News of Chinese Economy

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

From the People's Daily (Nov 28, 2003):

Goldman Sachs, one of the leading US investment banks, issued its
monthly report Thursday noting that over 80 percent of the profits of
German Volkswagen inthe first half of 2003 came from the Chinese market.

The report said China has contributed 1.3 euros to the per-share profit
of the world leading automobile-maker.

The Chinese automobile market is growing at a very high speed and auto
sales have surged by 70 percent, said the report, stressing that China
has become a key factor for almost every car-maker.

The report also indicated that Volkswagen's third quarter financial
report appeared worrying and the company's profits were in a decline.

More foreign competitors would enter the Chinese automobile market and
domestic car-makers would promote sales by cutting prices, said the
report. Based on this prediction, Goldman Sachs was pessimistic about
Volkswagen's sales prospect in the fourth quarter of this year.

**********************

The new BMW 5 series of sedans, China's most luxurious domestically-made
autos so far, debuted here Thursday, marking the heated competition
among world-level luxury car manufacturers in a "made in China" campaign.

"The new 5 series means that we have brought the most advanced product
to Chinese customers," said Helmut Panke, chairman of the board of
management of the  Germany-based BMW Group.

The joint venture between BMW and its Chinese partner Brilliance Auto
plans to gradually realize a 40 percent localization rate.

Experts say that, as the buying power of Chinese people rises, luxury
cars have begun to enter China. And their "made in China" campaign
indicates fiercer competition.

Earlier this month, General Motors announced it will introduce its
luxury Cadillac to China, with some produced in Shanghai. This will be
the first time that Cadillacs have been produced outside the United States.

Mercedes-Benz will also be produced in China soon, years after Audi has
worked with its Chinese partners to make luxury cars in the country.

To produce in China has been a common choice for many car producers in
the globlization era, due to the low labor cost and high technical
skills here.

Experts say that the "made in China" competition will widen the choice
of Chinese customers, and help improve the technological level of
China's automotive industry or even the whole manufacturing industry.

**************************

At present, the primary importance in China's economy is to increase the
grain output, develop agriculture and rural economy, and raise peasants'
income. In an exclusive interview with Lin Yifu, a prominent economist
in the "three issues concerning China's agriculture" and director of
China Economic Institute with Peking University, he considers that
improving the infrastructure in China's rural areas is the best possible
way for increasing peasants' income.

(Notes: The middle part of China mentioned in the article does not refer
to the geographic location, but to the 10 provinces, municipalities, and
autonomous regions with dense population, economic concentration on
traditional farm produces yet scarcity of land resources endowed by
nature. Though with half a total of rural population of the country its
GDP per capita and share of agriculture in the GDP are both higher than
the national average. If the rural population of the region is
transferred smoothly, it will do a lot of good to the readjustment of
China's national economy)

Q: As an expert focusing on China's agriculture for years, what's your
opinion on the fluctuation of grain prices in China now?

A: At the initial stage of China's opening-up and reform, the grain
output was only about 300m tons a year. It exceeded 500m tons in 1996
and leveled off for several years and 1998 saw it hit the record high.
Since then, China's agriculture entered into a new stage featuring a
balanced gross output and surplus stock in years of good harvest. This
change in supply and demand kept grain prices low for six years in
succession. The price curve plummeted to the bottom-line. Peasants got
low profits in deduction of the cost and in turn they had less
initiative to invest in grain growth. This is why land was left
uncultivated in some areas. The present grain price hikes should
therefore be regarded as a recovery within the normal range and this is
a relative decline both in gross grain output and stock resulted from
the previous years and the change in supply and demand.

Q: Is there any possibility in your point of view for the present grain
price rise to help motivate the peasants' initiative in
grain-cultivation, thereby leading to a new change in grain supply and
demand?

A. Absolutely possible, this is the role of the market.

Q. What's your opinion about the rise of grain price this time for
increasing the peasants' income?

A: It will play a positive role in increasing peasants' income in major
grain growth areas in China, I agree with that. But in consideration of
the limited arable land and grain output per household in rural areas,
the grain price rise is far from enough to help raise the peasants'
income. The only way to ensure a long and sustainable growth in
peasants' income is to reduce population in rural areas.

Q: Speaking of the "three issues concerning agriculture in China", an
unavoidable topic is the peasants' income. During the Ninth Five-year
Plan Period, the increase in peasants' income in China was decreasing
year on year. The last three years in the period only saw an annual
increase of 3.4 percent on average. The peasants' income was less than
half of the disposable income of urban residents. What do the slow
growth of peasants' income and the widening of urban-rural gap mean for
China?

A: I worked with Asia Development Bank since 1994 and especially during
recent years have been dwelled upon a systematic research on the key
strategies and sustaining problems in regard with China's rural
development. We have found that the problem at the kernel in China's
"three issues concerning agriculture" is that of peasants' income. Of
course, there are many factors that are affecting the growth of
peasants' income. But the fundamental reason lies in the surplus of
rural population and excessive rural labor-force. The development of the
agriculture can never stimulate fast growth of income among 900m
peasants. At the present stage, agriculture itself is not enough to
solve all the problems in rural areas and the readjustment of
agriculture polices will not turn out to be the only means that we
should turn to for speeding up the increase in peasants' income.

Q: Under the circumstances, China's agriculture presents a strange
phenomenon, i.e. the agricultural productivity is of low efficiency and
staple farm produces has poor competitiveness in the global market
whereas the staple farm produces are sold at unreasonably low price for
years.

A: The upsurge of farm produces output and the slow growth in consuming
farm produce by urban residents have made the situation even more
serious. This also shows that the policy of simply encouraging peasants
to invest in producing good farm produce can only play a limited role.
As a result of the policy, a certain farm produce will enjoy a fair
price for the first year in the market, followed by a price decline for
the second year and no cost recovery for the third year. In this case,
an increase in output does not necessarily means an increase in income.

Q: The income gap is still widening between the urban and rural areas,
so is the cleft between the regions and among the rural population. Some
scholars asserted that the income gap among the rural population is even
wider than that between the urban and rural areas. Do you think it's
necessary to make a classified research on the peasants' income?

A: Beyond doubt. The research should be made how to motivate the
participation of the broad masses of peasants and for rural population
to get the benefit of economic expansion.

Q: Obviously, 70 percent of the total rural population has become the
bottleneck for all issues in rural areas. A very popular opinion holds
that to bring prosperity to the peasants the only way is to reduce the
number of peasants. Do you agree?

A: Historical experience at home and abroad shows that a richer rural
population can only be achieved by way of transferring the rural
labor-force into that for non-agricultural industries. But the deflation
caused by excessive production capacity has made it even more difficult
to solve the problem of surplus productivity. Specifically, the chances
to make the rural labors pull out of their old haunts or give up their
land without relocating are getting more and more restricted than ever.
The pressing task to solve the "three issues in China's agriculture" is
to eliminate the excessive production capacity in the national economy
and put a halt to the deflation which seemingly is still gaining impetus.

Q: Does that mean a proactive financial policy should be adopted to
temper the deflation? In fact, we have stuck to this proactive financial
policy for years. But it doesn't seem to effect getting the peasants
richer as expected. Why?

A: This needs specific analysis. Take the Large-scale Development of the
West of China. In this campaign, we are investing aggressively in
projects of road, railways, airports, medium and large water conservancy
facilities, and natural gas pipelines. But it needs further
consideration on whether the investment is proved good enough to solve
the most pressing problem we are facing now.

Q: Then where do you think we should begin with?

A: In my opinion, efforts should be focused on the improvement of
small-sized infrastructure in the rural areas, including roads
construction, and water and power supply. Careful planning and direction
should be made available to channel the investment to the right fields.
Infrastructure projects in rural areas are featured with small
investment, short construction period and quick return and generous
social and economic benefits. They can create many job opportunities to
the rural labor-force which is very cheap, thus directly adding to
peasants' income sources. Furthermore, it can improve the living
conditions, help boost consumption, and absorb the excessive production
capability in rural areas. In this way, our national economy can walk
out of the woods of deflation and in turn peasants' income will keep on
upturn in a sustainable way. Generally speaking, accelerating the
infrastructure construction through proactive financial policy is the
most effective measure that can be adopted to boost the domestic demand
and eliminate the excessive production capacity. So it is the best
solution to the rural employment, restructuring of rural industries, and
bringing more earnings to peasants.

(Background: The rural population in China, accounting for 60.9 percent
of the total population and two thirds of the households are still
living a daily life in poor and backward condition. The power is
transmitted through outmoded grids with volatile voltage yet is highly
priced and with no tap-water available for the rural households. )

Q: The gap between the east, west, and middle part of China is also
getting wider. Some experts pointed out that solving the problem of
middle China development means the solution of 80 percent of the "three
issues of China's agriculture". Do you agree with them?

A: The middle region in China has the biggest rural population and faces
the least favorable policy, limited natural resources, most serious
poverty, and the fastest ecological deterioration. In the next 30 to 50
years to come, the traditional farm areas in this region will have a
direct bearing on the style and structure of China's economic
development. The Central government should create a better condition to
favor the labor-force flow in this area. The rural population in the
east is largely enjoying a better living and production conditions. The
rural areas in the west also received a lot of support policies to
alleviate the poverty. The middle of China is the main source of peasant
workers. Industrialization and urbanization is the choice for us to
successfully transfer the rural population and help the development of
this area.

Q: What's the advantage expectable from this strategy?

A: It can bring about several benefits. The outflow of labor-force from
the rural areas can leave more land to those staying in the rural areas
to till so that they can expand their operation on land and their farm
produces can be more commercialized. The labor-force transferred from
the rural areas will be changed from suppliers of the farm produces to
consumers, thus boosting the demand for farm produces and pushing the
prices up. The combination of the two forces will keep the peasants'
income rising fast. Also, among others, it will help to stop the
ecological deterioration as government at various levels will be able to
invest more on poverty alleviation and natural resources protection.

Q: But the prerequisite is that there is a unified market for farm
produces and labor.

A: Surely. Only when a national unified market for farm produces and
labor is established can it be possible for region around to choose a
particular industry to focus on according to their competitive edge.
When the east part loses its advantage in grain growth due to its higher
land and labor opportunity cost with economic development, it will
naturally choose to reduce its grain production and purchase more grain
from the middle part which is relatively strong in grain growth. This
will lead to rise of grain price. As a result, peasants living on grain
growth in the middle areas can get more benefit from the grain
production. The economic development in the east will in turn become a
motive force to help peasants in the middle engaged in grain production
to make more money. By this token, the more prosperous in the east, the
greater a motive force it will become for the grain-growth areas in the
middle to supply it with more labor-intensive products from the west.
And this will help the peasants in the west increase their income. In
the end, the east, west, and middle of China will achieve a harmonious
pace of development.

The article was carried on People's Daily, Nov.26 and translated by Li Jia