Analysing China's performance

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 an d 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 o ut 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 re nminbi (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 gen eral 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 ina 1997 and the continuing stagnation of the Japanese economy and the depreciation of the Ja panese 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 le d 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 w ere 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 ur ban 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 "salarie s 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 thos e 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 o n 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 ha ve 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 als o 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, Phil ippines, 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 (econ omic) 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, retai l 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 suc ceeded 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 vol ume. 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 artic les 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 ma cro 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 Wester n 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 t o 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.