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April 2001 ECONOMIC PERFORMANCE IN 2000
GDP exceeds expectations At more than RMB8.9 trillion ($1.07 trillion), China's GDP passed the trillion-dollar mark for the first time. The country's 8 percent GDP growth rate reversed a seven-year decline and beat most forecasts. Continued government stimulus and strong exports were the main drivers of China's economy in 2000. Prices rise, also with help China has yet to beat the deflation that has been haunting its economy for more than two years. Though prices rose slightly in 2000, most of that rise was due to high oil, steel, and coal prices, and administrative increases in housing, water, education, and healthcare prices. The onset of winter also helped boost prices of fruits and vegetables and demand for warm clothes and other cold-weather items in the last few months of the year. Worries about unemployment and higher living costs are still reining in consumer confidence. In an effort to boost consumption, Beijing gave consumers three week-long holidays last year. While city folk traveled and shopped, fueling consumption slightly, rural residents-whose incomes have stagnated in recent years-lacked the cash to join them. Output and investment up, thanks to government Industrial output rose 11.4 percent to RMB2.37 trillion ($286 billion) by year-end 2000, largely boosted by strong exports and government-directed fixed-asset investment, which rose 9.3 percent over 1999. Not surprisingly, the chemical, communications, electronics and machinery, power, textile, and metallurgical sectors produced more than half of all industrial output. State-owned enterprises (SOEs) produced more than 36 percent of total output. Heavy industry output grew by 13 percent, likely spurred by government stimulus, while that of light industry grew at the slower pace of 9.5 percent over 1999. Most fixed investment went into infrastructure, technical upgrading, and real estate.
Monetary policy eases China maintained a steady hand on monetary policy in 2000. M2, the measure of cash and deposits, rose only 12.3 percent over 1999, below the government's 14-15 percent target. The government seems sensitive to the risk of inflationary expansion of the money supply, despite the fact that deflation is currently more of a problem. Savings growth finally slowed, dropping to 6.3 percent at the end of 2000 from 18.5 percent in June 2000. A series of interest rate cuts, combined with a 20 percent tax on interest earned on deposits, has people looking for other investment options. Much new investment went into the stock markets, which rose 40-50 percent last year. Other than the move to free interest rates on foreign-currency deposits, there was little movement toward liberalizing tightly controlled interest rates in 2000. People's Bank of China Governor Dai Xianglong also indicated in early January 2001 that interest-rate liberalization will not occur until the state-owned banks are better able to compete in a freer environment. Foreign currency and the value of the RMB Foreign exchange reserves rose 7 percent, and the value of the renminbi (RMB) remained fairly steady throughout 2000. China experimented this year with occasionally allowing the RMB to move outside its narrow trading band. In January 2001, PBOC chief Dai announced that after its accession to the WTO, China would eventually move to a "managed float," though he gave no timetable. Devaluation remains unlikely, as it could undermine investor confidence and cause China's neighbors to devalue, without boosting exports. Indeed, the RMB has shown signs that it could even appreciate if left to market forces. Financial reform focus: Capital markets China initiated measures in 2000 designed to modernize its capital markets. The leadership appears to have recognized that alternatives to bank lending will be essential if China's companies are to compete with foreign firms after World Trade Organization (WTO)-induced liberalization. Key moves included
A September People's Daily report announced that state-owned financial institutions would be allowed to list publicly for the first time. The move to restructure banks to make them more profitable and competitive is a priority as WTO entry approaches. Government officials have also indicated that foreign firms may eventually be able to underwrite PRC government bonds in local currency.
Government budget Tax collection has improved significantly in the last few years. Up by 22.8 percent over 1999, total 2000 tax revenue stood at RMB1.3 trillion ($157 billion), or 14.2 percent of GDP. Central govern-ment revenue is estimated to be about 59 percent of that amount. Import taxes collected by Customs leapt to RMB149.3 billion ($18 billion), a rise of 43.7 percent over 1999, while the stamp tax on securities transactions rose 95.2 percent to RMB47.8 billion (5.8 billion). Together, these two taxes brought in 29 percent of total revenue collected in 2000. Tax on interest from bank deposits, first imposed in November 1999, was expected to bring in RMB15 billion ($1.8 billion). The government also continued its pump-priming of the economy through another year of hefty Treasury bond (T-bond) issues, which amounted to RMB150 billion ($18.1 billion). The government deficit reached 3.6 percent of GDP by mid-2000, according to the World Bank, and another year of heavy government borrowing is on deck for 2001. Agriculture-worrisome weakness Farming in China was hit hard by drought this year, particularly in the northern parts of the country. Grain output fell 9 percent. Rural incomes increased only 2.1 percent in 2000, the smallest rise since 1978. In contrast, urban incomes rose 6.4 percent, widening the wage gap yet again. Rural incomes are now only 36 percent of urban incomes, compared to 54 percent 15 years ago. World Bank economists have noted that rural consumption growth has stagnated and is now a "major drag" on the economy, and that the number of rural Chinese below the poverty line has increased over the last year. Agriculture will be one of the sectors most affected by China's WTO entry. Small, inefficient farms producing grain will have to switch to more labor-intensive, and more valuable, crops such as fruit and vegetables in order to compete on world markets. Even so, many observers predict that millions will leave the land for urban areas over the next few years, and there remain widespread concerns in China that WTO-induced dislocations of large numbers of farmers could create unpredictable social tensions. State-owned enterprise reform The results of Premier Zhu Rongji's three-year plan to turn around failing SOEs are mixed. State Economic and Trade Commission (SETC) head Sheng Huaren announced that 12 of China's 14 key industries are now in the black, and that profits were up sharply. (Coal and defense sectors are still losing money.) But analysts doubt that SOE management and accounting practices have improved much. Asset-management companies, formed in late 1999, simply lifted much of the debt off SOEs' books. The State Auditing Administration reported that 68 percent of SOEs use unreliable accounting methods, and that 11 percent of the assets of the audited firms were non-performing. Finally, even SETC acknowledged that some 3,000 SOEs that were profitable three years ago have slipped into the red. The government is nonetheless proceeding with restructuring of the largest SOEs. In 2000, major Chinese corporate entities listing on international markets raised more than $20 billion-funds that will be used to pay for the thousands of layoffs that were necessary to prepare the companies for their initial public offerings (see Foreign Investment). These large enterprises still employ millions, and their success will be key to future stability. Private enterprises get their due Over the last year, China has announced moves aimed at making life easier for private firms, such as easier access to credit. Private enterprises received 48 percent of new bank loans from the big four state banks in 2000, according to Dai, though SOEs reportedly still receive more than 60 percent of bank credit. As revealed in a recent International Finance Corp. study (http://www.ifc.org/), the private sector, which now officially includes some enterprises formerly categorized as collective, is presently the only sector exhibiting significant job growth. As a result, Chinese leaders hope that the sector (which they have no choice but to support) will be able to absorb significant numbers of workers displaced by SOE reform and WTO-induced corporate restructuring. According to one estimate, the private sector employed 81.3 million people in 1999. WHAT TO WATCH IN 2001 Economic performance
Government finances
Employment worries Unemployment remains a worry for Beijing, as laid-off workers have taken to the streets in several cities to demand back wages and unemployment compensation. Though the official urban unemployment rate remains 3.1 percent, the State Council's Development Research Center estimates that real urban unemployment is now over 10 percent. The Ministry of Labor and Social Security expects to pay benefits to 110 million in 2001. WTO entry, expected later this year, will hit SOE and agricultural workers particularly hard, throwing millions more out of work. In addition, roughly 11 million enter the labor force each year. China is looking to the growing private sector to absorb some of the unemployed. Social security system experiments China reportedly spent 80 percent more on welfare in 2000 than in 1999, and spending is expected to rise again this year as SOEs continue to formally lay off workers that until recently have been on the books with reduced pay. Desperate to maintain minimum standards of living for the retired and unemployed, the central government has given local governments leeway to experiment with social security reform. Trial programs are under way in cities across the country. Beijing and Shanghai have already raised mandatory employee and employer contributions to pension and unemployment funds, and Beijing Municipality is reportedly encouraging nonstate entities to become involved in the welfare sector. China's northeastern rustbelt has been particularly hard hit by layoffs, and the central government will be focusing resources on the depressed industrial northeast in the coming year. The Tenth Five-Year Plan Continuing the shift from strict planning to a more market-based approach, the 10th Five-Year Plan (FYP, 2001-05), in contrast to previous FYPs, will embody guiding policies and measures-continuing China's attempt to break its habit of administrative meddling in the economy. Continued economic growth and development, with a focus on technical capability, is the main theme. Great Western Development Strategy The yawning gap between China's developed coastal regions and backward interior has prompted the government to start a drive to develop the central and western regions. Western development was the focus of hundreds of conferences, speeches, articles, and government pronouncements in 2000, largely an attempt to attract investment-domestic and foreign-to these regions. Some multinationals have made deals largely for political reasons, but unfortunately for the west, most potential investors are staying away, as there is little in the way of new incentives for investment. The stubborn poverty, low levels of education, and general lack of infrastructure that plague the region translate into small markets, lack of adequately trained staff, and difficulty getting goods to developed markets further away. Local officials and bureaucracies unused to dealing with foreign investors add even more red tape to investment processes. In short, until the government takes significant steps to improve the human capital and infrastructure in these regions, investors-both foreign and domestic-are likely to stay where they are. The exception may be the three lead cities of the western development strategy: Xi'an, Shaanxi Province; Chengdu, Sichuan Province; and Chongqing Municipality. These are the most developed areas in central and western China, and boast better human capital and infrastructure, and more developed markets. Indeed, in recent years, Xi'an has seen an influx of foreign investment, particularly in the high-technology sector.
All rights reserved. Last Updated: 9-May-01
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