A changing economy

Maintaining high rates of growth without high levels of inflation is the issue that is engaging the attention of Chinese policymakers in their endeavour to evolve a socialist market economy.

THE expression that China uses to describe the performance of its economy in 1997 is "soft landing". To understand the expression and the related one, "hard landing", it is necessary to take a quick look at the performance of the Chinese economy in the past couple of decades, especially since 1987. An amazing feature is that with rare exceptions, for instance, 1981, 1989 and 1990, China's annual growth rate since 1978 has been around 10 per cent. In fact, in the late 1980s and in 1992, 1993 and 1994, it was well over 10 per cent; it was 15.2 per cent in 1984 and 14.2 per cent in 1992.

Performances of this kind are unparalleled anywhere in the world, at any point of time. But, of course, such high rates of growth are not an unmixed blessing. They tend to make the economy "overheated" because of the high rates of investment, resulting in high levels of prices. For instance, the high growth rates of 1992, 1993 and 1994 (14.2, 13.5 and 12.7 per cent respectively) were associated with investment rates of 37.3 per cent, 37.7 per cent and 36.4 per cent. The rate of inflation in 1993 (with a one-year lag) was 13.2 per cent, which shot up to 21.7 per cent in 1994 and remained at 14.8 per cent in 1995. Inflation, like fever, is basically a symptom. The hyper growth from 1992 to 1994 brought about different kinds of dislocations in the economy, especially in the emerging financial sector. The correction attempted in 1995 and 1996 was a sudden reduction in investment and growth to bring down prices. It is this sudden application of the brakes that is referred to as "hard landing". In turn, it created other problems, a big increase in unemployment, for instance, and drastic reduction in the incomes of those whose activities had to be suddenly reduced.

These consequences of "hard landing" necessitated changes in economic policies. The year 1997 was special for China. Deng Xiaoping had passed away and hence it was necessary to retain conditions in the country as normal as possible; the 15th Congress of the Communist Party of China (CPC) was being held; and the return of Hong Kong to China in July initiated the era of "one country, two systems". All these called for a more orderly adjustment process in the economy.

The "soft landing" that was attempted and largely achieved in 1997 did not adopt a unitary, clear-cut policy of reducing drastically investment, growth and inflation. The rate of investment had been brought down to 34.2 per cent in 1995 and further to 33.9 per cent in 1996. The same level was retained in 1997. The growth rate had come down to 9.5 per cent and inflation to as low as 1.8 per cent, the lowest since 1983. For the Chinese economy which is rapidly entering into market relationships, the price level is one of the crucially visible indicators of economic performance. It is, therefore, this low rate of inflation (no doubt achieved by the efforts of the period of "hard landing") that justified the year being described as one of "soft landing". How to maintain high rates of growth without high levels of inflation is an issue that is currently engaging the attention of Chinese economists and policy makers. It is one of the crucial issues in evolving a socialist market economy, which attempts to combine the "invisible hand" of the market with the visible hand of the state.

Even this brief account indicates the shift that has come into the discussion on economic policies in China: no longer is it in terms of physical indicators and sectoral priorities. The notion of balance in macro-economic value terms is now the underlying issue. Unemployment and inflation, which did not figure significantly in Chinese economic discourse even a decade ago, are now prominent items. There are also discussions about cyclical fluctuations, aggregate demand, monetarism and the rest of the jargon that economists in most other parts of the world indulge in.

AGRICULTURE AND INDUSTRY

Here is a more detailed account of the performance of the Chinese economy in 1997 and the years immediately preceding it. The year 1996 was exceptionally good for agriculture, especially in terms of foodgrain production. Government departments, enterprises and farmers all came to have large stocks of grain and market prices fell. These factors may have had an adverse impact on production in 1997. It is a reflection of the kind of changes taking place in discussions on the Chinese economy that the accent now is more on quantities marketed than on quantities produced. Similarly, there is a shift in emphasis in favour of the incomes of rural and agricultural households and the composition of rural incomes. A paper presented at the Hong Kong conference gave some interesting figures on these aspects. Quoting official statistics the paper pointed out that the sale of grain per rural household increased from 123.5 kg in 1985 to 203.5 kg in 1996 - an increase of 65 per cent. The sale of milk per household almost doubled, that of vegetables went up by 80 per cent and that of fruits by over 175 per cent during the same period. As for the income of rural households, it was shown that there was a more than fivefold increase between 1985 and 1996 although the figures were not adjusted for the increase in prices during the period. Equally noteworthy is the fact that as against wages constituting close to 50 per cent of household incomes in the mid-1980s, their share was only 16 per cent in the mid-1990s with earnings from family business now accounting for close to 80 per cent. These changes are attributed to the economic reforms initiated in the mid-1980s.

Industrial production in 1997 maintained a fairly steady growth. The growth of industrial value-added production for enterprises at township and higher levels was 11 per cent over the previous year. Production levels of state-owned and state-controlled enterprises grew by 7.4 per cent while that of collective enterprises grew by 11.1 per cent. Growth of production of enterprises under other types of ownership was 14.6 per cent. The production of steel in 1997 was estimated to be around 106 million tonnes, an increase of 7.6 per cent over 1996. But the secondary industry that consumes steel, such as those producing tractors, locomotives and trucks, performed poorly in 1997. It is recognised that industrial production is becoming highly sensitive to price factors and so the expectations are that industrial performance in 1998 will depend largely on achieving an appropriate macro environment.

INCOME AND CONSUMPTION

Increase in consumption is one of the objectives of Chinese economic policy. The Blue Book has a section dealing with the major characteristics of the 1997 consumer market with interesting information on many aspects. The low rate of inflation in 1997 and the fall in the prices of foodgrains have already been referred to. The prices of household appliances also fell. However, the cost of housing increased, especially in large and medium-sized cities. But the living standards in the urban areas would appear to have improved - indicated by the fact that the consumption of grains, oil and sugar fell significantly whereas the consumption of meat, poultry, eggs, seafood and dairy products improved. Expenditure on services such as medical care, transportation, telecommunications and cultural activities also increased. Urban centres certainly provide evidence of increasing affluence. In 100 large-scale shopping malls across the country the sale of colour televisions with screen sizes above 25 inches grew by 110.7 per cent, VCDs by 1044.9 per cent, drum-type washing machines by 159.3 per cent, microwave ovens by 192.4 per cent, dishwashers by 1033.4 per cent and personal computers by 88.4 per cent, during the first eight months of 1997 - all in comparison with the corresponding period in the previous year.

However, the affluence would appear to be confined to a section of the population, primarily in the urban areas. According to statistics gathered by the rural and urban census teams of the National Statistical Bureau, in the first half of 1997, the income of 46 per cent of the families declined and the livelihoods of low-income families became more difficult. In general, rural incomes have been increasing at a lower rate than urban incomes and income disparities have been increasing. But in macro terms, one thing is clear. The Chinese economy, which for many years was an economy of shortages and a sellers' market, is beginning to show features of a buyers' market.

FINANCE AND FOREIGN INVESTMENT

Along with increasing marketisation, there have been many changes in the monetary and financial features of the economy. One of the papers presented at the Hong Kong Conference dealt with these aspects. The banking system was introduced in China almost immediately after the major changes in 1978. The primary responsibility of the banks was the management of credit. With the People's Bank of China assuming the role of a central bank in 1984, a more systematic financial policy started emerging. But soon it was seen that the active role of money and credit in a rapidly marketising economy would become a factor that contributed to inflationary tendencies, a phenomenon that the Chinese were not familiar with. The rate of inflation, as shown by the retail price index in 1988, was a frightening 18.5 per cent, and in 1989 it was still 17.8 per cent. From then on the focus was on controlling inflation (the rate was effectively, but abruptly, brought down to 2.1 per cent in 1990) and putting the financial sector in order. Strengthening the macro-control of the central bank, introducing asset/liability ratio management in commercial banks and imposing credit quotas were the measures adopted. Financial reforms introduced in 1993 entrusted the People's Bank of China with the task of monitoring aggregate money supply and supervising financial institutions. The bank also gave up its commercial business, passing it on to a set of banks specially created for that purpose.

An important aspect of the reforms of the financial sector was in relation to foreign exchange. Early in 1994, the dual-exchange rate system that had existed until then was replaced by a managed, single-rate-based floating exchange rate scheme. Enterprises which until then retained foreign exchange earned through exports had to surrender their holdings to banks and purchase from them foreign exchange required for imports. The China Exchange Trading Centre was established to support and monitor inter-bank foreign exchange operations. Late in 1996 the Chinese currency was made convertible for current account transactions. The thrust of all these changes has been to replace the mono-banking system of the period of planning with a new financial system that serves the socialist market economy. By the end of 1997, apart from the People's Bank of China (which became the central bank) there were three policy-oriented banks, four state commercial banks, 14 other commercial banks, 244 trust and investment companies, 90 security firms and 72 financial companies of enterprise groups. With the introduction and active functioning of these banking and financial institutions, the Chinese economy has undergone a tremendous transformation indeed.

Closely related to this area is the securities market. One of the major decisions of the 15th Congress of the CPC was to increase the supervision of the financial institutions and the financial market, including the securities markets that have been steadily evolving. The year 1997 in fact was declared as "the Year of Securities and Futures Market Risk Prevention". With some safeguards worked out, there was a quick expansion of the securities market. The total number of shares increased by almost 50 per cent, the number of listed companies by 190 per cent and the number of individual investors by 40 per cent, reaching a figure close to 32 million. In the first half of 1997 the stock market appeared to recover from the previous three-year bearish period, but during the second half there was again a sharp fall in prices. China continued to work out a regime of laws and administrative measures to regulate the stock market, a new phenomenon in the Chinese situation.

OPENING up the Chinese economy to the rest of the world in terms of trade and capital movements has been another important aspect of Chinese economic reforms. In recent years, there has been a bid to boost exports, and Chinese goods made their presence felt in many foreign markets, especially the United States. The year 1996, however, was not a particularly encouraging year. In 1997 there was a recovery, and although the final figures for the year are not available, a trade surplus of $25 billion was expected. In terms of foreign investment, China is very prominent, holding the first rank in Asia and being next only to the U.S., in the world. In 1996 foreign investment worth $42 billion came to China, mostly going into productive activity and some 60 per cent contributed by overseas Chinese. Foreign exchange reserves were expected to be $140 billion at the end of 1997, an increase of $120 billion in a period of four years.

The profile of the Chinese economy today emerging from the descriptive account given above is likely to be very different from what most people consider it to be. The fact is that in the attempt to build a socialist market economy, China's economy has been undergoing a tremendous transformation. That transformation, in turn, has been giving rise to some new problems.

(To be concluded)