Chinas Economics

For various reasons, China has always been an important country in the world. With its increasing large population, it was determined by other countries that is has a lot of economic potentials. In just one decade and a half, China has transformed itself from a giant that use to live in poverty into a wealthy powerhouse to the world economy. With one-fifth of the worlds population, China is now producing 4% of world merchandise and a proportion of global production. It has also one of the worlds oldest and most influential civilizations. China has established three approaches to the world economy and they are establishing an alternative socialist system (1950s); isolating itself from the system (the 1960s to mid 1970s); and participating in the system again from the 1970s. Chinas economic system was quite similar to Soviet Unions because it is central planning system.

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However, after the 1950s, this central planning is broken into regional planning by different provinces in China. In another words, China has changed from a centrally based country in a regionally based country, in which different provinces produces different goods and servies. This change has encouraged the development of small enterprises, which are the main driving forces of Chinese growth. In 1978, China has liberalised its economy and start participating in the world economy. With its new market reforms in every sector, Chinas door has opened its economic door to foreign investors and freer trade in special economical zones. Beginning in 1994, China’s economic structural reforms have begun new breakthroughs. Major changes have been made to sectors like personal enterprises, taxation, finance, foreign investment and foreign trade. At the same time, the Chinese government is speeding up its establishment of a socialist market economy system. Hopefully, this socialist market economic system can be in place by 2010. (Roy 1-5) Major Structural Reforms Reforms already launched: 1. Reform of the state-owned enterprises has been furthered. h Some adjustment and reorganisation have been carried out in industries like textile, coal, oil and weapon-makings. 2. The social security system has made huge changes. h People established re-employment centres that can help laid off workers to find jobs in other economic sectors. Almost 99% of the laid-off staff and workers who were fired from the state-owned enterprises are using this re-employment service centre.

Reforms to be launched: 1. Financial reforms will be undertaken h To achieve the perfect management system, sectors like banks, securities, insurance and trust businesses are becoming independent from each other for clearer financial supervisions. h Government is speeding up the reform of state-owned commercial banks, in order for the banks to operate independently. h In case when companies have bad credit and unpaid debts, banks are reinforcing strong policies to ensure the quality of bank loans. h To safeguard financial assets and eliminate corruption of people who have political positions. 2. To increase export to maximize the economy h People are expanding export productions. h People are improving the development of international tourism to increase non-trade exchange earnings. (Online) Economic Activity GDP/GNP China must have annual GDP growth greater than 5% to maintain social stability and political survival. Economic freedom has increased Chinas prosperity. With its Real GDP of US$960.91 billion, it seems that is has increased its output by 7.8% from 1997. Within the GDP, primary industry increased by 3.5%, secondary industry up by 9.2%, and tertiary industry enlarged by 7.6%. The social labour productivity rose by 6.9% over 1997. In the first half of 1999, GDP grew at the rate of 7.6%. (Morrison) Beginning in 1979, China launched several economic reforms. To improve the standard of living of farmers, government is now allowing them to sell a portion of their crops on the free market.

The government also established four special economic zones to attract foreign investment and boost exports and imports. The decentralisation of economic control of various enterprises was given to provincial and local governments. This allowed enterprises to operate more freely and competitively, rather be controlled by the central government. Some coastal regions and cities were designated as open cities and development zones, which allowed people to experience free market reforms and to attract foreign investment. Therefore, the state price controls on good and services were gradually eliminated. Starting from the introduction of economic reforms, China’s economy has grown proportionately faster than during the pre-reform period (see Table 1). This Chinese statistic shows the growth of real GDP from 1979 to 1998, which is making China one the world’s fastest growing economies. According to the World Bank, China’s rapid development has driven 200 million people out of poverty. Table 1. China’s Average Annual Real GDP Growth: 1960-1998 Time Period Average Annual % Growth 1960-1978 (pre-reform) 5.3 1979-1998 (post-reform) 9.8 1990 3.8 1991 9.3 1992 14.2 1993 13.5 1994 12.7 1995 10.5 1996 9.7 1997 8.8 1998 7.8 Sources: Official Chinese government data reported by the World Bank, World Development Report (various issues), and DRI/McGraw-Hill, World Economic Outlook, various issues. Economists who worries about China’s rapid economic growth are mainly concentrating on two factors: large-scale capital investment (by large domestic savings and foreign investment) and rapid productivity growth. These two factors appear to interdependent of each other. Economic reforms led to higher efficiency in the economy, which boosted output and increased resources for more investment in the economy. Most of the Chinese are known to have a high rate of savings.

When reforms began in 1979, domestic savings as a percentage of GDP turned out to be 32% (nearly as high as Japan’s at the time). Eventually, savings as a percentage of GDP has steadily risen; it was 42.7% in 1998, among the highest savings rates in the world. In U.S. dollars, China’s GDP in 1998 was $968 billion with its per capita GDP of $769 billion. Such data would indicate that China’s economy and living standards were significantly lower than those of the United States, Japan, and Germany. China’s 1998 GDP was about 45% the size of Germany’s, 23% of Japan’s, and 11% that of the United States. Surprisingly, China’s per capita GDP was only 2.4% of the United States (see Table 2). The following data shows that China’s per capita GDP is $3,701. However, it falls far below the PPP per capita GDP levels of some major developed countries. For example, it is only 12% of U.S. levels. The International Monetary Fund estimates that China might surpass the United States as the world’s largest economy in the year 2007. However, even if that does occur, it would take China significantly longer time to achieve U.S. standard of living levels. Table 2. Comparisons of U.S., Japanese, German, and Chinese GDP and Per Capita GDP In Nominal U.S. Dollars and PPP: 1998 Country Nominal GDP ($Billions) GDP in PPP ($Billions) Nominal Per Capita GDP Per Capita GDP in PPP U.S. 8,500 8,500 31,414 31,414 Japan 4,190 2,969 29,860 23,228 Germany 2,109 1,637 26,024 21,376 China 948 4,610 769 3,701 Source: DRI/McGraw Hill. World Economic Outlook, Volume I 1st Quarter, 1999, p.A-27. Employment/unemployment By the end of 1998, China’s employment was 699.57 million, 3.57 million more than at the end of the previous year.

Of the total, 32.32 million people were in urban private enterprises. In 1998, great changes were made in the re-employment program, which enabled 6.09 million laid-off staff and workers of state-owned enterprises to find new jobs. By the end of 1998, the registered unemployment rate in the urban areas was 3.1% with no significant changes from the previous year. The income of people that are living in urban and rural areas increased steadily, and their living standard continued to rise. With the falling price levels, the growth of the per-capita disposable income of urban residents rise 5.8%, and that of rural residents increased by 4.3%. The registered unemployment rate in the urban areas is 3.5% in 1999. The number of people laid off in 1997 was 15 million, two-thirds from state owned enterprises. If privatisation of state enterprises continues, it is estimated that 15 million more workers would be laid off over the next two years (although the unemployment number may vary in different provinces). In some undeveloped provinces, the ratio of laid off to working labour was 3:1 in 1998. (Morrison) Inflation Inflation has reached 25.5% in 1994 and has become a prime concern of the government. Therefore, the government has planned a tight credit policy which helped to bring inflation figures down to 17.1% in 1995, 8.3% in 1996, and 4.1% in 1997. Due to statistics, the year-end figures for 1997 shows an average inflation of 2.8% for CPI. This steady drop in inflation during 1997 was due to large stockpiles of inventory such as wheat and cereals, which produced more competition in the economy.

It looks like steady deflation would continue for the next few years. In 1998, the total retail sales of consumer goods amounted to US$352.14 billion, up by 6.8% compared with 1997. Despite the deflation, the actual growth was 9.7%. (China: Economic Overview) Value of currency During the period of the Asian financial crisis, China has enforced a policy of maintaining the stability of RMB. There has also been a favourable balance in Chinas current account for five consecutive years. Foreign direct investments have continued to flow in. All these made it possible for RMB to remain stable in 1998. Now, its exchange rate against the US dollar is at US$1: RMB 8.2789. Unlike HK dollar, value of RMB might change over the year because RMB is not pegged to the US dollar. Specific contributions From several observations, it is known that the fastest growing provinces are Zhejiang, Jiangsu, Guangdong, Fujian, and Shandong. These places are where the state-owned industries have fallen most sharply. From 1981 to 1994, the shares of state-owned industry in each of the five provinces dropped by more than 40% for it was creating a lot of non-state owned enterprises. On the other hand, in the western regions, the state-owned enterprises have experienced a much slower structure reformation. The decline of importance of the coastal provinces was caused by the fast growth of enterprises in provinces like Jiangsu and Zhejiang. It can also be caused by foreign-invested enterprises in Guangdong as well as private enterprises in Wenzhou, Zhejiang.

The output of these enterprises grew at an annual average rate of 25 %, that is, 14 % higher than that of the state-owned industrial enterprises. The five fastest growing provinces are construction of free enterprise or indirect macro-management because they all attract foreign investments. In contrast, the inland areas lack foreign-invested enterprises and private enterprises. The fasted growth province, Guangdong, has an annual average GDP growth rate of 12%, while Jiangsu and Guizhou grew at an annual average growth rate of 6%. However, this increasing difference of provinces’ growth performance could lead to serious economic and political tensions among regions. (Decentralisation and Provinces’ Growth Performances) Government production of public goods/services State economy includes all enterprises that are funded by governments of various levels. Because of the economic reform, companies and business that use to receive government funding now have none. To increase growth without arising regional crisis, the government is using the good old-fashioned Keynesian approach V spend big on public programmes. Last year, government investment in telecommunications has increased by 53.4% and funding in agriculture and water conservation increased by 47.8%, as well as cement production jumped by 37.2%. The Statistical has shown that government owned retail sales grew at 9.4% pa in 1998. Due to the socialist system, most of the companies in this economy are state-planned production companies. The main financial burden that these state companies have to carry is the workers’ life long security, that is, paying for a worker’s child delivery bill and covering the funeral expenses of the dead retired worker.

Along with other reasons, more than half of such companies are currently not profitable. Therefore, government is slowly re-organising small state-owned companies and selling them to private entrepreneurs. At the same time, they are transforming large ones into corporations. To maintain social stability, the government has to make sacrifices in this economic sector. (Roy 48) Economic Stability Fiscal policy Chinas political and economic systems lack of transparency and constant enforcement has created many uncertainties for foreign investors. The complexity of national and local laws has made foreign trade and investment more difficult in China. Chinas main problem has always been the incompleteness of economic reforms and the absence of political reforms. This was due to the fact that Communist Party Officials are functioning as Chinas ruling class. They are a self-selected group accountable to nobody. Fiscal reforms China has made the following new pledges: 1. To eliminate high tariffs. 2. To have a more “balanced and equitable access” for foreign companies. They also made the following decisions about State-Owned-Enterprises: 1. Lend to those enterprises that can survive in the market. 2. For enterprises without a lot of hope for survival, better performing ones will acquire them. 3. Support bankruptcy for extremely insolvent enterprises. Mr. Jiang Zemin, Chinas new President has brought some strong changes in China. However other countries in the World Trade Organisation (WTO) are saying that Chinas should obtain lower tariff and freer trades because the use of high tariffs made it difficult to export to China. Import taxes in the form of value-added tax (VAT) and other taxes are added to tariffs on items entering China. This highly discouraged trade inflow.

In 1995, the National People’s Congress (NPC) established banking reforms, including the Peoples Bank of China Law. This new law gives NPC more authority in its functioning. It also abolishes loan and corruption from politicians. The reforms has sped up the commercialisation of the big four State-owned specialised banks, which include Agricultural Development Bank of China, Export and Import Credit Bank of China, and State development Bank. As a result, the Chinese government has opened its doors to some foreign banks to emerge new banks in China. The new banks are more efficient than the big four and offer much better quality of service. Monetary policy In 1994, Consumer Price Index was up by 24%. This is a sign of Chinas failure for the interest rates being set by the government and not economically. Monetary policy is useless in China because the central bank is not independent. Inflationary pressure resulted in money supply growth of 34.4% in 1994. China is not allowed to use the “raising interest rates” tool for fighting inflationary demand because it fears that the effect on state owned industries that survived on borrowed working capital. The raise in interest rates would greatly effect state-owned firms as they already borrow money from banks to pay their interest bills. Monetary reform Formerly Bank of China, it was transformed into a central bank in 1983.

Its responsibilities include: 1. Making and improving financial polices to meet government rules. 2. Controlling the supply of money. 3. Setting exchange and interest rates. 4. Setting policies concerning credit. 5. Controlling both domestic and foreign banking activities. 6. For practical purposes, the bank of China is the overseas agent of Central Bank. Therefore, privately owned firms are left to fund their own funds from sources outside the state banking system which include foreign investments, foreign currency borrowing, domestic share sales, bond issues, credit unions, non-bank financial institutions and unofficial private banks. The new interest rate for 6-month loans is now 9.5% and officials say, “Over the next five years our monetary policy direction will be a moderately tightening one.” Banking system China now has specialist banks and other financial institutions, which include: 1. The big-four State-Owned Specialised banks i.e. Agricultural Bank of China, Bank of China, Industrial and Commercial bank of China and The Peoples Construction Bank; 2. China International Trust and Investment Corporation; 3. The Industrial / Commercial Bank of China; 4. Bank of Communications, etc. Since the central bank in China is not independent, the transparency in the banking sector is then very poor. This makes the precise measurement of banks loans to become more difficult. The accounting principles are inconsistent and poorly understood by bankers. Interest rates are still be dictated by the bank and government instead of allowing the market to determine it.

However, with the new reforms and laws to its state owned enterprises, China may be on its way to a substantial economic recovery with a bright future in sight. (Grace Bosede) Economic Equity Income distribution/Standard of living Less than 60% of Chinese are covered by unemployment insurance. In 1997, most of the laid off workers received payments of less than 10% of the average national wage. There are virtually no social securities or pensions in China. Therefore, some people live at starvation level. However, the high rate of China’s economic growth last year has provided people with higher standard of living. Urban residents who use to make 27% of the national income are now making more than 50%. There is also a great difference depending on the specific provinces in which people work in (see Table 3). Table 3. Comparison of per capita income between urban and rural sectors in 1995 Province Urban Per Capita Income (RMB) Rural Per Capita Income (RMB) Anhui 2,767 973 Fujian 3,508 1,578 Guangdong 5,877 2,182 Zhejiang 4,691 2,225 Source: Internet article: “How to Benefit from the Booming Retail Market in China” Because China has a large population, the government rarely interferes with income distributions of individuals. However, there is more interference from the government in the state owned businesses than the privately own ones. Therefore, private businesses that try to maximize their profits often exploit workers who are in serious need of money.

The average per capita income of urban resident raise from RMB1,826 in 1992 to RMB3,179 in 1994. Recent figures show that the high growth rate will continue for some time (Table 4). Table 4. Urban per capita income Year Average Income (RMB) Growth Rate 1992 1,826.1 18.3% 1993 2,336.5 28.0% 1994 3,179.4 36.1% Source: Internet article: “How to Benefit from the Booming Retail Market in China” China has now developed large shopping centres and department stores in many provinces in order to bring up the standard of living, as well as to encourage consumer spending (Table 5). Table 5. Consumer spending in different provinces. Rank Area 1994 ( RMB billion ) 1993 ( RMB billion ) Rate 1 Guangdong 175.67 131.40 +33.7% 2 Jiangsu 124.73 93.50 +33.4% 3 Shandong 113.24 84.23 +34.4% 4 Zhejiang 96.37 67.44 +42.9% 5 Sichuan 93.33 71.79 +30.0% 6 Liaoning 86.80 67.22 +29.1% 7 Shanghai 77.07 62.19 +23.9% 8 Henan 70.25 49.72 +41.3% 9 Hubei 68.50 50.05 +36.9% 10 Beijing 66.67 53.18 +25.4% Source: Internet article: “How to Benefit from the Booming Retail Market in China” International Trade and Competitiveness Trading pattern Chinas international trade in 1928 was only 2.3% of the world total. In 1977, when Chinas economy was still isolated, its trade was 0.6%. It did not gain an important economic position until 1993. As one of the WTO members, China has opened many closed sectors under the Western influences.

The Washington-based Institute of International Economics estimates that Western exports to China could rise annually by US$21 billion. Economic reforms have transferred China into a major trading partner for many countries. Chinese exports rose from $14 billion in 1979 to $184 billion in 1998, while imports grew from $16 billion to $140 billion. China’s ranking as a trading power rose from 27th in 1979 to 10th in 1998. China’s trade volume fell slightly in 1998 over 1997 for it is too affected by the global financial crisis. Chinas exports rise by 0.5% after the rising of 20.9% in 1997, while imports dropped by 1.5%. Due to statistics, China has been running trade deficits in some years and surpluses in others. Over the past 5 years, China has run trade surpluses. In 1998 the surplus totalled about $44 billion (see Table 6). Merchandise trade surpluses and the large amount of foreign investment have made China to become the world’s second largest foreign exchange reserves, with a total $145 billion at the end of 1998.

During the first nine months of 1999, China’s exports increase by 2.1%, while imports rise by 19.3%. Table 6. China’s Merchandise World Trade: 1979- September 1999 ($Billions) Exports Imports Trade Balance 1979 13.7 15.7 -2.0 1980 18.1 19.5 -1.4 1981 21.5 21.6 -0.1 1982 21.9 18.9 2.9 1983 22.1 21.3 0.8 1984 24.8 26.0 -1.1 1985 27.3 42.5 -15.3 1986 31.4 43.2 -11.9 1987 39.4 43.2 -3.8 1988 47.6 55.3 -7.7 1989 52.9 59.1 -6.2 1990 62.9 53.9 9.0 1991 71.9 63.9 8.1 1992 85.5 81.8 3.6 1993 91.6 103.6 -11.9 1994 120.8 115.6 5.2 1995 148.8 132.1 16.7 1996 151.1 138.8 12.3 1997 182.7 142.2 40.5 1998 183.8 140.2 43.6 Jan.-Sept. 1998 134.2 98.6 35.6 Jan.-Sept 1999 137.0 117.6 19.4 Source: International Monetary Fund, Direction of Trade Statistics and official Chinese statistics. Trading partners China’s trade data differs significantly from its major trading partners statistics. This is due to the fact that a large share of China’s trade (both exports and imports) passes through Hong. China treats a large share of its exports through Hong Kong as Chinese exports to a foreign country. However, China treats the imports from Hong Kong as provincial trading.

According to Chinese trade data, its top five trading partners in 1998 were Japan, the United States, the European Union (EU), Hong Kong, and South Korea (see Table 7). Chinese data shows that United States is its second largest export partner and the third largest source of its imports. China’s trade with many of its Asian trading partners fell in 1998, while trade with the United States and the EU rose. Table 7. China’s Top 10 Trading Partners: 1998 ($Billions and % Change over 1997) 1998 Merchandise Trade ($) % Change over 1997 Country Total Trade Exports Imports Total Trade Exports Imports All Countries 323.9 183.8 140.2 -0.4 0.5 -1.5 Japan 57.9 29.7 28.2 -4.8 -6.7 -2.7 U.S.* 54.9 38.0 17.0 12.1 16.1 4.1 EU15 48.4 27.9 20.4 12.6 17.2 6.3 Hong Kong 45.4 38.8 6.7 -10.6 -11.5 -4.7 S. Korea 21.3 6.3 15.0 -11.6 -31.3 0.4 Taiwan** 20.5 3.9 16.6 3.3 13.9 1.1 Singapore 8.2 3.9 4.2 -7.2 -9.1 -5.4 Russia 5.4 1.8 3.6 -10.5 -9.7 -10.9 Australia 5.0 2.3 2.7 -5.2 13.9 -17.2 Indonesia 3.6 1.2 2.5 -19.6 -36.4 -8.1 Source: Official Chinese trade data. *U.S. trade data on U.S.-China trade differ significantly with Chinese trade data. **China and Taiwan do not maintain direct trade links. Most trade takes place via Hong Kong. However, the US trade data differs significantly with Chinese trade data. According to the U.S. trade data, it indicates that U.S. market is an important market to China’s export, but it is not reflected in Chinese trade data. Based on U.S. data on Chinese exports to the US, it is shown the exports have grown from 15.3% in 1986 to an estimated 38.7% in 1998.

This would indicate that the United States is China’s largest export market. The importance of the U.S. market for China’s exports has increased in 1998 because of the global financial crisis in Asia. China has survived the financial crisis because U.S. imports from China have continued to rise, whereas imports by several East Asian economies from China have fallen. There is an increasing level of Chinese exports from foreign funded enterprises (FFEs) in China. According to Chinese data, the total share of Chinese exports produced by FFEs has risen from 0.1% in 1980 to 44.1% in 1998. Many of these FFEs are owned by Hong Kong and Taiwan investors because they have shifted their labour-intensive, export-oriented, firms to China to take advantage of low-cost labour. A large percentage of the products made by such firms are exported to the United States. Export and imports/Foreign trade China has gained more access to export markets through the long term restructuring of the Chinese economy. Reforms initiated by President Jiang Zemin and Prime Minister Zhu Rogji have tended to languish under political pressure and economic and cultural inertia. Another cause of increasing export is the wider opening of China’s industrial and agricultural sectors to Western style management and competitive discipline. The strategy that Chinese used was a currency devaluation to promote export growth. This would inevitably be followed by a new round of defensive devaluation throughout the region, accompanied by further capital outflows, deepening liquidity problems, a return to protectionism and delay in recovery. (Roy 57) China’s cheap labour force has made it internationally competitive in many low cost, labour-intensive countries.

As a result, manufactured products comprise an increasingly larger share of China’s trade. The share of Chinese manufactured exports to total exports rose from 50% in 1980 to 89% in 1998, while manufactured imports as a share of total imports rose from 65% to 84%. A large share of China’s manufactured imports is comprised of intermediates like chemicals, electronic components, and textile machinery that are used in manufacturing products in China. Major Chinese imports in 1998 included electrical machinery, textile products, specialised machinery, plastics, and telecommunications and recording equipment (see Table 8). China’s major exports included articles of apparel and clothing, electrical machinery, textiles, office machines, and telecommunications and recording equipment (see Table 9). Table 8. Major Chinese Imports: 1998 Commodity Total ($Billions) % of Total Imports Electrical machinery, apparatus, appliances & parts, and household electrical appliances $16.5 11.8% Textile yarns, fabrics, and made-up articles 11.1 7.9 Specialized machinery for particular industries 8.3 5.9 Plastics in primary form 8.2 5.8 Telecommunications and sound recording and reproducing apparatus and equipment 7.9 6.6 Total top 5 52.0 37.0 Source: Official Chinese trade statistics Table 9. Major Chinese Exports: 1998 Commodity Total ($Billions) % of Total Exports Articles of apparel and clothing accessories $30.0 16.3% Electrical machinery, apparatus, appliances & parts, and household electrical appliances 13.9 7.6 Textile yarns, fabrics, and made-up articles 12.8 7.0 Office machines and data processing machines 11.9 6.5 Telecommunications and sound recording and reproducing apparatus and equipment 11.1 6.0 Total top 5 79.7 43.4 Source: Official Chinese trade data. China has pursued a trade strategy of import substitution.

This means Chinese only import the goods necessary to its economic development that cannot produce itself, and once it attains a domestic production capability, it stops importing those goods. This approach even carried over to China’s exports, which have consciously been used primarily as a means of generating foreign exchange for the purchase of advanced foreign technology. China’s imports fall mainly into one of two categories: raw materials (food, energy, lumber, wool and synthetic fibres, fertilizer, chemicals, steel, etc.) from the developing countries, and advanced technology (machinery, software, etc.) from the developed countries. Chinese exports, in keeping with China’s comparative advantage, are mostly relatively cheap labour-intensive manufactured goods, which are particularly attractive in lower-income countries. In other words, China generally “buys in the core and sells in the periphery”. Thinking that higher-tech products earn higher profits on the capitalist world market, China is running trade surpluses with developing countries and trade deficits with developed countries. China’s foreign trade has grown exponentially since the opening to the world market. Exports comprised about 2% of China’s GDP in 1980; in 1996, they account for 10%. (Roy 89) Total trade between China and the United States rise from $4.8 billion in 1980 to $85.4 billion in 1998, making China the 4th largest U.S. trading partner. China has become a major supplier to the U.S. market with its variety of low-cost U.S. consumer goods, such as toys and games, textiles and apparel, shoes, and consumer electronics.

China has been a major buyer of U.S. aircraft, fertilizers, and machinery. In recent years, U.S. imports from China have far exceeded U.S. exports to China. In 1998, U.S. imports from China totalled $71.2 billion while U.S. exports to China were only $14.3 billion. As a result, the U.S. trade deficit with China has increased to nearly $57 billion in 1998. (China-U.S. Trade Issues). Foreign investment China has kept out all foreign investment until 1979, the heavy restrictions were loosened to allow all kinds of foreign investment in China. This way, China can gain more access to foreign technology. Western investors began to rush into China in the 1970s but decreased in numbers in the early 1980s because they realised that China is still a difficult place for them to do business. Several reasons for this is that China has many regulations, corruption scandals and the assumptions that foreigners are wealthy and therefore should pay extra for everything. In the early 1990s, the Chinese government has reformed and clarified many laws concerning foreign investment to stimulate foreign investment in China. (Roy 90) In 1998, foreign capital investment in China has reached US$58.9 billion, with foreign direct investment (FDI) of US$45.6 billion. Within the countries that made direct investment in China, Hong Kong ranked first with 40.6% of China’s total foreign investment (see Table 10). Table 10. Foreign Direct Investment Countires % in total Hong Kong 40.6 United States 8.6 Singapore 7.5 Japan 7.5 Source: China’s economic conditions. In the first quarter of 1999, FDI totalled to US$7.34 billion. In the first half of 1999, FDI reached US$18.6 billion.

As a result, FDI has brought new technology and more capitals into China. Conclusion Further Outlooks 1999-2002 is the switch period for China from its command economy to a market economy. Therefore the Chinese government develops macro economic policies reinforce things like reform, development and stability. The governments main objectives in this period are to maintain a low inflation economy and improve employment rate while the restructuring is under its way. The long term outlook for the Chinese economy remains mixed. China has been able to weather out the effects of the Asian financial crisis, although this has done at the cost of delaying economic reforms to the SOEs and banking system. Continued support of money-losing SOEs draws resources away from more potentially productive enterprises, and thus undermines future growth. China’s commitment to join the WTO appears to represent a major commitment on the part of the Chinese government to significantly reform its economy and provide greater access to its markets. Some China observers believe that the Chinese government views accession to the WTO as an important, though painful, step to making Chinese firms more efficient and able to compete in world market (by exposing them to competition from abroad). In addition, the government hopes that liberalized trade rules will attract more foreign investment to China.

Economists argue that over the long-run greater market openness in China would boost competition, improve productivity, and lower costs for consumers, as well as for firms using imported goods as inputs for production. Economic resources would be more likely redirected away from money-losing activities towards more profitable ventures, especially those in China’s growing private sector. As a result, China would likely experience more rapid economic growth (than would occur under current economic policies). Goldman Sachs estimates that WTO membership would double China’s trade and foreign investment levels by the year 2005 and raise real GDP growth by an additional 0.5% per year. In the short run, however, widespread economic reforms (if implemented) could result in disruptions in certain industries, especially unprofitable SOEs, due to increased foreign competition. As a result, many firms would likely go bankrupt and many workers could lose their jobs. How the government handles these disruptions will strongly determine the extent and pace of future reforms. The central government appears to be counting on trade liberalization to boost foreign investment and spur overall economic growth; this would enable laid-off workers to find new jobs in high growth sectors, especially in China’s growing private sector. However, the Chinese government is deeply concerned with maintaining social stability. If trade liberalization was followed by a severe economic slowdown, leading to widespread bankruptcies and layoffs, the central government might choose to delay (or even rescind) certain economic reforms rather than risk possible political upheaval. The Chinese government has recently taken a number of steps in preparation for China’s WTO entry.

For example, In January 2000, Zhen Peiyan, Chairman of China’s State Planning Commission, stated that the government would eliminate all restrictive regulations against private enterprises in China in preparation for China’s WTO accession. Currently, private firms in China face a variety of discriminatory government policies, including lack of access to borrowing from state banks, that have made it difficult for such firms to develop. China’s entry into the WTO will require the government to establish a level playing field for Chinese firms to compete against foreign firms. This could greatly expand the role of the private sector in China’s economic development and accelerate China’s transition to a market-oriented economy. Economic Growth – China want to expand its domestic demand to promote its economy. For the next few years, domestic demand, that is, the consumption and investment will slightly increase. Researchers say that after the year 2000, the impact of the financial crisis will gradually reduce, whereas the international environment will gradually improve. Chinas economic growth rate is expected to be about 7% and its CPI to be around 3% in this period. Investment – Foreign and local investments in fixed assets will continue to be the main driving force in Chinas economic growth. Due to the changes in policies, it is known that investment in the state sector will increase, as well as the investment in the non-state sector will also speed up gradually.

The estimated average increase in the investment in fixed assets will be 12% or so in 1999-2002. The Chinese government has also pursued policies to improve the amount of foreign investment. Foreign Direct Investment is expected to rise after 2000. Employment – In the period between 1999 and 2002, the working population will be over 11 million and 85% of them will enter the labour market. As the reform of the state-owned enterprises continues and the economic restructuring speeds up, it is estimated that the registered unemployment rate will be 3.5%. China is speeding up the development of its economy to create more employment outlets and to deepen labour market reforms. The government is also thinking of building of a social security system that will improve the standards of living among people in the future. (Roy 57)

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