.3 3.5 5.9 Pipelines -3.1 -6.6 0.0 0.7 -3.4 -1.0 0.3 4.5 -1.9 -0.7 -4.9 Civil aviation 2.6 0.7 L.9 2.0 0.0 -0.4 0.7 4.3 2.7 -6.4 -1.6 OVERALL 11.0 -2.9 -0.8 3.8 6.2 4.7 5.2 -1.8 -1.8 2.9 2.5 Source: China Staistical Yearbook 1996, p. 505. T H E W O R L D B A N K 1818 H Street, N.W. 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