Transcript Document

2000
2001
2002
2003
GDP per head ($ at PPP)
3,980
4,340
4,720
5,180
GDP (% real change pa)
8
7.5
8
9.1
Government consumption (% of GDP)
13.08
13.39
13.2
12.9
Budget balance (% of GDP)
-3.62
-2.97
-2.96
-2.5
Consumer prices (% change pa; av)
0.35
0.73
-0.77
1.17
Public debt (% of GDP)
30.4
30.6
31.1
29.6
Labour costs per hour (USD)
0.59
0.69
0.8
0.92
Recorded unemployment (%)
8.2
9.3
9.75
10.1
Current-account balance/GDP
1.9
1.48
2.8
2.2
215,605 291,128
401,036
Recent Statistics:
Foreign-exchange reserves (mUS$)
168,278
•
2006: A fixed exchange rate (around 8.007 Yuan to $1 now but may break the
8 Yuan barrier later this year) and strong capital inflows => The government’s
five-year plan, which runs to 2010, aims for growth of 7.5% per year (but
official projections tend to be low). Goldman Sachs predicts growth of 8.6% in
2006 and 8.2% in 2007. The economy grew 9.9% in 2005.
The Chinese Economy Since 1976
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For hundreds of millions of Chinese, the past 60 years have
required adaptation to a series of political, economic and
cultural revolutions, punctuated by cycles of order and chaos,
liberalization and repression, plan and market, social protection
and individual responsibility.
•
During the mid-90s, after a decade of gradual market reform,
China recorded the world's most rapid rate of economic growth
… nearly 10% per year that hasn’t slackened since.
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Based on comparisons of economic performance, many
observers conclude that the policy of gradualism in China had
proved more effective than the "shock therapy“ used in Eastern
Europe and the new CIS countries.
•
Indeed, based on its enormous population, its expanding
consumer market, and its strategic position in Asia, a rising
chorus of voices claim that China will become an economic
superpower in the 21st century.
History and Environment:
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With about 1.2 billion people, China constitutes more than
one-fifth of the world's population.
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In surface area, only Russia and Canada are larger.
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Only 10% of China's land is suitable for cultivation.
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Thus, with more than 70% of the Chinese labor force engaged
in agriculture, the average farm worker controls less than one
acre of land (India - 2 acres on average; in USA - 100 acres).
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The Chinese empire was the only giant of the ancient world to
survive into the twentieth century.
- The post-1949 civil war China provides an opportunity to
study both the effects of ideology on system design and also
some major experiments with new strategies and forms of
motivation.
1. CCP came to power Oct. 1949 – faced two problems:
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Had to consolidate its political position.
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Had to establish itself as the center of a reorganized decisionmaking system.
2. The Peoples’ Liberation Army and its related organizations
penetrated into every area of economic activity yet do to its
military orientation the government had neither trained
personnel nor information to assume complete control of the
economy in 1949.
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Economy was totally disorganized … government under
Kuomintang in 1930s and Japanese during WWII required
thorough overhauling.
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Government embarked on a course of gradual change …
despite Marxian theory Mao proposed to skip the capitalist
stage replacing it briefly with a stage of “democratic
centralism.”
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To gain support of rural population and to alter the decisionmaking structure, widespread land reform was pursued
(“collectivization”).
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By 1952 CCP had nationalized most foreign firms.
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By the late 50s, CCP had succeeded in its initial goals – now
faced choice of a system that would best promote the ideas of
the CCP.
A period of centralized command and bureaucracy … framework
of system:
1. Decision-making system with CCP at center – individual
agent under the influence of party cadres, trade and labor
organizations, agricultural communes, and state enterprises at
the lowest echelons.
2. During this whole period there was constant friction between
two party factions…
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Moderates – believed growth as a balanced, orderly process
… careful, methodical planning and progress.
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Radical Left (Mao) – feared CCP losing sight of inherent
dynamism of the broader social revisions and the
confrontation of opposites and was being stifled by the
preoccupation with bureaucratic and technical considerations.
The Great Leap Forward – 1957
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Radical Left gained control … put aside 5 year plan in favor
of The Great Leap Forward … in which China would elude
the timetable imposed by the rate of capital accumulation by
calling upon the vast resources of its industrial and
agricultural force, thus “walking on two legs.”
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Vast initiatives implemented in five months … too brief for
proper preparation … organizational chaos … Russia
withdraws support … radicals forced to abandon the effort
due to falling agricultural/industrial output.
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Entered a period of “Readjustment, Consolidation and Repair
(1961-65) … with the abandonment of the GLF, the
moderates within the CCP effected sharp changes in policy to
restore order and to repair damage done to economy.
Particular emphasis was given to agriculture to reduce threat
of mass malnutrition and starvation. … focus on communes.
The Great Proletariat Cultural Revolution (Jan. 1967) …
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Not intended as a systematic reform … SR impact on
economy was minor … basically it was a more intense
expression of Mao Tse-tung’s beliefs.
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Witnesses sweeping change in organizational structure from
the CCP down to communes.
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Power shifted to newly formed networks of “revolutionary
committees.”
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Tremendous decentralization in decision making structure.
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Anti-intellectual and professional.
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Time of great suffering.
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By 1970 Mao had to back off … disruptions/starvation in the
millions
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Moderates held sway although Mao and his radicals present
in Politburo
Transition of Power: 1976-1978
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In 1976, China was shaken by the death of Zhou Enlai in
January, an earthquake in July that killed 240,000 people, the
death of Marshal Zhu De in July, major floods on the Yellow
river in August, and the death of Mao Zedong in September.
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An intense battle for succession erupted between Deng
Xiaoping, Zhou's handpicked successor, and Jian Qunig
(Ching), who was Mao's widow, a leader of the Cultural
Revolution, and a member of the radical Gang of Four.
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The power struggle, together with mass demonstrations, riots,
and natural disasters interrupted economic growth in 1976
and caused Deng Xiaoping to fall from power once again.
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Hua Guofong - compromise candidate - had the Gang of Four
arrested in an attempt to consolidate power - grudgingly
rehabilitated Deng Xiaoping for a second time - China
reached crossroads in 1978 at Party Congress over Hua's
ambitious industrialization scheme (7 year plan to build 120
large scale projects) … Industrialization scheme was found to
be unrealistic and Deng made serious political ground.
Following decisions were made in this Congress:
1. The focus of the party's work would shift from
political agitation and class struggle to socialist
modernization and improvement of living standards.
2. To remedy the effects of long-term ruination and neglect,
economic modernization would begin in the agricultural
sector, supported by a substantial increase in agricultural
prices paid by the government.
3. Work incentives would be strengthened in the communes,
based on the Marxian prescription for early stages of
socialism: "To each according to his work.“
4. Local authorities and industrial and agricultural enterprises
would gain greater autonomy under the guidance of unified
state planning.
5. The Party would continue to play a leading role in society, but
clear lines would be drawn between the responsibilities of the
Party, government, and enterprise leaders.
Socialism with Chinese Characteristics (1979-Present)
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Early in 1979, Deng initiated an enormous agricultural reform
- the household responsibility system - that led to dissolution
of the people's communes.
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In 1980 Deng rose to power after the Gang of Four were
convicted of crimes causing more than 34,000 deaths during
the cultural revolution and Hua offered his resignation (he was
implicated as an accomplice in conspiring to overthrow Mao
in 1971).
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With Deng in power China entered a remarkable period of
economic transformation.
[a] Introduced a new philosophy of pragmatism (1983),
displacing the leftist ideology of Mao.
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1984 Central Committee called for development of a
"socialist commodity economy with the following 4 major
features:
[1] China would continue "on the whole" to have a planned
economy, but planning would become indicative:
macroeconomic guidance would replace mandatory targets.
[2] Markets would establish a "rational price system," which
would be "the key to reform of the entire economic structure";
never-the-less, markets would not allocate or control
ownership of labor, land, mines, banks, railways, or state
owned enterprises (SOEs).
[3] The economic functions of the government would be
defined more narrowly, and the enterprises would be allowed
to make more of their own decisions.
[4] State enterprises would remain "the leading force" in the
economy, but other forms of collective, individual, and
foreign joint venture ownership would be encouraged.
[5] Special enterprise zones begun (1980 … in south of country).
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After 1984, the scope of market activity grew very rapidly.
Price controls lifted across the board.
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Also in 1984, the rural communes were disbanded with
ownership of their industrial holdings transferred to the new
units of local government: TVEs – “township and village
enterprises.”
[1] Between 1984-1995 they created 95 million new jobs, and
their rates of productivity growth were twice as high as those
in the state sector.
[2] Reasons for...
…Strong kinship links among rural villagers create implicit
property rights in a setting of collective ownership.
… Chinese public finance has been decentralized since 1984,
so financial benefits and burdens of the TVEs are felt locally.
… Communities with TVEs engage in stiff competition with
one another to attract local and foreign investment.
… TVEs have acted flexibly to supply light industrial goods
and services that were neglected by the state system.
… Many of the TVEs have taken advantage of their freedom
to form supply and technology alliances with state industries
and foreign investors.
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Chinese leaders have a lasting enthusiasm for philosophy and
ideology.
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Articulated in October 1987 by Premier Zhoa Ziyang... at l3th
Party Congress...
… China would continue to operate in the primary stage until
al least 2050.
2. “Primary stage of socialism”… idea of professor Li Yining… a
Marxian rationale for a wide range of market reforms and
ownership arrangements… argued that China did not achieve
a high level of capitalist development before its socialist
revolution, so it must employ institutions usually associated
with capitalism to prepare it for a higher stage of socialism.
(Same reasoning used by Lenin in the 1920s to justify his
“New Economic Policy” in Russia)
[a] Until 2050, to develop “Socialism with Chinese
Characteristics”, the government should encourage
individuals to engage in market exchange and pursue
individual wealth, but it should carefully preserve the political
monopoly of the Communist Party.
[b] Reforms proceeded most rapidly
in agriculture, population policy, and
foreign trade, and were accompanied
by modest efforts in industry and finance.
… Special economic zones - localize
experiments.
[c] reforms seemed to go smoothly until second half of 1985
at which time a wave of consumer price inflation began =>
caused a temporary tightening of economic controls.
[d] Despite a new "anti-bourgeois liberalization" campaign
supported by Party conservatives, the Thirteenth Party
Congress in 1987 reaffirmed China's commitments to
ideological pragmatism, economic reform, and the “Open
Door” (...of foreign travel, trade and investment), but it
continued to oppose national political reform at the national
level (it had been supported at local level since early 80's).
[e] The conservatives succeeded in having Hu Yaobang, the
reform-minded General Secretary, resign and when he died in
April 1989, university students honored his memory with a
memorial service in Tienanmen Square… subsequent events
well known:
[d] Conservatives in Party again gained ground and pushed for
recentralization of authority and imposition of controls on
prices and foreign investment.
[f] Still, in 1992 Deng Xaiping led another campaign for
acceleration of economic reforms, culminating in the
declaration of the 1992 Party Congress that China would
build a "socialist market economy.”
… Constitution amended in 1993 to acknowledge that China
was operating in the "primary stage of socialism", that its
immediate goal was to build a "socialist market economy ,
and that effective reform would require continued "opening to
the outside world."
[g] After Deng's death in 1997, Deng's successors declared their
continuing allegiances to his pragmatic ideology and
policies… today chief of state: President Hu Jintao (since 15
March 2003) and head of government: Premier Wen Jiabao
(since 16 March 2003)
Financial market reform:
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Banking … Peoples Bank of China at the center (primarily
controlled by the Ministry of Finance)
=> disequilibrium: Sm  Dm
… Interest rates and exchange rates still centrally determined.
… four publicly owned banks under PBOC: Bank of China,
Construction Bank, Industrial and Commercial Bank,
Agricultural Bank.
… much of Chinese financial reform centers on this system.
By late 1980’s central authorities recognized the need for
developing a private financial system paralleling the state
system.
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1990 ... Shanghai exchange officially opened.
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1991 a stock market was established in Shenzen, adjacent to
Hong Kong, trading shares of joint venture companies with
foreign participation.
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Chinese Securities Regulation Commission created in 1993.
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“A”, “B” and “H” shares:
1. “A” shares … about 600 companies … denominated in Yuan
and can only be traded in domestic equity markets among
Chinese nationals (1/2 are SOEs).
2. “B” shares … first issued in 1993 … about 60 companies …
denominated in US $ and can only be traded in international
equity markets among non-Chinese nationals.
3. “H” shares … denominated in Hong Kong dollars …
represents stock of Hong Kong based companies trading in
domestic equity markets.
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T – bonds and T- bills are important yet private trading only
began in 1995. During the Asian financial crisis, 1997,
China’s government began to fiscally stimulate the economy.
There is not an active secondary bond market so standard
western techniques for implementing monetary policy
unavailable.
Taxation:
• The corporate income tax is theoretically 33%.
• In practice, a raft of preferential policies reduce the tax paid by
foreign-invested enterprises (FIEs). A 15% rate applies in special
economic zones, and a 24% reduced rate applies in 14 coastal open
cities.
• There is also a considerable amount of tax evasion that occurs.
• Preferential policies for FIEs is to be phased out and a uniform tax
rate for domestic and foreign enterprises applied.
• Tax breaks will still be offered for investment in the west and
north-east and in high-technology industries.
Current problems & issues:
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Growing income disparities between rural workers, with
declining incomes, and urban workers enjoying rising incomes
and standards of living => migration to urban areas with the
consequence of a growing number of unemployed city
dwellers.
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Since the 1990s, leases of 30 years or less have been granted
on the tiny plots of land given to rural citizens after the
communes were disolved, but peasants have not been able to
use the land as collateral for loans or to sell it. Land seizures
and low income growth is creating resentment.
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The National Development and Reform Commission, China's
chief economic planning agency, has said that if growth is 8%
this year, China would be able to provide jobs for only 11m
out of a total of 25m urban unemployed and new entrants to
the urban workforce.
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Needed reduction in number and extent of state owned
enterprises (SOEs: public services, construction, defense,
steel) … inefficient, over staffed and drain on public funds.
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SOEs now account for less than one-third of GDP, against
almost all of it in the early 1980s. But that still leaves nearly
140,000 of them, employing 40m people. The state sector
still accounts for more than half of all industrial assets, only
ten percentage points down on 1998. More than one-third of
these SOEs are making no return on their investment and
need to be closed down or sold off.
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Needed improvement of regulatory framework, accounting
standards and reduced corruption… The Opacity Index
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Need for a deep, efficient secondary debt market.
• Most important for the long run: China admitted to the WTO on
November 10, 2001: Will demand deeper and more rapid reform at
all levels of the economy.
- Will force China to integrate with the global economy.
Is China’s economy overheating today?
• Not a minor point for China has accounted for a quarter of global
GDP growth (measured at purchasing power parity) over the past five
years. In the first quarter of 2006 growth came in at 10.2%!
• Essentially it will unless the central bank regains control of the
money supply. To slow down the economy the PBOC raised the one
year lending rates last month for the first time since 2004.
• Important to understand that a sustained 10% growth rate in itself
will not cause overheating.
• The issue essentially has to do with asymmetric development and
irrational allocation of capital.
• The “Big 4 Banks” allocate 80% of all loans in China.
• Many feel a cleanup of the banking sector is a prerequisite for
permitting the yuan to float.
• As a stopgap measure, the government is toughening enforcement
of capital controls; such as cracking down on the illegal ways in
which banks connive with their customers to dodge restrictions on
bringing in speculative capital.
• This has allowed the People's Bank to raise interest rates with the
hope that it won’t attract additional inflows of capital, but it will only
buy then a little extra time.
• Although China may not be seriously overheating, there are signs
that it could do so soon. The main risk of excessive growth is not a
surge in inflation, but the inability of China's financial system to
allocate capital efficiently.
• Excessive borrowing is likely to lead to another wave of bad debts
(especially in the consumer loan area). On some estimates, these
already amount to 40-50% of all bank loans.
• In a developed economy, the obvious solution would be to raise
interest rates. But it is a truism of economics that a country cannot
control both its exchange rate and its interest rate simultaneously.
• While the yuan remains pegged to the dollar, the People's Bank
can do little about monetary conditions. Huge inflows of capital put
upward pressure on the yuan. To hold it down, the central bank must
buy foreign currency, which injects new liquidity into the banking
system.
• As a result, banks have excess reserves, undermining the impact of
a rise in reserve requirements or interest rates.
• The central bank has tried to mop up the extra liquidity by selling
bonds. But such “sterilization” is getting harder.
• China's foreign-exchange reserves climbed to $875 billion in the
first quarter of 2006 (now highest in the world).
• Unless investors are offered higher interest rates, they will be
reluctant to buy more bonds. But higher interest rates would attract
yet more capital inflows.
• So, China needs to adjust its currency, not because it may be too
cheap, but to regain control of monetary policy. In the medium term
China needs to allow its exchange rate to float.
• That cannot happen, however, until the banking system is in better
shape. Three of the four state banks are technically insolvent.
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If they are unsuccessful, it has been predicted that inflation could
be double that by the end of the year (6%).
Then the question would not be whether China is growing too
quickly, but how fast it will slow down.
Still, for a quarter-century, China has officially enjoyed average
annual GDP growth rates of more than 9%. Even allowing for
occasional over-and underestimates, average rates have been
higher than those achieved by any other Asian country during a
similar period of rapid development.
China suffered sharp slowdowns in the early 1990s and again
later that decade, but quickly recovered. Those who predicted a
hard landing for the country's economy two years ago as it
applied the brakes have been proved wrong.
Growth in 2006, barring some calamity, looks likely to be only
slightly lower than last year's 9.9%. Few expect a protracted
slowdown in the remaining years of this decade.
• China's economy has a number of strengths beyond its rapid
growth. Government finances appear reasonably healthy, with
national revenue growth averaging 18% a year since 1994, a deficit
of 1.6% of GDP and public debt of less than a quarter of GDP.
• This gives the government some room to pump up the economy if
need be. China has one of the world's highest saving rates, at some
40% of GDP, and foreign-exchange reserves that will breach the $1
trillion US dollars barrier later this year.
• The country is making some headway against its problems, partly
by design and partly thanks to rapid growth.
• High growth, the party believes, is still vital to its grip on power.
And for the foreseeable future this will mainly come from the same
sources as it does now: investment and exports.
隔ぇ沧翴