THE PEOPLE’S REPUBLIC OF CHINA

In an effort to reduce the impact of the Asian financial crisis and the historically serious flood disaster, China enforced a series of policies aimed mainly at increasing the investment to expand domestic demand. As a result, China’s economy as a whole maintained its momentum in 1998. 

REAL GDP GROWTH 

China's economy continued to grow at a relatively high speed in 1998. Real GDP reached US$960.91 billion, up by 7.8% a rate which was one percentage point lower than that of 1997. A breakdown of the figure shows that the value-added of primary industry was up by 3.5%; that of the secondary industry up by 9.2%; and that of tertiary industry up by 7.6%. The social labor productivity rose by 6.9% over 1997. 

The total retail sales of consumer goods amounted to US$352.14 billion, up by 6.8% compared with 1997. With the deflation factor taken into account, actual growth was 9.7%. 

In 1998, China’s total investment in fixed assets amounted to US$343.73 billion, up by 14.1% from 1997. This increase constituted the main pull for the growth of the national economy. In addition, the investment structure improved further as greater efforts were made to increase investment in infrastructure construction as well as in the western regions. In 1998, the investment in the western regions went up by 31.2% compared with the year before, at a rate which was higher than those of the eastern and central regions by 14.9 and 16.8 percentage points respectively. 

China's exports slowed down markedly in the face of the Asian financial crisis; its imports dropped, too, as a result of the restrictions in factors such as domestic demand. In 1998, a surplus of US$43.6 billion in tangible merchandise trade was registered which accounted for 4.5% of the GDP. 

In the first half of 1999, GDP grew at the rate of 7.6%. For 1999 as a whole, China’s real GDP is forecast to increase by about 7.0%. 

Inflation 

In 1998, the CPI was down by 0.8% from 1997, with the prices of services rising by 10.1% over 1997. It is estimated that the CPI will be around zero in 1999. 

Employment 

By the end of 1998, 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, up by 5.63 million over the year before. In 1998, great headway was 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%, which was on a par with the rate of the previous year. 

The income of the urban and rural residents increased steadily, and their living standard continued to rise. With the falling prices taken into account, the actual growth of the per-capita disposable income of urban residents was 5.8%, and that of rural residents was 4.3%. The registered unemployment rate in the urban areas is estimated to be 3.5% in 1999. 

Current Account 

In 1998, the current account surplus of China reached US$29.3 billion, accounting for approximately 3.0% of GDP, and down slightly compared with US$29.7 billion in 1997. The merchandise trade surplus stood at US$43.6 billion in 1998, up by US$3.3 billion over 1997. China’s imports and exports totaled US$324 billion, down by 0.4% from the year before, exports totaled US$183.8 billion, up by 0.5%, and imports totaled US$140.2 billion, down by 1.5%. In 1998, the RMB exchange rates were stable and foreign reserves continued to rise, reaching US$145 billion by the year-end, up by US$5.1 billion over the previous year-end. 

In the first seven months of 1999, China’s exports declined 2.8% while imports increased 16.6%. However, the trade surplus remains stable and reached US$11.3 billion by the end of July 1999. Thus, for 1999 as a whole, China’s exports are forecast to grow at the rate of -1.5% while imports grow by more than 10%. Foreign reserves increased to US$147 billion by the end of June 1999. 

GROSS EXTERNAL DEBT 

By the end of 1998, China’s registered foreign debts balance was US$146.04 billion, up by US$15.08 billion over the previous year. Of the foreign debts, long-and medium-term debts amounted to US$128.70 billion, up by US$15.88 billion over the previous year; the short-term debts amounted to US$17.34 billion, down by US$800 million from the previous year. New foreign borrowing in 1998 totaled US$45.66 billion, and the repayments of the principal and interest of foreign debts amounted to US$42.78 billion. 

By the end of 1998, China’s registered foreign debts balance was up by 11.5% from 1997 and the liability ratio (balance of foreign debts/GDP) stood at 15.2%, which was below the internationally recognized warning level. 

Foreign Direct Investment 

In 1998, foreign capital actually utilized in China reached US$58.9 billion, with foreign direct investment (FDI) amounting to US$45.6 billion, up slightly over the US$45.3 billion in 1997. Among the economies that made direct investment in China, Hong Kong, China ranked first, accounting for 40.6% of the total, followed by the USA, accounting for 8.6%, and then by Singapore and Japan, accounting for 7.5% respectively. An improvement was registered in the channeling of FDI, with more investment, about US$1 billion, going respectively into real estate development, social services and the production and supply of electricity, gas and water. 

In the first quarter of 1999, FDI totaled US$7.34 billion, down by 14.6% from the corresponding period of 1998. In the first half of 1999, FDI reached US$18.6 billion, decreased by 9.2%. 

Exchange Rate 

In the face of the Asian financial crisis, China has enforced a policy of maintaining the stability of RMB. In addition, there has been a favorable balance in China’s current account for five consecutive years; inflation has been held in check; FDI has continued to flow in; and there are ample foreign reserves. All this made it possible for RMB to remain stable in 1998, with its exchange rate against the US dollar, standing at US$1: RMB 8.2789 at the year-end, slightly up by 9 basic points over the previous year-end. 

Financial Policy 

In 1998, particularly in the second half of the year, China formulated an active financial policy and issued long-term state bonds valued at US$12.08 billion to increase the input in infrastructures. Consequently, the investment in fixed assets has accelerated noticeably, constituting the major factor contributing to China’s economic growth. Total fiscal revenue reached US$119 billion, up by 13.9% over the previous year; while total expenditure came to US$130.1 billion, up by 16.7%. The fiscal deficits of the central government amounted to US$11.6 billion, equivalent to 1.5% of the GDP, a proportion which was slightly higher than in the previous year. State bonds amounting to US$47 billion were issued in 1998 (not including the special bonds issued by the Ministry of Finance to the four major wholly state-owned commercial banks), compared with US$29.1 billion issued in 1997. 

In 1999, China will continue to implement its active financial policy. It will increase the deficits to a proper degree, and the central government will issue more long-term state bonds to the commercial banks. China will focus on infrastructure projects such as agriculture, forestry, water conservancy, transportation, telecommunications, environmental protection, construction and transformation of urban and rural power networks, and the construction of grain reserves depots directly under the central government. Further efforts will be made to channel investment into the central and western regions. In the first five months of 1999, total fiscal revenue reached US$50.3 billion, US$10 billion more than the same period of the previous year; while total expenditure came to US$42.6 billion, up by US$6.2 billion. In 1999, the deficits of the central budget will be bigger, projected to reach US$18.15 billion. However, from medium and long term points of view, the government needs to adhere to the principle of basically balancing revenue and expenditure, to pursue a moderately tight financial policy, and to reduce the deficits gradually. 

Monetary Policy 

As China’s economy has been growing at a reasonable speed and the inflation rate has come down steadily for the last two years, the focus of the country's financial policy has shifted to the promotion of economic growth. Since 1 May 1996, the central bank has lowered the interest rate seven times in succession, and at the same time, has enforced a steady monetary policy. However, in spite of all this, the growth rate of China’s M2 came down from 19.6% in 1997 to 15.3% in 1998 as a result of the impact of the Asian financial crisis and the restrictions in domestic demand.

MEDIUM-Term Prospects 

1999-2002 is the key period for China in the switch-over of its economic system from a planned economy to a market economy; therefore, the macro economic policies of the government will give greater emphasis to the correct handling of the relationships of three things: reform, development and stability. It can be expected that the government’s main objectives in this period will be to maintain a low inflation rate, to develop the economy at a moderately high speed, and to confine the unemployment rate within acceptable limits while the reform is deepened and the restructuring is under way. 

Economic Growth: To expand domestic demand will be a long-term policy adopted by China to promote its economy. In 1999-2002, domestic demand (consumption and investment) will be steadily on the rise. After 2000, in view of the fact that the impact of the financial crisis will gradually diminish, and the international environment, particularly the peripheral environment, will gradually improve, China’s economic growth rate is expected to average around 7%, and its CPI to be around 3% in this period. 

Current Account: In 1999-2002, China will continue to have a favorable trade balance. However, the adverse balance in service is unlikely to be eliminated completely, although the tourist trade, which is expected by the government to grow rapidly, may help alleviate the imbalance. The payments in the current account may be basically balanced. As the financial crisis has not produced a direct impact on China’s financial market, and the Chinese government has pursued an active policy to introduce foreign investment, FDI is expected to rise steadily after 2000. The foreign reserves will be relatively ample. 

Investment: It is anticipated that in the next few years, investment in fixed assets will continue to be the main driving force in China’s economic growth. With the expansion of domestic demand and the implementation of an active financial policy, investment in the state sector will increase; at the same time, the investment in the non-state sector will also pick up gradually. The estimated average increase in the investment in fixed assets will be 12% or so in 1999-2002. 

Employment: In each year of the period between 1999 and 2002, the increase in the working population will be over 11 million, of whom 85% will enter the labor market. As the reform of the state-owned enterprises forges ahead, and the economic restructuring quickens its pace, the employment pressure will become even greater, with the registered unemployment rate expected to be 3.5% or so. It thus follows that developing the economy to create more employment outlets, deepening labor market reform and stepping up the building of a social security system will all be hard tasks facing the Chinese government in the future. 

Major Structural Reforms 

Reforms already launched: 

1. Reform of the state-owned enterprises has been deepened. 

• Adjustment and reorganization have been carried out in the textile, coal, oil, petrochemical, metallurgical and national defense industries.

2. The social security system made rapid progress. 

• Re-employment centers have been set up in all the state-owned enterprises where staff and workers have been laid off. Up to now, 99% of the laid-off staff and workers of the state-owned enterprises have used the re-employment service centers.

3. Programs of basic retirement insurance, funds for pensions raised on the basis of overall planning, and funds for medical expenses for serious diseases raised on the basis of overall planning were brought into effect. Significant headway has been made in the reform of the financial system.

• Branches of the People’s Bank of China at provincial level have been closed; nine trans-provincial branches have been set up.
• A vertical management system has been introduced in the Security Supervision Commission.
• The Insurance Supervision Commission has been set up to supervise the insurance business.
• Branches of the state-owned commercial banks have been being closed, merged or adjusted.
• Quota control over loans by the state-owned commercial banks has been removed, management based on the assets to liabilities ratio carried out, and the system classifying loan quality into five grades enforced.
• Special bonds valued at US$32.6 billion have been issued for the purpose of recapitalizing the wholly state-owned commercial banks so as to enhance their capability to prevent financial crises.

Reforms to be launched: 

1. Financial reforms will be undertaken 

• To perfect the management system and the system that will ensure separate operation of the banking, securities, insurance and trust businesses; to implement the responsibility system for financial supervision;
• To accelerate the reform of the state-owned commercial banks, to see that the banks exercise the right to operate independently, and to carry out the work of setting up branches by economic region and by business;
• To set up, step by step, financial assets management companies to take charge of the bad credit assets of the banks; to enforce a rigorous responsibility system to ensure the quality of new bank loans;
• To run the policy banks well so as to implement the industrial policies of the state, and to raise the efficiency in the use of funds; and
• To standardize and safeguard financial order in accordance with law, and to check up on non-bank and local financial institutions to eliminate financial crises and maintain financial stability.

2. To increase export to balance external account measures will be taken 

• To further expand the exports handled by production enterprises themselves; to development international tourism to increase non-trade exchange earnings; and
• To raise the export tax-refunding rate by 2.56 percentage points on the average in 1999.

 China: Overall Economic Performance

Notes:

(1) Real Investment in Fix Assets Growth;

(2) Current Price;

(3) Current Price;

(4) 3 months inter-bank rate. 

Table 2. Forecasting Summary (% change from previous year)

Note: The LINK forecast is from the World Outlook (Proyect LINK, May, 1999); growth projection for 1998 is for GNP. The IMF forecast is from the World Economic Outlook (IMF, April 1999). The ADB forecast is from the Asian Development Outlook (1999). The OECD forecast is from the OECD Economic Outlook (OECD, June 1999).