China

 Table of Contents

 1.1 Introductory Details

The People’s Republic of China has been one of the most widely discussed and controversial economies on the world stage for quite some time. We hope to unveil some of its secrets by looking first into its historical, social and political background, before analysing its major economic indicators. Life in China has much to reveal.

This has been a century of major social and economic upheavals in China. At the beginning of the century, China was still an imperial feudal State, before it briefly became a republic in 1911. The country was torn apart by numerous civil wars, until Mao Zedong proclaimed the foundation of the People’s Republic of China on October 1^st, 1949. This heralded an era of communist rule in China which exists to this day, with the unwavering control of the Communist Party in China. Early concerns led the government to focus primarily on eradication of starvation and, amid international outcry, the consolidation of its power. Economic Policies were often left to the whim of the political elites.

One of the major events in China’s economic history was the Soviet-inspired ‘Great Leap Forward’ experiment, which aimed to collectivise agriculture and industry. The failure of the experiment plunged the country in to a deep depression by the 1960’s. Chairman Mao’s response to these difficulties was the infamous ‘Cultural Revolution’, which disrupted normal economic activity in China for a decade. It was only with the death of Mao Zedong and the rehabilitation of Deng Xiaoping that China embraced wide-ranging economic reforms. The Cultural Revolution highlighted the need for China to trade with the outside world. This led to a series of export – led policies, and the first tentative steps towards liberalising the economy.

The next major reforms started in 1980. Following Deng Xiaoping’s dictum that "getting rich is glorious" the State allowed for certain private enterprises to be removed from central control, and encouraged foreign trade. This lead to Growth Rates (Measured in GDP per capita) in the region of 10% per annum since then, according to official figures. Economic Reform has had its downside however, inflation rose above 20% in 1994, and there are growing regional and social disparities, as unemployment soars.

We are very fortunate in the timing of our project. China has just celebrated 50 years of communist rule; perfect timing for an economic check-up. Like their leaders during the official commemorations, we will focus on the performance of the last 20 years. This period represents the only economically stable and consistent period in recent Chinese history. Last week’s agreement with the USA on accession terms to the WTO caused quite a stir in world markets and gave added impetus to our analysis.

Writing about China is not easy. For many reasons (the nature of the regime, its human rights record, its perception as a military threat, and the inscrutability of the country in general) China has become, in Western circles, an emotive topic. For various reasons, in the west the commentary is often tainted with prejudicial viewpoints, while the Chinese government politicises its economic achievements, moulding statistics to suit its objectives. As Jenner has argued, "Chinese governments have for at least two thousand years, taken history much too seriously to allow the future to make its own unguided judgements about them" (Jenner 1992: 5).

As a consequence, the responsibility falls on researchers to critically evaluate all information and data, no matter what its source.

Another related element involved in the study of China is the comparability of their statistics with those of the International agencies, such as the World Bank/IMF or the OECD. Preliminary readings into the issues lead to a number of discrepancies. A good example is Chinese Unemployment figures that do not count people who have been laid off from jobs. That it is obviously at odds with international statistics, and makes comparison very difficult. We have however found sources of data which try to adjust for these factors. (OECD/some IMF, World Bank) Also, it is widely believed that Chinese GDP figures are overepresented by as much as 2% - 4%. The Caveat has been sounded!

China statistically is a fascinating country. With a population at around 1.3 billion, China is the most populous country on earth. Its total area is about 9,600,000 km², however 60% of this consists of deserts and mountainous regions, and only 10% of the total land area is cultivated. (GRAPH?)

China’s most recent figures for Gross Domestic Product (GDP) per capita are a mere $750 per capita. Increases in population are responsible for swallowing up large amounts of nominal GDP growth. That growth has certainly been spectacular, however and piqued in 1994 at 13%. In the last years however growth rates have declined, leading to a fall in investment and industrial production. See Chart 1 on next page.

 Chart 1

There are however increasing social disparities. People living under the poverty line (<$1 per day) in China, according to 1997 World Bank estimates represent almost a quarter of the population.

China's Human Development Index (HDI) stood at 62.6 for the year 1997.

Unemployment is officially at 3.1%, but applying international criteria brings the figure up to 6.5%.

China’s fiscal policy has been recently praised, in a 1999 World Bank report: "The policy is well balanced and supports market reforms ... [and] has targeted both causes and symptoms [of the economic slowdown]". Total debt (both internal and external) lies around 31.6%, very low by developing countries standards.

The consumer price index has been falling since 1998 and looks like its heading to an annual average of -2%, based on the first three quarters of 1999. Accordingly, real wages contracted by almost 1% in 1998. This is highly inconsistent with the announced growth rates and leads one to question the accuracy of official estimates for growth. This has been a major concern among the Chinese Central Bank’s economists, who have been trying to stimulate consumption in various ways. Short-term Interest rates have fallen from 8.9% in 1997 to the current 3.2% and domestic credit has risen by 1%. This modest increase in domestic credit leads one to suspect that consumer confidence is at a low.

In the subsequent paragraphs we will outline the key issues that will be dealt with in more detail in the final project. The discussion there will comprise an overview and a set of policy recommendations aimed at solving certain impasses in economic policy.

Trade has been one of the driving forces behind China’s growth. China has currently the second largest trade surplus in the world, second only to Japan. Access to foreign markets has not been accompanied by any major relaxation of tariff controls, and that has greatly contributed to the rise of domestic industrial production. It has however antagonised some of China’s leading trading partners, who are in practice more targets than partners. International pressure and fears of continuing decline of the Chinese economy has however led to the signing of a bilateral agreement with the US on the terms of accession to the WTO. The liberalisation of largely inefficient state-owned enterprises and the entry of foreign competition will lead to major adjustments in both the agricultural and industrial sectors.

The sheer size of China’s population provides an added dimension to the debate as to whether size matters. The discussion about the relationship between population and economic growth is, in the Chinese context, a crucial one. Historically, China has always had a huge population, and that has been considered as a hindrance to innovation and growth. The debate is not uncontroversial, and in our project we will analyse the question and underlying assumptions very carefully.

Another feature of Communist China is the widening inequality in income distribution. The rural-urban and East-West divides provide China’s policy-makers with major strategic challenges. Basing their legitimacy on the delivery of socio-economic progress, the government is under pressure to address these issues. The impact of the so-called Special Economic Zones will be an essential part of our discussion.

The accession to the World Trade Organisation will have a very strong impact on the dubiously efficient Chinese Banking sector. That being said, the sector has been reforming as of late. The issue exciting economists the most has been the formation of Asset Management Corporations to manage the debt of the highly inefficient retail banking sectors and to improve their access to cheaper funds. As much as 25% of the loans at China’s retail banks are said to be non-performing. They are going to find it very hard to compete with foreign banks as restrictions on who all banks can lend to and who can lend are to be liberalised under the WTO agreement.

Because the Banks are State – controlled they are obliged to lend to State companies, who are heavily dependent on those loans to survive and are largely responsible for the low level of performing debt and for the precarious state of the banks finances. It is important to note that there are a lot of developments being finalised as a consequence of the WTO negotiations.

The Yuan has been performing remarkably well. Even amidst the Asian Crisis, Chinese Central Bankers enhanced their position in the international arena by resisting temptations to devalue. Such a devaluation would have been the prudent measure for the Chinese economy in isolation, but it would have further plunged the region into a deeper crisis. In the interest of regional stability they uncharacteristically refrained and are thus being credited with the partial stabilisation of the East- Asian Economic Crisis.

This topic will be further developed.

China initially adopted Marxism as a developmental strategy, in this case only relatively successfully. After Deng Xiaoping’s arrival however, the structure of the economy was changed into a mix of centrally planned and market-oriented frameworks that became known as the Socialist Market Economy. The totalitarian nature of the government has not undergone any major transformation, though a new generation of reformists, led by President Jiang and Premier Zhu, has introduced a greater degree of accountability in the party.

Although there are more freedoms in China dissent is still severely dealt with, and that has become an embarrassment for Chinese authorities in the West.

No country ever lives in isolation. China is one of the few who have tried. Throughout the ages China’s relationship with the West has been a series of misunderstandings, leading to open or covert conflict. In the 1990’s China, though still prone to nationalistic rhetoric when necessary (see Kosovo war, and the NATO bombardment of the embassy) is more than ever engaged with the outside world.

For the West, the issue of how to deal with China is a passionate one. Western governments must face severe internal criticism in their deals with China. But China cannot be ignored. Its human rights record, the totalitarian regime, the occupation (justified or not) of Tibet are some of the reasons put forward for not engaging with China. The debate of whether "appeasement" or "confrontation" is the more adequate strategy for China is an on-going one, with both sides having constructed equally valid arguments. For the time being engagement is being preferred, though this might not be the case in the future.

Whether the Chinese government will be forced to democratise is a crucial one. Chinese officials seem to be proving that economic freedom and political liberties are not synonymous. Whether Communism will survive in China and its implications for the West, is anybody’s guess.

• Todaro, M. P. 1997. Economic Development. Harlow: Addison Wesley Longman.
• Various World Bank / IMF / OECD reports including Country Reports, and Article IV consultation documents