Analysing China's performance

["Ulhas Joglekar" <ulhasj@xxxxxxxxxxxxxxxxxxxx>]

Volume 17 - Issue 21, Oct. 14 - 27, 2000
India's National Magazine on indiaserver.com
from the publishers of THE HINDU


BOOKS
Analysing China's performance

C.T. KURIEN

Economics Blue Book of the People's Republic of China, 1999: Analysis and
Forecast, Edited by Sun Wenbin, Michelle H.W. Fong, Geof Wade; Centre of
Asian Studies, University of Hong Kong; 1999.
THE main theme of this, the second volume of the authorised annual English
language publications on the performance of the Chinese economy, authored by
researchers of the Chinese Academy of Social Sciences, other scholars and
state officials, is the same as that of the first-one, "the track
alteration" the economy of China has been undergoing in recent years. The
change of track is from a predominantly state-owned and controlled economy
to a socialist market economy. The process was initiated in 1978 and gained
momentum from 1987.

One of the perceptible achievements of the change has been a sudden spurt in
the rate of growth of the Chinese economy. For several years since 1978, the
growth rate was over 10 per cent per annum, touching 15.2 per cent in 1984
and 14.2 per cent in 1992 . By the middle of the 1990s, the economy had
become overheated, leading to a high level of inflation. A "hard landing"
was then attempted which also had some adverse consequences. In 1996 and
1997 there was a shift to "soft landing". The application of brakes of both
varieties had the intended result of slowing down the economy. Both 1997 and
1998 have been described as years of "mild deflation". One issue debated in
the present volume is whether the same will continue in 1999 or whether it
will turn out to be a year of recovery.
In 1998, the Chinese economy faced some unanticipated problems, both
internal and external. The internal problems were caused by heavy floods in
the midstream and downstream portions of the Yangtze River, with an
estimated economic loss of 160 billion renminbi (RMB). (By way of
comparison it may be noted that this amount was almost 85 per cent of the
total value of exports of the year and more than the total value of
imports.) Fortunately, the floods did not reduce the total grain output
which, in fact, slightly exceeded the 1997 figures. But the production of
cotton and tobacco was hit badly. Apart from the adverse impact on
production, the floods showed the vulnerability of vast expanses of
territory and of the country's ecological environment in general which has
a bearing on the lives and livelihoods of the people.
The external shock was not so visible, but was no less serious. The
financial and currency crisis that dramatically affected South Korea,
Thailand and Indonesia in 1997 and the continuing stagnation of the
Japanese economy and the depreciation of the Japanese yen cast a shadow
over China's conditions. In spite of the fall in the value of most
currencies in Asia in relation to the U.S. dollar, a deliberate decision was
made not to devalue the RMB, which in turn affected the growth of exports.
It also led to the realisation that the growth of the Chinese economy
depends primarily on internal factors - a fact which may have been
overlooked for a while because of all the excitement of opening up of the
economy after decades of self-imposed isolation.
However, it was no longer possible to go back to old economic policies as
money and markets had changed the functioning of the economy and the rise in
the levels of income of the bulk of the population had altered patterns of
expenditure. With the change in the ownership of enterprises - from
primarily state-owned or collective to increasingly private-owned - credit
and borrowing and interest rate regimes had come to occupy a prominent role.
In an attempt to stimulate domestic activity, interest rates were reduced
five times in 1998, but without leading to the expected results. Changes in
fiscal policies have also been attempted. Several tax reductions - on stamp
duties on bond transactions, tax rebates on textile machinery and shipping -


were effected . Public investment was also stepped up. And, in order to
finance investment, RMB 100 billion worth of treasury bonds were issued, in
part to mobilise savings of the households and channel them into productive
activity.
But a constant refrain in the Blue Book is that the crux of the economic
problem of the Chinese economy currently is that consumer spending is not
going up as much as it should. A variety of explanations are offered.
Personal disposable income in both urban and rural areas increased at a
slightly higher rate than in 1997. However, the growth of personal income
fell behind gross domestic product (GDP) growth rate. It is pointed out that
in the early- and mid-1980s, the general complaint was that "salaries were
eating up profits" (during the high growth period from 1986 onwards, the
annual average family income growth rate was only 6.3 per cent, considerably
below the growth rate of GDP) and that consequently the proportion of
average personal income to GDP at constant prices fell from 57.5 per cent in
1986 to 45.5 per cent in 1996. This is recognised as a failure of the market
economy to guarantee that labour income will automatically grow with GDP
growth. A recommendation made is that salaries of those who work in the
areas of education, science, art, health and government should be increased
and that it could be done through appropriate fiscal adjustment.
Three other reasons are put forward as explanations for low consumer
expenditure. First, consumer spending was suppressed by the uncertainties
about future income owing to the possibility of unemployment and the
expected increase in the future expenses on education, medical care and
retirement. In other words, Chinese public expenditure in the social sectors
is not adequate enough to maintain rising private expenditure - indeed a
significant finding that should have a bearing on policies in the evolving
socialist market economy. Second, Chinese consumers have passed the stage
where basic consumer necessities could be met through supply managements
alone. That is, the Chinese economy has moved out of a sellers' market into
a buyers' market. Producers have to respect consumer preferences for the
kinds of goods that their higher incomes permit to buy. Third, in 1997
registered unemployment rate was 3.1 per cent of the labour force. But when
the number of people waiting to be employed was also taken into account, the
rate went up to 8 to 9 per cent.
As already noted, in 1998 the Chinese economy was affected by external
factors as well. The poor performance of the Japanese economy and the fall
in the external value of many Asian countries had an adverse impact on
China's exports. However, imports also got reduced and so the year ended
with a trade surplus as well as a higher foreign exchange reserve. The Asian
financial crisis also had some impact on foreign direct investment in China.
Investment from Asian countries - Hong Kong, Taiwan, Japan, Philippines,
Thailand, Singapore, South Korea and others - which constituted about 75 per
cent of the total in 1997 came down to a little above 70 per cent and
declined in absolute terms also. At the same time, investment from Europe
and the U.S. increased.
A brief reference to Hong Kong may be made in concluding this review mainly
because of the fact that on July 1, 1997 the British handed over Hong Kong
to China and it became the Hong Kong Special Administrative Region based on
the "one country, two (economic) systems" principle. It is unfortunate that
this transfer happened at a time when the Asian financial crisis was setting
in. The growth rate of Hong Kong suffered as a consequence. Particularly
affected were activities in finance, real estate, retail trade and hotels.
Unemployment increased and problems related to it became very visible as
there was also an increase of new immigrants from the Mainland. The banking
sector and the stock market came under severe strain. However, the
administration succeeded in keeping matters under control.
The Blue Book is meant for outsiders who are interested in the Chinese
economy and it certainly serves a useful purpose. As an interested user I
would make some comments about its contents and format. One would see more
statistical information in the volume. Statistical information is available
throughout, but the appendix containing consolidated statistics constitutes
only seven pages out of a total of over 500. It will be helpful to have
critical evaluation of official statistics also. In the 50 articles that
form the substance of the volume there is a great deal of repetition. In a
compilation of this kind some repetition is unavoidable. But it should be
possible, in the future issues, to reduce it considerably.
I must also add that Chinese scholars who have authored the articles seem to
suffer from want of appropriate theoretical tools to analyse the Chinese
economy in its present phase. They have relied almost exclusively, though
not uncritically on Western macro economic theory and its analytical
corpus. However, macro economic aggregates are premised on micro economics,
particularly the nature and objectives of the basic production units of a
capitalist economy. Since China differs significantly from Western
economies in this regard, it is necessary to use theories and tools suitable
for the country's conditions. This is not an easy task. But if the Chinese
scholars succeed in adapting Marxist theory to suit their conditions, it
must be possible for them to evolve economic theories and analytical tools
to deal with the kind of market socialism they are trying to put into
practice.
Two articles on the Chinese economy, based on the first Economics Blue Book
and other writings were published in Frontline, September 11 and September
25, 1998.

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