Revised October 25, 1999
CHINA'S MOVE TO MARKET: HOW FAR? WHAT NEXT?
Thomas G. Rawski(1)
INTRODUCTION
Two decades of Chinese reform have delivered an astonishing economic boom. But China's great growth spurt may be nearing its end. This paper surveys China's reform by asking whether the economy has evolved into a market system. Despite impressive changes in many areas, I find that the largely unreformed investment mechanism tilts China's whole economy toward patterns typical of planned rather than market systems. My analysis links China's declining economic momentum to investment structures that continue to waste vast amounts of capital. Current Chinese policy, which deploys short-run fiscal stimulus to combat structural problems, seems counterproductive. At the present juncture, policies focused on the promotion of domestic private business offer a unique opportunity to alleviate short-term weakness without compromising long-term reform objectives.
WHAT IS A MARKET SYSTEM?
Market systems have occupied the core of economics at least since Adam Smith's famous comment on the human "propensity to truck and barter." Surprisingly, economists have no clear definition of market economy. Efforts to specify the meaning of a market system are not easy to find. The comprehensive New Palgrave Dictionary of Economics, for example, contains no discussion of "market economy" or "market system." Edward Green defines a market system as one in which the economy operates through "a profusion of coalitions doing things independently and without coordination" in pursuit of financial gain.(2) While this definition omits the state, it surely implies that the function of government is to create a stable and predictable background that allows individuals to assess the benefit and cost of joining coalitions (firms, projects, contracts, etc.) and to prevent illicit groups (of thieves, extortionists, etc.) from disrupting legitimate activity.
This formulation implies that the pricing of commodities and services, the allocation of resources, the choice of technologies, and other fundamental determinants of economic structure and change depend primarily on the nature and operation of voluntary coalitions. Since economists emphasize the importance of marginal decisions, evidence that government action influences the conduct of economic activity need not vitiate the primacy of voluntary coalitions.
The importance of public policy in any market economy - recall that even in colonial Hong Kong, government controlled the scarcest factor, land, and conducted large-scale operations in education, housing, and health care - complicates any effort to differentiate between market and non-market systems. Since extensive government intervention is found everywhere and typically extends far beyond enforcement of clearly-specified laws and regulations, evidence of frequent ad hoc interventions in market operations is not sufficient to establish that China (or any other national system) remains outside the realm of market economies.
The relation between governments and market systems is anything but clear. Any but the most rudimentary market system requires a foundation of supportive government regulation. American experience shows that market systems can retain their fundamental character even under intrusive regulation. This means that conclusions about the "marketness" of an economy cannot rest on straightforward criteria such as the extent of price controls, the size of official bureaucracies, or other readily denumerable elements. Instead, they require delicate judgments about the scope of voluntary coalitions, the extent of supportive regulation, and the impact of official intrusions on market outcomes.
HAS CHINA BECOME A MARKET SYSTEM?
Has reform propelled China into the ranks of market economies? Some observers do not hesitate to offer an affirmative answer: "Chinese leaders did not intend to bring a market economy to China when they launched their reform program . . . . However, the reform creates its own path to a market economy."(3) Efforts by American trade negotiators to obtain Chinese acceptance of a "non-market economy" designation well into the coming century may be dismissed as attempts to shield powerful domestic interests from market competition, but the Economist forcefully advances the opposite perspective, arguing that "China's economy. . . is still largely controlled by the state. Prices are fixed, monopolies common and subsidies legion. Its laws are opaque and often applied arbitrarily. Even if China does away with import quotas and dismantles tariff barriers, its markets will not be free in any meaningful sense."(4)
What is the scope of market forces in China's economy? A brief review of evidence may resolve this sharp clash of views.
Allocation of commodities. We find overwhelming evidence that market forces now play a dominant role. Tables 1 and 2 show that, by the mid-1990s, market determination of commodity prices had become the norm. Although government intervention remains common, the primacy of market forces in determining the pricing and distribution of commodities is beyond dispute. Major distortions of relative prices, such as the long-standing underpricing of energy and industrial materials, have virtually disappeared, in part because of pressures arising from the growing openness of China's economy.
[INSERT TABLE 2 ABOUT HERE]
Confirmation of this judgment comes from the structure and behavior of commodity prices, which display phenomena associated with market systems. Even in sectors dominated by state enterprises and closely monitored by central ministries, press accounts routinely report that domestic sales, prices, profits etc. respond to national and global market trends in ways that exactly parallel observations from market systems. Thus we read that "China's steel imports skyrocketed" because of "the plunging price of steel products on the international market . . . . triggering fears [of]. . . . a negative influence on the domestic steel market.(5) Similarly, "diesel fuel prices have risen to their highest level" in several years following "the reduction in diesel fuel imports" after "prices on the international market . . . reached their highest point" in several years; as a result, "many domestic petrochemical factories have increased production."(6)
Efforts to attenuate the workings of the price system now arouse vociferous opposition from critics who extol the virtues of untrammeled competition with arguments that are instantly recognizable as standard themes of "free market" advocacy. When mounting deflationary pressures prompted efforts to curtail "unethical competition" by enacting minimum prices, critics insisted that "any firm should be entitled to institute desired price-cuts as long as its actions do not result in a market monopoly. . . . The true danger comes from all forms of monopoly under the backing of administrative power singing enticing tunes like 'safeguarding the normal market order'."(7)
Allocation of services. Although systematic information about the allocation of services is not readily available, abundant anecdotal evidence indicates that gradual reform has cumulated into extensive commercialization. Housing, education, health care, telecommunications, transport, wholesale and retail trade, meals, entertainment, personal care, banking, finance, insurance, law, and accounting, formerly the exclusive province of systems controlled by government officials, are increasingly available through parallel networks of market-based suppliers accessible to anyone willing to pay the going price. Substantial commercialization is visible even in sectors like banking and railways where traditional suppliers retain overwhelming market shares.
Allocation of labor. Long viewed as a lagging segment of Chinese reform, the market for labor has expanded rapidly during the late 1990s. The emergence of disturbing phenomena that were not tolerated under the planned economy provides the clearest possible evidence of major change in the labor market. Recent developments include mass layoffs in state enterprises, steeply rising unemployment among previously tenured urban workers, virtually uncontrolled mass migration of rural workers seeking non-farm employment, the rise of private business as the largest source of new formal employment, and a large and growing differential between women's and men's wages.(8) The depth of official commitment to market forces is evident from the Minister of Labor and Social Security's advice, offered during the spring festival holiday season, to state enterprises "afflicted with the scourge of low efficiency and surplus employees" -- "lay off redundant labourers to pull the companies out of the quagmire."(9)
Allocation of ownership rights. Restructuring of ownership rights via merger, divestiture, bankruptcy, or liquidation of corporate assets is a central component of any market system that hardly existed in pre-reform China. The scale of property-rights transfers remains modest, with annual volume of perhaps RMB 1 billion in the late 1980s and RMB 10 billion during 1990-1995 -- small figures when compared with state-owned fixed assets amounting to RMB 5,298 billion for industry and RMB 9,642 billion for all economic sectors.(10)
Yet shareholding corporations, which accounted for only 5.5 percent of industrial assets in 1995, contributed 44.2 percent of the reported asset transfers in that year.(11) With the share of assets held by various forms of shareholding entities rising steeply -- the number of state enterprises fell by 24,000 in 1998,(12) while local governments, particularly in China's southern provinces, sold large numbers of rural collective firms (TVEs) to private buyers or reorganized them as shareholding cooperatives, -- it seems reasonable to anticipate that a major expansion in the frequency and scale of property rights transactions.
Technology. China has achieved great strides toward commercialization of research, development, and technology transfer. New patent and trademark systems provide rudimentary protection to entrepreneurs. Research institutes and universities face stringent financial pressures that compel efforts to produce marketable products. Despite well-documented complaints about theft of intellectual property rights, the contractual transfer of specialized equipment, proprietary technologies, blueprints, and knowhow across China's international borders, provincial boundaries and administrative systems has become a routine feature of commercial life. Success stories associated with companies like Haier, Changhong, and Baosteel demonstrate that Chinese firms can acquire new technology and use it to improve product quality and enhance their domestic and international competitiveness.
Market-supporting institutions. Chinese newspapers and journals are filled with information about the (often incomplete) development of market-supporting institutions, which have expanded immensely over the past two decades. The legal system illustrates this history of massive, though uneven progress. China's legislatures, long dismissed as "rubber stamp" bodies, continue to expand their influence and power. Legislative seats, previously regarded as devoid of influence, have become a venue for fierce competition. Legislators regularly challenge, and occasionally reject official reports and proposals. The courts, formerly meek recipients of government and party instructions, demonstrate growing independence. Business periodicals inform readers about contracts and lawsuits, evidently because managers and entrepreneurs increasingly apply such knowledge in their everyday work. Demands that government itself submit to the "rule of law" now come to the fore, as legislators contemplate measures that would "require government officials to meet . . . legal standards" and People's Daily intones that "All are equal before the law. . . . No government department or worker has the privilege to supersede the Constitution or the law. All must follow the law. . . and accept the supervision of the people's congresses. . . "(13)
Capital market. To this point, our review uniformly supports the notion that, despite wide differences from economic patterns observed in most OECD nations, China deserves recognition as a market system. Investigation of the market for capital, however, shows that this conclusion is premature.
Like other segments of China's economy, the market for capital has made important steps in the direction of a market system. Stock exchanges in Shanghai and Shenzhen transact shares of several hundred corporations. In place of the socialist monobank we see a moderately independent central bank supervising a financial system featuring four large state-owned banks, each lumbering in the direction of commercial operation, surrounded by a host of smaller institutions.
Investment finance, formerly dominated by government grants, now depends mainly on enterprise funds. This emerges from Table 3, which shows that funds for investment projects come mainly from retained earnings, issues of shares or bonds, and other funds assembled by enterprises. The share of government grants is less than five percent for state firms, and less than one percent for firms outside the state sector (including foreign-linked enterprises). The share of domestic bank loans, including some offered to state enterprises on concessional terms in response to government pressure, is less than one-fourth of investment spending in the state sector and under one-sixth elsewhere. The combined share of official grants and domestic bank loans in investment finance, which might be viewed as a crude measure of official involvement or of non-market influences in capital allocation, is surprisingly small - just over one-fourth in the state sector and less than one-sixth elsewhere.
With more than three-fourths of investment spending funded through channels -- retained earnings, share offerings, bond issues, inter-enterprise transfers, individual subscription, foreign borrowing, and direct foreign investment -- that respond primarily to profit expectations, investment appears to qualify for the list of economic categories in which market forces prevail. This impression turns out to be mistaken.
Information on seasonal changes in gross domestic product (GDP), reproduced in Chart 1, shows quarterly figures for nominal GDP from 1995-Q1 to 1998-Q3 along with projections through 1999.(14) These data show a consistent pattern. Output rises sharply in the fourth quarter and declines precipitously in the first quarter. There is modest expansion in the second quarter and little change in the third quarter. These observations are typical, not unusual. Projections for 1998/99 show the same features, which also appear in data for 1980-95 (not shown). Chart 2, which shows the percent change in nominal GDP from quarter to quarter, illustrates the regularity and scale of seasonal fluctuations.
These data show that the world's most dynamic economy regularly shrinks during 3 months of each year and stagnates for another quarter, with all the growth occurring in the second and fourth quarters.(15) The enormous seasonal fluctuations dwarf comparable variations in any market system. In the United States, for example, quarterly GDP fluctuations between 1875 and 1995 are limited to plus or minus nine percent.(16)
There is nothing mysterious about the fluctuations revealed in Charts 1 and 2. The seasonal profile is typical of a socialist economy driven by planned investment. The socialist calendar is punctuated with regular bouts of storming or shock work ( ¬ð À» ), "the spurt of activity before the end of each planning period. . . in an attempt to achieve 100 percent fulfillment, with a subsequent period of slack until the next target date approaches."(17)
Disaggregation of the GDP figures (not shown) reveals that huge fluctuations in investment drive the seasonal patterns displayed in Charts 1 and 2. This suggests that limited reform of investment, which accounts for roughly two-fifths of Chinese aggregate expenditure, may lie at the root of China's growing economic difficulties. This possibility has not escaped the attention of Chinese economists:
Many basic components of a 'pure' market economy are still in their incipient stage in China, although market-oriented reform started two decades ago. Government-guided investment mechanisms, a State-controlled banking system and dominant State-owned enterprises. . . still run in a framework molded primarily on the previous planned economy.(18)
Anyone who visits China or reads Chinese publications encounters frequent reference to capital scarcity, e.g. "Generally capital remains in short supply"(19) or "capital shortages still exist."(20) Elementary economics teaches that if capital (or anything else) is scarce, profits will be high for the lucky few who gain access to the scarce resource. But profit rates in China have fallen almost continuously for the past two decades. The tribulations of state enterprises are all too familiar. But we also observe steep declines in the profits of rural collective industries, where after-tax profit rates plunged from above 20 percent of total capital during 1978-82 to less than 10 percent in nearly every year since1987.(21) The unexpected combination of scarce capital and falling profit rates signals the presence of serious defects in China's capital allocation mechanism.
Chinese investment spending may generate weak financial outcomes, but what about product flows? Here again, we encounter unmistakable evidence of difficulty, this time from information about rates of capacity utilization. In 1995, the utilization rate for China's steel refining capacity, which then amounted to 169 million annual tons, was only 56 percent.(22) Even though output never came close to 1995 capacity, new investment pushed refining capacity to 190 million tons, nearly double the expected 1999 output of 104 million tons.(23)
This history of excessive investment recurs in sector after sector. China's 1995 industrial census revealed that the average utilization rate for equipment in 111 product lines was 66 percent, with half of the figures falling under 55 percent.(24) In 1996, utilization rates for 600 of 1,000 product lines fell below 60 percent. A 1999 report, presumably referring to conditions in 1998, stated that "at present, nationwide utilization rates are below 60% for half of all industrial products."(25) Data for Guangdong, one of China's most dynamic provinces, and one with only a small legacy of older state enterprises, show that "of 320 types of production equipment [apparently for 1998]. . . 52% have utilization rates below four tenths, and 22 types have utilization below two tenths. . ."(26) Reports of overcapacity span a broad range of industries, including steel, glass, cement, chemicals, machinery, motor vehicles, fertilizer, textiles, garments, appliances, paper, coal, and oil refining.
Evidence that industrial investment projects often fail to produce commodities as well as profits provides further proof that China's economy is riddled with massive waste of capital. The magnitude of waste -- including roughly 100 million tons of excess capacity in both steel refining and cement manufacture(27) -- far exceeds anything that might be attributed to individual incompetence, theft, or fraud. After two decades of market-leaning economic reform, why does China continue to direct vast quantities of investment funds into ill-considered projects?
Chinese analysts and external observers point to a number of institutional factors, such as soft budget constraints and "investment hunger." There is also a long history of negative real interest rates, which make it profitable to attempt projects with low payoffs. But none of these factors seems capable of explaining either the scale of mis-allocation or its persistence throughout a reform process that has hardened firms' budget constraints, denied investment funds to growing numbers of weak firms, and, most recently, produced steep increases in real interest rates.
The influence of government administrators over investment decisions stands out as the most likely explanation of long-standing low returns to capital. At the macro-level, government agencies use annual investment and credit plans(28) to control the size of overall investment. And at the micro-level, efforts to expand the independent management capabilities of enterprise managers and bank executives have failed to eliminate the key role of government offices in investment decisions.
While government agencies value profits, which remain the leading source of tax revenue, many other motivations influence their view of investment alternatives. Officials may plunge ahead with industrial projects that seem certain to fail. Even though a 1995 report indicated that "float glass production lines which have started construction or preparatory work" have a "combined annual output capacity. . . [that] far surpasses actual demand and will cause a surplus on the market," an official announced "plans to build some float glass projects with foreign investment in the central and western regions to seek a balanced distribution of float glass projects."(29)
Projects may aim to create or preserve employment, or to postpone the bankruptcy or closure of specific enterprises. Political motives often come into play, as when officials ordered the rebuilding of stonework to remove designs associated with the banned Falungong movement or when Beijing welcomed "the completion of five new office projects in celebration of the 50th anniversary of the founding of the People's Republic of China" even though a surplus of office space, with a 30.2 percent vacancy rate at the end of 1998, meant that "they are unlikely to be sold or rented out in the short term."(30)
These matters are well understood by Chinese economists:
It is widely recognized that the root cause for the low efficiency of China's
economy lies in overly duplicated industrial structures and overflowing similar
products. . . . Behind the duplicated industrial mix is a diseased investment
decision-making mechanism. Most investment projects are funded not
based on an investors' pursuit of profit maximization, but on
administrative power.(31)
Summary. Despite huge progress in the direction of market operation, it is not yet possible to
classify China's economy as a market system. China remains outside the realm of market
economies because of an unreformed investment mechanism, which remains largely controlled by
public officials rather than by the profusion of independent coalitions typical of market systems.
Administrative management of China's investment system leaves its distinctive imprint in the form
of a seasonal macroeconomic roller-coaster. No market system can produce the seasonal
fluctuations shown in Charts 1 and 2, which are characteristic of plan-driven socialist economies. IMPLICATIONS: WHY IS CHINA'S ECONOMY SAGGING? After two decades of boisterous growth China's economy is now in difficult straits. While official
figures show continued high growth, the frequency with Chinese authors speak of "glut,"
"depression," "slide," "stagnation," "grim conditions," etc. suggests that the domestic as well as
foreign observers doubt the credibility of government statistical reports. Whatever the exact circumstances, declining growth, falling profits, protracted deflation, rising
unemployment, and the associated fall in confidence(32) have dimmed China's economic prospects.
China's leaders attribute these difficulties to a shortfall in aggregate demand resulting from a
combination of domestic and international circumstances: Chinese households save too much and
the Asian crisis has hammered the growth of exports and foreign investment. Current policy
features two components: deficit spending and other short-term measures intended to bolster
aggregate demand, combined with long-term initiatives designed to extend the process of gradual,
market-oriented reform. This diagnosis is mistaken and the policy misconstrued. Weakness in the economy, which pre-dates the Asian crisis of 1997/98, runs much deeper than China's leaders appear to believe. The
difficulties are structural rather than cyclical. Short-term pump-priming exacerbates structural
problems and undercuts long-term reform objectives. A policy built around a major effort to
expand the scope of domestic private business holds the promise of resisting short-term decline
without compromising long-term goals. Despite initiatives in this direction, ideological
constraints hinder the promotion of private business, and with it the prospects for an early exit
from China's present economic doldrums. To explain this perspective, I conclude this paper with a series of propositions. 1. Deep decline in growth performance. Falsification of economic statistics, formerly of major
significance only in the data for rural industry, exploded in 1998 after the government identified 8
percent annual growth as a compulsory target. China's statistical authorities rejected GDP figures
supplied by the provinces. After unspecified informal adjustments that supposedly "squeezed out
the over-reported part," the State Statistics Bureau (SSB) announced real growth of 7.8 percent
for 1998.(33) Table 4 contrasts official measures of 1998 performance with alternative indicators
suggesting more modest outcomes. Only a painstaking reconstruction of 1988 statistics can
provide firm conclusions about output growth. In the meantime, it is clear that the range of
possibilities includes growth amounting to less than half of official claims.
2. The falloff in growth performance antedates the Asian crisis. China's success in quelling strong inflationary pressures sparked claims that the economy had achieved a "soft landing" in 1994/96. Evidence from the labor markets shows that conditions in the real economy were anything but soft. Table 5 calculates absorption of labor into formal employment as a percentage of increments to the labor force. The years 1990/95 witnessed an unprecedented labor-market boom that sucked millions of workers from the informal sector (including household farming) into formal employment, mainly in rural industry (TVEs) and private business. In 1996, absorption of labor into formal employment suddenly plunged from 140 percent to less than two-thirds of annual labor force growth. The ratio of new formal employment to labor force increment turned negative in 1997. In 1998, formal employment in the urban sector dropped by 23 million or 16 percent (Table 4), with more to come as downsizing continues and enterprises begin to sever ties with furloughed personnel who remain on the employment rolls.
3. The accumulated effect of wasted investment is the principal cause of the collapse in job creation. Every economy wastes resources. The experience of Japan and Korea illustrates the capacity of dynamic economies to sustain rapid growth despite massive waste. Assigning valuable resources to occupations that deliver no returns effectively partitions the economy into two components, one dynamic, the other stagnant. As the share of the stagnant component grows, a constant overall growth rate requires ever-faster growth from the dynamic sector. This is increasingly difficult because a large stagnant component not only consumes resources, but disrupts the operation of dynamic firms, for example by choking the banking system with non-performing loans. The result is an eventual falloff in growth.
This process is now visible in China, where protracted waste of investment funds has inflicted frightening financial pressures upon governments, who are the main owners of capital, and their clients: publicly-owned state and collective enterprises, state-owned banks, and public sector employees. These pressures take the form of dwindling profits, slow growth of tax revenue, and accumulation of bad debt. The most dramatic consequence is xiagang, best translated as "furlough" or "on-the-job layoff," which began in 1993 and has expanded rapidly from 1996. Twelve million workers were furloughed in 1998, and a further 7.5 million in the first half of 1999.(34) These changes are enormous: in percentage terms, the scale of layoffs far surpasses the postwar experience of any major market economy.
4. Keynesian "pump-priming" cannot resolve structural difficulties. Chinese economists recognize that the anticipated "multiplier effects"of recent deficit spending have not materialized. Official media credit short-term interventions with adding 1.5 percentage points to overall growth in 1998.(35) The costs associated with this modest gain are large. Efforts to ramp up aggregate demand promise fresh cohorts of hastily selected and poorly implemented investment projects. Predictably, the quality of bank assets and the proportion of loan obligations fulfilled by borrowers continued to decline in 1998.(36) In addition, the administrative measures that accompany the drive to boost spending obstruct long-term reform by reversing efforts to commercialize the state-owned banks and to reduce ad hoc official interventions in enterprise management. The benefits of fifteen months of pump-priming are scant: the (unknown) rate of overall growth continues its downward drift, while China's gravely flawed investment mechanism continues to direct resources into outlets that have a long history of waste and mismanagement.
5. Private business offers the best opportunity for renewed growth momentum. Current policy concentrates investment funds in the very sectors responsible for the overhang of excess capacity that is dragging the economy down. To escape structural difficulties, China must reduce the resources available to the old, failed investment mechanism. But with the economy sagging and mass unemployment now a reality, it is not feasible to curtail spending in any major sector, however incompetent, in the absence of fresh sources of demand. With former "growth poles" -- rural industry, exports, joint ventures, foreign investment -- largely dormant and with little prospect for rapid revival, private business offers the only opportunity for an investment boom that could rekindle China's dwindling economic momentum.
This observation is rooted in economic reality, not ideology. Officially recognized private businesses (excluding family farms and other sources of informal work) have created more jobs since 1994 than the combined efforts of state, shareholding, collective (rural and urban), and foreign-invested businesses. The policy issue is simple. Private business is already the most dynamic sector of China's economy. How much additional investment resources could private business absorb, and how much additional employment could private entrepreneurs create if the government initiated a sweeping assault on the obstacles that currently limit the flow of resources into private business?
No precise answer is possible. We know, however, that formidable barriers confront would-be entrepreneurs. Private businesses have little access to credit. They are easy targets for predatory officials. Government agencies and state-run banks are permeated with an anti-business culture. Even though private sector borrowers repay 90 percent of loans(37) - perhaps double the figure for state-sector debtors - bankers eschew loans to private borrowers, evidently because defaults by private clients are more dangerous to their careers than defaults from public sector borrowers.(38)
Local governments, particularly, but not exclusively in the south, have begun to lavish resources and energy on the promotion of private business. Growing attention to the potential of private business is visible at all levels -- note the passage of a constitutional amendment recognizing the legitimacy of private property and the contribution of private entrepreneurship to the national economy, followed by preparations for implementing legislation.(39) But enthusiasm for such efforts seems to decline at the higher levels of the administrative ladder. No national leader has stepped forward to champion the cause of the private sector. News that "China will launch a nationwide campaign to clean up all the random charges and fees imposed on foreign-invested companies" prompts an obvious query: what prevents China's leaders from supporting employment growth with a concerted effort to "clean up all the random charges and fees imposed on" businesses established and operated by Chinese entrepreneurs?
CONCLUSION
Despite immense progress toward the creation of a market system, a largely unreformed investment mechanism tilts China's whole economy toward distinctively non-market behavior patterns, most visible in the continuation of huge seasonal fluctuations driven by investment plans. China's economic downturn, which appears far deeper than official statistics would indicate, is structural, not cyclical. Its sources are domestic, not international. A long history of wasteful investment spending is the root cause of China's economic woes. Current policy seems short-sighted, inconsistent, and poorly aligned with economic realities. Without major policy shifts, the chances of rekindling high-speed growth seem remote. Accelerated development of private business stands out among available economic options. Promoting private business, the most dynamic sector of China's economy, offers the unique prospect of boosting short-term demand while advancing (rather than obstructing) long-term reform goals. Official policy offers growing recognition and support to private business, but the legacy of anti-business ideology dictates a cautious approach, especially in Peking. The resulting ideological constraint on the pace of private business growth could prove very costly to China's economy over the coming years.
* Chinese authors writing in Chinese are cited in the Chinese fashion, surname first (e.g. FAN Gang). Chinese authors writing in English-language outlets are cited in the English fashion, with surname last (e.g. Weiying ZHANG).
1. Department of Economics, University of Pittsburgh, Pittsburgh PA 15260, tgrawski+@pitt.edu The author thanks participants in the 28th Sino-American Conference on Contemporary China held at Duke University, June 12-14, 1999, for comments on an initial draft, and gratefully acknowledges information and explanations provided by Nicholas Lardy, Li Jingwen, Liu Shucheng and Zheng Yuxin without implicating them in what follows.
2. Edward Green, notes for a panel discussion on the theme 'What is a Market Economy?' held at
the January 1996 meetings of the Allied Social Science Associations, San Francisco CA.
3. Weiying Zhang and Gang Yi, "China's Gradual Reform: A Historical Perspective," (Working
paper E1995001, China Centre for Economic Research, Peking University, 1995, p. 16.
4. "China and the WTO," Economist, 3 April 1999, p. 15.
5. Yan Zhang, "Steel Import Rise Causes Concern," China Daily Business Weekly 31 May 1999,
p. 2.
6. Wei Gao, "Profits Fall as Record Diesel Price Makes Mark," China Daily 25 December 1996,
p. 5.
7. Jianlin Li, "Let Market Function According to Its Rules," China Daily 4 May 1999, p. 4.
8. See Thomas G. Rawski, China: Prospects for Full Employment (ILO Employment and
Training Papers, no. 47; Geneva, 1999) and Margaret Maurer-Fazio, Thomas G. Rawski and Wei
Zhang, "Inequality in The Rewards For Holding up Half The Sky: Gender Wage Gaps in China's
Urban Labor Markets, 1988-1994," China Journal, no. 41 (1999): 55-88.
9. Zuoji Zhang, "Social Security Instrumental to SOEs Reform," China Daily 6 February 1999,
p. 4.
10. '96 Zhongguo guoyou zichan nianjian [State Assets Yearbook 1996; Beijing: Jingji kexue
chubanshe, 1997], p. 451.
11. Ibid., 76; Zhongguo tongji nianjian 1996 [China Statistics Yearbook 1996; Beijing:
Zhongguo tongji chubanshe, 1996], p. 414.
12. "State's Property Grows Fast Last Year," China Daily 7 August 1999, p. 1.
13. Yang Xu, "Supervision Law Urged by Deputies," China Daily 13 March 1999, p. 2;
"Officials Urged to Follow Law," ibid. 8 July 1999, p. 4.
14. Data in Chart 1 are from Zhongguo renmin yinhang tongji jibao [People's Bank of China
Quarterly Statistical Bulletin], no. 1 (1997); Zhu Yunfa et al, "Analysis of China's Trends and
Prospects From Economic Performance in the First and Second Quarters of 1997," Shuliang
jingji jishu jingji yanjiu [Research in Quantitative and Technical Economics], no. 3 (1997), p. 4;
Zhang Yanqun, "Analysis and Forecast of Quarterly Economic Situation for 1998-1999," in 1999
Zhongguo jingji xingshi fenxi yu yuce, ed. Liu Guoguang et al (Beijing: Shehui kexue wenxian
chubanshe, 1998), p. 80; and Yunfa Zhu and Yanqun Zhang, "Quarterly Analysis and Forecast of
the Chinese Macroeconomy," in PRC 1998 Economics Blue Book, ed. Guoguang Liu et al (Hong
Kong: Hong Kong University Centre of Asian Studies, 1998), p. 139.
This explains the Chinese practice of comparing partial year output totals with "the same
period of last year" rather than with the previous month or quarter. This approach permits
commentators to avoid the question of why, for example, output in the first quarter of 1999 was
projected to be nearly 40 percent below the figure for 1998-Q4.
16. "Taking the Business Cycle's Pulse," Economist, 28 October, pp. 89-90 (citing Victor
Zarnowitz, Business Cycles).
17. Alan A. Brown and Egon Neuberger, "The Traditional Centrally Planned Economy and Its
Reform," in Comparative Economic Systems: Models and Cases, ed. Morris Bornstein (Burr
Ridge IL: Irwin, 1984), p. 370.
18. Jianlin Li, "Uneven Results Raise Questions," China Daily, 12 February 1999, p. 4, with
emphasis added.
21. Charles C. L. Kwong, "Property Rights and Performance of China's Township-Village
Enterprises," in China's Economic Growth and Transition: Macroeconomic, Environmental and
Social/Regional Dimensions, ed. Clement A. Tisdell and Joseph C.H. Chai (Commack NY: Nova
Science Publishers, 1997), p. 496.
23. "Steel Output Cut to Boost Development," China Daily 23 June 1999, p. 4.
24. Calculated from Zhongguo tongji nianjian 1997 [China Statistics Yearbook 1997; Beijing:
Zhongguo tongji chubanshe, 1997], pp. 454-455.
26. Li Chao, "Guangdong Economic Review for 1998 and Development Policy for 1999," in 1999 nian Guangdong: jingji xingshi fenxi yu yuce [Guangdong in 1999: analysis and forecast of
economic environment; Guangzhou: Guangdong renmin chubanshe, 1999], eds. Li Chao and Li
Hongchang, p. 45.
27. According to Dashan Xu, "Cement, Glass Firms to be Closed," China Daily 11 June 1999, p.
5, 1998 cement production and capacity were 536 and 700 millions tons.
28. Credit plans, supposedly eliminated in 1997, continue to operate. Thus "an important
development in 1998 is that we truly include the nurture of credit for enterprises outside the
public sector in the Central Bank's credit plan. Prior to that, the share of nonpublic economy in
bank lending was less than 1%" [Li Xiaoxi, "Analysis and Forecast of China's Economic
Situation," Zhongguo gongye jingji [China Industrial Economy], no. 1, 1999, pp. 10-14].
29. Yu'an Zhang, "Glass Industry Urges Interior Investments" China Daily,. 4 July 1995, p. 5.
30. Craig S. Smith, "In China's Religious Crackdown, An Ancient Symbol Gets the Boot," Wall
Street Journal 8 September 1999, p. B1; Dashan Xu, "Surplus to Grow in Office Market," China
Daily Business Weekly 19 April 1999, p. 5.
31. Jianlin Li, 32. Poll results from 1998 show that unemployment has replaced social order as "the main
worry" of Chinese residing in major cities, only 12 percent of whom "expressed confidence that
their lives would improve significantly in the next five years." See Jin'gen Jiang, "Corruption
Tops List of Major Concerns," China Daily 28 August 1999, p. 1.
33. Binglan Xu, "Statisticians Seek Reliability," China Daily Business Weekly 15 February 1999,
p. 1.
34. Bin Shen and Lan Bing, "Nation to Reverse Money-Losing Firms," China Daily 26 April
1999, p. 1; Yan Wu, "Laid-off Workers To Get Extra Pay," ibid. 30 August1999, p. 1.
35. "Treasury Bond Issuance Aid to Economic Growth," China Daily 1 September 1999, p. 4.
36. Xie Ping, "Challenges Facing China's Financial Reform," Zhongguo gongye jingji [China
Industrial Economics] no. 4 (1999), p. 24; Kan Ren, "Central Bank Chief Reaffirms Money
Policy," China Daily 30 July 1999, p. 5.
37. According to Professor Dong Fureng, in a July 1999 lecture at the University of Melbourne.
38. This is the apparent point of Fan Gang, "Overcoming Credit Crunch and the Reform of the
Banking System," Jingji yanjiu [Economic Research], no. 1 (1999), p. 7, note 1.
39. Yan Meng, "Draft Law May Help Individual Enterprises," China Daily 25 August 1999, p.
5.
Share of prices determined by
State State Market
Order Guidance Forces
Retail commodities
1990 29.8 17.2 53.0
1991 20.9 10.3 68.8
1992 5.9 1.1 93.0
1993 4.8 1.4 93.8
1994 7.2 2.4 90.4
1995 8.8 2.4 88.8
1996 6.3 1.2 92.5
Agricultural products
1990 25.0 23.4 51.6
1991 22.2 20.0 57.8
1992 12.5 5.7 81.8
1993 10.4 2.1 87.5
1994 16.6 4.1 79.3
1995 17.0 4.4 78.6
1996 16.9 4.1 79.0
Production materials
1990 44.6 19.0 36.4
1991 36.0 18.3 45.7
1992 18.7 7.5 73.8
1993 13.8 5.1 81.1
1994 14.7 5.3 80.0
1995 15.6 6.5 77.9
1996 14.0 4.9 81.1
Sources: Guo Jianying, "Proportion and Changes for Three Types of Prices," Zhongguo wujia [China Price], no. 11 (1995): pp. 10-12; Zhongguo wujia nianjian 1996 [China Price Yearbook 1996; Beijing: n.p., 1996], p. 388; ibid. 1997 (Beijing: n.p., 1997), pp. 479-481.
Retail Agricultural Production
Sales Commodities Materials
NATIONAL AVERAGE 90.4 79.3 80.0
PROVINCIAL FIGURES
Beijing 79.0 94.2 68.8
Tianjin 89.0 ... 72.4
Hebei 88.8 88.8 81.3
Shanxi 97.4 80.9 71.6
Liaoning 96.4 90.4 82.5
Jilin 91.8 85.9 84.4
Heilongjiang 87.8 81.2 51.9
Shanghai 94.9 91.7 78.3
Jiangsu 92.8 77.4 77.8
Zhejiang 92.8 76.5 90.6
Anhui 91.9 81.7 85.5
Fujian 91.9 91.0 87.1
Jiangxi 84.6 74.7 74.9
Shandong 89.0 73.5 73.3
Henan 87.2 60.0 68.0
Hubei 90.2 72.7 71.1
Hunan 85.2 79.3 86.5
Guangdong 92.6 98.8 93.0
Guangxi 90.2 81.2 88.9
Hainan 93.7 ... 87.2
Sichuan 89.2 80.6* 78.1
Yunnan 93.6 67.3 81.7
Shaanxi 84.3 77.2 87.3
Gansu 87.8 85.0 77.9
Qinghai 70.7 77.5 77.7
Ningxia 80.6 81.5 72.0
Xinjiang 92.1 74.2 60.1
*corrects obvious misprint in source ... no data
Source: Guo Jianying, "Proportion and Changes for Three Types of Prices," Zhongguo wujia [China Price], no. 11 (1995): pp. 10-12. The source provides no data for Guizhou, Inner Mongolia, or Tibet.
Table 3
Sources of Funds for Investment Spending in 1997
(percent)
| Total | State Sector | Others | |
| State Grants | 2.8 | 4.7 | 0.7 |
| Domestic Loans | 19.2 | 23.0 | 15.0 |
| Foreign Investment | 10.8 | 5.1 | 17.1 |
| Own funds | 55.6 | 52.7 | 58.9 |
| Other | 12.9 | 14.3 | 11.4 |
| Total | 101.3 | 99.7 | 103.0 |
Note: figures do not add to 100 percent because of inconsistencies in the underlying data.
Source: calculated from Zhongguo tongji nianjian 1998, pp. 188-189.
Table 4
Alternative Indicators for Growth of Gross Domestic Product and Major Components, 1997/98 (percent)
Category Standard Measure Alternative Indicator
Industrial Output SSB Figures 8.9 Electricity output 2.8
Aggregate Investment SSB Figures: 14.1 Steel output 5.4
consumption 4*
Cement output 4.7
Aggregate Consumption Retail Sales: 9.6 Wage Bill -0.6
Dept. Store Sales 0?**
Aggregate Output Real GDP: 7.8 Freight Transport: -0.9
Energy Use -1.6
Airline Pass. Traffic 3.4
Note: GDP is equal to the sum of A. Wages and Salaries
B. Interest, rent, dividends
C. Profits (including net farm income)
D. Taxes
The nominal value of items A (certainly), B (almost certainly), and C (probably) declined in 1997/98. Government revenue rose by 13.9 percent. The implicit GDP deflator for 1997/98 is -1.5 percent.
Source: except as noted, Zhongguo tongji zhaiyao 1999 [Statistical Survey of China 1999; Beijing: Zhongguo tongji chubanshe, 1999], pp. 6, 7, 11, 16, 35, 55, 104, 112.
* "with net steel imports declining. . . . the increase in consumption of steel materials reached about 4 %" in 1998 ["1998 Market Prices for Steel Materials: Trends, Analysis, and Forecast for 1999," Zhongguo wujia [China Price], no. 3 (1999), p. 8.
** "among the country's 234 large-sized shopping malls, 61.7 percent saw negative sales growth" in 1998 [Chandong Wang, "Retailers Suffer as Market Plunges," China Daily 30 January 1999, p. 4.
Table 5
China: Sectoral Contributions to Labor Absorption, 1980-1997
| 1980/90 | 1990/94 | 1994/95 | 1995/96 | 1996/97 | |
| Labor Force
Increment
(millions) |
215.5 | 32.9 | 7.5 | 9 | 7.5 |
| Absorption (Percent) | |||||
| Formal Sector | 49 | 141 | 143 | 63 | -34 |
| State | 11 | 26 | 7 | -2 | -27 |
| Collective | 5 | -8 | -17 | -14 | -19 |
| Other | 1 | 18 | 17 | 8 | 20 |
| Private | 3 | 27 | 64 | 32 | 45 |
| TVE | 29 | 84 | 112 | 72 | -1 |
| Xiagang | 0 | -6 | -40 | -33 | -53 |
| Informal* Sector | 51 | -41 | -43 | 37 | 134 |
Source: Calculated from Zhongguo tongji zhaiyao 1998, p. 32 and Rawski, China's Prospects for Full Employment, Tables 1 and 2.
Xiagang figures: 2 million for 1994, 3 million for 1995 and 1996, 4 million for 1997 ["Measures Suggested to Reduce Unemployment," China Daily 1-29-99, p. 4, gives figure for 1997 and a cumulative total of 8 million at year-end 1996].
*Residual, including self-employed farmers and unemployed workers. Note that xiagang workers remain associated with their units and are therefore included in the employment totals.
