Z~~~~~~l LI J\ 1-+,'S ;>-41 C' &7 X~ 1> 3 Ll - "T( i:DCCL 19602 July 1999 0 -' i, f K &KAKt'?Ki A L e. slw K-l 1 A WORLD BANK COUNTRY STUDY China Weathering the Storm and Learning the Lessons The World Bank Washington, D.C. Copyright ( 1999 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing July 1999 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the academic, business and financial, and development communities. 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Contents Abstract v Acknowledgments vi Executive Summary 1 PART 1 How CHINA IS WEATHERING THE STORM 1 1 Chapter 1 The Storm Clouds Emerge: Macroeconomic Developments and Policy Response 12 Macroeconomic Trends 12 The Authorities Respond: The 1998 Macroeconomic Policy Package 17 The Economy Responds: Macroeconomic Trends in 1998 19 Challenges for the Future 23 Notes 23 Chapter 2 Reforming China's Enterprise and Financial Sectors 25 Weaknesses in the Enterprise and Financial Sectors 26 Performance and Reform of the Enterprise Sector 27 Reform of the Financial Sector 32 Public Investment Program 33 Notes 36 Chapter 3 Challenges of Labor and Social Protection Magnified by Macroeconomic Shocks 38 Labor Markets 38 External Shocks and the Terms of Trade 39 Public Spending and Fiscal Tradeoffs 41 111 Public Investment Program 43 Notes 43 PART 2 BUILDING ON LESSONS LEARNED 45 Chapter 4 Developing a Macroeconomic Policy That Reflects External and Internal Uncertainties 46 Uncertainties Facing China in 1999 and 2000 46 Managing the Macroeconomic Policy Mix 49 Notes 5 1 Chapter 5 Developing a Pro-growth Strategy for the Enterprise and Financial Sectors 53 Transforming the Enterprise Sector 53 Reforming the Financial System 55 Limiting the Strain on Enterprises 58 Note 59 Chapter 6 Tackling the Social Agenda 60 Maintaining Employment 60 Supporting Consumption and Social Protection through Public Spending Choices 65 Monitoring the Evolving Social Impact 67 Annex. Job Growth Projections, 1998-2000 67 Notes 70 PART 3 STATISTICAL ANNEx 71 References 105 CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS iv Abstract T he difficulty of dealing with a domestic slow- tribution. It examines the policy options for the future down in China has been compounded by the to deal with economic slowdown, enhance reforms, and Asian crisis and the global economic slowdown. tackle the social agenda. These macroeconomic challenges come at a critical The report argues that the major policy issue facing juncture in China's structural reform program. Unem- China is how to respond to the near-term growth pres- ployment and demand for social protection have sures in ways that reinforce structural reform and eco- increased, and corporate debt pressures are building nomic development. As implementation of reform in China, in line with the transition to a more market- proceeds and newstorm clouds emerge, policymakers will based economy. However, the country's large and partly have to focus on pro-growth reforms that support the insulated domestic economy has inoculated it to some development of the labor-absorbing service sector. At the degree against contagion from its less fortunate neigh- same time, restructuring enterprises and strengthening bors. Having weathered the storm so far, China can corporate governance must remain high priorities, in learn lessons from other countries that have experi- order to both tackle the corporate debt problem and enced difficulties and, hence, diminish the risk of a cri- release assets to productive activities. Finally, China's sis in China. strategy needs to support structural measures that This report, China: Weathering the Storm and Learning the increase household demand by raising rural incomes Lessons, analyzes how China has responded to the domes- and providing adequate fiscal support to safety net pro- tic and global challenges of the past two years: macro- grams. Increasing household demand is essential to economic policy stance and effectiveness, reforms in the growth recovery and to successfully transforming China financial and enterprises sectors, and the effects of into a demand-driven economy that serves Chinese macroeconomic shocks on employment and income dis- households. v Acknowledgments T Ihis report was carried out by the World Bank in Ministry of Foreign Trade and Economic Cooperation; collaboration with the Chinese Ministry of the Ministry of Labor and Social Security; the China Finance. It is based on the work of a mission that National Bureau of Statistics; the People's Bank of China; met with Chinese government agencies during October the State Administration for Foreign Exchange; the 1998.The report was managed from the World Bank's field Industrial and Commercial Bank of China; the State office and written by a team led by Kathie Krumm and Council Development Research Center; the State comprising Carmen Chu, Jianqing Chen, Wei Ding, Peter Economic Reform Office; and various Chinese research Fallon, Albert Keidel, and Xiaofan Liu (World Bank) and and nongovernmental organizations. The Ministry of Xiao Geng (consultant). Additional support was received Finance kindly organized discussions of the draft report from E.C. Hwa, Limei Sun, Wei Wang, and Christine in February 1999. Wong (World Bank) and Tom Richardson and Paul Insightful comments from peer reviewers Andrew Heytens (International Monetary Fund). The report draws Sheng (Hong Kong Securities and Futures Commission), on studies carried out in collaboration with the State Michael Walton (World Bank), and Pieter Bottelier Information Center under the direction of Liu He and the (World Bank) are appreciated. The report was carried China National Bureau of Statistics under the direction out under the overall guidance of Yukon Huang, China of Liu Fujiang as well as on background papers commis- Program Director, and Masahiro Kawai and Kyle Peters, sioned by the World Bank and the Development Research of the Poverty Reduction and Economic Management Center under the direction of Lu Baifu and Lu Mai. Sector Unit of the East Asia and Pacific Regional Office The report benefited from discussions with the State of the World Bank. The report was edited by Barbara Development Planning Commission; the State Enterprise Karni, laid out by Garrett Cruce, and proofread by and Trade Commission; the Ministry of Finance; the Daphne Levitas of Communications Development. vi Executive Summary T his report builds on the framework and vision laid tackle the corporate debt problem and release assets to out in the 1997 Country Economic Memo- productive activities. China's strategy also needs to sup- randum, China 2020: Development Challenges in the port structural measures that increase household demand New Century, and its companion reports. Although the vul- by raising rural incomes and providing adequate fiscal nerabilities and near-term challenges facing China were support to safety net programs. Increasing household less apparent at that time than they are today, the demand is essential to growth recovery and to success- longer-term framework and vision presented in that fully transforming China into a demand-driven economy report remain largely valid. Building on that framework, that serves Chinese households. this year's report focuses on the near term. The difficulty of dealing with China's main macro- Weathering the Storm: The Effect of the economic challenge-weakened domestic demand-has East Asian Crisis been compounded by the Asian crisis and the global economic slowdown. These challenges come at a critical Unlike other countries in the region, China was not juncture in China's structural reform program. severely affected by the East Asian financial crisis that Unemployment and demand for social protection has began in 1997. Several factors explain its ability to increased, and corporate debt pressures are building in weather the storm. China, as the transition to a more market-based econ- China's economy is driven largely by domestic developments. omy proceeds. However, the country's large and partly Recent economic performance in China has been dom- insulated domestic economy has inoculated it to some inated by trends in the domestic economy, many of which degree against contagion from its less fortunate neigh- preceded the onset of the Asian financial crisis. By 1996 bors. Having weathered the storm so far, China can China had achieved a soft landing by reducing inflation learn lessons from other countries that have experi- dramatically without sacrificing high rates of officially enced difficulties and, hence, mitigate against the risk reported GDP growth. With the outbreak of Asian finan- of a crisis in China. cial crisis in the second half of 1997 and the continued The major policy issue facing China is how to respond weakening of domestic demand, soft landing policies to the near-term growth pressures in ways that reinforce were replaced with a macroeconomic policy mix aimed structural reform and economic development. As imple- at stimulating domestic demand. mentation of reform proceeds and new storm clouds China's economy had a good starting position, which allowed emerge, policymakers will have to focus on pro-growth it to respond to the macroeconomic challenges that emerged in 1998. reforms that support the development of the labor- As a result of the pragmatic stabilization policies adopted absorbing service sector. At the same time, restructur- since 1993, China enjoyed steady growth, low inflation, and ing of enterprises and strengthening of corporate an exceptionally strong external position. Foreign savings governance must remain high priorities, in order to both played only a negligible role in China's financial system, and most of those savings were in the form of foreign direct With total rural consumption equal to total urban con- investment and long-term loans. Currency inconvertibil- sumption in China, stimulating both rural and urban eco- ity on the capital account provided an additional buffer nomic growth will be critical to recovery. against destabilizing external financial flows. Exports to Asia havefallen, but the balance ofpayments remains The Governmentes Policy Response strong. Regional turbulence has reduced exports to Asian markets and foreign direct investment from traditional In 1998 the authorities responded to the challenges fac- Asian sources. The overall impact on export demand and ing the Chinese economy. Their program relied on stim- foreign direct investment flows has been muted, how- ulating domestic demand (largely through infrastructure ever, by continued growth from major North American and investment) while maintaining currency stability. China's European sources, particularly in the first half of the year. willingness to forgo external stimulus acted as an anchor Exports rose 0.5 percent (8.2 percent in real terms) in 1998, for East Asia economic stability in an environment of foreign direct investment inflows remained roughly at acute crisis. 1997 levels, and the observed trade account surplus Publicsectorinvestment-anda monetaypoligythataccommo- remained large and positive ($43.6 billion). dates it-stimulate demand. The centerpiece of the 1998-99 Illegal capital outflows have increased amidst concerns stimulus package is a public sector infrastructure invest- about the stability of the exchange rate, large-scale ment program, which is being leveraged by additional com- smuggling activities, and the reversal of capital flows, as plementary financing from the banking sector and local gains from interest rate arbitrage in 1997 fell following budget counterpart funds. The program, which represents cuts in yuan interest rates. In response, the government about 2.5 percent of 1998 GDP spread over two years, also recently strengthened its management of capital account increases allocations to various social protection programs transactions and closed loopholes for illegal capital out- and seeks to narrow regional differences by offering more flows under the current account. Overall the balance of attractive on-lending rates to inland provinces. payments position did not deteriorate. The heavy focus on infrastructure investment was aimed partly at meeting China's infrastructure needs and Other Developments in the Chinese partly at avoiding allocating resources to manufacturing, Economy a sector beset with excess capacity The program's invest- ments span water conservation, grain storage, road and Rural income and consumption demand have weakened. China's rail transport, power grids, and urban infrastructure, with agricultural sector represents about 20 percent of GDP; small allocations to housing and poverty relief. Some allo- the nonagricultural rural economy accounts for another cations are financing public goods, such as flood pre- 30 percent. A slight decline in real agricultural growth- vention projects; others are augmenting the equity base from 4-5 percent in recent years to 3.5 percent in 1997 of public enterprises, helping those enterprises qualify and 1998-was compounded by large declines in farm for complementary bank financing. procurement prices in 1996, 1997, and 1998. In the In close coordination with fiscal policy, China adopted nonagricultural rural sectors, rural enterprise growth a more relaxed monetary policy. Interest rates were cut has been slowing since the early 1990s but remains repeatedlyin 1998, and the reserve requirement was low- relatively strong. Labor absorption has weakened con- ered. Lower interest rates spurred fixed asset investment, siderably, however, and may have declined. As a result, alleviated the interest burden on state-owned enter- rural income and rural consumption demand have prises, and discouraged banks from keeping excess liq- weakened, with real household income rising by less in uidity with the central bank. the rural sector than in the urban sector in both 1997 Thestimuluspackagehasprovedeffective,with signsofrevival and 1998 (a reversal of the trends of the previous few emerging in late 1998. Driven by a surge in state-led invest- years). ment, China remains an engine of growth, growing 7.8 CHINA: WEATHERING THE STORM AND LEARNING IrHI. LESSONS 2 percent in 1998, according to official figurps. China's China that could help form the basis for a dynamic econ- strong performance is remarkable given the regional omy as long as progress continues to be made on restruc- crisis affecting its neighbors. To sustain the recovery, it turing enterprises away from inefficient, low value-added will be critical to build additional pro-growth structural activities. Serious problems remain, however. Many enter- reform measures into the program for 1999 and beyond. prises serving the domestic market are uncompetitive, China's countercyclical fiscal stance is appropriate and some large enterprise groups have focused on invest- given the limitations on monetary and external stimu- ment and size rather than profitability and efficiency. lus. Because of conservative fiscal policies in the past, Financial performance has worsened since 1995 across all China's level of government debt remained relatively low groups of medium- and large-scale industrial enterprises. (about 10 percent of GDP). In the medium term, how- Collectively owned and township and village enterprises ever, the fiscal sustainability of the program will depend whose growth had been key in the past decade are having on how the government can contain its additional lia- difficulty transforming themselves into efficient enter- bilities-notably in the banking and pension systems- prises. According to official figures, half of all medium-size and strengthen the central government's revenue base and large state-owned enterprises reported losses in 1998. in order to service those liabilities rather than on the mag- Including underreported losses (often uncovered in audits) nitude of the stimulus package. would raise this figure even higher. Corporate leverage is high, increasing vulnerability to shocks. The average lia- The Government's Commitment bilities to equity ratio is about 2:1 for industrial and state- to Reform owned enterprises and about 4:1 for commercial enterprises. In the financial sector, dependence on the banking sys- The new government installed in March 1998 laid out tem is excessive. China's financial sector is dominated an ambitious agenda that guaranteed growth and com- by the banking system, which accounts for three-quar- mitted itself to reforming state-owned enterprises, the ters of households' financial asset holdings and enter- financial sector, and the government structure within prises' external funding sources. The government three years. The agenda also established five reform continues to interfere in investment decisions. Financial priorities for 1998: grain marketing, investment proce- management of financial institutions is weak. Financial dures, housing, health financing, and fiscal and extra- skills are also lacking; turning bureaucrats and clerks into budgetary financing. Tackling corruption and financial bankers has proved no easy task. Bank portfolios include fraud also received renewed attention. Progress on all of a large share of nonperforming loans. The official esti- these fronts has been made. mate of the proportion of nonperforming loans in bank The Asian financial crisis has highlighted the impor- portfolios (based on the current classification system) tance of addressing systemic weaknesses in China's exceeds 20 percent, of which at least 5-6 percent are con- financial and enterprise sectors. The new government's sidered unrecoverable. These figures probably underes- agenda clearly recognizes that the domestic financial-cor- timate the true scope of the problem. Finally, regulatory porate nexus represents a major source of risk in the near capacity is inadequate. Expansion of the role of the term. Although the external threat of contagion is mod- financial system in China has outpaced regulation and est in a country with a large and partly insulated domes- supervision of the financial system, often leading to ad tic economy, recognition that the triggers for a crisis are hoc government interference in financial decisionmak- hard to predict has lent urgency to China's efforts to ing and inconsistent policy messages. Lack of adequate tackle systemic weaknesses. regulation has allowed many nonbank financial institu- Much progress has been made in China toward reform- tions to take on excessive risks. ing the financial and enterprise sectors. Preliminary analy- Fortunately there are additionalfactors that give China time to sis of medium- and large-scale firm-level industrial data learn lessons and avoid a aisis. Without taking into account suggest that a group of productive enterprises exists in China's continuing ability to support domestic banks and EXECUTIVE SUMMARY 3 enforce foreign exchange supervision, as well as the reform ference, and problems at some small troubled financial initiatives already taken, it might appear that China's institutions were resolved. These measures have only economy is rather vulnerable in the face of risks of finan- begun to address the weaknesses in the sector, however. cial crisis.For China, however, the likelihood of a crisis in Moreover, the pace of financial sector reform continues the near term remains small. The central role of domes- to be constrained by lack of progress on the enterprise side. tic savings, the composition of foreign saving, and the cur- As incentives in the financial sector improve, credit rency inconvertibility on the capital account provide a expansion will be dampened as banks become more dis- buffer against destabilizing external financial flows. The criminating about making loans-a trend that is already major commercial banks are state-owned, and depositor evident. Careful management of these reforms will be confidence in the banks remains high. The level of narrowly needed to ensure that they foster rather than hinder cor- defined government debt is low enough to allow the gov- porate restructuring. ernment to manage the contingent liabilities imbedded in the banking system. Continued attention to resolving the The Need to Address the Social Agenda underlying systemic weaknesses in the corporate and finan- cial sectors is required, however, to prevent an increase in Maintaining employment and ensuring that social pro- the risk of a crisis over the medium term. tections are major challenges for China as it moves to The pace of reform has accelerated since the Fifteenth Party a more market-oriented economy. The slowdown in the Congress ... Steps toward fostering corporate innovation economy has further highlighted the need to address the began in the mid-1990s. Despite progress in many areas, social agenda in China. however, these reforms have only gradually altered the Urban labor market equilibrium is increasingly fragile. basic governance mechanisms that left central govern- Rationalization of the labor force through enterprise ment ministries and local government bureaus in control reform has increased unemployment in China. A growing of operations. Reform accelerated after the Fifteenth Party economy was creating jobs in urban areas at a rate of Congress, held in September 1997, when the government about 7 million ayearbetween 1994 and 1997, manyin the restated the important role for "public" ownership (to be tertiary and informal sectors. Despite this job creation, interpreted more broadly than state control), and acknowl- employment growth has not been sufficient to absorb nat- edged the role of other forms of ownership, including lim- ural urban labor force growth, rural migration, and work- ited liability corporations, stock share corporations, and a ers let go by state- and collectively owned enterprises. As varietyofhybridownershipandcontrolforms.TheFifteenth a result, about 8.1 percent of the urban labor force was Party Congress also called for bolder steps to separate unemployed by mid-1998, according to World Bank esti- government units from enterprises, significant progress mates, with rates of unemployment of 12-13 percent in toward which was made in the second half of 1998. some urban areas. The emergence of urban unemployment ... with recent effortsfocusing on financial reform. Drawing and reduced migration from rural areas means that the partly on lessons from the Asian financial crisis about labor market equilibrium has become increasingly fragile. the financial vulnerability of large enterprises and enter- The problem has been particularly serious because of the prise groups, Chinese policymakers shifted their empha- inadequacy of the safety net. Because of the high unem- sis in 1998, placing greater attention on the financial ployment levels, the government may wish to hold in aspects of state-owned enterprises. Initial steps focused abeyance removal of remaining admistrative impediments primarily on banking sector reforms aimed at managing to rural-urban migration; but over the long term, as the financial risk and reducing the rate of accumulation of non- excess labor overhang is absorbed, removing these imped- performing loans in the system. A risk-based loan classi- iments will be essential to increase labor productivity. fication system was introduced, the central bank's network Regional incidence of external shock not limited to coastal of branches was consolidated along regional lines to area. Based on preliminary analysis through late 1998, enhance supervision and reduce local government inter- the Asian and global crisis has affected not only the CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 4 better-off coastal provinces but other provinces as well. forcing than they have been. Policies and programs must The direct impact has been relatively mild in the poor- emphasize pro-growth structural reform measures that est rural provinces, more severe in the coastal provinces, increase both demand and supply. The pace of these and most severe among middle-income areas in the reforms will need to be accelerated in order to reduce interior, which are suffering the most severe urban the need for implementing additional expansionary fis- labor problems and have sizable poor populations. With cal and monetary policies. the risks of exports deteriorating further, policymak- ers will need to look carefully at regional impacts. Avoid extremes in growth Funding ofsocialprotection schemes has increased but remains inadequate. During 1998 both the central government Chinese policymakers must try to maintain growth and local governments injected additional funding into within a narrow band. Lower growth-the greater risk the major social protection programs. The central gov- in China at this time-could cripple job creation and ernment subsidized local outlays for guaranteeing a exacerbate financial problems imbedded in the corporate basic living standard for workers laid off from state- sector. Higher growth could cause inflation and the need owned enterprises in central and western areas and old for sharp adjustments in the future. industrial bases. Efforts were also made to reduce pen- Growth will be affected by two major uncertainties: sion arrears. The injection has not yet been on the scale changes in the global environment and the extent to which required, however. As a result, not all laid-off workers eli- the domestic economy-in particular, household con- gible for re-employment services and subsistence sumption and nonstate investment-responds to the allowances and not all lower-income urban households macroeconomic stimulus package. In the base case scenario, eligible for minimum living stipends are receiving them. despite continuing difficult global economic conditions, the Public investments associated with the fiscal stimu- domestic economy responds modestly to the macroeco- lus package are relatively labor intensive, with a direct nomic stimulus package, growing about 7 percent in 1999. and indirect employment impact estimated at about 5 Under the downside scenario the global economy is million jobs over the two-year life of the program. Much assumed to deteriorate sharply, reducing GDP growth in of the investment program is rural based, employs China by 3 percentage points. Assuming that China can unskilled workers, and will stimulate employment in only partly offset this decline through domestic measures, the building materials sectors, which have excess capac- growth would fall to 5 percent a year. This possibility ity. Given the location of provinces experiencing the requires foresight and preparation by the government, largest temporary demand shock, efforts to direct a including stronger efforts to tackle the social agenda. larger share of fiscal financing toward the central and In either scenario some deterioration in the external western regions represent appropriate regional target- trade accounts would be consistent with the Chinese ing. Much smaller amounts have been allocated to sup- authorities' policy of maintaining relatively strong domes- plement poverty relief projects, however, suggesting tic economic performance. Given China's strong external further scope for targeted initiatives. reserves position and modest external debt burden, such developments are not likely to lead to unsustainable exter- Policy Options for the Future nal imbalances or an externally induced crisis in the base case. Policymakers will, of course, need to communicate Although new storm clouds are gathering, lessons of their intentions clearly to the market-by providing as experience-on macroeconomic management, capital much reliable information as possible-so that any dete- account liberalization, the corporate and financial sec- rioration in the external accounts is recognized as a con- tors, and social issues-are emerging. The key chal- sistent part of the government's overall macroeconomic lenge for the near term will be to make macroeconomic stance. Without such recognition, market confidence could and structural reform policies even more mutually rein- decline, setting off disorderly capital account behavior. EXECUTIVE SUMMARY 5 The downside scenario poses more serious risks, Given the large share of GDP accounted for by invest- because a sharper decline in the trade accounts could be ment of the nonstate system (16 percent) and rural and accompanied by short-term capital outflows. It is too urban household consumption (45 percent), sustainable early to assess the extent to which measures to intensify growth will depend on structural measures that can enforcement and scope of capital controls will have a last- stimulate their growth. Further reliance on centrally ing impact. Should such risks materialize, adjustments driven public investment as the primary fiscal instrument would need to be made to both domestic and external of reform could reduce the quality of investment. policies. Additional efforts may be required to remove structural impediments, improve the competitiveness of Transform the financial-corporate sectors-in time exports, and reduce the attractiveness of imports. China would still be well advised to cushion the impact on the Clearly, the way to gradually replace the poorly per- domestic economy with some decline in international forming parts of the economy is to develop the dynamic reserve levels. With current reserve levels standing at sectors of the economy. about I I months of imports of goods and services, there Develop the service and informal sector Nurturing of vig- is scope for such reduction without exposing China to orous enterprises and industries within the service excessive risks. As long as global demand remains weak, sector is a critical element of the pro-growth structural it will be difficult to rely on the external sector as a reform agenda. The same type of dynamism evidenced major source of growth. in the growth of China's external trade in recent years Stimulate domestic demand ifnecessary. Adequate domes- can be equally well used to tap the potential of the tic activity is key to minimizing risks on both the employ- domestic market. ment and corporate-financial fronts, which are likely to In other low- and middle-income countries, the increase in 1999-2000. Should the growth pattern evolve service sector accounts for more than half of nona- as expected, the government may not have to resort to gricultural employment and two thirds in large devel- major macroeconomic initiatives. It nevertheless needs oping countries. In China less than half of to be prepared to stimulate demand further if necessary. nonagricultural employment is generated by the ser- Maneuvering space has existed for short-term fiscal vice sector. Slightly faster growth in that sector could measures, subject to tackling the fundamental prob- add an additional 2 million jobs by 2000, reducing lems affecting fiscal sustainability. Recent World Bank the job shortfall by half. Expansion of service activi- analysis shows that while the government may be able ties could take place in various sectors, such as telecom- to cover its existing contingent liabilities in the banking munications and tourism, which are growing rapidly. and public pension systems, fiscal sustainability requires An array of business-related services-such as account- both successful containment of such contingent liabili- ing, auditing, legal, secretarial, media, public relations, ties and the strengthening of the finance of its central information technology, and communications-needs government. These factors, rather than the magnitude to be developed. Facilitating the development of this of the short term fiscal stimulus alone, will determine package of services is essential to the restructuring fiscal sustainability. While the reform of extrabudgetary enterprises and transformation of corporate culture funds is expected to raise the revenue to GDP ratio by that is the second prong of a pro-growth enterprise up to 5 percent over the next two to three years, the dis- strategy. cretionary allocative power of the budget will not increase, Create afinancial sector that serves dynamic domestic markets. as extrabudgetary funds are currently financing many Excessive attention to centralization and consolidation government activities. More fundamental fiscal restruc- of financial risks can impede precisely the financial sec- turing will have to be implemented, including broaden- tor transformation needed to improve intermediation of ing the tax base to include rapidly growing sectors and domestic savings. Increased financial supervision needs emerging nonstate activities. to be underpinned by a desire to develop the kinds of CHINA: WEATHERING THE STORM AND LEARNING TH] LESSONS 6 financial markets and instruments that help develop for enterprise restructuring, bankruptcy, and debt work- dynamic domestic markets. More vigorous enterprises outs and developing better accounting standards, judi- need greater access to capital so that they can increase cial processes, and other procedures. the returns to the large pool of domestic savings. Such The size and complexity of the Chinese economy access could be increased by approving public issues of defies any one comprehensive overarching strategy for debt or equity for private firms; promoting leasing; intro- tackling these issues, and one would expect to see a ducing a venture capital investment mechanism; sup- large degree of diversity in approaches across localities, porting development of smaller financial institutions, sectors, and institutions. The experience of other coun- which traditionally serve smaller, more dynamic clients; tries suggests that managing such problems is a complex developing over-the-counter equity markets; and expand- and lengthy process that requires some fiscal contribu- ing the corporate bond market. Capital markets can tion (although an emphasis on recovery can reduce the play an equally important role in strengthening corpo- cost to taxpayers). rate governance. A growing economy willfacilitate tackling of systemic weak- Restructure enterprises with excess capacity and strengthen nesses... Addressing systemic weaknesses by developing corporate governance. The corporatization and commer- dynamic industries and increasing growth can-in fact, cialization of state-owned enterprises-and the separa- must-be done simultaneously. Based on analysis of the tion of party politics and government from liquidity position of enterprises in the industrial survey, business-represent steps in the right direction. China's firms with higher productivity appear to have a cushion incentive structures, legal framework, and code of con- to absorb some deterioration in financial performance duct remain inadequate to strengthen corporate gover- without jeopardizing their ability to employ workers or nance, however. Restructuring of physical capacity must service financial obligations. Most firms with low or neg- go hand in hand with financial restructuring and delever- ative productivity, however, are already unable to meet aging of enterprises; enterprise reform must be closely current obligations to workers and suppliers, let alone coordinated with banking reform and capital market financial institutions. More worrisome yet, firms with development. marginal productivity (which control about a third of total A framework must be established for resolving bad assets) have little margin for further stress. The pre- bank debts and attracting investors. The recent increase carious position of many Chinese firms reinforces the in emphasis on financial sector reform is a welcome importance of avoiding excessive declines in growth, start. Unless the quality and allocation of new financial which threaten survival of firms that could remain viable flows is improved within China, however, problems will in a healthier economy. Improving the climate for recur. Strengthening supervision, enforcement, and dynamic firms and sectors is essential to managing the transparency will be critical to improving the incentives difficult balancing act of accelerating corporate restruc- to financial institutions as well as to maintaining confi- turing and maintaining macroeconomic stability. dence of others in the financial system. ... and relieve the strain on the labor market. The strains on The interrelationships between the enterprise and the labor market in China are likely to be unusually financial sector are extremely complex and involve sev- acute in the next two or three years until the com- eral hundred thousand enterprises. Because the bulk of pounding urban overhang has been absorbed. Economic loans are with the four large state-owned banks, the growth can facilitate labor absorption and reduce slack- authorities have selected reform of those institutions as ness. If, for example, the economy grows by 7 percent a the key entry point for tackling the bad debt problem. year, the expected annual urban job shortfall of about 4 The initial impact has been to harden the budget con- million jobs could be equilibrated largely through a siz- straint on state-owned enterprises, which in turn has cre- able absorption by the informal sector. The urban unem- ated pressures in the system for additional reforms, ployment rate could rise by about I percentage point, such as improving the legal and regulatory framework however, and rural labor absorption could fall by about EXECUTIVE SUMMARY 7 a third. Growth ofjust 4-5 percent a year could have a in infrastructure, and introducing clear enabling legisla- more severe effect on employment. tion for foreign investment to help restructure state- Even with growth of 9 percent a year, however, China owned enterprises. is likely to face an employment shortfall of about 2 mil- The Asian financial crisis has shown that caution lion jobs a year. These figures highlight the need to must be used in encouraging international short-term develop labor-intensive enterprises. Reforms that help capital flows. It has also shown, however, that excessive develop the service sector, private sector employment, restrictions over foreign participation in the provision of urban informal sector, processing industries, and non- domestic financial services can impede healthy devel- grain agricultural production are essential to reduce or opment of the domestic financial system. absorb the job shortfall. Given disparities in regional labor markets, the inten- Increase household consumption sity of labor market interventions should vary across regions. Internal migration should be facilitated, but it Growth in household consumption is important both to is likely to have only a marginal equilibrating effect in increase demand and to restructure the economy away the short run in the face of large disparities. Retraining from heavy and supply-driven investments toward a pro- will need to be selective to ensure adequate social returns. duction structure that responds to market demand. The China's labor surplus appears to be a transitory economy has begun to reflect the needs of Chinese problem. If current rates of natural attrition and lay- households, but the legacy of past imbalances remains. offs were to continue, the surplus would disappear by Policies that encourage greater rural and urban con- as early as 2001 and no later than 2004. With the urban sumption are essential to both near-term growth recov- labor overhang exhausted, the flow imbalance in the ery and the quality of that growth. urban labor market would be corrected. The urban Strengthen the safety net. One of the major factors that has labor market would be able to absorb more workers than constrained consumption for many households is uncer- required; the pace of rural-urban migration could be tainty with respect to future income security. Creation of restored, if not accelerated; and levels of structural adequate safety nets for households experiencing tempo- unemployment built up during the transition could be rary adjustment problems would increase public confi- reduced. The right combination of macroeconomic and dence in future household economic security, which in structural policies could allow this transition to be turn would stimulate urban household consumption. accelerated. Building on efforts by both local and central govern- Foreign direct investment can ser7ve these domesticbusiness devel- ment in 1998, the authorities will need to ensure that opments. As the lessons from the recent Asian crisis indi- social protection programs receive adequate fiscal sup- cate, China should remain cautious about portfolio and port. Less than 0.5 percent of GDP would be required short-term capital flows until it is prepared to assume the to fully fund the social protection programs already associated risks. At the same time, it should continue to established by the government. These programs must encourage longer-term flows. China is fortunate to have reach fiscally distressed localities, especially if a contin- sufficient policy levers to continue to attract foreign direct ued slowdown continues to disproportionately affect investment with which it can augment and enhance provinces with the greatest urban labor imbalances. domestic business development. Although overall inter- The 1998 public investment program stimulus pack- est by foreign direct investors has declined since the Asian age, which relied largely on traditional large-scale invest- crisis, there is scope for making up the shortfall by encour- ments, missed the opportunity to use the public works aging investment in the more dynamic sectors of the programs to target areas in need. Funding of small pub- economy (many of which remain on the "restricted" list), lic workfare programs could enhance regional targeting promulgating the build-operate-transfer (BOT) law and and have a strong social impact in depressed urban other steps to liberalize foreign and private investment economies and poor rural areas. CHINA: WEATHERING THE STORM AND LEARNING TMH L1.SSONS 8 Should growth and employment slow significantly, Organization of the Report adequate fiscal support for social protection programs will prove even more vital. To prepare for such a possibility, The report is organized as follows. Chapter I describes the authorities must develop a contingency plan for macroeconomic developments in China in the past two reaching the rising number of distressed rural and urban years in the context of developments since 1991. It also households. reviews China's policy stance, examines the response Increase revenue mobilization. China's macroeconomic of the Chinese economy to the domestic stimulus pro- stance must not threaten key public expenditures over gram, and identifies factors that will affect the success the medium term. To enable the government to finance- of the program in the future. Chapter 2 examines the and expand-its involvement in the social sectors, espe- weaknesses in the financial and enterprises sectors and cially in rural areas, revenue mobilization must be describes the reforms that have been adopted. It also strengthened. Many of the institutional measures describes China's public investment program. Chapter required will take time, but the groundwork must be laid 3 examines the effects of macroeconomic shocks on now. Improvements in budgetary management systems employment and income distribution, looking at labor will be critical to improving the link between the gov- markets, external shocks and the terms of trade, and ernment's priorities and its budget. public spending and fiscal tradeoffs. Chapter 4 exam- Implement other structural reforns. The shift toward con- ines three alternative scenarios for the future, linked sumption has implications for a range of policy issues, to the global picture, and shows how the government many ofwhich China is already pursuing. Housing reform can use fiscal (especially expenditure), monetary, is essential to stimulating demand for housing in the exchange rate, and trade policies to deal with an eco- medium term. The timing is right for monetization of nomic slowdown. Chapter 5 presents specific recom- nonwage benefits. In the rural sector, agricultural policies mendations for reforming the enterprise and financial can enhance rural consumption and benefit domestic firms sectors. Chapter 6 looks at ways in which policymakers producing lower-end goods. Opportunities for continued can maintain employment, support consumption, and rural migration are also essential. These and other pro- increase social protection, thereby tackling the social household shifts in consumption need to be accelerated. agenda. EXECUTIVE SUMMARY 9 Part 1 How China Is Weathering the Storm Chapter I The Storm Clouds Emerge: Macroeconomic Developments and Policy Response T he structural reform agenda for the medium- and opments since 1991. It also reviews China's policy longer-term was laid out in the 1997 Country response, examines the response of the Chinese econ- Economic Memorandum, China 2020: Development omy to the domestic stimulus program, and identifies fac- Challenges in the New Century, and its companion reports. tors that will affect the success of the program in the Although the vulnerabilities and near-term challenges future. facing China were less apparent at that time than they are today, the longer-term framework and vision pre- MacroeconomicTrends sented in that report remain largely valid. Building on that framework, this year's report focuses on the near China's macroeconomy was in a solid position to respond term. to the shocks that emerged during the past two years. Faced with the combination of a domestic slowdown Problems that developed in 1997 led to a shift to a and regional financial turmoil in 1997-98, China was domestic stimulus program in 1998. The economy forced to make difficult policy choices. Policymakers rec- appears to be responding to that program. Whether the ognized that a sharp slowdown in economic growth could program will generate sustained growth should become cause a decline in employment opportunities and worsen evident in 1999. enterprise financial performance, thereby making the labor and social adjustment more difficult and exacer- Economic Developments in 1 996 ond 1997-A good bating the problems of the domestic financial system. Too stort is half of the success' little stimulus is a risk. At the same time, they recognized that failure to keep up the pace of structural reforms The macroeconomic stabilization program adopted in could exacerbate medium-term problems and reduce 1993 guided the Chinese economy toward a soft land- confidence by households and investors alike in China's ing in 1997. Consumer price inflation fell from 24.1 future. Too much stimulus at the cost of reforms is a risk. percent in 1994 to 2.8 percent in 1997, while growth China's policies and programs in 1998 have tried to momentum remained relatively strong. GDP growth reconcile the tension between maintaining macroeco- in 1997 was officially reported at 8.8 percent, led largely nomic stability and moving ahead with structural by an export-driven expansion during the first half of reform. China has minimized the risk of contagion the year and a domestically driven expansion during the from its neighbors and adopted new structural reforms second half. aimed at preventing financial crisis in the future, China's external position was exceptionally strong in learning from the experiences of other East Asian 1997, with a trade surplus of US$40 billion and foreign economies. investment of US$45 billion. As a result, foreign exchange This chapter looks at macroeconomic developments reserves rose to US$140 billion, almost twice their 1995 in China in the past two years in the context of devel- level of US$74 billion. 12 China's external debt position has been prudent. The The decline in exports to Asia was partly offset by increases in exports majority of inflows have been long-term funds and direct to other markets investment, resulting in an external debt to GDP ratio FIGURE 1.1 of 16 percent by the end of 1997, about a fifth of which Growth in exports by destination, 1996-98 was short-term debt (World Bank 1999a).' Percent The structural reform program continued to move 25 forward in 1997. The Fifteenth Party Congress, held in September, reaffirmed support for continued domestic 20 reform, including nullification of the state guarantee of employment and welfare, endorsement of an important I 5 role in the economy for a wider group of ownership cat- 1 egories, and acceleration of state-owned enterprise reform. The policies adopted in 1996 and 1997 gave China a good starting position from which to respond to the o -* a_ problems that developed. During the second half of m Total * North Asian crisis 1997, with the domestic contribution to GDP growth -s already declining and the effects of the East Asian cri- 0 Asia M Europe sis beginning to be felt in China, the pace of economic -10 D :S| . /,- growth slowed. The Effect of the East Asian Financial Crisis Source: China General Administrabon of Customs. China has probably been the East Asian country least in world commodity prices. China's exports are mainly affected by the regional crisis that began in 1997. China's labor-intensive low value-added goods, and its exports economy is still largely domestically driven. Although are not highly correlated with those of other Asian trade represents about a quarter to a third of GDP (com- economies.3 At the same time, sizable currency depreci- parable to other large countries, such as the United ations by these countries have eroded China's wage cost States and Indonesia), these figures overstate the coun- advantages, increasing both competition in the export sec- try's vulnerability to trade shocks.2 About half of China's tor and the competitiveness of imported goods domesti- exports are generated by enclave operations owned by cally.4 In addition, the anti-smuggling campaign that foreign-invested firms with high imported content. intensified toward the end of 1998 reduced exports in China has nevertheless felt the impact of the East the short term, as enterprises that had relied on smug- Asian crisis. Lower demand, lower export prices, and gled imports need time to search and switch to other reduced competitiveness by domestic producers have legal sources of supply. hurt Chinese exports tojapan, which accounts for 16-17 About 80 percent of foreign direct investment in percent of exports; the Republic of Korea, which accounts China has traditionally come from regional investors, for 5 percent of exports; and other ASEAN economies, with Hong Kong (China) accounting for 55-60 percent which account for about 4 percent of exports. Exports to of the total.5 The reduced wealth and liquidity of China's China's other major markets, the United States and to key Asian investor bases slowed regional foreign direct a lesser extent the European Union, rose, partly offset- investment in China.6 In the wake of the Asian crisis, the ting the decline in demand from Asia (figure 1.1). share of investment from Hong Kong (China) declined Export volume rose 8.2 percent in 1998, while export to 46 percent in 1997 and 41 percent in 1998. The share prices fell 7.7 percent, a decline consistent with the drop of investment accounted for by Taiwan (China) also fell, THE STORM CLOUDS EMERGE: MACROECONOMIC DEVEI.OPMENTS AND Poi.icY RESP'ONSE 13 while the share of investment accounted for by the matically while maintaining high official rates of GDP United States and European countries, such as France growth. By early 1998, however, the growth of domestic and Germany, rose. demand continued to weaken, inflation became negative, The increased perception of risk associated with the and the Asian financial crisis began to affect the Chinese Asian crisis may have reduced interest by North American economy. China's soft landing policies were replaced and European investors, but the backlog of project pro- with a macroeconomic policy mix aimed at stimulating posals provided the authorities with a cushion of invest- domestic demand.The effect of weakening demand is ments on which to draw. Realized foreign direct revealedinChina'sofficiallyreportedGDPgrowthrates, investment from the United States rose 21 percent and which declined from more than 14 percent in 1992 to 7.8 contractual foreign direct investment rose 26 percent, percent in 1998 (figure 1.2). while realized foreign direct investment from Europe rose 3 percent and contractual foreign direct investment rose SECTORAI. TRENDS. Although weaker performance by 40 percent, offsetting the decline among Asian investors. the agricultural sector contributed to the slowdown in Over the past five years realized foreign direct invest- GDP growth, the sharp deceleration in real industrial ment doubled its share in total fixed assets investment. growth was the main cause of declining economic growth It still represents only 15 percent of total investment, rates in 1995-98. Output growth by state-owned enter- however. China relies less on portfolio and other flows prises fell slightly, but the decline was especially pro- most directly affected by external developments. These nounced for nonstate-owned output. Growth in collective, channels are important for certain sectors, such as private, and foreign joint-venture production-which finance, however. had led the industrial output surge in 1992-94-declined During 1996-97 the strong balance of payments put sharply (figure 1.3). incipient pressure on the yuan to appreciate. While The sharp deceleration in industrial output reflects some factors contributed to a deterioration in the bal- both structural factors and the decline in aggregate ance of payments, they offset earlier pressures to appre- ciate and were not sufficient to lead to macroeconomic The end of the soft landing pressure to devalue. Nonetheless, concerns over deval- FIGURE 1.2 uation intensified, particularly as the Asian crisis wors- Official GDP growth, 1991-98 ened, spilling over into other emerging markets. Percent Current account convertibility and off-shore financ- 25 ing contributed to leakages from the capital account, making it more difficult to manage the current and cap- IndusAsian csis ital accounts and implying some vulnerability to capi- 20 onset tal flight. China's external linkages are strong enough to affect 15 Total economic developments. The enormous size of China' s economy reduces its vulnerability to external shocks, X however, and suggests that policymakers' primary focus 0 should be on domestic economic developments. Servce 5 Agricufture From Soft Landing to Domestic Demond Stimulus Beginning in 1993 China adopted anti-inflationary mea- 0 sures and implemented structural reforms. By 1996 1991 1992 1993 994 1995 1996 997 998 China had achieved a soft landing, reducing inflation dra- Source. Govemment statistics. CHINA: WEATHERING THE STORM AND LEARNING H. LE.SsONS 14 Growth by industrial enterprises has declined enterprises rose from 8 percent in 1996 to 15 percent in FIGURE 1.3 1997, with reports of further deterioration in 1998. The Official industrial growth, 1991-98 level of losses has increased even more rapidly, reaching Percent Y60 billion in 1997, with even worse losses reported 80 Other unofficially in 1998. The number of enterprises in oper- ation has also declined sharply, falling from 23 million 70 Asiancrisis in 1996 to 20 million in 1997, with anecdotal accounts 60 onset of continued closings in 1998. Major causes of these fail- ures include poor management, high levels of indebt- 50 o edness, and the inefficient small scale of operation. owned Despite these difficulties, value added in rural enter- 40 enterprise prises grew roughly 16 percent in real terms in 1997, a 30 much larger increase than in other sectors. The rate of / >0 e Total growth in the sector was roughly consistent with growth 20 f" \, . \ of 17.5 percent in 1995 and 14.2 percent in 1996. 10 State-ownd _Although real growth has remained high, employ- State-ow.ned - _ ment in rural enterprises has fallen as a result of efforts enterpnise 0 to increase profitability and reduce costs. Reports vary, 1991 1992 1993 1994 1995 1996 1997 1998 based on different definitions, and in some cases the Note: Other includes individual-owned enterpnses in urban and rural areas and other data seem contradictory, but the overall conclusion is the types of pnvate ownership. Source: Govenment statistics. same: rural enterprise employment opportunities sig- nificantly weakened in 1996-98 (see chapter 3). These decelerating trends in rural enterprise activity demand. Oversupply of poor- to mediocre-quality products and employment weaken rural incomes and hence con- produced a surfeit of unsellable products and contributed sumption demand. Rural household income from nonfarm to a moderate increase in industrial inventory in 1995-96. activities expanded its share of rural household income As early as 1995, when the industrial census was taken, from 22 percent in 1990 to 36 percent in 1997. Official many industrial sectors had as much as 50 percent idle data indicate that real rural household income increased capacity. The oversupply of goods has begun to influence by only 4.3 percent in 1998-even less than the 4.6 per- industrial behavior. The increase in inventories as a share cent figure for 1997 and much less than the 7.4, 10.0, and of capital formation declined during the growth slowdown 14.4 percent increases in 1994, 1995, and 1996. of 1996-97, reflecting the fact that traditional funding for This sharp decline in rural income growth has not been working capital and inventory build-up was more difficult caused solelyby weaker rural enterprise employment con- to obtain as the budget constraint hardened in line with ditions. Even more important has been the decline in pro- financial sector reforms (see chapter 2). curement prices for agricultural products since 1996. The large and continuous decline in farm procurement prices THE RURAL ECONOMY. China's nonagricultural rural in 1996, 1997, and 1998 had a major impact on rural economy (which accounts for about 30 percent of GDP) household income. has been hurt by declines in total demand, growing China's agricultural sector represents roughly 20 per- structural imbalances, and credit tightening. Large and cent of total GDP Crops account for 45 percent of rural profitable rural enterprises have nevertheless performed household income, with animal husbandry, forestry, and well. Small and financially struggling rural enterprises aquatic products accounting for another 11 percent and have seen performance decline precipitously, however. wage labor in farm jobs accounting for another 2 percent. The proportion of loss-making township and village Following real increases in farm prices of 17 percent in THE STORM CLOUDS EMERGE: MACROECONOMIC DEVELOPMENTS AND PoI.cY RESPONSE 15 1994 and 3 percent in 1995, farm procurement prices fell Investment growth had slowed 3.5 percent in 1996 and 7 percent in 1997, after account- FIGURE 1.4 ing for inflation. Incomplete data for 1998 indicate that Real growth of fixed asset investment, 1991-98 procurement prices continued to decline, as rural retail Percent food prices fell 2 percentage points more than rural con- 5SO sumer prices. As a result of these trends, rural household Other nominal income from farming remained essentially flat, 120 Collectively Asian crisis despite real agricultural growth of 3.5 percent in 1997. owned onset enterprise What agricultural income gains there were came pre- 90 dominantly from animal husbandry (which accounted for roughly 30 percent of nominal growth). Preliminary 60 reports for 1998 put real agricultural growth at 3.5 per- cent, suggesting that per capita rural household income State0 Total growth must have remained weak. 30 owned The conditions responsible for low rural household 0ers income and consumption growth-weak rural enterprise 0 performance and low agricultural procurement prices- are not likely to change much without a significant increase -30 in aggregate demand from the nonfarm sector. Changes 1991 1992 1993 1994 1995 1996 1997 1998 in China's basic agricultural policy mix-which was Note: Other includes individuals, joint-owned economic units, shareholding economic units, foreign-funded economic units, economic units funded by entreprenuers from adopted in 1995 to ensure adequate domestic grain out- Hong Kong, Macao, and Taiwan (China), and others. put at stable prices and was not changed under the 1998 Source: Government statistics. economic reform program-may also be necessary. Without these changes, rural consumption, an important compo- nent of overall GDP demand, is likely to remain weak, Domestic developments dominate unless national demand for rural products recovers and new FIGURE 1.5 reforms make higher-income-earning activities possible. Foreign and domestic demand, 1986-98 The program is the main cause of the 1996-98 bumper Percent grain production levels, which caused grain prices to fall. 20 Since early 1998 the government has sought to support Domestic demand minimum grain procurement prices to protect ruralr incomes, but the program promises to be both difficult to 15 Total GDP onset enforce and expensive, despite efforts to reduce fiscal and quasi-fiscal outlays. Additional subsidy programs (for veg- 10 etables, meats, oil crops, and cotton), which affect rural incomes, also remain in force through 1999. 5 AGGREGATE DEMAND. Fixed asset investment slowed in 1997 and the first half of 1998 before picking up sharply 0 in the third quarter of 1998 (figure 1.4). Consumer demand weakened, and the importance of domestic demand to Foreign demand GDP growth declined, falling from roughly 90 percent of -5 1986 1988 E19so 1992 1994 1996 1998 GDP growth in 1994-96 to just 57 percent in 1997 (fig- ure 1.5). These problems became especially serious in Source:Govemmentstatistics. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 16 the second half of 1997 and the first half of 1998. The recov- domestic economy dominates macroeconomic develop- ery that began in the third quarter of 1998 raised domes- ments, the package appropriately focused on the domes- tic demand's contribution to GDP growth to 7.4 out of 7.8 tic economy. percentage points (95 percent), however. Before the crisis intensified, the government Growth in household consumption declined to 7.4 announced that beginning in 1998, incentives for invest- percent in 1997. The 3.9 percent rate of growth of rural ment would be increased. Exemptions on import tar- consumption was the slowest since 1989-90. Urban iffs-which had been blamed for the slowdown in foreign household consumption remained relatively robust, direct investment-were resumed on imported equipment although it has been affected by increased uncertainty in priority areas. As the scope of the slowdown became over future household income security as the economy apparent in early 1998, the authorities outlined their moves to a market-based labor market. Brisk sales of policy response, which consisted of stimulating domestic higher-end consumer durables and sluggish sales of low- demand (largely through infrastructure investment) and end nondurables hint at a shift in income distribution in maintaining currency stability, thereby forgoing external favor of higher-income families. stimulus (box 1.1). The initial stimulus package aimed In the past, China's net exports have generally surged at increasing investment by about 15 percent, a sizable when domestic demand was weak. Because of the Asian increase over the past few years, when investment con- crisis, however, export demand has been weak and com- trols (particularly in booming coastal regions) and rela- petitively priced imports have made inroads into the tively tight monetary policy were in place. domestic market, thus weakening overall demand. By the second quarter of 1998 it was clear that lend- ing through the policy banks and other sources would The Authorities Respond: The 1998 not provide adequate stimulus. By mid- 1998 adjustments Macroeconomic Policy Package were made to further loosen the monetary policy stance with additional interest rate cuts. These changes followed By late 1997 the combination of slowing domestic demand earlier cuts in interest rates and the reserve requirement growth and the effects of the emerging international cri- announced in March. Despite these efforts, the deceler- sis led the Chinese authorities to respond with an evolv- ation of the economy continued and worsening external ing macroeconomic policy package. Because China's developments threatened to exacerbate weak indicators. BOX . I China's commitment to maintaining the value of the yuan While the Asian regional currencies depreciated in nominal The policy also made good economic sense for China. China had terms by some 20-80 percent against the U.S. dollar in the midst a large trade surplus, significant foreign direct investment inflows, for- of the Asian crisis, the yuan remained stable, as the Chinese eign exchange reserves of nearly a year's import payments, and low authorities remained firmly committed to a nondevaluation inflation. Moreoverthe effectiveness of devaluation would likely have policy. Concems about a possible devaluation intensified when been limited, given that weaker Chinese exports stem mainly from the Japanese yen weakened sharply during the third quarter of tepid extemal demand rather than lack of price competitiveness. 1998. Those concerns reemerged when the Guangdong Although exports to Asia (which accounted for half of China's InternationalTrust and Investment Corporation declared bank- exports) fell 10 percent in 1998, China remained competitive with ruptcy, and the crisis in Brazil began, in January 1999. Chinese otherAsianexportersinothermarkets,asdemonstratedbythemain- policymakers held fast, however. tenance of its market shares in the United States and Europe in 1998. The stability of the yuan served as an anchor at a time of volatile China's capital account remains closed, and management of currency markets and herd behavior Any competitive devalua- the convertible current account was recently strengthened, pro- tion may have led to further rounds of speculative behavior and tecting China from massive, especially illicit, capital outflows. volatility China's policy stance thus made an important contribution However, over time it may emerge that China suffered some loss to resolving the financial and global crisis. of competitiveness as a result of its decision not to devalue. THE STORM CLOUDs EMERGE: MACROECONoMIc DEVELOPMENTS AND PoI.cY REsPONSE 17 Consequently, in August 1998 the authorities introduced have less of an effect on demand than direct cuts. a fiscal stimulus package and active monetary measures. Moreover, the level of tax revenue mobilization (12 per- cent of GDP) is already low and in need of structural mea- The Fiscol Stimulus Program sures. With the aim of boosting exports, the authorities did increase the value-added tax rebates on a number China's fiscal stimulus program represents about 2.5 of export items, albeit not to the full rebate consistent percent of estimated 1998 GDP. With its multiplier with neutral tax treatment. effect, it is sufficiently large to have a major impact on One of the policy reforms announced for 1998 by the aggregate demand. This countercyclical fiscal stance is newgovernment was housing reform. The role of housing breaking new policy ground in China. reform as a stimulus measure remains in doubt. The The package consisted of aYlOO billion fiscal injection reform, which reflected manyyears of preparation, proposes in 1998-99 (US$12 billion, or 1.4 percent of GDP), financed raising urban housing rental charges dramaticallywhile sell- through the issuance of special government bonds to the ing housing to occupants, usually at highly subsidized state commercial banks. The centerpiece of the package prices. New housing would be provided at cost in a system is a public sector infrastructure investment program- of "monetized allocation" rules, under which an urban made up largely of traditional large-scale projects-which employee would be awarded the right to enterprise match- will be leveraged by an additional YIOO billion in com- ing funds and bank mortgage credits to supplement pri- plementary financing from the banking sector and local vate payments for housing purchase or upgrade. The budget counterpart funds (see chapter 2). The package fundamental change would be that housing purchase and also increases allocations to various social protection pro- quality control decisions would now be in the hands of grams (see chapter 3) and seeks to narrow the gap between households rather than work units. As housing distribution coastal and inland provinces by offering more attractive and sale has proceeded and preparations are made for fur- on-lending rates to inland provinces. Because of the enor- ther implementation, resistance to borrowing for-or sim- mous size of the Chinese economy, it will take time before ple inability to fund-private contributions to housing the full effects of the stimulus are felt. costs has raised doubts about whether the new system The current macroeconomic situation is favorable for will be able to fund new urban housing adequately, much a substantial fiscal stimulus. Levels of government debt less result in a major stimulus to overall demand. are modest relative to GDP; interest rates are set by the government, but at an attractive level; and the capital Monetary Policy account remains controlled. The additional debt burden associated with the fiscal stimulus does not add significantly An important element of the macroeconomic stimulus to China's level of government debt.7 The high ratio of M2 package is an accommodating monetary policy stance. to GDP gives scope for a larger share of government debt Various monetary measures were taken to avoid crowding in households' financial assets. Putting these measures in out investment. A more relaxed monetary policy was a medium-term quantitative framework and taking con- adopted in order to encourage fixed asset investment, tingent liabilities into account, fiscal sustainability over- alleviate the interest burden on state-owned enterprises, whelmingly depends on how the government can contain and discourage banks from keeping excess liquidity with its contingent and hidden liabilities-especially in the the central bank. Deposit and lending rates were lowered banking and pension systems-and strengthen the finance in March and again inJuly and December. These moves of the central government, rather than on the size of the lowered longer-term interest rates significantly and reduced stimulus package (see box 4.1). the rate of interest paid on reserves held with the central Public expenditure expansion was chosen over tax cuts bank relative to bank deposit rates. Interest rates on U.S. as the main instrument for fiscal stimulus because dollar deposits were lowered before domestic rates were China's tax system is dominated by indirect taxes, which cut in order to avoid massive shifts in deposits. CHINA: WEATHERING THE STORM ANI) LEARNING T H1 LE.SSONS 18 In early 1998 the reserve ratio was lowered from 13 per- Monetary policy accomodates cent to 8 percent. The additional liquidity was largely FIGURE L.6 absorbed, however, as the central bank recalled loans to com- Quarterly money supply growth, 1996-98 mercial banks in order to sterilize the inflationary impact Percent of the monetary expansion. Additional steps taken to enhance 12 the lending capacity of financial institutions included grant- I0 ing policy banks permission to issue bonds under market M f mechanisms for fund raising, restoring open market oper- ations through government bond repos in the interbank mar- 6 ket, widening the interest rate band for lending to small 4 enterprises and establishing guidelines to encourage loans 2 3 . to small and medium-size enterprises, and simplifying the ,. interest rate structure of seller credit in exports of machin- 0 ery (which accounted for 20 percent of total exports). -2 MO In early 1998 the People's Bank of China reallocated -4 Asian cnsis YIOO billion within the overall indicative credit plan to onset increase loans for fixed asset investment to a guided level M2 of Y370 billion. The overall indicative credit quota for 1998 4. % was later raised to YI trillion (from the Y900 billion set at the beginning of the year), supporting the bond issue Note: Growth calculated relative to the last quarter (seasonally adjusted). of Y 100 billion. Notices were issued to commercial banks encouraging them to extend mortgages, car loans, and con- sumer credit. Guidelines were also announced to pro- Growth mote "closed loans," or loans to loss-making state-owned enterprises producing marketable and profitable products. Growth in early 1998 increased much more slowly than The volume of these loans was insignificant, however, the government had anticipated. Consequently, the rest because of the difficulty of finding clients and the costli- of 1998 became a catch-up effort, as the government tried ness of controls needed to prevent abuses. to ensure that it met its much-publicized annual GDP As a result of the adjustments to monetary policy, mon- growth target of 8 percent. By the end of the third quar- etary aggregates began to pick up by mid-1998, reversing ter, it was clear that the stimulus program had indeed the deceleration that had occurred earlier in the year ended the deceleration of growth and that growth had (figure 1.6). The increased emphasis on bank lending begun to accelerate. accountability had reduced bank loans to enterprises, The most direct indicator of a growth turn-around is and enterprises withdrew deposits to meet liquidity needs. the acceleration in GDP growth from 7.0 percent in the However, with increases in the growth of lending in the first half of 1998 to 7.6 percent in the third quarter and third and fourth quarters, credit to the nongovernment 9.1 percent in the fourth quarter (figure 1.7). Stronger sector was up 16.3 percent by the end of 1998. growth was evident in both primary and secondary sectors. A second indicator is the acceleration in investment The Economy Responds: Macroeconomic by state-owned enterprises, which rose 20 percent in Trends in 1998 1998 and remained robust at the beginning of 1999 (fig- ure 1.8). The increase in 1998 was dominated by the con- The impact of the stimulus package began to be seen dur- struction sector, investment in which rose 45 percent. ing the second half of 1998. The program affected growth, Investment in transport, post, and telecommunications inflation, trade, and capital flows, rose 50 percent, and real estate investment increased 24 THE STORM CLOUDS EMERGE: MACROECONOMIC DEVEI.OPMENTS AND POLICY RESPONSE 19 The economy responded to stimulus ... percent. Industrial investment rose only 5 percent, FIGURE 1.7 reflecting efforts to avoid financing sectors experiencing Official quarterly real GDP growth, 1996-98 difficulties in marketing (avoiding duplication). Percent Investment growth was much less robust in the 15 Asiancnsis nonstate sector, where investment growth in 1998 onset remained at the 1997 level of about 8 percent, with overall fixed investment growing 14 percent. If inven- Industry tory increases had continued to decline at the same Total / rate they had in 1996-97, the investment stimulus to 9 Xu \ / f? GDP demand would have been weaker. Formal-sector industrial growth rates barely recovered (figure 1.9). Growth in smaller, less-formal enterprises is still a 6 question mark. Hence, unlike in the past, output Agriculture / recovery for the year may not find support in strong 3 industrial growth. Widespread flooding took thousands of lives in the summer of 1998. The impact on the overall economy o promises to be modest, however (box 1.2). Despite the authorities' efforts to improve China's sta- Source: Govemnment statistic tistical system, concerns are growing that official statistics may overstate GDP growth (box 1.3). The debate over the level of GDP growth, however, should not raise any doubts about China's late-1998 growth recovery. But ... as investment in state sector rose any overstatement of official figures would imply that FIGURE 1.8 China's economy may need more fiscal and monetary Quarterly nominal growth of fixed asset invest. stimulus than official data indicate. ment by state-owned enterprises, 1997-98 Percent 30 . . .sBOX 1.2 onset China's floods 25 The worst floods in more than 50 years struck China in 1998, causing thousands of deaths and inundating entire counties. 20 / While the human cost of the disaster was high, the impact on 20 GDP is likely to have been minimal.The agricultural loss is esti- mated to be at most 0.5 percent of GDPsome of which is off- 15 set by better harvests in other regions. (The North China Plain, for example, which typically has low productivity because of lO 0 / / dryness, will have a bumper crop in 1999 as a result of the flood- related rainfall.) While flooding caused some industrial dam- age (including damage to the Daqing oilfields and to factories S V in Wuhan, much of the damage was to small-scale-and often polluting-industries that had been scheduled to be scaled back O and will not be rebuilt. Investments in housing and infrastruc- 0 ~ ture reconstruction will be carried out, partly under the fiscal stimulus package. Source: China National Bureau of Stabstics, China Monthiy Statistics. CHINA: WEATHERING THE STORM AND LEARNING THI. LESSONS 20 Recovery not yet broad based Inflation FlGURE 1.9 Quarterly industrial growth, 1997-98 Mild deflation accompanied China's weakening growth Percent in 1998 as retail prices fell 2.6 percent and consumer 20 prices fell 0.8 percent. Although lower prices were onset heavily influenced by falling grain prices in the first half of 1998 and failing prices for vegetables and meat 1 5 later in the year, price indexes for most nonfood retail Other commodities were negative by the end of September. Estimates of core inflation (that is, the increase in 10 16, mar- -20 ginal productivitw is 3-16, ow or negasve productivty is <3. 1995 1996 1997 b. Enterpnses with independent accounting systems. Source: Xiao and others 1998; China National Bureau of Statistics, China Stotisticol Yeorbook 1998. Source: Xiao and others 1998. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 28 Performance by the remaining (marginal productiv- panies, and foreign-invested firms reveal adequate ity) firms, which employ about half of all industrial work- productivity. ers and own about a third of industrial assets, was mixed. Evidence regarding the link between financial per- Performance by about a quarter of these firms deterio- formance and growth trends in the economy was mixed rated in 1996 and 1997 over the previous year, while in 1997. For the sample as a whole, financial perfor- performance improved over the previous year for another mance slipped slightly in 1996 and remained rela- 25 percent, with performance for the remainder remain- tively stable in 1997, despite the slowdown in the ing stable. The average after-tax return on assets was economy. This trend held for all categories of firms as negative (see figure 2.1). Acceleration of corporate well as for productivity and ownership categories. restructuring is clearly needed to try to move more firms While foreign-invested firms continue to enjoy the into the better-performing category. highest overall rate of return on assets, that rate has Analysis of the sample by ownership category reveals declined significantly, falling from 15 percent in 1995 that medium-size and large collectively owned enter- to 4 percent in 1996 and 1997. Part of this decline prises (predominantly urban collectives) face grave dif- may be attributable to a deliberate strategy of reduc- ficulties. Such enterprises are overrepresented in the ing profit margins in order to maintain a presence in low or negative productivity group, have negative and domestic and-since the second half of 1997-export declining profitability, and are more highly leveraged markets given increased competitive pressures stem- than average.6 The state's wholly-owned industrial ming from the Asian crisis. enterprises represent the majority in the adequately The performance of the Chinese enterprise sector will performing category, though the inclusion of a group continue to depend on the pace of structural changes that of utilities and other firms in state monopolized willincreaseproductivity. Growthandoveralleconomic industries would have skewed the results upward. A activity have been only one of many factors determining large share of private companies, shareholding com- performance in recent years. We return in later chapters to a pro-growth strategy for nurturing enterprise reform, FIGURE 2.2 improving the climate for expansion of the higher pro- Ratio of liabilities to equity of survey enterprises, ductivity firms, and easing the transition for those asso- 199597 ciated with poorly performing firms. Liabilities/equity 5 Enterprise Sector Reform Low-negative Policy statements issued in 1997-98 ratified reforms 4 ~~~* begun in the early 1990s, including restatement of a central role for "public" ownership-but to be inter- 3 preted more broadly than state control.7 This effort breathed new life into other reform initiatives. The cen- Marginal tral government also took bold steps to separate gov- 2 Total ernment units from enterprises completely. The direction ............ .......... .... ...... ........... ... ,,,,......,,,,,, ......... ............. ..... , _____________ __ Adequate of reform-to set up a clear corporate governance sys- tem and modern enterprise system-is now established. Despite concerns about the macroeconomic impact of reform on employment and financial stability (boxes 2.3 0 and 2.4), enterprise reform initiatives continue. 1995 1996 1997 The enterprise reform program lays out an ambi- Source: Xiao and others 1998. tious program. Much remains to be done to imple- REFORMING CHINA'S ENTERPRISE AND FINANCIAI. SEICTORS 29 BOX 23 Bankruptcy, merger and acquisition, and industrial rationalization In most economies enterprise reform and restructuring rely quota allocated by central and local commissions, including the heavily on bankruptcy or mergers and acquisitions, followed by State Economic and Trade Commission, the People's Bank of consolidation and layoffs. In China, however where the social China, and other institutions. safety net is weak officials are reluctant to saddle banks with large In 1998,2,000-3000 enterprses were identified for bankruptcy, losses, and "false bankruptcies" have resulted in asset stripping, gov- merger or acquisition.The most recent policies target large and emnment restrictions heavily regulate bankruptcies, mergers, and medium-size loss-making enterprises that are controlled directly acquisitions. bythe central govemment and are stmtegically important for struc- Bankruptcy presents especially thorny problems. China's bank- tural reform. ruptcy procedures generally award employee and fiscal claims Pilot programs forindustriol robonalizatonThe State Council intro- ahead of bank claims, and bank debt write-offs are limited (to duced a three-year textile sector pilot restructurng that began Y32 billion in 1997 andY40 billion in 1998).Unions and local gov- in 1998. By reducing obsolete cotton spindles and laying off 1.2 emment officials lack faith in job creation through disposal of assets million workers, it aims to tum around loss-making textile com- to other firms through a competitive process. These factors panies. In the first half of 1998 state textile enterprises had restricted the number of bankruptcies to about 650 in 1997.The already reduced production through elimination of 2.8 million spin- new bankruptcy law currently being finalized may allow more dles and laid off 400,000 workers. bankruptcies to be declared. Enterprise reform officials see gov- The restructuring program forthe coal industry aims to trans- ernment-guided mergers and acquisitions as an altemative to fer management of 94 key state-owned coal enterprises to local bankruptcy More than 1,000 state enterprises were acquired in authorities. It also bans illegal mining and has inspectors appointed 1997. Aithough the layoffs involved in these mergers were sub- by the State Council. Loss subsidies, value-added tax rebates, and stantial.theywere inadequate,thus burdening acquiringfirms with subsidized loans will continue to be offered by the central bud- excess laborThese mergers are sweetened ad hoc by munici- get; retired workers will continue to receive pensions; and laid- palities, which reduce interest payments under the write-off off workers will continue to receive subsistence allowances. ment it effectively, however, in order to create profit- holding) was emphasized following the Fifteenth Party oriented corporate governance systems that are inde- Congress. Pilot enterprise groups were formed in the pendent of government influence.' The greatest petrochemical and steel industries, and the number of challenge is to empower enterprise owners and man- enterprises involved in piloting enterprise groups more agers to undertake market-driven shake-outs, consol- than doubled, rising from 57 in 1991 to 120 in 1997. idate companies, and reduce capacity in a wide range Refinement of this strategy remains at an initial stage, of sectors without impoverishing significant portions however. of the nonfarm labor force. The task will be particu- By early 1998 the bankruptcies of several Korean larly difficult in many interior regions of the country, chaebol (conglomerates) had increased concerns among where the influence of foreign markets and invest- Chinese officials about the financial vulnerability of ment has yet to be felt. China's large enterprises and enterprise groups (see box Development of modern competitive firms requires 5.1). Such concerns led to a shift in the focus of enter- substantial new investment funds as well as liquidation prise reform initiatives, with greater attention being and write-offs of unrecoverable debts in failed firms. A paid to financial performance. In fact, one of the moti- wide range of ancillary reforms-including housing vations behind the government's focus on infrastructure reform, management recruitment and remuneration in its domestic stimulus package is the desire to avoid reform, social security reform, and divestiture of enter- compromising state enterprise reform efforts in order prise-run social installations, such as hospitals-also to enforce financial accountability and improve per- needs to be completed. formance in the manufacturing sector. The importance of establishing large enterprise groups The pace of implementation of reforms was mixed in (through alliance, merger and acquisition, and share- 1997-98. New initiatives accelerated activity in some CHINA: WEATHERING THE ST ORM AND Ll.ARNING T Hl Ll.SSONS 30 BOX 2.4 Improving enterprise governance and management Improving governance and management represents the most Several provincial govemments accelerated the divestiture of fundamental challenge facing enterprise reform in China. At the small state enterprises in 1998, divesting both small and large indus- Fifteenth Party Congress, held in September 1997, the gov- trial and nonindustrial state enterprises. Liaoning Province, for exam- ernment announced that although public ownership would ple, an old industrial base with many loss-making state enterprises, continue to dominate the Chinese economy (and control the plans to retain only a fraction of large and medium-size state enter- largest and most strategic enterprises), many other forms of prises as state-controlled share companies. Fairs were held in sev- ownership, including limited liability corporations, stock share eral cities to try to sell the others. corporations, and a variety of hybrid ownership and control Municipalities continue to debate the virtues of, and experi- forms, would be permitted as well. Private ownership was ment with, state asset management holding companies, trustee explicitly mentioned as an important part of the new formula. arrangements, and investment funds fortemporary ownership of The Fifteenth Party Congress also reiterated the reform strat- residual state shares during the stepwise corporate system inno- egy of "embracing large key state enterprises and letting go of vation process. Some progressive municipalities have started small state enterprises." revamping their approach to management selection. By the end The Ninth People's Congress, held in March 1998, intro- of 1997,183 of the 512 key enterprises; 40 of the 100 enterprises duced major reforms of government-enterprise relations (see under the "modern enterprise system" pilot; and 66 of the 120 box 2.5). It also authorized creation of an inspection system for large enterprise groups were listed on the Chinese stock mar- monitoring key state enterprises. Special inspectors are respon- ket raisingY 130 billion. sible for overseeing financial management, ensuring that managers There is growing concem among central government policy- of state enterprises follow relevant legislation and policies, and makers that privatization has not resulted in improved govemance. assessing management performance at the 512 key state-owned In some cases, workers have been pressured into participating in companies.They are not supposed to interfere in business activ- the purchase of their enterprises. In many cases, proceeds from ities. Inspectors will submit reports, which cover personnel issues, enterprise sales were not maximized, or receipts from enterprise to the State Council for approval. About a third of the 512 key sales were diverted. Recently SETC officials have emphasized state enterprises posted losses during the first half 1998.The chair- the objective of rapidly improving govemance as a basis for cor- man of the State Economic andTrade Commission (SETC) has porate restructuring, with privatization as one means ratherthan wamed that enterprises that continue to lose money in 1999 the end. A speech by Jiang Zemin in June 1998 and a notice by will be taken off the list, thereby losing their status. the SETC in July also urged caution in the sell-off of small state- The govemment is using various mechanisms to let go of small owned companies, which were perceived as disturbing the orderly state enterprises. These include restructuring, alliance, merger redeployment of laid-offstate workers and harming workers' inter- and acquisition, leasing, sale and formation of stock share com- ests. One way of improving govemance is to make the financial panies, and establishment of shareholding cooperatives. The statements of state enterprises available to financial intermedi- appropriate mechanism is chosen based on the particular situa- aries. The effort has improved corporate governance and the tion of each enterprise. assessment of manager performance. areas. Financial controls to monitor the performance of auctions may signal backsliding. To the extent that it rep- China's largest state-owned enterprises were introduced, resents stock-taking and attempts to tackle new concerns for example, and measures were taken to separate gov- (such as the need to address the financial problems of ernment from commercial functions. Separating state many privatized small firms and examine the income dis- and commercial functions is part of a broader reform of tribution implications of housing pricing policy), however, the public sector and a rationalization of the role of the it may facilitate implementation. government in China's economy, as outlined in box 2.5 Increasingly, the private and small and medium-size (Zhang 1999, Gong 1999). enterprise sectors are being acknowledged as the main Complications and unexpected developments com- engine of job creation in China. In recognition of the promised progress elsewhere. More cautious imple- importance of their role, municipalities are reducing or mentation of housing reform and small enterprise eliminating many ofthe fees levied on such enterprises. REFORMING CHINA'S ENIERPRISE ANI) FINANCIAI SECTORS 31 BOX 2.5 Reorganizing the government in support of enterprise reform Elimination and merger of govemment ogencies. Following the up enterprise layoffs and for a "new way of thinking" for employ- installation of Premier Zhu Rongji's govemment at the National ees of state enterprises (see chapter 4). Massive govemment lay- People's Congress in March 1998, the govemment was radically offs likely made these enterprise layoffs more acceptable politically reorganized in order to support the restructuring of enterprise for the urban work force. ownership.The number of ministries and cabinet-level commis- Government-enterprise relationship. By late 1998 govemment sions was cut from 40 to 29, with many industry-specific ministries, reorganization and layoffs at the central level were essentially com- such as the ministries for coal, machinery, metallurgy, and electric pleted. A new wave of related reforms began in the second half power eliminated. Other ministries and commissions were merged of 1998. Following corruption and smuggling scandals, President or given new functions deemed better-suited to a market econ- and Party Secretary Jiang ordered the police, the Chinese mili- omy. The State Planning Commission, for example, was con- tary, and other security agencies to completely divest themselves verted into the State Development Planning Commission and is of their considerable industrial, commercial, and financial assets. set to lose significant direct control over many national investment The delinking processes were technically completed by the end decisions. its new name emphasizes the shift in its function away of 1998, with businesses either closed or transferred to "handover from direct control toward indirect and strategic planning. In offices," although actual implementation continues. addition, more than 200 functions were delegated from ministries Late in 1998 the government ordered all Party and govern- controlled by the State Council to enterprises, intermediary ment administrative organs to sever their links with the enterprises organizations, or local authorities. they control.The new responsibilities ofthe govemment and large Cut in govemment personnel. Government personnel were enterprises are described in a document approved during the also cut as part of the 1998 reforms. Premier Zhu announced in Ninth People's Congress. Under the new system, the govemment March 1998 that he would cut half of the govemment's 8 million will be responsible for securing retums on its investment stake administrative workers. Downsizing started at the top. The in the enterprises, sending inspectors to monitor the asset man- Communist Party's staff was cut by 30 percent For central gov- agement and profrt and loss situation of enterprises, and assess- emment,this has averaged roughly 50 percent for each ministry ing, appointing, and dismissing senior enterprise management. Restructuring of the civil service in central government has been Enterprises will be responsible for operating independently and completed, with staff reductions of about 36,000, but the process legally, while taking full responsibilities fortheir own profits or losses, has not yet begun in eamest in the provinces. and assuming their own tax liabilities.They will also be responsi- Cut in enterprise personnel. Intensification of lay-offs of enter- ble for protecting and increasing the value of state assets and own- prise personnel, announced in September 1997 at the Fifteenth ers' interests. If fully implemented these steps would represent Communist Party Congress, continued in 1998. Jiang Zemin's dramatic reforms in state enterprise ownership and governance authoritative address to the congress specifically called for stepped- relationships. Municipalities are considering various funding mecha- reforms-including the establishment of policy banks in nisms, including city-funded funds, to provide such enter- 1994 to be used for directed lending and the enactment prises with funding for start-up and expansion. State of the Central Bank Law and Commercial Bank Law in banks are setting up specialized units to expand credit 1995-have been implemented. Links between local to these enterprises, albeit from a very low base. China governments and commercial banks have been weakened, is only at the very early stages of translating this policy and requirements regarding oversight and publication into practice, however. of financial information have been strengthened. Much remains to be done, however. Reform of the Financial Sector The details of a number of initiatives have emerged since the new government was installed in March 1998. The financial crisis in neighboring countries has increased Financial sector reforms extend across a broad front pressure on China to deal more decisively with domes- that covers financial sector infrastructure (box 2.6), the tic financial problems in order to prevent a similar cri- banking sector (box 2.7), and nonbank financial insti- sis from occurring there. Since 1993 a variety of tutions and capital markets (box 2.8). Initial reforms CHINA: WEATHERING THE STORM AND LEARNING TIHE LEssONS 32 BOX 2.6 Upgrading the financial sector's infrastructure The government has taken a series of steps to upgrade infra- into five categories-normal, special mentioned, substandard, structure in the financial sectorThe Ministry of Finance imple- doubtful, and loss-as recommended by the Bank for mented new national financial accounting standards in 1998. In International Settlements.The classifications are based on June 1998 a financial working committee was established under judgment in addition to overdue criteria. A pilot program the Chinese Communist Party Central Committee to support the was completed in Guangdong Province in late 1998, but the People's Bank of China and the China Securities and Regulatory results are not yet available. Plans to extend the system Commission (CSRC) in fulfilling their duties and to help safeguard throughout the country have been announced. This initia- the independent legal entity status of state-owned commercial tive should help improve the reliability of portfolio assess- banks.To break the link between local government and central ment and should increase incentives to reduce the stock of bank branches, nine regional offices were formed by combining nonperforming loans.The use of a loan classification system provincial branches.The offices began operating January 1,1999. such as this requires skills and judgments by bank staff, In early 1998 the government announced a risk-based however, which will take time and extensive training to loan classification system. The new system divides loans develop. focused primarily on banking sector reforms aimed at institutions. Access to equity and bond markets remains managing financial risk and reducing the rate of accu- tightly controlled and rationed, not necessarily based on mulation of nonperforming loans in the system. About financial performance. a third of these loans were legacies of the planned econ- To some extent the slowdown in the economy reflects omy; another third were made during the overheated earlier progress toward financial sector reform, notably investment boom in 1992-93. The remaining third in the banking system, in the face ofonly gradual struc- reflects the lack of effective corporate governance since tural reform in the enterprise sector. The evolving change reform began, however (Zhou 1999). Recently, the author- in incentives facing bank management decreased their ities have introduced a pilot program that seeks to willingness to lend to enterprises when financial condi- resolve the stock ofnonperforming loans in the banking tions were weak. As noted in chapter 1, adjustments system. Because weaknesses in the legal structure impede were made to monetary policy in mid-1998 that mitigated recovery of bank loans, financial sector reform cannot be against this tendency. Tensions remain, however, between disentangled from reform of the legal system and the cor- the government's efforts to reform the banks and its porate governance system. desire to stimulate the economy through greater bank In related efforts, the authorities have begun to lending to enterprises. resolve problems at some small financial institutions. The capital market, which is still at a nascent stage Bank and nonbank financial intermediaries, including the of development, has been little used as part of China's Hainan Development Bank and Guandong International macroeconomic program. It is important to identify Trust and Investment Corporation (GITIC), have been opportunities for capital market development that are closed. The authorities have also increased enforcement consistent with the macroeconomic challenges facing of laws banning financial fraud, initiating criminal pro- China. ceedings against many individuals. The balance between strengthened financial over- Public Investment Program sight and the need to diversify the sector and develop new intermediation channels has resulted in inevitable ten- To ensure that stimulus leads to sustainable growth- sions. The authorities have become less willing to tolerate and does not exacerbate structural and macroeconomic the activities of smaller and traditionally less tightly problems-the Chinese authorities will have to adopt regulated parts of the financial system, including rural stimulus measures that are consistent with the structural REFORMING CHINA'S ENTERPRISE AND FINANCIAI. SECTORS 33 BOX 2.7 Reform of the banking sector The govemment has taken a number of steps to reform the bank- enterprise restructuring (primarily mergers and bankrupt- ing sector: cies), up from Y30 billion in 1997.The government is estab- Replocement of the credit quota system. In 1998 the central bank lishing asset management companies for the four large replaced the credit quota system used by the four state- state-owned banks.The first pilot,forthe China Construction owned banks with indicative quotas and a system of asset and Bank was established in April 1999. Lessons from that pilot liability management (as applied to other Chinese banks). are expected to be built into the design of programs for the The new system applies to both working capital and fixed other banks. In this connection, it is imperative to develop a investment loans.The credit quota system had been a pow- framework to strengthen the rights of creditors so as to facil- erful tool with which the authorities had controlled broad itate the debt resolution process. money and allocated financial resources. By 1997, however, * Closure of troubled regionol commerciol bankThe People's Bank the system was no longer binding, and only 95 percent of the of China closed down the Hainan Development Bank in June quota was met, as bank managers became more reluctant to 1998 following a payment crisis. It was the first time a regional lend to loss-making enterprises. bank was closed. More closures and mergers of China's banks Strengthening of the capital bose of state-owned banks. A pro- and other financial institutions are expected as part ofthe gov- posal was approved in February 1998 to allow the Ministry emient's drive to clean up the financial sector of Finance to issueY270 billion (US$32.S billion) worth of spe- Licensing offoreign banks.The number of foreign banks granted cial 30-year nontradable Treasury bonds to the four state- licenses to engage in limited domestic currency operations in owned banks.The proceeds would be used to strengthen the Pudong, Shanghai, doubled, from 9 to 18 in 1998. In May 1998 banks' capital bases.The move will help improve the balance most ofthe banks granted licenses earlier in the process were sheets ofthe four state-owned banks, enabling them to raise allowed to participate in the interbank market. In August the their capital adequacy ratio to at least 8 percent, as required People's Bank of China eased restrictions on foreign banks' by the Commercial Bank Law and Bank for International domestic cunrency business, raising their operational ceiling and Settlements' Basle standards.The bond issue represents only cap on interbank borrowings fromY30 million toY 100 million. about 3 percent of GDP a small fraction ofthe estimated fis- Foreign bank branches in Shenzhen were also granted per- cal costs associated with inadequate provisioning for non- mission to conduct business in local currency. Four foreign banks performing loans have obtained approval to do so, and other applications are * Resolution ofbad loans. Banks continue to face a ceiling on loan being assessed. In December 1998 the first intemational loss provisioning for income tax purposes (I percent of year- domestic currency syndicated loan was announced in Shanghai. end loan balances rather than beginning-of-year balances as A group of six Chinese and foreign banks agreed to extend a of May 1998).The amount of bad loans that state banks are Y80 million short-term loan to the Shanghai Tyre and Rubber allowed to write off has increased steadily, albeit from a low Co., Ltd.. Notwithstanding these initial steps, there is still much base.The limit for 1998 wasY50 billion, withY40 billion ear- room foropening up the banking sectorto foreign participa- marked for debt forgiveness for bad loans arising from state tion while improving its supervisory framework reform agenda and that improve efficiency. Given China's longer-term projects with high rates of return. Second, infrastructure needs, a program focusing on infrastruc- boosting investment beyond a certain point without intro- ture investment made sense (box 2.9). About 70 percent ducing other channels for project identification could cause of the program's financing is going toward accelerating the government to fund projects with lower rates of return implementation ofprojects currently being implemented and create structural problems. Third, the emphasis on or projects that have been approved. rapid implementation may be misplaced given the physi- While the program is reasonably well conceived (an cal constraints on implementation, the lack ofsufficient local impressive achievement given that it was put together in government counterpart funds, and the need for proper con- less than 6 months), some of its features may be prob- trols over public funds and due diligence by banks. lematic. First, the process is biased toward projects that can The mix of government and bank financing is deter- be completedwithintwoyears. It therefore neglects some mined on a project by project basis. In general, the gov- CHINA: WEATHERING THE STORM AND Ll.ARNING THI. Ll.SSONS 34 BOX 2.8 Reform of nonbank financial institutions and capital market initiatives The government has implemented several steps to reform non- cial system, are reportedly in a weak financial position. In 1996 bank financial institutions and develop China's capital markets: all rural credit cooperatives were placed under the supervi- OCosure oftrust and investment companies. For several years more sion of the People's Bank of China. In 1998 the State Council than half of China's trust and investment companies have report- announced its intention to incorporate the qualified rural credit edly been insolvent or lost moneyThe assets of the 240 trust foundations into the rural credit cooperatives. The rural and investment companies account for only about 3 percent of credit foundations emerged in the 1 990s as quasi-state finan- the total financial assets on the mainland. Banks had been cial institutions controlled at the township level.. instructed to divest trust and investment company holdings to * Creation of legal framework The long-delayed Securities Law minimize the potential for systemic risk. As part of the clean-up was approved in December 1998 by the National People's effort, the authorities have closed several prominent trust and Congress. The law clearly defines insider trading and allows investment companies,indudingthe Guangdong IntemationalTrust confiscation of illegal profits, impositions of fines, and crimi- and Investment Corporation (GITIC),the second largest foreign nal prosecution of violators. It splits the brokerage industry into debt-issuing intemational trust and investment company in China two tiers, with firms able to trade on their own account and The GITIC group has estimated assets of Y2 I billion and esti- underwrite securities required to register a high minimum level mated liabilities ofY36 billion, implying a shortfail for repayment of capital. The law represents an important step given the of someY 15 billion (US$2 billion), or 42 percent of total liabili- importance of securities market growth to enterprise reform. ties. The GITIC group will be liquidated, and the settlement * Oversight of copitol markets. Oversight responsibilities have been team will apply for a court order in Guangdong, thus triggering clarified and consolidated.The CSRC is now responsible for anotherthree-month claim registration period.While more than overseeing securities markets; a new agency was recently 25,000 individual creditors are to receive repayment of princi- established to oversee the insurance industry Several recent pal deposits immediately with funds from the Guangdong provin- intiatives for the relatively undeveloped capital market have cial govemment other creditors, including intemational banks,will focused on strengthening oversight, including cracking down have to apply for restitution through bankruptcy proceedings.The on illegal practices.The CSRC has introduced new rules call- determination ofthe authoritiesto deal decisively with ailing finan- ing for increased disclosure, including disclosure of assets, cial institutions will play a useful role in restructuring China's finan- cash flows, changes in shareholders' stakes, and performance cial sector, but it is important to ensure that cases are handled of subsidiaries. These efforts represent initial moves toward responsibly. Intemationally accepted procedures must be applied, aligning with international standards and the rules ofthe game and policy intentions must be com- * Licensing of mutuol funds. To develop long-term institutional municated as quickJy, openly and clearly as possible. investors, the State Council endorsed provisional regulations Supervision of rural credit cooperatives. Rural credit coopera- on securities investment funds (domestic mutual funds), and tives, which hold 10 percent of the assets of China's finan- several funds were licensed. ernment budget finances investment of a pure "public expected to come up with counterpart funds to finance good" nature, such as water conservancy, while projects projects of a local nature. These funds will be used in con- with commercial returns and shorter gestation periods, junction with the nearly half of the government bond sale such as urban power projects, are left for banks to eval- proceeds that the central government allots to local gov- uate. Part of the proceeds of the government bond issue ernments to finance local projects. In poor regions cen- are being used to augment the equity base of public tral government funds are provided as pure transfers, enterprises that otherwise could not attract bank lend- with no repayment obligations. Elsewhere funds are ing. While the commercial banks are demonstrating granted in the form of 5- to 10-year loans with an annual considerable independence in their lending decisions, 5.5 percent interest rate. there may inevitably be some pressures on state-owned The fiscal stimulus program relies very little on cap- banks to contribute to the stimulus effort. It is thus ital market channels other than government bonds. likely that some lending will add to the stock of non- Greater experimentation with tapping into domestic performing loans. In addition, local governments are savings through alternative channels, such as domestic REFORMING CHINA'S ENTERPRISE. AN]) FINANCIAI. Sl.CTORS 35 BOX 2.9 Sectoral composition of the public investment stimulus program The public investment program associated with the fiscal stimu- will be used primarily for national highways and key segments lus program for 1998/99 covers six sectors. Most of the program's of the Beijing-Shenyang and Beijing-Shanghai freeways, many of spending is on infrastructure, with spending divided among agri- which can attract commercial financing.The secondary road net- culture, forestry, and water (34 percent); transportation and com- work will need to be improved to ensure that the full benefrts munication (24 percent); the urban sector (35 percent); and of these high-grade highways are reaped. Railroad investment power (2 percent). Housing and social sector projects each accounts for another 7 percent of total spending.To ensure that account for another 2 percent of spending. the quality of service increases, these investments will need to Agriculture, forestry, and water. Water conservancy accounts for be matched by improvements in locomotives and wagons. 22 percent of total spending. Key projects include reinforce- Waterways account for less than I percent of total spending, ment of key sea walls and flood prevention projects for insufficient for the upgrading and transfer of ports needed to Changjiang,theYellow Riverthe Huai River,theTaihu Basin,the tap this underutilized assetThe remainder of spending goes Zhujiang Basin, Songhuajiang, and the Liao RiverThese kinds toward airports and communications. of large projects are essential components of China's water * Urbon infrostructure. Urban roads and bridges and sewage strategy. Construction of grain storage facilities accounts for treatment and water supply facilities account for the bulk of 6 percent of total spending. Forestry and ecology projects, urban infrastructure investments. The capacity to operate largely protection of natural forests, account for another4 per- such facilities efficiently must be strengthened. Many worth- cent Fisheries and rural water and sanitation projects account while urban projects extend beyond the two years used in guid- for the remainder As is appropriate, these projects are fully ing investment decisions for this program. funded from the budget Power Rural and urban power grids each account for I per- Transportoaon and communicotion. Transportation investments cent of total spending. Investment in the sector should help account for 14 percent oftotal stimulus spending,with the bulk reduce distribution bottlenecks in both urban and rural of those funds going to highway projects Additional financing areas. bond issues by local infrastructure entities and direct 2. Based on the ratio of liabilities to assets of 63.9 at the end infrastructure investment funds, would be consistent of 1997 for industrial enterprises with independent account- with long-term investment financing as well as the incen- ing systems (China National Bureau of Statistics, China tives to focus on efficient investments. Statistical Yearbook 1998), 80.0 at the end of 1996 for commer- The thrust of the increased spending on public infra- cial enterprises (Ministry of Internal Trade), and 65.9 at the structure under the fiscal stimulus package is to ensure end of 1995 for all state-owned enterprises (based on the sustainable growth, which is essential for poverty reduc- China National Bureau of Statistics's revised methodology, tion and minimization of negative social impact. While which includes land valuation. Without such an adjustment for the debate on the appropriate macroeconomic response land values, leverage would appear higher.). to the crisis has not focused on the direct distributional 3. Adequate data on nonindustrial enterprises were not impact of the macroeconomic policy mix, the package by available. Such enterprises accounted for half of all losses by and large has had a positive impact. (Chapter 3 assesses state enterprises in 1994. the program's social impact.) 4. Profitability and leverage of the sample firms were slightly better than the industry average, probably because medium- Notes size and large state enterprises have tended to perform bet- ter than smaller ones. The after-tax return on assets for the 1. In his March 19, 1998, inaugural press conference, sample firms was 1 .7 percent, slightly higher than the 1.6 per- Premier Zhu Rongji promised to maintain economic growth of cent for industrial enterprises as a whole. The ratio of liabili- 8 percent a year, keep inflation at 3 percent or less a year, and ties to equity of sample firms was 1.7, slightly lower than the ensure the stability of China's currency. 1.8 for all industrial enterprises. CHINA: WEATHERING THE STORM AND LEARNING TlHIE LE.SSONS 36 5. A 1998 audit of 162 key loss-making enterprises found that 7. The National People's Congress report emphasizes "pub- losses were twice as high as reported. The audit also revealed lic" ownership as the main part of the economic system and unreported profits in the petroleum industry and overstated the leading role of the state-owned economy in the allocation profits in state petrochemical enterprises. of resources and strategic direction of the economy However, 6. For all industrial collectives with independent accounts, the "public" ownership is allowed and expected to diversify into dif- after-tax rate of return on assets was 2.8 percent in 1997, much ferent formats. higher than the -3.1 percent rate of return for the sample firms. 8. The question of how to strengthen enterprise restruc- The difference suggests that smaller collectives, predominantly turing while promoting nonstate investment is addressed in town and village enterprises, perform better than other enter- chapter 5. prises, perhaps because of tighter budget constraints. REFORMING CHINA'S ENTERPRISE AND FINANCIAL. SECTORS 37 Chapter 3 Challenges of Labor and Social Protection Magnified by Macroeconomic Shocks M aintaining employment and ensuring that Labor Markets social protections are in place are major chal- lenges for China as it moves to a more The labor market in China is undergoing significant market-oriented urban economy. China has a labor sur- changes. Since 1994 state- and collectively owned enter- plus economy, with surpluses in both the urban and prises, which employed 140 million workers at the end rural labor forces. Estimates of excess workers in urban of 1997, have been reducing their excess labor.2 No enterprises-particularly state- and collectively owned employment growth can be expected from these sectors enterprises, which account for two-thirds of all excess in the next few years. A growing economy continues to workers-range from 15 to 35 percent of their work- create jobs, adding some 7 million new job in urban forces. The surplus of rural workers is estimated at areas between 1994 and 1997, most of them outside the 100-130 million, only part of which is being absorbed state or collective sectors (figure 3.1). Growth in tertiary through permanent and temporary ("floating popula- sector employment has also been strong. Nevertheless, tion") migration. despite population control that has limited the growth The recent financial crisis highlighted the impor- of the labor supply tojust 1.2 percent ayear, employment tance of developing a competitive domestic nontradable growth has not been sufficient to absorb natural urban goods sector, including services, in addition to a globally labor force growth, continued levels of rural migration, competitive tradable goods sector. Development of this and xiagang (laid-off) workers. The result has been an sector is essential to absorb labor and reduce overca- increase in urban unemployment and a decrease in pacity in noncompetitive industries in a socially accept- absorption of rural migrants. able way. The Asian crisis also underscored the need to Unemployment has risen sharply in China in recent establish a social safety net and other instruments that years, with current unemployment at its highest rate can help households manage risks associated with a since 1949. By the end ofJune 1998, about 11.7 million market economy that is increasingly integrated with the workers had been laid off by state-owned enterprises; 4.2 global economy. Development of these instruments is million workers had been laid off by collectively owned essential to increase household confidence and reduce and other enterprises.3 Assuming that the pattern of social tensions. reemployment and exit from the labor force by workers These key social challenges have been magnified by laid off by other enterprises is the same as that of work- developments in the macroeconomy. Macroeconomic ers laid off by state-owned enterprises, there were about developments are transmitted to China's households 9.4 million unemployed laid-off workers-about 5 per- and communities through labor markets and employ- cent of the urban labor force-in mid-1998.4 Adding ment, relative price changes and the terms of trade, this figure to the mid-1998 registered unemployment rate and public spending and fiscal tradeoffs. This chapter of 3.1 percent yields an urban unemployment rate of focuses on each of these effects.' about 8.1 percent according to World Bank estimates. 38 The tertiary and informal sectors took up some of the slack in the TABLE 3.1 urban labor market Estimated unemployment rates in select FIGURE 3.1 provinces, end-1 997 Number of urban jobs by sector, 1995-97 Official Estimated Millions Province unemployment rate unemployment rate 200 Beijing 0.6 1.6 Guangdong 2.5 5.3 Hebei 1.9 5.3 Hubei 3.5 9.7 150 Shangdong 3.5 8.0 Sichuan 3,7 10.2 Guizhou 6.2 12.0 Heilong&ang 3.0 12.2 100 Liaoning 3.6 12.7 National 3.1 8.1 a a. National rate is slightly lower than the weighted aggregate of the provincial rates. Source: China National Bureau of Statistics, China Labor Statstcs Yearbook, Ministry of Labor and Social Secunty;World Bank staff estimates. 50_ township and village enterprises declined by 3.4 percent 0 in 1997. According to the Ministry of Agriculture, which 1995 1996 1997 supervises all township and village enterprises, after Source: China National Bureau of Statistics, China Statstical Yearbook 1998, China absorbing an average of 7.2 million rural workers a year Lobor Statistics Yeorbook 1995 and 1997; World Bank staff estimates. between 1991 and 1995, rural enterprises absorbed only 6.6 million workers in 1996 and only 4.0 million in 1997. That figure may overestimate the number of unem- This trend continued at least through the first half of 1998. ployed laid-off workers, as government officials and aca- Thus while the macroeconomic environment has allowed demic surveys indicate that about a third of displaced some equilibration of labor flows, the rise in unemploy- workers are currently employed in informal activities. ment and the drop in migration has created an increas- This unemployment estimate is not particularly ingly fragile labor market equilibrium. high for a country experiencing the dual challenges of reforming state-owned enterprises and shifting from a External Shocks and the Terms of Trade rural-based to an urban-based economy. The national average conceals large regional differences, however. The effect of the Asian crisis on income distribution in The "rust belt" regions of the northeast and the "third China has received scant attention. Based on our pre- front" regions of the southwest have been especially liminary analysis, the crisis appears to have affected not hard hit, and impending layoffs will exacerbate these only the better-off coastal provinces, which traditionally trends (table 3.1). have been the most integrated with the global economy, Rising structural unemployment associated with enter- but other provinces as well. In fact, the greatest impact prise reform in the midst of an economic slowdown has has been on middle-income provinces. Changes in resulted in growing intolerance of rural migration, which exports for the first three quarters of 1998 by province is essential to reducing rural-urban and regional show that the impact appears to have been relatively inequities.5 In 1997 urban areas absorbed fewer rural mild in the poorest rural provinces, stronger in the migrants, and the rural labor supply increased by 3.6 better-off coastal provinces, and strongest in middle- million-1.6 million more than average in the mid 1 990s. income areas (figure 3.2) ., Sales of processed exports, At the same time, employment generation by rural enter- which are produced largely in the coastal provinces, prises slowed. Official data indicate that employment in were better in 1998 than those of other exports, includ- CHALLENGES OF LABOR AND SOCIAI. PROTECTION MAGNIFIEI) BY MACRO1.CONOMIC SHOCKS 39 Export shocks were greatest among middle-income communities. . . FIGURE 3.2 Effect of export shock on rural poverty in China, 1998 Percentage change in export growth 400 a Yunnan 300 200 100 \ Jiangx Guangx Shannx! Gansu )",I Hubei Hebei Tibet ai -100 angong 5OlAnhui Hainan Gih Qingai ~~~~~~~ii 51 SHuanxir -200 | r ongolia Eastern region Liaoning 0 -300 provinces (Shanghai, Sichuan GuangdongTianjin, 00 Fujian, Beijing, Zhejiang, Heilongjiang and Jiangsu) a Chongqing -500 1i 0 1 0 20 30 40 50 Incidence of rural poverty Note: Change in export growth indicates the percentage increase or decrease in export growth rates by origin between January-September 1997 and January-September 1998. Rural poverty indicates the percentage of poverty incidence in 1996 based on income. Figure excludes Xinjiang, where the export growth rate rxose 2,848 percent and the incidence of rural poverty was 40.54. Source: Customs data; China National Bureau of Statistics 1996. ing commodity exports, such as coal and oil, which suf- effectively captured in the calculations (such as grain fered terms of trade losses. The Asian crisis had a par- output planning and quota procurement policies, which ticularly strong impact in areas in which the number of were partially discontinued in 1998), would have worsened laid-off workers is high (figure 3.3). With the risks of the terms of trade even further. exports deteriorating further, these regional develop- The relatively small share of agricultural commodity ments and their effects on income distribution will need trade makes the rural sector less vulnerable than the to be monitored carefully. urban sector to external shocks. Agriculture-based Income differences between rural and urban areas exports, however, were more badly hurt by the crisis within provinces are as large as, if not larger than, the than other exports. During the 1995-97 period such income differences across provinces. The rural-urban exports averaged about 10 percent of total exports; dur- terms of trade improved in the 1990-97 period, as admin- ing the first nine months of 1998, their share fell to just istered pricing was phased out and market prices adopted, 7.9 percent. Moreover, while more than 90 percent of but appears to have deteriorated during 1996-97. The ratio China's agricultural production is not traded, prices are of the rural retail price index of industrial products to the nevertheless influenced by world prices. Because of purchasing price index for farm products increased 1.9 per- smuggling and pressure from coastal grain-deprived cent in 1996 and 5.9 percent in 1997. The ratio of the rural provinces (Fujian and Guangdong) to allow imports if the consumer price index to the purchasing price index for domestic price significantly exceeds the world price, the farm products rose 1.6 percent in 1996 and 1.4 percent in world price influences the floor on domestic grain prices 1997. Some types of implicit rural taxation, which are not even without free trade in grain. The appreciation of the CHINA: WEATHERING THE STORM AND LEARNING THIE LESSONS 40 . .. and communities with a high percentage of laid-off workers FIGURE 3.3 Effect of export shock on urban labor markets in China, 1998 Percentage change in export growth 400 a Yunnan 300 200 100 Guangxi Gansu -300 Easternregion SchuanniJag 0 (3 E3~~~prvncs Fjin -400 Tibetngon Qgaai Ahn ui Shangai Tianjin -100 ea NingxiaO 13 [3Xee a 3, Chongqing ~ E Laoin -200 Hunan Shangdong |ShanineraHnna -300 Eastern region Sichuan= provinces (Fujian, 400 Guangdong, and Zhejiang) Heilongjiang Chongqing -500 ni 0 5 10 15 20 25 Percentage of laid-off workers Note: Change in export growth indicates the percentage increase or decrease in export growth rates by origin between January-September 1997 and January-September 1998. Figure excludes Xinjiang, where the export growth rate rose 2,848 percent and 3.4 perrent of workers had been laid off as of June 1998. Source: Customs data; China National Bureau of Statistics data. currency as well as lower world commodity prices have and central government funding has not yet been on the reduced that floor, thereby restricting the ability of scale required. domestic grain pricing to improve rural-urban terms of Social protection for urban residents involves three trade. Dependence on grain income increases as per lines of defense: capita income declines in rural areas (World Bank 1 997c). * Income support and reemployment of workers laid off by state- The appreciation of the currency may also put downward owned enterprises. Reemployment programs have been pressure on other tradable-albeit not traded-non- set up in municipalities across the country, most grain products. recently on an enterprise-by-enterprise basis. Workers laid off from state-owned enterprises are eligible for Public Spending and Fiscal Tradeoffs income support, with the level of support set at 120 percent of the unemployment benefit, which repre- China's safety net has many holes and snags, which sents about 70 percent of the minimum wage. Support exacerbate the already traumatic transition away from for laid-off workers is to be provided based on the the "iron rice bowl." The decentralized fiscal system in "three-threes" policy, reiterated at a high-level con- China puts the burden of social protection on local- ference on unemployment in mid-1998, according to mostly municipal-authorities. Because local budgets are which government (mainly local government), enter- not permitted to run deficits, these social protection prises, and "society" contribute (mainly from unem- schemes are procyclical and distressed localities have dif- ployment insurance funds). Profitable state-owned ficulty fulfilling their obligations. The injection of local enterprises rather than the central government or the CHALLENGES OF LABOR AND SOCIAL PROTECTION MAGNIFIED BY MACROECONOMIC SHOCKS 41 (state-owned) controlling company are now expected straints in less developed cities, which find it difficult to be financially responsible for their own laid-off to finance the schemes. workers. In 1998 the central government injected Responsibility for social insurance was consolidated about Y8 billion-close to 1 percent of government in March 1998 under the Ministry of Labor and Social expenditures, or 0. I percent of GDP-from the cen- Security. The move brought together the Ministry of tral budget to subsidize local outlays for income sup- Labor and System Reform Commission, which had port and re-employment of workers displaced by been managing two different urban models for pen- state-owned enterprises in the most affected regions. sions, and the Ministry of Civil Affairs, which had been Another Y6.4 billion was provided from the central managing voluntary rural schemes. It also consoli- budget for subsidies to enterprises controlled by the dated the handling of pensions, health insurance, and central government. Despite these allocations, not all unemployment insurance. This consolidation should of those who are eligible have received subsistence help resolve two critical issues: unification and allowances. In fact, as of the end of the third quarter expanded coverage and strengthened fund manage- of 1998, less than 80 percent of eligible displaced ment and governance. workers had received the full allowance. A State Council Decision of August 1998 (Document Unemployment insurance. Since 1998 enterprises have had No. 28) sets out the basic parameters of the next stage to contribute 3 percent of their payrolls to unemployment of China's pension reform: insurance funds (before 1998 contributions represented * Provide a mandatoiy basic public benefit. The basic bene- I percent of payroll). Workers laid off by state-owned fit will play a largely redistributive role, with pooling enterprises who have not found employment after three to be extended from the municipal to the provincial years in reemployment centers are eligible to tap these and ultimately the national level. funds. In 1997 about half of unemployment funds went * Establish mandato?y individual accounts. Although these toward unemployment benefits, with the remainder accounts are largely unfunded currently, the aim is to going to employment exchanges, retraining, and pro- make provision for their eventual partial or full funding. duction activities.7 In many localities the unemploy- * Encourage the establishment ofsupplementay voluntag indi- ment insurance fund had built up surpluses, some of vidual accounts. As part of the program to encourage which are being tapped to provide protection of laid-off voluntary accounts, the government would promote workers' basic living standards, the use of commercial insurance. * Minimum urban livingstipendscheme. In 1994 the Ministry Many Chinese pensioners have been shortshrifted, of Civil Affairs promoted city-based urban minimum partly because loss-making enterprises have been unable living stipends schemes throughout the country. to make pension payments while profit-making enter- Benefits are determined by each city based on a num- prises have been unwilling to do so and partly because ber of factors, including the standard of living, the some enterprises acting as collection agents used pen- degree of social development, and the price level. In sions funds for other purposes.8 A policy directive in September 1997 the State Council announced that mid- 1998 called upon local authorities to clear up exist- minimum urban living stipend schemes should be ing arrears and avoid incurring further arrears. The set up in all prefecture-level cities by the end of 1998 central government allocated Y2 billion from fiscal and in all county-level cities and towns by the end of resources in 1998 to help local governments settle pen- 1999. Currently 584 of 668 cities have introduced the sion payments. Local governments also readjusted their scheme. Payments range from a monthly stipend of expenditures to support the scheme. While progress YIOO in Yinchuan to Y250 in Xiamen. Coverage is has been made, it is not clear whether there are suffi- fairly limited, however, with only about 2.4 million of cient provisions for central or provincial government the estimated 12.8 million eligible people receiving support to localities in which local authorities are stipends. Lack of coverage partly reflects fiscal con- strapped for financing. CHINA: WEATHERING THE STORM ANI) LEARNING THI. L]SSONS 42 Public Investment Program Notes The fiscal stimulus package has had a largely positive 1. Equally challenging are the social and income distribu- impact on income distribution. Some opportunities to tion issues associated with the sorting out of the stocks of var- improve income distribution have been missed, how- ious implicit contracts imbedded in the macroeconomy as ever. The authorities may wish to address these missed China moves away from the dualistic household protection opportunities in the coming years. system epitomized by the "iron rice bowl" in urban formal jobs. The stimulus program exhibits a relatively high The verydifficult issues ofburden sharing associated with dis- degree of labor intensity. About 5.3 million workers are tribution of assets or liabilities (pensions, housing, or financial likely to be affected by the program-far more than sector contingent liabilities) maywell come to a head as a result suggested by the program's growth impact alone. of macroeconomic developments. Although these issues will Employment of rural and unskilled workers (often rural require in-depth analysis, the guidance provided in earlier migrants) accounts for two-thirds of the program's Bank work remains largely valid. employment impact. The program will also increase 2. The number of workers declined even after accounting employment indirectly, as urban workers in building for the fact that some losses injobs in state-owned enterprises materials sectors, such as steel and cement, are hired, were due to reclassification in statistics. Many small state- Based on labor coefficients for railway, road, and water owned enterprises were changed to township and village enter- projects, which account for more than half of the invest- prises, while some state-owned enterprises were transformed ment program, about 4 million additional workers will into shareholding companies. be employed as a result of the stimulus program. 3. The total includes both xiagang and fenliu workers. About 37 percent of the stimulus program is going Xiagang refers to layoffs of surplus workers who retained an toward the coastal provinces. These projects use a larger association with the enterprises and received some benefits. share of bank lending and a smaller share of fiscal expen- Fenliu refers to workers whose monthly living expenses con- ditures than other provinces. The bulk of fiscal financ- tinued to be supported. This classification includes both work- ing will go to the central and western regions, which ers who were relocated to subsidiary labor service companies account for 29 percent and 24 percent of the total pro- and workers who took early retirement (including retirement gram, respectively. Less bank lending and more fiscal before early retirement age). It also includes absorption of sur- spending will take place in those regions. Such expen- plus workers through redeployment by other enterprises and ditures are appropriate (and, in fact, are probably insuf- self-employment. ficient) given the large temporary demand shock from 4. Of the 11.7 million workers laid-off by state-owned export slowdown experienced in these areas. enterprises as of the end ofJune 1998, 4.6 million were fen- The government's position favoring western regions liu and 7.1 million were xiagang. Of the fenliu workers, 1.2 mil- may also be valid from a longer-term development per- lion had retired and 3.4 million were redeployed (including I spective-although it may not be consistent with the million who became self-employment). Of the 7.1 million xia- demand stimulus and employment shock rationale for gang workers, 175,000 are identified as not wishing to be the investment program. (Of course, the multiplier effect redeployed (according to data from the Ministry of Labor would presumably increase employment demand across and Social Security). This implies that about 6.9 million work- the economy.) The bias in favor of the poorer central and ers laid off by state-owned enterprise are currently seeking western regions is likely to have a favorable impact on employment. A similar pattern for the collectively owned income distribution. Inclusion of public works programs enterprises and other enterprises would imply an additional targeted at increasing employment opportunities in dis- 2.7 million unemployed laid-off workers, 2.5 million of which tressed urban and poor rural communities could have a are seeking employment. positive social impact, suggesting that policymakers may 5. Despite rural-urban migration, the urban labor force is want to consider targeted programs in the future. still much smaller than the rural labor force. As of the end of CHALLENGES OF LABOR AND SOCIAI. PROTECTION MAGNIFIED BY MACROICONOMIC SH-OCKs 43 1997, the urban labor force was estimated at 207.8 million, 7. In 1997, Y1.9 went to unemployment benefits, Yl.3 to while the rural labor force was estimated at 493.9 million. The employment exchanges, YO.5 to retraining, and YO.4 billion to urban labor force estimate excludes some temporary rural production activities. migrants. 8. The overall balance of pension funds actually showed a 6. The analysis assumes that the change is driven by a surplus of Y50 billion at the end of 1998, with pension payment decline in export demand rather than a switch in response arrears of Y8 billion. This represents only a fraction of the sur- to increased domestic demand. The assumption is reason- pluses that need to be built up in light of the rapid aging of able for most sectors at this point in the macroeconomic China's population, however. Large differences also exist across cycle. provinces, with the largest arrears in the northeastern provinces. CHINA: WEATHERING THE STORM AND LEARNING THI LESSONS 44 Part 2 Building on Lessons Learned Chapter 4 Developing a Macroeconomic Policy That Reflects External and Internal Uncertainties T he key challenge for China in the near term will be the dominant factors affecting the Chinese economy be to adopt macroeconomic and medium-term in 1997-98. A major source of uncertainty in 1999-2000 economic development policies that are mutu- is the response of the domestic economy to the govern- ally reinforcing. The focus must be on those pro-growth ment's stimulus program. As noted in chapter 1, the reform measures that increase both demand and supply. extent to which the stimulus package will lead to broad- Implementation of such measures will need to be accel- based recovery is not yet clear. Given that household con- erated to produce a broad-based and sustained recovery sumption represents 45 percent of GDP in China and and to reduce the need for additional expansionary fis- nonstate investment another 16 percent, much hinges cal and monetary measures. on their response to the stimulus program. Household The Chinese authorities have responded rapidly, appro- consumption has traditionally contributed to China's priately, and boldly in the face of a tense domestic, regional, GDP growth in a positive and stable manner. Since 1998, and global economic environment. Given the uncertainty however, households have become much more cautious, surrounding the response of the domestic economy and the and increased income inequality in both urban and rural growing risks in the global environment, the government areas has complicated consumer demand patterns. While will need to monitor developments closely. it is not likely that Chinese households will actually cut This chapter outlines the uncertainties China faces their consumption, as households did in many other and examines three alternative scenarios. The most likely Asian countries, consumption may remain flat in 1999. "base case" scenario assumes modest recovery in the A second major source of uncertainty is the global eco- domestic economy-a "soft take-off," despite some weak- nomic situation. China will almost surely experience ness on the external front. The "downside" scenario more pressure on the external trade front, because of con- assumes that the domestic macroeconomy fails to respond tinued weak demand in world markets and strong com- to the stimulus package and/or the external environment petition from other Asian economies. Foreign becomes significantly more hostile. The "upside" sce- competition, especially following East Asian currency nario-the least likely of the three-assumes that exces- depreciations, cuts into China's market share abroad and sive stimulus causes the economy to overheat. The chapter strengthens foreign import penetration of China's domes- then suggests a macroeconomic policy mix that can help tic markets. Increased domestic demand during the China avoid extremes in growth in the coming years. expansionary phase of the business cycle typically reduces exports and increases imports. Continued weak exter- Uncertainties Facing China in 1999 nal demand combined with an increase in demand for and 2000 imports as a result of a successful stimulus package is thus likely to lead to deterioration in China's trade balance. Despite the worsening of the external environment, Through its effect on the foreign trade accounts, the state domestic economic developments and risks continued to of the global environment could cause as much as a 3 per- 46 centage point difference in China's GDP in 1999, as in net exports decline slightly in 1999, acting as a mild drag the "downside" scenario. on GDP growth. The domestic stimulus package suc- Some deterioration in the external trade accounts cessfully compensates for the moderate negative impact would be appropriate-and consistent with the Chinese of the Asian crisis, however, causing investment to rise authorities' policy of maintaining strong domestic eco- 12.6 percent and real consumption to increase 5.3 per- nomic performance. China is well placed to use its strong cent in 1999. As a result of the stimulus package, even international reserve position as a buffer for the domes- with moderate deterioration in the foreign trade bal- tic economy. It will be important to manage market ance, GDP grows 7 percent a year through 2005. This expectations so that any deterioration in the external pattern reflects the effect of the 1998-99 fiscal stimu- accounts is viewed as a consistent part of the govern- lus on investment during a period in which rural income ment's overall macroeconomic stance, thereby prevent- growth is weakened by soft crop prices and urban con- ing a precipitous drop in confidence, which could set off sumption is undermined by layoffs in the state enter- disorderly capital account behavior. Providing as much prise sector. reliable information as possible to the market would Base case trends in both exports and imports reflect play a stabilizing role. The market can accept bad news, weak global demand and a loss of Chinese competi- but it deals badly with uncertainty. tiveness, as Asian economies hurt by the crisis begin to deliver exports. This competition will reduce China's The Base Case Scenario exports and significantly increase its imports of inex- pensive products and materials. East Asian markets for The base case scenario (table 4.1) assumes that the Chinese exports continue to contract, and the rate of response of the domestic economy to the 1998-99 increase of Chinese exports in Europe and North macroeconomic stimulus package is moderate and that America decline. China's exports during the second half the external environment remains difficult but does not of 1998 already reflected these trends, especially the worsen significantly (assumptions that are in line with weakening export growth in Europe. Nonexport-related the World Bank's Global Economic Prospects most likely imports, which account for roughly 55 percent of total worldwide scenario). It represents the most likely out- imports, rose in 1998, and they are expected to continue come for China in 1999 and beyond. Under this scenario, to do so.' This scenario assumes that China recognizes TABLE 4.1 Base case scenario projections, 1999-2005 (Percent, except where otherwise indicated) Item 1997 1998 1999 2000 2001-02 2003-05 Reol growth rotes GDP 8.8 7.8 7.0 7.0 7.0 7.0 Consumption 5.3 5.1 5.3 6.3 7.7 7.7 Investment . 5.7 10.0 12.6 8.1 6.2 6.2 Exports of goods and nonfactor services 27.6 4.6 -5.0 3.0 4.7 5.0 Imports of goods and nonfactor services 13.1 1.5 -0.2 2.9 4.0 4.3 Imports unrelated to exports -0.5 -0.6 4.9 3.5 4.0 4.3 Shore in GDP Current account balance 2.8 2.6 1.0 0.5 0.1 0.2 Resource balance 4.5 4.6 3.3 3.1 3.1 3.1 Flows and stocks (billions of US$) Foreign direct investment inflows (net) 41.7 37.0 31.9 31.9 35.2 44.7 Miscellaneous capital inflows (net) -44.3 -72.6 -58.7 -51.7 -43.1 -53.9 Foreign reserves 141.6 145.1 142.2 143.2 156.0 192.5 Reserves in terms of months of imports 10.2 10.7 10.3 9.9 9.7 10.1 Source: China National Bureau of Statisitcs, Chinb StotisticolYeorbook for histoncal periods;World Bank staffforprojections, based on data available before the end of 1998. DEVELOPING A MACROECONOMIC PoI.cY THAT REFI.ECTS EXTERNAI. AND INTI ERNAL UNCERTAINTIES 47 the importance of continued import growth to its over- The Downside Scenario all economic development (and takes advantage of the declines in international prices as a result of the Asian In the downside scenario, exports deteriorate, the trade crisis) and uses its foreign reserves strategically if nec- surplus declines, and the current account surplus is essary. almost eliminated in 1999 (table 4.2). To counter the 1999 The base case scenario represents a reasonable drop in export demand, overall investment is assumed response to both domestic and international condi- to increase in 1999 as a result of a larger fiscal stimulus tions. Because of significant domestic investment, the program. Consumption growth drops by half, however, incremental capital-output ratio rises, from just over falling to just 2.5 percent. Despite efforts to prop up 5 to just over 6. The increase reflects the degree to which investment and compensate for lost markets abroad, investment in China is unconnected to other demand recovery fails, and GDP growth slows to 5 percent. trends. The productivity effect of infrastructure pro- Capital outflows remain at very high levels in 1999, grams is spread out over many years. Import-to-GDP reserves fall by more than US$20 billion, and possibili- elasticities remain low in 1999 because of the high ties for further direct fiscal stimulus are limited. elasticity of import demand with respect to anticipated The sharp deterioration in 1999 forces China to export growth, which is expected to be low or negative choose between continuing with the same package of in 1999. Although net foreign direct investment inflows measures and introducing new stimulus programs to decline slightly-reflecting commitment trends in stimulate demand and manage the external accounts. 1996-98-the absolute level of inflows is large. In the "unadjusted" alternative, foreign exchange out- Nevertheless, because China continues to experience flows worsen as result of weak investment growth and relatively large undocumented effective capital out- mild trade recovery. In the "adjusted" alternative, the flows (capital flows not elsewhere indicated), foreign decline in reserves is more moderate thanks to a policy exchange reserves change very little, declining slightly boost to exports and foreign direct investment. in 1999. The likelysurge in capital outflows and the decline in Nonstate fixed investment grew only 8 percent com- foreign exchange reserves projected in this scenario pared with 19 percent for the state sector. Investment pose serious risks for China. It is too early to determine by the nonstate sector is still not encouraged by the the likely impact of measures to expand the scope and planning and investment approval system, which seeks intensify the enforcement of capital controls. Should to direct investment to national priority sectors and capital outflows increase and foreign exchange reserves regions. Identifying and relaxing the constraints to pri- decline, the deficit would be funded by diminished but vate and other nonstate participation in infrastructure still significant net foreign direct investment inflows and other investments may provide additional options for and a reduction in China's massive reserves (which, at promoting growth without incurring additional fiscal about US$125 billion at the of end 1999, could finance costs (see chapter 5). 10 months of imports). By 2000, however, continued Sustaining the recovery after 1999 requires a macro- pressures could lead to more serious balance of pay- economic program that is more broadly based than the ments pressures. Such an outcome could be avoided, current program. Overreliance on public investment however, with appropriate policies. strains state-run channels for investment funds and may In the downside scenario for 2000, the trade balance cause worthwhile projects to go unfunded. Shifting the and foreign direct investment are successfully stimulated. structure of investment away from state-directed pro- As a result, overall growth improves, and reserves remain jects should be a high priority. Although overall invest- above US$ 110 billion, or more than 8 months of imports. ment growth would decline, it would be driven by the China has the ability to attract foreign investor interest shift away from state investment toward nonstate if it so desires, by eliminating some restrictions in key investment. sectors (see chapter 5). Additional efforts may be required CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 48 TABLE 4.2 Downside scenario projections, 1999-2000 (Percent, except where otherwise indicated) 2000 Item 1997 1998 1999 Unadjusted Adjusted Real growth rotes GDP 8.8 7.8 5.0 4.4 5.0 Consumption 5.3 5.1 2.5 2.6 2.7 Investment 5.7 10.0 13.5 6.1 6.1 Exports (goods and nonfactor services) 27.6 4.6 -14.5 1.5 4.0 Imports (goods and nonfactor services) 13.1 1.4 -7.6 0.4 0.0 Imports unrelated to exports -0.5 -0.7 0.1 0.1 -2.8 Share in GDP Current account balance 2.8 2.6 0.2 -0.2 0.3 Resource balance 4.5 4.6 2.6 2.6 3.1 Flows and stocks (billions of US$) Foreign direct investment inflows (net) 41.7 37.0 29.6 26.7 38.4 Miscellaneous capital inflows (net) -44.3 -72.7 -67.9 -69.4 -69.4 Foreign reserves 141.6 145.1 123.3 93.7 110.6 Reserves in terms of months of imports 10.2 10.7 9.7 7.2 8.5 Not "Unadjusted" scenaro assumes that the govemment takes no dramatic steps in the face of 1999-2000 downside conditions. "Adjusted" scenario assumes that the govern- ment responds to the emerging conditions and takes actions accordingly. Source Official Chinese govemment data for 1997 and 1 998;World Bank projections for future years, based on data available before the end of 1998. to remove structural impediments, and increase the Managing the Macroeconomic Policy Mix competitiveness of exports, and reduce the attractiveness of imports. The government can use fiscal (especially expenditure), China continues to rely on a moderate decline in monetary, exchange rate, and trade policies to deal with international reserve levels to cushion the impact on an economic slowdown. Some policies may have a more the domestic economy. With current levels standing at direct impact than others on aggregate demand and about 11 months of imports, there is scope for such growth stimulation. Should the base case scenario pre- reduction without exposing China to excessive risks. vail, as expected, the government would not have to Market expectations need to be handled carefully, how- resort to major additional macroeconomic initiatives, ever, to ensure that the deterioration in the external although it should continue to focus on refining its accounts does not cause a loss of confidence and disor- macroeconomic management techniques by introducing derly market behavior, which could exacerbate declines more market-based mechanisms. in the external accounts. China's macroeconomic policymakers face the diffi- cult task of guiding China's growth to keep it in the The Upside Scenario narrow range between socially destabilizing levels of unemployment and enterprise failure at the low-growth Should the stimulus package prove too strong and end and inflationary overheating at the high-growth cause overheating, the government will need to be end. With the macroeconomic policy mix described here, ready to moderate its program in order to avoid a China has the potential to avoid both too little and too "hard take-off" (that is, sudden expansion into infla- much growth. tionary overheating). The policy response should be Historical experience shows that the safe range of guided by the government's recent "soft-landing" GDP growth is between 5 and 10 percent, as measured experience, with demand-dampening techniques by China's official statistics. Staying within this range is applied in a timely way. much more difficult today than it was before the Asian DEVELOPING A MACROECONOMIC PoI.IcY THATr REFLECTS EXTERNAL ANI) INTIIRNAL UNCEIRTAINTIE.S 49 crisis, given greater uncertainty and the potential for both such contingent liabilities and strengthening of the domestic and international growth shocks. Given the finance of its central government, however (box 4.1). major uncertainties facing China's economy, policy- These factors rather than the magnitude of the short term makers will need to monitor the macroeconomy closely fiscal stimulus alone will determine fiscal sustainability. and afford top priority to reforms that reinforce medium- While reform of extrabudgetary funds is expected to term economic development. Only by simultaneously raise the revenue to GDP ratio by as much as 5 percent maintaining short-term policy flexibility and aggres- over the next two to three years, it will not significantly sively pursuing these changes can China sustain job cre- increase the discretionary allocative power of the budget, ation, manage financial problems already lurking in the since extrabudgetary funds are currently financing many corporate sector, and ensure that this policy combination government activities. More fundamental fiscal restruc- can be continued in the coming years. turing will have to be implemented, including broaden- ing the tax base to include fast-growing sectors and Fiscal Policy emerging nonstate activities. Reform efforts in the finan- cial and enterprise sectors suggest that increases in con- As China's economy becomes increasingly market ori- tingent liabilities may be more limited than they have ented, fiscal policy will play a more dominant and con- been in the past and, if continued, give hope that fiscal structive role. For fiscal measures to be effective, however, sustainability will not deteriorate. continued structural reforms are essential. Some short- The Chinese authorities have at their disposal signifi- term fiscal adjustments can be made without affecting cant real assets, which could be liquidated- in the form the sustainability of fiscal policy. Recent analysis shows of divestiture to the private sector-should the need for that the government is able to cover its existing contin- short-term fiscal stimulus continue and the stock of fiscal gent liabilities in the banking and public pension systems. liabilities grow too large. This is a potentially important tool Sustainability requires both successful containment of with which China could reduce its fiscal vulnerability. Asset BOX 4.1 Threats to China's fiscal sustainability China's long-tenm fiscal sustainability is threatened by the contingent growth of this debt, debt ratios could explode. Elimination of new liabilities of the banking sector, the fiscal obligations arising from quasi-fiscal debt through the financial system would ensure sus- reform of state-owned enterprises and the social security system, tainable debt dynamics. Immediate elimination would imply a and the unbalanced nature of fiscal relations between the cen- decline in the debt to GDP ratio. Gradual elimination through tral govemment and local govemments. Long-term fiscal sus- a steady decline of quasi-fiscal debt would imply an increase in tainability depends largely on how the govemment addresses these the stock of debt that approach levels comparable to high- problems. income countries, but the debt to GDP ratio would peak and Deficits in China are actually larger than official statistics decline thereafter suggest, because official figures fail to include liabilities associated Strengthening central revenue mobilization is critical to fiscal with, for example, the nonperforming loans owned by state- sustainability Central govemment revenue in China is estimated owned commercial banks. Measured more comprehensively, at 5-6 percent of GDP-much lower than the 10 percent that World Bank estimates of Chinese debt rise from the compar- is typical in low-income economies,the 20 percenttypical in mid- atively low level of about I I percent of GDP to levels compa- die-income economies, orthe almost 30 percent typical in high- rable to, if not exceeding, the debt ratios of middle-income income economies. If quasi-fiscal debt were eliminated gradually, economies.These debt levels should give pause to those who the share of interest payments in central government revenue still argue that long-term fiscal sustainability is not threatened based would remain high, at 35-50 percent. If adjustment were done on the narrow fiscal position. immediately, this share would fall to about 25 percent-still Even if revenues increase in 1999, the government must higher than average for all countries but close to the average for control the growth of its quasi-fiscal debtWithout reducing the South Asia. CHINA: WEATHERING THE STORM AND LEARNING T HI. LESSONS 50 sales are one-time additional sources of financing, however, ing excessively preoccupied with the strength of the and reduce future income streams. They can thus be used external sector, which could inadvertently lead to trade to reduce the stock of debt, but they will not solve the flow restrictions harmful to China's recovery and medium-term problem of inadequate government revenues. prospects. At the same time, there is scope for introduc- Improving the allocation of budgetary spending can ing structural measures to enhance exports. Recent mea- be as important as increasing the level of revenues and sures to expand direct trading rights to private sector expenditures. In the event of a significant economic exporters with proven track records represent a step in slowdown, social risks would be exacerbated and fiscal the right direction. Elimination of the antiexport bias rep- spending would have to be redirected toward social pro- resented by the less than full value added tax rebate on tection (see chapter 6). exports is also consistent with international trade prac- Depending solely on the central government to stimu- tice. The value added tax rebate could thus be extended late the economy through public investment programs across all products. While it is appropriate to strengthen may limit the availability of viable projects after the efforts to combat smuggling, such efforts need to go 1998-99 package is completed. There is room for further hand-in-hand with continued rationalization of the struc- fiscal expansion and fiscal deficit in the public sector, but ture of tariffs and nontariff barriers. it would be desirable to expand the agents of the fiscal stim- China has sequenced the liberalization of the capital ulus beyond the central government. Greater use could be account appropriately, reforming financial markets and made of the local bond market. While it may make sense strengthening prudential regulations and requirements for the central government to issue most of the country's before freeing capital account transactions. Given that general obligation debt, the government could pilot the use China's current account is convertible while its capital of revenue bonds and debt issues by government-owned cor- account remains closed, some leakage from the accounts porations and utilities that are partially guaranteed by local is inevitable, however, especially when confidence about governments in 1999.2 The degree of risk borne by the gov- the domestic currency is shaken. It is appropriate that ernment could be made very clear in order to avoid uncer- China has recently strengthened its management of tainty over contingent government liabilities. capital account transactions and tried to close loopholes for illegal capital flows under the current account. As the Monetary Policy lessons from the recent Asian crisis indicate, China should remain cautious about portfolio and short-term Monetary policy will need to continue to play a comple- capital flows until it is prepared to bear the associated mentary and coordinated role with fiscal policy. It could risks. At the same time, it should continue to encourage also be used to allow lenders to charge higher interest more stable longer-term flows. Given the importance of rates on loans to small and medium-size enterprises liberalizing the climate for dynamic domestic business, and other higher-risk projects. Allowing a wider band of regulations need to be designed to minimize their impact interest rates to be charged would provide banks with on legitimate current account transactions, even if doing incentives to increase their lending activities. Increased so implies less perfect enforcement. lending would increase bank profitability, which would in turn lead to generate additional lending. Monetary pol- Notes icy, however, is a particularly useful tool with which to deal with a scenario of inflationary overheating. 1. Nonexport-related imports rose 2.4 percent during the first half of 1998 over the first half of 1997. By November 1998 Trade Policy nonexport-related imports were 12 percent higher than they had been a year earlier. (Nonexport related imports refer to External sector policies will need to be consistent with total imports less imports for value-added final exports, that domestic developments. Policymakers should avoid becom- is, processing and assembling with imported materials.) DEVELOPING A MACROECONOMIC POLICY TiHiAI RrFi.I.cIs EXII.RNAL. AND INTIRNAl. UNCEIRTAINTIE.S 51 2. Issuance of debt by the central government may make make monetary control more difficult. Third, the possibility sense for several reasons. First, debt issued by sovereign of creating deep and liquid debt markets is greater if debt central government is less expensive than debt issued by local is not fragmented (issued by multiple sources). Fourth, moral governments, even when local government finances are hazard for local government debt issues maybe a significant sound. Second, in China, where indirect monetary policy problem if bail-outs by the central government are widely tools are limited, bond financing by local governments may expected. CHINA: WEATHERING THE STORM AND LEARNING THE L1sSONS 52 Chapter 5 Developing a Pro-growth Strategy for the Enterprise and Financial Sectors T he Chinese authorities recognize that the trig- meet the needs of the domestic market. The dynamism gers that set off a crisis are hard to predict and evidenced in the growth of China's external trade in that structural reform initiatives must there- recent years can be used to tap the potential of the fore be accelerated. They are committed to continued domestic market as well. progress on enterprise and financial reform and have laid out a program that can be implemented. DEVELOP THE1 SERVICE AND INFORMAI. SECTORS. One Policymakers often face difficult choices in the design area that warrants heightened attention is improving the and pacing of structural reform. This chapter highlights climate for service and informal sectors, in which private critical dimensions of the agenda and suggests a sequenc- and small and medium-size enterprises would be expected ing of reforms in which growth and social stability can to play a major role. (Chapter 6 confirms their importance be mutually reinforcing. It proposes a plan for simulta- for the employment agenda.) Although the government neously tackling the economy's systemic weaknesses has relaxed entry restrictions in several sectors, in many while supporting the dynamic parts of the corporate sectors, such as the rapidly growing telecommunications and financial sector. and tourism industries, private business remains periph- eral. The former system of central allocation gave short Transforming the Enterprise Sector shrift to services, and it is likely that many restrictions remain. An array of business-related services-such as Continued progress on reforms will help China establish accounting, auditing, legal, secretarial, media, public a dynamic enterprise sector. Appropriate policies involve relations, information technology, communications, and a combination of "growing" the dynamic sectors and related services-have great potential to develop quickly restructuring the uncompetitive sectors of the economy. if entry is facilitated. Growth of these kinds of services This process primarily involves domestic entrepreneurs, is essential to the successful restructuring and change in managers, and owners, but foreign investors can also play culture of the enterprise sector. a role. EXPAND PRIVATE SECTOR PARTICIPATION IN INFRASTRUC- "Growing" the Dynamic Sectors TURE. The expanded infrastructure development pro- gram provides the opportunity to develop private sector Nurturing vigorous corporate enterprises and sectors is capacity. A small proportion of lending for infrastructure a critical element of the pro-growth pro-employment spending could be go to private firms, which could han- structural reform agenda. Gradually replacing poorly per- dle maintenance contracts or small projects (such as forming enterprises with dynamic and efficient enter- building minor irrigation canals, for example). The gov- prises in both the state and nonstate sectors can help ernment could also help form small enterprises to par- China achieve targeted growth rates, create jobs, and ticipate in modest low-technology activities required as 53 part of public works. These types of initiatives stimulate ment. In finetuning the strategy for dealing with large dynamism in the nonstate sector. enterprise groups, Chinese policymakers will have to keep in mind the lessons emerging from the Asian finan- CONTINUE TO SUPPORT ENTERPRISES IN THE PROCESSING cial crisis (box 5.1). AND OTHER LABOR-INTENSIVE INDUSTRIES. Although pro- Restructuring must go hand in hand with the finan- ductivity and profitability may be lower in processing and cial restructuring and deleveraging of enterprises. The other labor-intensive industries than in other sectors, process must include a framework for resolving bad these industries absorb labor. In some parts of the coun- bank loans and attracting investors. It must thus be try, low-technology low-profit industries are the only means closely coordinated with banking reform and capital of employing China's huge rural surplus labor. Maintaining market development. Bankruptcies, mergers and acqui- employment through these enterprises in turn creates sitions, and continued sectoral rationalization will con- demand for services. Because profit margins in these tinue to be critical to reduce excess capacity industries are low and world market competition high, As the scope of reform expands, restructuring will their continued success will depend on low tariffs and increasingly need to rely heavily on market-based mech- minimal trade barriers. Even a slight change in the bar- anisms rather than on administratively determined solu- riers to international and domestic trade can choke-or tions. The regulatory framework will need to be streamlined vitalize-labor-intensive manufacturing. to facilitate this process on a large scale. The government should also develop other mechanisms, such as asset auc- DEVELOP FINANCIAL MARKETS AND INSTRUMENTS TO SUP- tions and exchange centers, which allow excess assets of PORT EMERGING DYNAMIC DOMESTIC BUSINESSFS. A key con- state-owned enterprises to be channeled to the private sec- straint on the development of vigorous businesses is the tor, where they can be used more efficiently. Experience lack of capital for expansion. Most businesses rely on in other countries indicates that assets can be rechanneled internal cash generation and secured lending from state to the private sector in a transparent and fair manner. banks and nonbank financial institutions (land and prop- erty are the most important assets offered as security). ATTRACT FOREIGN DIRECT INVESTMENT. China is fortu- These enterprises need access to other sources of capital. nate to have sufficient policy levers to continue to attract foreign direct investment, which can augment and Restructuring Enterprises ond Strengthening Corporate enhance domestic business development. There was a Governance backlog of project proposals on which the authorities can draw, as they recently have. Thus although interest by Excess capacity must be reduced in uncompetitive sectors. foreign director investors has declined, foreign invest- The corporatization and commercialization of state-owned ment will be adequate as long as some restrictions are enterprises and the separation of party politics and gov- removed, business procedures simplified, investment ernment from business represent steps in the right direc- environment improved, and legislation made more com- tion, but China's incentive structures, legal framework, phrehensive. Several policy changes could help attract and code of business conduct remain inadequate. foreign direct investment: * Streamline and eliminate approval systems where RESTRUCTURE STATE-OWNED ENTERPRISES. Some of the possible. The first step might be to move to a system largest productivity gains, which are essential for sus- of automatic approvals (that is, streamlined approvals tained growth, will come from accelerating the restruc- according to set criteria) for many investments. Once turing of state-owned enterprises. A key objective must broad classes of investments are free of restrictions, be to reduce excess capacity in uncompetitive sectors and approvals can usually be eliminated. to rapidly channel as many assets as possible toward * Revise entry and ownership policies. Most of the indus- other businesses that can use them to generate employ- tries and services of greatest interest to foreign investors CHINA: WEATHERING THEI STORM AND LEARNING 'I'HI: LiESSONS 54 BOX S. I Large enterprise groups: Lessons from the Republic of Korea China's enterprise strategy has drawn on the Korean model, in trol related companies with little equity oftheir own. Ownership which the government promotes large enterprise groups in concentration may lead controlling owners to expropriate what are considered strategic sectors. Examination of the rea- other investors and stakeholders and receive "cross-guaran- sons for the bankruptcy of many of these chaebol can provide tees" for less profitable chaebol subsidiaries. some useful lessons for China: Corporate governance wos weak. In a market with little market *The relotionship with the govemment wos too close. The gov- discipline and ample liquid assets, excessive optimism about ernment's desire to control development of "strategic" sec- growth, and comfortable relations between bankers and their tors, such as heavy and chemical industries, led it to support corporate clients there is little incentive to improve disclosure large enterprise groups.These groups eventually dominated and corporate govemance. Banks remained heavily influenced not only the heavy and chemical industries but the economy by the govemment preventing them from exercising discipline as a whole. Investments by the chaebol were implicitly guar- on lax corporate management. anteed by the government. * Capacity was underutilized and the chaebol were overly diversi- *Ownership concentration led to excessive leverage. Although fied.The availability of easy credit and favorable tax treatment families usually own far less than 50 percent of chaebol- coupled with protection from foreign competition often related companies, they have almost total control over their resulted in blind diversification, without sufficient regard to business groups. Interlocking ownership allows them to con- profitability Source: "Financial Crisis in Korea and its Impact on Korean Enterprise Groups,"World Bank-sponsored workshop for the State Economic andTrade Commission, Beijing, March 1998. are on the restricted projects list and must be approved nal investors that the climate in China had become by central departments, regardless of the size of the more hospitable. investment. Simplifying procedures will provide only Allow foreign ownership of restructured state-owned limited benefits unless more projects are reclassified enterprises. Currently, foreigners are prohibited from from "restricted" to "permitted" or "encouraged" cat- owning some types of assets (such as listed A shares), egories. Eliminating restrictions on wholly foreign- and the rules governing acquisition of other assets are owned enterprises would encourage foreign investment unclear. Introducing clear enabling legislation for and the transfer of technology. Reducing the number foreign investment in or acquisition of state-owned of sectors in which foreign direct investment is banned enterprises would attract foreign direct investment. and reducing restrictions on wholly foreign ownership would have an immediate and sizable impact on for- Reforming the Financial System eign direct investment. Develop a sound legal system and impartial dispute The allocation of financial resources is expected to play settlement process. Strengthening the legal system to a major role in the development of China's socialist allow for a quicker settlement of disputes in the courts market economy. The financial system must be able to would increase the attractiveness of foreign direct channel China's sizeable domestic savings toward effi- investment in China. cient uses. Without continued progress toward improv- Create opportunities for investment in infrastruc- ing the allocation of new financial flows within China, ture. Passage of the build-operate-transfer (BOT) any measures to address problems with the existing law and announcement of new BOT projects would portfolio will soon need to be repeated, an additional bur- provide strong signals to investors and likely gener- den that China can ill afford (as the analysis in box 4.1 ate significant new short- to medium-term invest- illustrates). ment. Other steps to liberalize foreign and domestic The interrelationships between the financial andl private investment in infrastructure would also sig- enterprise sectors are extremely complex and involve DEVELOPING A PRO-GROWTH STRATEGY FOR THE ENTIIRPRISE ANI) FINANCIAI. SlICTORS 55 hundreds of thousands of enterprises. Given that the bulk countries suggests that managing such problems is a com- of all loans are with the four large state-owned banks, it plex and lengthy process that requires some fiscal con- is logical that the authorities have selected reform of tribution (though an emphasis on recovery can reduce those institutions as a key entrypoint for tackling the bad the costs to taxpayers) (box 5.2). Moreover, if not han- loan problem. The initial impact of reform has been to dled carefully, the process can lead to repeated problems harden the budget constraint on state-owned enter- after only a few years. Fundamentally changing banking prises, which in turn has created pressures for addi- practices at the state banks and other troubled institu- tional reforms. These include pressures to improve the tions will be critical if a recurrence of the bad debt prob- legal and regulatory framework for enterprise restruc- lem is to be prevented. turing, bankruptcy procedures, and debt work-out mech- Involving the banks in the operational restructuring of anisms, as well as accounting standards, judicial their clients makes sense, as long as changes are made in processes, and other procedures. The size and com- the banks' corporate governance and operations. The plexity of the Chinese economy means that no single approach makes significant demands on the legal and strategy is appropriate for tackling these issues, and regulatory environment, however, highlighting the impor- one would expect to see a diversity of approaches across tance of developing regulations (such as bankruptcy and localities, sectors, and institutions. collateral provisions, elimination of tax disincentives, and a framework for debt-equity conversion) to facilitate the Strengthening Regulation, Supervision, Enforcement, and debt resolution process as quickly as possible. Tronsparency The bank-led approach also implies the need for appropriate incentives to strengthen the recovery effort China has started to signal the financial community and enhance banks' bargaining position with respect to about its seriousness regarding regulation and supervi- corporations and local governments in restructuring sion of financial institutions and discipline of individuals negotiations. Without such reform, banks' efforts at engaged in fraudulent activities. Resolute, transparent, recovery will continue to be hampered, and the fiscal bur- and consistent enforcement will be critical to strength- den on the state will grow. ening the incentives faced by financial institutions and This approach also requires the technical capacity and maintaining the confidence of others in the financial skills to restructure a large number of enterprises. system. The process of cleaning up the financial system Experience has shown that resolution strategies can is inevitably a messy one that brings problems into benefit from financial engineering and partnership with sharper focus. Given the magnitude and complexity of the private sector (investment banks, accounting firms), the inherited problems, the process is likely to take which has specialized skills in solving problems and pre- many years. serving value. Transparency is critical. Market participants must Whatever measures are taken, many loans will not be have access to information, such as disclosure of finan- recoverable, and major fiscal support will be necessary cial risks. Financial accounting rules must also be applied. at some stage. To avoid the experience of other countries, Use of such rules will be particularly important as the in which problems recurred after only a few years, China process of separating government and business activities will need to ensure that fiscal injections are not made pre- accelerates. maturely. Deoling with the Stock of Bad Debts and Restructuring Fostering the Development of Financiol Channels thot the Banking Sector Improve Intermediation of Domestic Savings China plans to use a decentralized bank-led approach for Increased attention to financial supervision needs to be its large state-owned banks. The experience of other balanced with development of financial markets and CHINA: WEATHERING THE STORM AND LEARNING THEI LE.SSONS 56 BOX 5.2 International experience with corporate debt and bank restructuring The experience in Latin American countries in the 1 980s and the * The bank-led approach recapitalizes banks, which then take the transition economies in the 1 990s shows that large-scale enter- lead in corporate restructuring, including financial restructur- prise debt and bank restructuring is fraught with problems.The ing. Individual banks or groups of banks work out problem debts process can be costly to taxpayers, and problems often recur after and take charge of the operational restructuring, possibly only a few years.The Nordic countries were able to resolve their providing working capital during the process. Most transition financial crisis quickly, but other economies spent 5-10 percent economies have used this approach, with the most notable of GDP in the process. Lessons are only beginning to emerge from success occurring in Poland. Poland's program forced com- the East Asian crisis economies, which implemented some finan- mercial banks to address problem loans through repayment, cial sector restructuring measures and are formulating more bank conciliation, court conciliation, bankruptcy, state enter- aggressive frameworks for corporate debt workouts. prise liquidation, or sale of debt.The program was very use- In general, restructuring has worked best where the costs to ful as a catalyst in forcing othervise passive creditors to take taxpayers have been minimized, shareholders have borne most action against bad debtors.The program may have had lim- of the brunt, banks did most of the enterprise restructuring, and ited power to promote necessary restructuring in firms, how- the government did not end up as the owner of a large number ever More work is needed to redesign the long-term workout of banks and enterprises. and exit mechanisms and to strengthen creditors' and debtors' Three approaches can be adopted to achieve the necessary incentives to use them for restructuring. restructuring: * The govemment-led approach relies on the govemment or a gov- * The morket-bosed approach uses mainly market forces, such emment agency to take over a large share of distressed assets as operational restructuring of enterprises (which lead to from the banks and replace them with govemment bonds or higher efficiency and profitability), foreign inflows for new other safe assets.The govemment then tries to restructure the investments; asset sales to foreign and domestic investors, off- claims and to force corporate restructuring. Chile adopted this shore and domestic equity issuance, and debt restructuring. approach successfully in the 1 980s. The main advantages of gov- Such approaches are currently being used in East Asia Market- emment-led restructuring are speed and clarityThe approach based solutions limit the burden on taxpayers, reduce the like- can also shift the balance of power to creditors in the case of lihood that govemments end up as the primary owner of banks large corporations. Large transfers without the involvement of and erterprises, and help deepen capital markets.The approach banks (which have privileged access to information) may create is unlikely to reduce debt to sustainable levels for many com- asset value losses, however Moreover, govemment-led restruc- panies or fully resolve nonperforming loans ofthe banking sys- turing may provide too little capacity for working capital lend- tems in the next few years, however It is also unlikely to lead ing, and it provides weak incentives to restructure corporations to a more balanced corporate financing structure. and develop corporate govemance. Source:World Bank 1998a. instruments that foster dynamic domestic markets. need to be downsized, and the role of small and medium- Excessive centralization and consolidation of financial size banks needs to be expanded. Recognition of the risks can impede precisely the transformation needed to increasingly important role of private and small and ensure high returns on savings. The authorities thus medium-size enterprises provides an opportunity to need to continually update the regulatory framework in identify the constraints to the sound development of anticipation of the eventual transformation in financial smaller financial institutions whose traditional client services. base is exactly these enterprises. The competitiveness of the banking system and its Dynamic enterprises need greater access to capital. The ability to serve the expanding nonstate sector are cur- financing needs of the corporate (and increasingly the rently constrained by the heavy concentration of finan- household) sector represent a much wider set of risks cial assets in the four large state-owned banks, which than deposit-taking banks can accept. In most countries, channel most financial flows in China. The state banks the higher-risk but high-potential small business sector DEVELOPING A PRO-GROWTH STRATEGY FOR THE ENTIRPRISE AND FINANCIAI. SlC-rORS 57 has access to financing other than traditional unsecured away from heavy reliance on quasi-fiscal channels for lending. To increase access to credit by this sector in influencing economic development, and it will take time China, the government could promote leasing, the most for the fiscal system to develop operable alternatives. In important financing source for emerging market entre- the meantime, policymakers must try to avoid sending preneurs in other countries. It could also introduce ven- mixed signals to the financial sector. The government ture capital investment mechanisms, which are particularly must constantly reevaluate and clarify the appropriate role appropriate for the future development of the high-tech of quasi-fiscal activities and be willing to bear the ultimate sector. Better structural balance in the financial system costs and risks associated with those activities. is key to reducing dependence on banks and deleveraging the corporate sector, thereby reducing its vulnerability. Limiting the Strain on Enterprises Policies should facilitate and encourage a shift of house- hold savings out of the banking system over time. Reforms on many fronts must be made simultaneously Development of equity and bond markets would help in order to avoid adversely affecting enterprise perfor- financially sound enterprises diversify their funding sources. mance. The task of tackling systemic weaknesses is facil- Measures that should be taken include the following: itated by a growing economy. * Reduce discriminatory treatment of private firms in Based on the sample of medium- and large-scale consideration and approval of public issues of debt or industrial enterprises, Chinese firms with adequate pro- equity as a way to raise finance. ductivity have a cushion with which to absorb some dete- * List the best-performing firms on financial exchanges. rioration in financial performance without jeopardizing * Make greater use of the corporate bond market for their ability to employ workers or service financial oblig- qualified firms. * Develop an array of instruments, including asset secu- Marginal enterprises may be in a precarious liquidity situation ritization, to help restructure financially distressed FIGURE 5.1 enterprises. Liquidity of industrial enterprises by productivity, Even more important than their role in helping to raise end 1997 financing is the role that capital markets can play in Liquidity ratio strengthening corporate governance. The recent 1.5 Securities Law and the strengthening of disclosure requirements are important steps in this regard. Foreign financial institutions can play an important cat- 1.2 alytic role in China. Foreign participation in the financial services sector needs to be viewed as distinct from foreign 0.9 capital flows. One of the lessons of the Asian financial cri- sis was that short-term international capital flows must be viewed with caution but that failure to allow foreign 0.6 firms to participate in the domestic financial services sec- tor can retard development of domestic financial systems. 0.3 The increase in the number of foreign banks permitted to engage in limited local currency business in China and the recent pilot experiments permitting joint venture .0 foreign-invested firms to access the domestic A share Adequate Marginal Low-negative foreigninveste firms o acces the dmestic shareproductivity productivity productivity market represent steps in the right direction. Note: Liquidity ratio represents (operating cash flow + currrent assets)/(tax and The clean-up and strengthening of the financial sec- financial charges including part of amortization + current liabilitbes). tor will be a long process. China is still in the transition Source: Xiao and others 1998. CHINA: WEATHERING THE STORM ANi) LEARNING ITHI L]ESSONS 58 ations (figure 5.1). Firms with adequate productivity port. But the firms' financial and liquidity problems had an average liquidity ratio of 1.4:1 at the end of have already been made quite apparent to government 1997. As shown in chapter 2, at least through 1997 their and financial entities. financial performance remained relatively strong, despite The inability of many Chinese enterprises to weather a decline in profitability in recent years. macroeconomic shocks highlights the importance of Firms with marginal productivity, which represent avoiding a slowdown. Improving the climate for dynamic about a third of total assets, appear to have little mar- firms and sectors is essential if the right balance between gin for additional stress. These firms are just meeting restructuring corporate enterprises and maintaining their obligations with current operating cash flow. The macroeconomic stability is to be achieved. Heightened liquidity ratio for this group of enterprises has declined attention to managing the risks imbedded in the finan- slightly since 1995, falling to 1:1 by the end of 1997. A cial system is also essential. major slowdown in the economy could well cause addi- tional financial problems to surface. Note Firms with the lowest productivity are in an even more precarious situation. The average liquidity ratio 1. Analysis is underway that will distinguish the ratio of of these firms was 0.6:1 in 1997, and most were unable stocks from the ratio of flows. Data limitations do not allow iden- to meet current obligations to workers and suppliers, tification of truly liquid assets and liabilities. Current assets, let alone financial institutions. Pensioners and workers for example, include all inventories, including those that may displaced from these firms will need government sup- not be easily sold (Xiao and others 1998). DEVELOPING A PRO-GROWTH STRATEGY FOR THM ENTERPRISE. AN) FINANCIAI. SECTORS 59 Chapter 6 Tackling the Social Agenda hina's progrowth strategy will need to tackle the output growth in others. The structural shift of the econ- : country's social agenda, which will be affected omy toward these labor-intensive activities-and policies by both macroeconomic developments and the that support that shift-also facilitate employment growth. pace of enterprise reform. This chapter stresses the The rate at which state- and collectively owned enter- need to develop labor-intensive sectors in order to absorb prises decide to run down their inherited labor surpluses displaced workers and to shift consumption toward and the magnitude of frictional and structural unem- household consumption in order to facilitate growth. ployment also affect the employment rate. Shifting consumption toward household consumption The degree to which labor markets adjust is one of the will also help transform the Chinese economy into a most significant risks facing the Chinese economy, and demand-driven economy that serves the needs of Chinese it has appropriately been given prominence in economic households. policy formulation. The combination of a growing econ- omy and declines in the rate of growth of the natural labor Maintaining Employment force is a favorable combination and lies in contrast to the situation faced by many other transition economies. An important objective of the macroeconomic and reform The problem of redundant workers is nevertheless a package is to increase employment growth. Doing so is serious one, however, because many displaced workers essential if unemployment is not to rise to unprecedented are between 40 and 50 years old and have little educa- levels. Without policies to increase employment, a grow- tion, making it difficult for them to find reemployment. ing proportion of the urban labor force could be pushed This problem implies several slack years in the labor mar- into an urban informal sector characterized by declining kets until the urban overhang has been absorbed. real labor incomes. The fragile labor equilibrium of recent The outlook suggests that the labor surplus in state- and years, in which urban employment has grown almost fast collectively owned enterprises is a transitory problem. enough to absorb the growing labor supply, may break Over the medium term the labor market issue can be down if the economy slows down. Substantial layoffs by largely a transitional one. About IO million of the estimated state- and collectively owned enterprises are expected to 16-36 million surplus workers in the state- and collectively continue through at least 2001, and strains on the labor owned enterprise sector have already been laid-off. Given market are likely to be unusually severe. Slower growth natural attrition of 1.2 million workers a year and lay-offs because of changes in the global environment could make of another 3.5 million state enterprise workers a year, labor market adjustment particularly acute. China's labor surplus could disappear as early as 2001 and Employment in China is sensitive to a number of fac- no later than 2004. Once this urban labor overhang is tors other than the overall rate of growth in the economy. exhausted, the flow imbalance in the urban labor market Output growth in some sectors, primarily the tertiary and would be corrected. Some 3 million fewer urban jobs would urban informal sectors, generates more employment than be required a year, and demand for urban workers would 60 exceed supply. The pace of rural-urban migration could be Growth can reduce the shortfall in job creation restored, if not accelerated, and the levels of structural FIGURE 6.1 unemployment built up during the transition period could Shortfall in job creation, 1998-2000 be reduced. Rising wages could be expected to accompany Millions of jobs the consequent fall in employment elasticities. 7 5 percent Given the right combination of macroeconomic and growth / ~~~~~Downside structural policies, this transition could be accelerated. 6 /- os However, given the uncertainty over the extent of the mag- nitude of the urban labor overhang as well as the com- 5/ plexity of labor market developments during economic /7 percent transition, any attempt at further precision about the case 4 time frame for that transition would be highly speculative. A longer-term transition will be necessary to integrate 3 rural households fully into China's labor markets. The challenge will be to accelerate the urban transition and 9 percent to manage it so that it does not reduce the prospects of 2 a smooth resolution of the rural-urban transition. Maintain Economic Growth 1998 199 2000 Source: World Bank estimates. GDP growth can facilitate labor absorption and reduce slackness (figure 6.1). Our estimates indicate that more short fall, conservatively estimated at some 6-7 million than I million urban jobs would be lost for each per- urban workers, as enterprises reduce their labor forces. The centage point reduction in GDP growth. If growth is in group of average industrial firms, many of which are in a the base case scenario range (7 percent in 1999-2000) precarious financial position, employs about half of the labor and the share and employment elasticity of tertiary force represented in the survey. Given growth ofjust 4-5 activities in GDP remain what they were in 1994-97, the percent, these enterprises could layoff more than the 3.5 economy could be expected to create about 5-6.5 million million workers a year assumed in the base case scenario. formal urban jobs a year. This level ofjob creation would Even if the informal sector continued to grow, rural migra- be about 4 million short of the level needed to absorb tion would have to be restricted or reversed, creating rural urban labor force growth, rural migration, and workers pressures and urban unemployment of close to 10 percent. displaced by state- and collectively owned enterprises. Some of this slack could be absorbed by the informal Promote Labor-Intensive Activities in Small- and Medium- sector. Informal labor force growth of 10 percent would Size Enterprises and Tertiory Sector absorb an additional 3 million workers a year, creating modest downward pressure on income in this sector. To avoid this high an unemployment rate, it is desirable Even if rural-urban migration declined by a third in to maintain growth in 1999-2000 at at least 5 percent. response to the high rate of unemployment in urban Higher growth alone is not sufficient, however. Growth areas, however, urban unemployment would approach 9 of 9 percent, for example, would still leave an urban short- percent by 2000. Without such a decline, urban unem- fall of about 2 million jobs a year in 1999-2000. Moreover, ployment could rise to 11 percent or more. there is some evidence that growth is creating less Lower growth would have an even more deleterious employment than it once did. In 1997 urban employment effect on employment prospects. If growth were to fall to growth slowed considerably relative to GDP growth (fig- 4-5 percent, this would result in a much more serious ure 6.2). This reduced ability of growth to absorb labor TACKLING THE SOCIAI, AGEINDA 61 may indicate structural problems. Jobs were lost in the ment of the relatively labor-intensive tertiary sector; the state- and collectively owned enterprise sectors even private sector, and nongrain agricultural production would after adjusting for exits of laid-off workers. While it is also help reduce labor market tension. inadvisable to base calculations of elasticity of employ- Promotion of small to medium-size enterprises, which ment with respect to growth on the experience of a sin- are usually more labor-intensive than larger enterprises and gle year, labor market developments will need to be tend to be concentrated in labor-intensive service activities, monitored carefully in the coming year to see if the would help-creates jobs. Labor-intensive private tertiary sec- unfavorable 1997 trend continues. If it does, the job cre- tor activities are certain to be a major source of employ- ation projections presented above would have to be mod- ment growth given China's relatively low share of such ified downward. Using the employment elasticity for activities in total employment. A I percentage point increase 1997 rather than the average 1995-97 one, the shortfall in the share of output accounted for by the tertiary sector in formal urban job creation would increase by a third, and nonstate enterprises in the secondary sector over the even in the more optimistic base case scenario. next few years would create 2 million new jobs (figure The possibility that employment elasticity has decreased 6.3), cutting the shortfall in job creation by half under the highlights the need to maximize employment growth base case and a third under the low-growth scenario. through expansion of labor-intensive activities. Labor The tertiary sector in China accounted for 20 percent absorption is sensitive to structural shifts. Given large dif- of the total labor force and 45 percent of the nonagri- ferences in the labor intensityofvarious activities, reforms cultural labor force in 1997.1 China's service sector is that favor labor-intensive activities are as important as smaller than that in comparable low- and middle-income reforms that stimulate growth or aggregate demand. The countries (table 6.1). Moreover, China's service sector scenarios outlined here assume that the informal sector accounts for a much smaller share of nonagricultural has the scope to absorb more workers. Dynamic develop- employment than do the service sectors of other com- Recent trends in employment elasticity are worrisome A growing service sector can absorb many urban workers FIGURE 6.2 FIGURE 6.3 Urban employment and GDP growth, 1994-97 Potential impact on urban employment of more GDP growth rate Urban employment rapid growth in the service sector, 1998-2000 (percent) growth rate (percent) Millions of jobs Urban 15 employment 8 Job creation job creation growth assuming services assuming service 7 continue to sector share of represent 1997 output rises by 12 . 4 share of output I percent a year GDP growth 5 9 3 4 6 2 3 2 3 0 ~~ ~~~~~~~~~~~~0 0 1994 1995 1996 1997 1998 1999 2000 Source: Govemmens eslmates. Source: World Bank staff estimates, see annex to chapter 6. CHINA: WEATHERING THE STORM AND LEARNINGmTHE LE.SSONS 62 parable countries (figure 6.4). The services sector The service sector will play a major role in gener- accounts for over half of agricultural employment in ating new jobs in the foreseeable future (see annex). low- and middle-income countries and up to 70-80 per- In recognition of the sector's critical role in creating cent in large developing countries such as Indonesia, jobs, all remaining barriers to the operation of service the Philippines, and Brazil. activities should be removed.2 The importance of increasing the labor intensity of growth also means that TABLE 6.1 China should continue to encourage expansion of pro- Service sector contribution to GDP and labor cessing and other mature industries with positive but force, 1997 csm n te aueldsre lhpstv u low profits that create both rural industrial jobs and Percentage Percentage urban services jobs. In many localities, low-technology of GDP of labor force low-profit industries are the only options for employ- Economy Non- Economy Non- ing the huge rural surplus labor. Creating rural indus- as a agricultural as a agricultural Country whole output only whole output only trial jobs may create a third as many additional urban Low-income 42 57 17 53 service jobs. Middle-income 50 61 39 56 Large countries Increase Nongroin andAnimal Production China 29 36 20 45 India 43 59 20 56 Indonesia 41 49 40 68 The role of agriculture as a source of employment has Philippines 48 60 43 72 been underappreciated. Because labor input per hectare Brazil 50 58 63 83 for oilseeds, sugar, tobacco, and vegetables is twice that Source: World Bank 1 999b,World Bank databases, and World Bank estimates. Of grain crops, facilitating production of nongrain crops increases labor intensity per hectare. Animal production China's service sector employs a smaller share of nonagricultural also requires a high level of labor input. Shifting pro- workers than service sectors elsewhere duction away from low-return grain into higher-value FIGURE 6.4 crops can reduce rural migration. Such shifts would, of Service sector share of nonagricultural course, require government willingness to import more employment grains.3 Percent 100 Use Other Options Cautiously _0 The growth of the urban labor force could be slowed by reducing the number of entrants and encouraging ear- lier retirement. Under the labor preparation system, 60 new labor entrants who do not attend high school or uni- versity must receive one to three years of vocational 40 training. The effect of this training is to permanently reduce the labor supply by about 5 million workers and to decrease the growth of the urban labor supply by 20 about 2.5 percent over the next year or so. The short-term labor market impact of this development would be wel- come. However, this needs to be weighed against the con- China Low- Middle- India Indonesia Thailand Brazil siderable resources required by such a large expansion income income of training that may not be justified in terms of longer- Source: See table 6.1. term social benefits. TACKLING THE SOCIAI. AGENDA 63 Rural-urban migration is likely to fall if labor mar- value of these services is questionable. Retraining should ket conditions deteriorate. Survey results on urban bejudged in terms ofwhether the present value of a recip- China indicate that rural migrants earn less than ient's productivity is improved by more than the cost of urban residents, even after adjusting for differences providingthe training. Selectivitybyage and retrainability in personal characteristics (Knight and Song forth- could be used to improve the social returns to training. coming). Nevertheless, most migrants gain substan- tially by working in cities, and their expected length Set Factor Prices Correctly of stay is positively related to their wage rate. A cut in expected urban incomes-through increased Inappropriate interventions in the setting of factor scarcity of jobs in enterprises or lower informal sec- prices can adversely hinder employment growth and tor incomes-would thus reduce net migration rates lead to poor labor allocation. This was the case until into urban areas. fairly recently in China, as commercial incentives to Subnational governments could slow migration by employ labor were weakened through low-cost capital tightening various controls. Policies currently being and energy policies and full employment was main- implemented in some subnational areas include allow- tained through bureaucratic labor allocation systems ing fewer job permits to be issued and taxing the that created labor surpluses. This situation has since employment of migrants. A recent survey of urban been largely reversed, as energy subsidies have been enterprises found that 81 percent reported that they removed and interest rates set at sensible levels. were officially restricted in recruiting migrant worker; Intervention remains in the control of the wage bill of 77 percent reported having had had to pay fees to state-owned enterprises, however, which may allow recruit migrants. Such policies are costly to enforce, as wage rate differentials between the state-owned enter- they can be evaded through illegal migration and the prises and other enterprises to emerge, potentially movement of migrants to casual job status. Moreover, making them uncompetitive when recruiting or retain- while a tightening of migration controls would offer ing skilled labor. some relief to urban employment in the informal sec- tor, it would come at the expense of other groups. In Address Regionol Disparities particular, it would shift part of the burden onto the rural poor and other rural households at a time when The aggregate labor market picture for China con- the rural enterprise sector is cutting back on job cre- ceals important differences. In areas with relatively ation. These problems indicate that this adjustment strong growth-such as Beijing and surrounding channel needs to be used cautiously. provinces, as well as the rapidly growing coastal Since 1995 the government has emphasized the role provinces, such as Guangdong-narrow and broad of improved labor market services. Recently it has unemployment rates are below the national average and required all state-owned enterprises with laid-off work- job creation has been robust. Efforts to facilitate labor ers to establish on-premise reemployment centers to adjustment in these areas are likely to be successful. At help workers find new jobs and retrain displaced work- the other extreme-in the Northeast of China, for ers. In economies close to full employment, improved example-highly industrialized areas are undergoing information about jobs can lower unemployment by massive enterprise restructuring, resulting in both reducing the level of unfilled vacancies at any point in increased layoffs and slower job creation. Traditional time. In economies in which workers are unemployed, labor market interventions alone are unlikely to succeed however, provision of such services may merely help pro- in these regions. Extraordinary efforts to promote gram recipients at the expense of others. It is likely that growth in more dynamic sectors need to be comple- in rapidly growing parts of China, there are real social mented with emergency labor market support mecha- benefits from such services. Elsewhere, however, the nisms, such as public workfare programs. Variations in CHINA: WEATHERING THE S1ORM AND LEARNING THI LFSSONS 64 the regional intensity of labor market interventions of responsibilities is appropriate. At the same time, efforts should be an essential feature of policy in the next few will be needed at all levels of government to ensure that years, as international experience suggests that inter- adequate funding is available for fiscally distressed local- nal migration will have little equilibrating effect on such ities. Analysis of the regional effect of the external shock large disparities. indicates that provinces with severe urban labor imbal- ances have been hardest hit by the slowdown in exports. Supporting Consumption and Social Failure to-provide social protection in one part of China Protection through Public Spending could affect other parts of China as well. Choices The major complication involves incentives to local governments and strengthening of institutional mecha- Ensuring sufficient fiscal support to the safety net for nisms. The central authorities are justifiably concerned households experiencing temporary adjustment prob- that central funding not merely replace local funding. lems would both support the social agenda and lever- However, the current system of case-by-case adjustments age fiscal policy by stimulating urban consumption. is fraught with incentive problems. One alternative would Adequate financing of social protection programs can be to provide block grants to any community that has enhance public confidence in households' economic exceeded certain thresholds of unemployment and eco- security, which in turn will stimulate consumption by nomic distress. Under the current system, pension sur- urban households. This is particularly timely as China pluses are tapped to cover pension payments, a system that has begun to narrow the gap in its dualistic social pro- reduces incentives for local governments to build up pro- tection system. These programs should thus not be visions for a rapidly aging population. An alternative viewed as a permanent fiscal drain supporting a costly, would be to fund pensions from general revenues. Any cen- inequitable, and unsustainable system for urban house- tralized attempt to pool risks from macroeconomic shocks holds but as essential complements to the efforts to or redistribute resources to the needy could be ineffective gradually break down the traditional "iron rice bowl" if resources are poorly targeted or central resources are system. fungible. Mechanisms for disseminating public informa- China's unemployment insurance scheme is tion at the local level may help to reduce leakages. expected to be adequately funded, given the increase The need to ensure adequate fiscal provisions at both in the contribution rate in 1998. Additional resources the central and local government levels is even more will be necessary for other social protection programs, acute under the downside (low-growth) scenario. The however. The fiscal resources required to fully fund the authorities must be prepared to make modifications to major social protection schemes to which the govern- the primarily urban programs discussed here, to poverty- ment is already committed (excluding pensions) is focused programs, and to other channels for public estimated at about 0.3 percent of GDP. Based on the spending in order to reach distressed rural and urban benefit standards set by county-level cities, the mini- households in the event of an economic downturn. mum urban living stipend scheme would involve about Fiscal policy has played an important role in the Y6-9 billion per year, up from Y1.2 billion in 1998. management of the macroeconomy during economic These stipends cover only workers displaced by state- downturns (see chapter 4). It is critical that this macro- owned enterprises, however. Fully funding that program economic stance not threaten key public expenditures and extending coverage to workers laid off by collec- over the medium term. To enable the government to tively owned enterprises would cost about Y20-22 bil- finance and expand its involvement in the social sec- lion a year. tors, revenue mobilization must be strengthened. Many Under the Chinese system responsibility for social pro- of the institutional measures required will take time, tection is borne largely by local authorities. Social stabil- but the groundwork must be laid immediately. ity is largely a local public good, and hence this allocation Improvements to the budgetary management system TACKLINC THE SOCIAI. AGENDA 65 will also be critical to improving the link between the Increase Household Consumption through Structural government's priorities and the budget (World Bank Reforms forthcoming). Increasing the growth of household consumption, which Promote Small Public Workfare Projects in Depressed continues to stall, is part of the fundamental transfor- Urbon and Poor RuralAreas mation in China away from supply-driven investments toward a production structure that responds to market The public investment program is likely to positively demand. The economy has begun to reflect the needs of affect income distribution, particularly if a significant households, but the legacy of the past has not been proportion of program funds are spent in provinces suf- undone and distortions remain, indicating the need for fering most from the external shock. Even greater more attention from policymakers. The ability of domes- scope for regional targeting exists, however. Small tic financial and fiscal systems to intermediate domes- public works programs, which were not a major part tic savings into appropriate supply-driven investments of the 1998 public investment program stimulus pack- is limited. Policies to encourage greater rural and urban age, could target both depressed urban economies and consumption are essential to both near-term recovery in poor rural areas. growth and the quality of that growth. Public works projects in urban areas seek to provide Lack of an increase in consumption in the near term low-wage employment to workers in municipalities in can threaten recovery in China and hence its ability to which the employment situation is temporarily address the central employment issues. Reforms to depressed. Examples of projects include road clean- increase consumption could include the following: ing and maintenance; night soil processing, including * Social protection programs, which reduce uncertainty construction and maintenance of public sanitary facil- over future income and hence boost consumption. ities; tree planting, gardening, and park cleaning; * Housing reform, which stimulates demand for housing. and garbage and waste disposal. Most of these pro- Reforms could include removal of restrictions on the grams use labor-intensive technology and could hire sale of property owned by individuals and clarification workers-including xiagang and other unemployed of pricing policy for housing transfers. While the workers-with minimal skills. These kinds of projects near-term impact may be negligible as a group of represent cost-effective components of public infra- households get prepared to purchase housing, the structure that are often overlooked by a system that medium-term impact will be enormous. focuses on new projects and investments. Public works * Monetization of nonwage benefits. Increasing money pay- projects aimed at the poor can ensure appropriate ments to employees by converting benefits and services targeting by offering wages that are slightly below to cash payments is an essential structural change the market rate. Moreover, these programs are auto- whose time has come. China's low inflation rate sug- matic stabilizers and fiscally prudent, as spending on gests that policymakers need not worry that moneti- such programs increases naturally during economic zation of nonwage benefits will cause inflation. slowdown and subsides as local economies recover. Civilservicesalaty increases. Increasing salaries in the civil Construction of rural infrastructure, such as rural service could be contemplated once the streamlining water supply improvement and feeder roads, would both of the civil service has been completed. Salary stimulate rural consumption and protect the poor dur- increases of 10-30 percent would not be out of line with ing an economic slowdown. The increased allocation in broader market developments. the 1998 budget to poverty programs represents a promis- * Development of consumer credit. Promotion of credit cards ing start. The government may wish to make additional and development of a legal and institutional frame- allocations and implement new programs to help the work for financial institutions to effectively operate hard-core poor. in this market would increase consumption. CHINA: WEATHERING THE STORM AND LEARNING THE, LESSONS 66 Rural consumption also needs to be boosted. Rural has proven to be a critical factor in enhancing rural incomes in 1998 rose 4.3 percent in real terms, less than incomes, including off-farm income. Reform of the the 5.8 percent registered among urban households. rural financial system and rural enterprises must also Accelerated rural consumption would likely benefit be accelerated if financial resources are to be used domestic firms producing lower-end goods, many of most productively. which are not operating at full capacity. Accelerated overall GDP growth would also raise rural income and Monitoring the Evolving Social Impact consumption levels. Key reforms for enhancing rural consumption could include the following: The government has made impressive progress on all * Development of agriculturalplanting, pricing, and marketing of these policy and program fronts. The storm clouds policies andinstitutions. Reducing the quasi-administrative over the economy have not dispersed, however. The pressures on farmers to plant grain would allow them global environment remains uncertain, reducing to shift production to crops with higher value-added. prospects for exports and capital inflows. Employment Where rural households continue to produce grain, prospects remain fragile. Many enterprises are in a pre- grain prices should reflect urban market demand. Such carious financial position, and economic growth may grain-pricing policies might lift domestic prices above be declining. These factors suggest that even in the international levels at the current exchange rate, base case, social pressures are likely to intensify in the implying strengthened enforcement of quantitative coming years. By creating a climate that supports grain import restrictions,while allowing grain imports dynamic enterprises and sectors and shifting con- of 5-10 percent of total domestic demand. Rural income sumption toward household consumption, however, and consumption would also benefit from improve- China can weather the storm. Moreover, Chinese pol- ments in marketing infrastructure and institutions icymakers can learn from the lessons of other countries that reduce the high marketing margins facing both in the region. rural producers and consumers. It will be critical to monitor the evolving social impact * Increase opportunities for labor mobility. Municipalities of macroeconomic and structural developments to ensure restrict rural labor migration partly out of concern that the social agenda is tackled successfully. The level over the impact on urban workers. This reduction in of trade and foreign direct investment will need to be job opportunities for rural workers reduces rural con- tracked, and the ability of the diverse labor markets sumption. Municipal governments should be encour- within China to intensifyjob creation will need to be mon- aged to refrain from unduly restricting rural labor itored. migration during this period of adjustment. Experimentation with unrestricted mobility in selected Annex. Job Growth Projections, small and medium-size towns is a welcome develop- 1998-2000 ment, but it is inevitable that larger urban areas also will continue to demand and attract rural workers and, Most of the growth in formal employment in China has hence, will need to be accorded greater labor mobility occurred in the service sector. Between 1994 and 1997 as well. employment in the state- and collectively owned enter- * Strengthen rural infrastructure. Constrained fiscal prises declined, as xiagang workers were either rede- resources will need to be focused on the gaps that com- ployed to other sectors or enterprises allowed employment mercial agents fail to fill, including critical infra- levels to fall through natural attrition (table A6.1).4 structure needs. Continued expansion of the rural While total formal employment growth averaged only power grid based on sound cost-recovery principles, about 3.2 million jobs a year over this period, the over- for example, can facilitate rural consumption as well all balance of labor supply and demand was maintained as production. Improving educational opportunities through annual informal job growth of about 2.8 million. TACKI.ING THE. SOCIAI. ACENDA 67 TABLE A6. 1 Labor force and urban employment, 1994-97 (Millions) Average annual percentage change Labor force 1994 1996 1997 1996-97 1 994-97 Rural labor force and employment 487.86 490.35 493.93 0.73 0.41 Urban labor force 188.89 203.68 207.77 2.01 3.23 Primary 16.11 15.51 15.22 -1.87 -1.88 Secondary 71.40 71.20 68.37 -3.97 -1.44 Tertiary 49.09 56.33 60.41 7.24 7.16 Government 30.81 32.45 33.07 1.91 2.39 Informal 16.73 22.65 25.00 10.38 14.32 Total urban employment 184.13 198.15 202.07 1.98 3.15 Unemployed 4.76 5.53 5.70 3.07 6.19 Total employment 671.99 688.50 696.00 1.09 1.18 Source: China National Bureau of Statistics, Clina Stotistical Yearbook 1998, Chino Labour Stoastical Yeorbook. 1995 and 1997. Observed employment levels in state- and collectively * Employment within each of the remaining nongovern- owned enterprises can be divided into two categories: ment categories is projected using the estimated employ- workers who work in return for remuneration and xiagang ment elasticity with respect to real GDP for 1994-97. workers who are on furlough from the enterprises and Employment in government services is projected to face only a small chance of re-employment. Past movements rise by 600,000 in 1998, and to decline by 500,000 in in employment levels are thus difficult to interpret, as exit of xiagang workers from the employment records will TABLE A6.2 reduce observed employment growth below the number of Projected formal job creation, 1998-2000 net new jobs being created. Similarly, a transfer of work- (Thousands) ers to xiagang status will leave observed employment lev- Growth scenario/sector 1998 1999 2000 els unaffected, even though there has been a net loss in jobs. High-rowth upside scenario To circumvent these difficulties, our projections are (9% growth) restricted to job growth among nonxiagang workers. Primary -56 -34 -12 Secondary 820 1,405 1,806 Formal urban employment is projected for the primary, Tertiary 4,359 5,917 7,119 secondary, and tertiary sectors using four employment Government 600 -500 0 subcategories: state-owned enterprises, collectively owned Total 5,723 6,787 8,913 enterprises, other enterprises (such as joint ventures), Base cose scenorio (7% growth) Primary -56 -45 -30 and private enterprises (including self-employment). Secondary 820 867 1,106 Government services are treated separately The main Tertiary 4,359 4,597 5,234 assumptions include the following: Government 5,723 4,919 6,405 State- and collectively owned enterprises reduce Low-growth downside scenono employment through natural attrition. The level of (5% growth) attrition for 1994-97 was calculated by subtracting xia- Primary -56 -55 -46 gang exits not redeployed within the enterprise from Tertiary 435290 3,278 3,649 observed employment loss over the period and pro- Govemment 600 -500 0 rating the loss across subcategories. This calculation Total 5,723 3,020 4,056 Note:The high-growth scenario assumes real GDP growth rates of 7.8 percent in 1998 suggests that state- and collectively owned enter- and 9.0 percent in 1999 and 2000.The base case scenario assumes growth rates of prises together lose about 1.2 million jobs annually 7.8percentin 1998and7.0percentin 1999and2000.Thelow-growthscenarioassumes growth rates of 7.8 percent in 1998 and 5.0 percent in 1999 and 2000. through attrition. Source: World Bank projections. CHINA: WEATHERING THE STORM AND LEARNING THHI Ll.ssoNs 68 1999 to accommodate planned reductions in the be the need to redeploy enough xiagang workers to main- armed forces. Government employment is projected tain the stock of xiagang at present levels while absorbing to remain at 1999 levels in 2000. both the natural increase in the urban labor force and ongo- Based on these assumptions, urban job growth in ing rural-urban migration. With a projected increase of 1998-2000 is projected to be overwhelmingly in the ser- about 3.5 million xiagangworkers ayear over the next two vice sector, with employment in the urban primary sec- years and anticipated retirement of about 0.5 million xia- tor declining and some growth occurring in the secondary gang a year, urban areas will have to absorb about 3 mil- sector (table A6.2).Job growth is also sensitive to assump- lion additional job-seekers a year. Including the natural tions about GDP growth. Under the high-growth scenario, increase in the labor force, China will need to create about 7.1 million jobs are created a year. Under the low-growth 10 million urban jobs a year in 199o-2000. scenario, only 4.2 million jobs are created. The high- Under the high-growth scenario, the employment growth projection is higher than observed employment situation appears manageable, as most of the shortfall growth in 1994-97 because observed employment can be taken up by growth in the informal sector, with- includes the effect of xiagang exits. out any likely deterioration in informal incomes. Under all three growth scenarios, China will face a Assuming that the number of informal jobs increases by shortfall of formal job growth over the next few years 2.0-2.6 million a year, as it has in recent years (figure (table A6.3). The main cause of this unemployment will A6. 1), unemployment would rise only marginally (figure A6.2). Indeed, the urban labor market should be roughly TABLE A6.3 in equilibrium by 2000. Projected urban employment, 1998-2000 Under the base-case (medium-growth) scenario, higher (Millions) growth of the informal sector will be needed, which may Item 1998 1999 2000 depress informal incomes in the urban sector. With offi- Urban jobs required cial unemployment rising to 4 percent or more over the Normal urban labor supply growth 6.7 6.9 7.1 Growth will affect employment Targeted Xiagang redeployment 3.0 3.0 3.0 Total 9.7 9.9 10.1 FIGURE A6. 1 High-grwth upside scenario Informal sector employment, 1998-2000 Shortfall 4.0 3.1 1.2 Millions of workers Contribution of. 35 Low Informal sector growth employment creation 2.6 2.4 2.0 Increased unemployrnent 07 0.3 -0.8 -.Base ca Reduced rural-urban migration 0.7 0.4 0.0 Bose case scenario Shortfall 40 5.0 3.7 Contribution of. Informal sector employment creation 2.6 3.0 2.5 30 Increased unemployment 0.7 1.0 0.4 Reduced rural-urban migration 0.7 1.0 0.8 Low-growth downside scenario Shortfall 4.0 6.9 6.1 Contribution of Informal sector employment creatbon 2.6 3.5 3.2 Increased unemployment 0.7 1.4 1.3 25 Reduced rural-urban migration 0.7 2.0 1.6 1998 1999 2000 Note: Adjustments shown to urban job shortfalls are illustrative. Source: World Bank projections. Source: World Bank projections. TACKLING THE SOCIAI. AGENDA 69 FIGURE A6.2 Higher growth means higher rural migration Total unemployment, 1998-2000 FIGUREA6.3 Millions of workers LOW Annual rural-urban migration, 1997-2000 16 growth Millions of workers 3 High growth 14 - /Bs ae \^. Base caeBase case 13 \ t 12 1998 1999 2000 1 Lowgrowth 1997 1998 2000 Source: World Bank projections. Note Figures excluding 'floating population (temporary migration among provinces). Source. World Bank projections. period, urban unemployment including xiagang workers allocated to agriculture, the tertiary sector accounted for 13 per- would exceed 9 percent. Rural-urban migration would cent and the nonagricultural labor force 24 percent of total fall significantly under this scenario, given less attractive employment. The methodology used here prorates the unallocated urban conditions (figure A6.3). The bright spot is that the 108 million workers across the three sectors. Using this method- urban labor market reaches an equilibrium by 2001, and ology, the service sector represents 20 percent and the nonagri- labor market conditions improve thereafter. cultural labor force 45 percent of total employment. The official In the low-growth scenario, all of the undesirable fea- Chinese methodology allocates the bulk of unallocated workers tures of an urban shortfall are likely to appear. The to the service sector, allocating 22.8 million to industry, 7.7 mil- shortfall remains high in 2000, suggesting that the prob- lion to agriculture, and 77.5 million to services. Using that method- lem will continue in subsequent years unless economic ology, the service sector accounted for 28 percent and the growth accelerates or labor intensity improves. Indeed, nonagricultural labor force 54 percent of total employment. the situation may be worse than that shown in table 2. Giving preference to laid-off workers when granting loans A6.3, as a significant slowdown in growth would adversely or other incentives to small and medium-size enterprise does not affect enterprises currently facing problems and increase necessarily make sense, as most laid-off workers have little rel- layoffs above envisaged levels. evant experience in small and medium-size enterprise operations and may prove less successful than other applicants. Notes 3. The World Bank (1997a) suggests that importing 10 per- cent of grain requirements is consistent with food security 1. The employment numbers disaggregated by sector do not concerns. add up to total employment for China. In 1997 only 588 million 4. Some job losses were also due to reclassification of of 696 million workers were identified by sector. If the residual is statistics. CHINA: WEATHERING THE. S1TORM AND LEARNING *ITHE LE.SSONS 70 Part 3 Statistical Annex TABLE I National Accounts (Billions of yuan, in current prices) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 GDP at market prices 1196.25 1492.83 1690.92 1854.79 2161.78 2663.8i 3463.44 4675.9 5847.8 6788.5 7477.2 GDP at factor cost .. .. .. .. .. .. .. .. Agriculture 320.43 383.1 422.8 501.7 528.86 580 688.21 945.72 1199.3 1384.4 1396.9 Industry 525.16 658.72 727.8 771.74 910.22 1169.95 1642.85 2237.22 2853.8 3361.3 3677 Mining and quarrying 16.24 19.84 24.27 26.7 30.11 36.13 49.45 67.68 88.08 110.90 122.2 Manufacturing 410.95 522.84 583.93 612.71 722.29 923.51 1267.56 1726.49 2190.65 2568.58 2786.5 Services 350.66 451.01 540.32 581.35 722.7 913.86 1132.38 1493 1794.72 2042.8 2403.3 Imports of goods and nonfactorservices 161.42 205.51 219.99 223.4 289 407.1 566.7 961.6 1129.6 1280.8 1382.4 Exports of goods and nonfactor services 162.57 190.4 201.44 274.5 350.7 434.7 498.7 1025.2 1229.5 1426.6 1718.5 Resource balance 1.15 -15.11 -18.55 51.1 61.7 27.6 -68 63.6 99.9 145.8 336.1 Total expenditures 1195.1 1507.94 1709.47 1803.69 2100.08 2636.21 3531.44 4612.3 5747.9 6642.7 7141.1 Total consumption 762.9 958.44 1099.97 1159.29 1348.38 1672.61 2031.64 2686.2 3360.2 3956 4284.7 General government 149 172.7 203.3 225.2 283 349.23 449.97 598.62 669.1 785.2 865 Nongovemment 613.9 785.74 896.67 934.09 1065.38 1323.38 1581.67 2087.58 2691.1 3170.8 3419.7 Statistical discrepancy 17.78 22.43 44.32 22.84 33.74 77.44 13.37 -35.15 -92.68 -148.1 -130.5 Gross domestic investment 432.2 549.5 609.5 644.4 751.7 963.6 1499.8 1926.1 2387.7 2686.7 2856.4 Gross domestic fixed investment 374.2 462.4 433.9 473.2 594 831.7 1298 1685.6 2030.1 2333.6 2569.8 Nonfinancial public sector 244.9 302 280.8 298.6 371.4 549.9 792.6 961.5 1089.824 1200.6 1309.2 Nonstate sector 129.3 160.4 153.1 174.6 222.6 281.8 505.4 724.1 940.276 1133 1260.6 Changes in stocks 58 87.1 175.6 171.2 157.7 131.9 201.8 240.5 357.6 353.1 286.6 Gross domestic saving 433.35 534.39 590.95 695.5 813.4 991.2 1431.8 1989.7 2487.6 2832.5 3192.5 Net factor income -0.8 -0.6 0.86 5.05 4.47 1.38 -7.39 -8.9 -98.3 -103.4 -131.9 Net current transfers 0.8 1.6 1.4 1.3 1.5 6.4 6.8 11.5 12 17.7 42.61 Gro.ss national saving 433.35 535.39 593.21 701.85 819.37 998.98 1431.21 1992.3 2401.3 2746.8 3103.31 Net indirect taxes 93.4 104.9 125.5 133.1 161.3 187.9 295.9 354.8 411 460.4 567.6 indirect taxes 160.4 181.2 222.8 229.1 249.6 264.6 367 422.8 480.3 539.5 658.3 Subsidies 67 76.3 97.3 96 88.3 76.7 71.1 68 69.3 79.1 90.7 Gross national product 1195.45 1492.23 1691.78 1859.84 2166.25 2665.19 3456.05 4667 5749.5 6685.1 7345.3 Nominal official exchange rate (annual average) 3.7221 3.7221 3.7651 4.7832 5.3234 5.5146 5.762 8.6187 8.3514 8.31 8.29 GDP at market price (current billion US$) 268.22 307.17 34229 354.64 376.62 418.18 431.80 542.53 700.22 816.49 901.98 Note: 1. Extemal balance based on the balance and payments data rather than from national accounts data in China Statistical Yearbook 1998. ZAs there are some changes in definition and methodologyfor nominal exports and importsfrom 1995 onwards in official source,the trade data after 1995 (including 1995) are not comparable with the previous years. Source: Chino Statstical Yearbook 1998, p. 55,67, staff calculations. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 72 TABLE 2 National Accounts (Billions of yuan, in constant 1990 prices) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 GDP at market prices 1,542.2 1,716.5 1,786.9 1,854.8 2,025.4 2,313.0 2,625.3 2,956.1 3,266.5 3,580.1 3,895.1 Net indirect taxes 120.4 120.6 132.6 133.1 151.1 163.2 224.3 224.3 229.6 242.8 295.7 GDP at factor cost .. .. .. .. .. .. .. .. Agriculture 442.2 453.3 467.3 501.4 513.5 537.6 562.9 585.4 614.6 646.0 668.6 Industry 629.6 720.9 748.3 772.2 879.6 1,066.0 1,278.2 1,513.4 1,723.7 1,932.3 2,141.0 Mining and quarrying 19.5 21.7 24.9 26.7 29.1 32.9 38.4 45.7 53.1 63.6 71.0 Manufacturing 492.7 572.0 600.1 612.7 697.2 840.3 984.1 1,165.8 1,320.5 1,473.7 1,619.1 Services 470.4 542.4 571.3 581.1 632.4 709.4 784.3 857.4 928.1 1,001.8 1,085.5 Imports of goods and nonfactor services 199.8 238.5 256.4 223.4 258.9 332.2 433.6 473.9 525.1 556.1 626.7 Exports of goods and nonfactor services 202.8 228.3 244.5 274.5 316.7 365.3 399.0 511.0 578.5 610.3 751.3 Resource balance 3.0 -10.2 -11.9 51.1 57.8 33.1 -34.6 37.1 53.4 54.2 124.6 Total expenditures 1,539.2 1,726.7 1,798.8 1,803.7 1,967.7 2,280.0 2,659.9 2,919.0 3,213.1 3,525.8 3,770.5 Total consumption 967.7 1,088.2 1,152.8 1,159.3 1,270.5 1,493.4 1,677.3 1,783.0 1,901.3 2,106.2 2,270.7 General govemment 191.8 199.5 206.2 225.1 268.5 305.1 332.8 362.9 384.2 420.7 455.0 Nongovemment 776.0 888.7 946.6 934.2 1,002.0 1,188.3 1,344.5 1,420.1 1,517.1 1,685.5 1,815.7 Gross domestic investment 571.5 638.5 646.0 644.4 697.2 786.6 982.6 1,136.0 1,311.8 1,419.7 1,499.8 Gross domestic fixed investment 486.1 529.2 457.5 473.2 547.4 678.4 846.6 996.0 1,131.9 1,252.0 1,355.1 Nonfinancial public sector 318.1 345.6 296.1 298.6 342.3 448.5 517.0 568.1 607.6 644.1 690.4 Nonstate sector 168.0 183.6 161.4 174.6 205.1 229.9 329.6 427.9 524.3 607.9 664.7 Changes in stocks 85.4 109.3 188.5 171.2 149.8 108.2 136.0 140.0 179.9 167.7 144.7 Net factor income -3.2 -3.6 -2.0 5.0 3.9 2.1 -6.8 -7.7 -52.3 -52.4 -68.7 Net current transfers 1.0 1.8 1.5 1.3 1.4 5.5 5.1 7.3 6.7 9.3 22.2 Gross national product 1,539.0 1,712.9 1,784.9 1,859.8 2,029.4 2,315.2 2,618.5 2,948.4 3,214.2 3,527.7 3,826.4 Gross domestic saving 572.9 621.0 624.4 695.5 752.5 809.1 930.6 1,167.3 1,358.2 1,483.0 1,652.2 Gross national saving 570.7 619.2 623.8 701.9 757.8 816.8 928.9 1,166.9 1,312.7 1,440.0 1,606.0 Capacity to import 201.2 221.0 234.8 274.5 314.2 354.7 381.5 505.3 571.5 619.4 779.1 Terms of trade adjustment -1.6 -7.3 -9.7 0.0 -2.5 -10.6 -17.4 -5.8 -6.9 9.1 27.8 Gross domestic income 1,540.7 1,709.2 1,777.2 1,854.8 2,022.9 2,302.5 2,607.9 2,950.3 3,259.5 3,589.1 3,922.9 Gross national income 1,537.4 1,705.6 1,775.1 1,859.8 2,026.9 2,304.6 2,601.D 2,942.6 3,207.3 3,536.8 3,854.2 Source: China Statisicol Yeortbok 1998, p. 5548 and table I. STATISTICAL ANNEX 73 TABLE 3 National Accounts (Implicit price deflators, I90= 100) 1987 1988 1989 1990 1991 1992 1993 1994 1995 I996 1997 GDP at market prices 77.6 87.0 94.6 100.0 106.7 115.2 131.9 158.2 179.0 189.6 192.0 Net indirect taxes 77.6 87.0 94.6 100.0 106.7 115.2 131.9 158.2 179.0 189.6 192.0 GDP at factor cost .. .. .. .. Agriculture 72.5 84.5 90.5 100.0 103.0 107.9 122.3 161.6 195.1 214.3 208.9 Industry 83.4 91.4 97.3 100.0 103.5 109.7 128.5 147.8 165.6 174.0 171.7 Mining and quarrying 83.4 91.4 97.3 100.0 103.6 109.9 128.8 148.1 165.9 174.3 172.1 Manufcturing 83.4 91.4 97.3 100.0 103.6 109.9 128.8 148.1 165.9 174.3 172.1 Services 74.5 83.2 94.6 100.0 114.3 128.8 144.4 174.1 193.4 203.9 221.4 Imports of goods and nonfactor services 80.8 86.2 85.8 100.0 111.6 122.5 130.7 202.9 227.2 217.2 208.5 Exports of goods and nonfactorservices 80.2 83.4 82.4 100.0 110.7 119.0 125.0 200.6 218.0 210.1 206.0 Terms oftrade (Px/Pm) 99.2 96.8 96.0 100.0 99.2 97.1 95.6 98.9 95.9 96.7 98.8 Total expenditures 77.6 87.3 95.0 100.0 106.7 115.6 1328 158.0 179.6 190.3 191.8 Total consumption 78.8 88.1 95.4 100.0 106.1 112.0 121.1 150.7 178.0 191.0 192.6 General government 77.7 86.6 98.6 100.0 105.4 114.5 135.2 165.0 174.2 186.6 190.1 Nongovernment 79.1 88.4 94.7 100.0 106.3 111.4 117.6 147.0 179.0 192.1 193.3 Gross domestic investment 75.6 86.1 94.3 100.0 107.8 122.5 152.6 169.6 182.0 189.3 190.5 Gross domestic fixed investment 77.0 87.4 94.8 100.0 108.5 1226 153.3 169.2 179.4 186.4 189.6 Nonfinancial public sector 77.0 87.4 94.8 100.0 108.5 122.6 153.3 169.2 179.4 186.4 189.6 Nonstate sector 77.0 87.4 94.8 100.0 108.5 122.6 153.3 169.2 179.4 186.4 189.6 Changes in stocks 67.9 79.7 93.2 100.0 105.3 121.9 148.4 171.8 198.8 210.6 198.1 Net factor income 24.9 16.8 -42.7 100.0 114.1 64.3 108.3 115.8 188.0 197.5 192.0 Net current transfers 77.6 87.3 95.0 100.0 106.7 115.6 1328 158.0 179.6 190.3 191.8 Gross national product 77.7 87.1 94.8 100.0 106.7 115.1 132.0 158.3 178.9 189.5 192.0 Gross domestic saving 75.4 85.1 93.2 100.0 107.7 120.9 151.0 169.6 180.4 187.7 191.1 Gross national saving 75.7 85.5 93.6 100.0 107.8 120.7 151.2 169.9 180.1 187.4 191.0 Note: Extemnal accounts: deflators forn staff cakulatons and estimates. Source:Table I divided bytable 2. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 74 TABLE 4 National Accounts (Percentage growth rates in constant 1990 prices) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 GDP at market prices 11.6 11.3 4.1 3.8 9.2 14.2 13.5 12.6 10.5 9.6 8.8 Net indirect taxes .. .. . .. . GDP at factor cost .. .. .. .. .. .. .. .. Agriculture 4.7 2.5 3.1 7.3 2.4 4.7 4.7 4.0 5.0 5.1 3.5 Industry 13.7 14.5 3.8 3.2 13.9 21.2 19.9 18.4 13.9 12.1 10.8 Mining and quarrying 3.5 11.5 14.9 7.1 8.8 13.1 16.8 19.0 16.2 19.8 11.6 Manufacturing 12.8 16.1 4.9 2.1 13.8 20.5 17.1 18.5 13.3 11.6 9.9 Services 14.4 15.3 5.3 1.7 8.8 12.2 10.6 9.3 8.3 7.9 8.4 Imports of goods and nonfactor services -8.6 19.4 7.5 -12.9 15.9 28.3 30.5 9.3 10.8 5.9a 12.7 Exports of goods and nonfactorservices 11.1 12.6 7.1 12.3 15.4 15.3 9.2 28.1 13.2 55a 23.1 Resource balance .. .. .. .. .. .. .. .. Total expenditures 8.6 12.2 4.2 0.3 9.1 15.9 16.7 9.7 9.6 9.1 6.7 Total consumption 9.5 12.5 5.9 0.6 9.6 17.5 12.3 6.3 5.9 9.7 7.4 General government 4.8 4.0 3.3 9.2 19.3 13.6 9.1 9.1 5.9 9.5 8.2 Nongovemment 10.7 14.5 6.5 -1.3 7.3 18.6 13.2 5.6 5.9 9.8 7.2 Gross domestic investment 7.0 11.7 1.2 -0.2 8.2 12.8 24.9 15.6 15.5 8.2 5.6 Gross domestic fixed investment 15.0 8.9 -13.5 3.4 15.7 23.9 24.8 17.6 13.6 10.6 8.2 Nonfinancial publicsector 10.5 8.6 -14.3 0.9 14.6 31.1 15.3 9.9 7.0 6.0 7.2 Nonstatesector 22.8 9.3 -12.1 8.2 17.5 12.1 43.4 29.8 22.5 15.9 9.4 Changes in stocks -26.2 28.0 72.5 -9.2 -12.5 -27.8 25.7 2.9 28.5 -6.8 -13.7 Net factor income .. .. .. .. .. .. .. .. Net current transfers .. .. .. .. .. .. .. .. Gross national product 11.5 11.3 4.2 4.2 9.1 14.1 13.1 12.6 9.0 9.8 8.5 Gross domestic saving 15.5 9.4 0.9 9.7 8.6 8.6 15.7 23.7 17.5 9.5 10.7 Gross national saving 15.2 9.5 1.1 10.8 8.3 8.8 14.4 23.9 13.7 10.0 10.8 Capacity to import .. .. .. .. .. .. .. .. Terms of trade adjustment .. .. .. .. .. .. .. .. Gross domestic income 11.6 10.9 4.0 4.4 9.1 13.8 13.3 13.1 9.9 9.7 9.2 Gross national income 11.5 10.9 4.1 4.8 9.0 13.7 12.9 13.1 8.4 9.8 8.9 a it is estimated by the Bank staff as the uncomparability between trade data in 1995 and 1996. Source: Table 2 GDP accounts. SSB, and the Bank staffestimation. STATISTICAL ANNEX 75 TABLE S Balance of Payments (Billions of U.S. dollars) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Exports of goods and nonfactorservices 39.1 45.9 47.8 57.3 65.8 78.8 86.5 119.2 147.2 171.7 207.3 Merchandise (fob) 34.7 41.1 43.2 51.5 58.9 69.6 75.7 102.6 128.1 151.1 182.7 nonfactor services 4.4 4.8 4.6 5.8 6.9 9.2 10.9 16.6 19.1 20.6 24.6 Imports of goods and nonfactor services 38.9 50.0 52.7 46.6 54.3 73.8 98.3 111.5 135.3 154.1 166.8 Merchandise (fob) 36.4 46.4 48.8 42.4 50.2 64.4 86.3 95.3 110.1 131.5 136.5 Nonfactor services 2.5 3.6 3.9 4.3 4.1 9.4 12.0 16.2 25.2 22.6 30.3 Resource balance 0.2 -4.1 -5.0 10.7 11.5 5.0 -11.8 7.7 12.0 17.6 40.5 Netfactorincome -0.2 -0.1 0.3 1.0 0.8 0.3 -1.3 -1.1 -11.8 -12.4 -15.9 Factor receipts 1.0 1.5 1.9 3.0 3.7 5.6 4.4 5.7 5.2 7.4 3.2 Factor payments 1.2 1.6 1.7 2.0 2.9 5.3 5.7 6.8 17.0 19.8 19.1 Total interest due 1.8 2.2 3.2 3.1 3.7 3.4 3.4 4.8 6.0 5.5 6.9 Other factor payments and disc. -0.6 -0.6 -1.5 -1.1 -0.8 1.9 2.3 2.0 11.0 14.3 12.2 Net current transfers 0.2 0.4 0.2 0.3 0.8 1.2 1.2 0.4 1.4 2.1 5.2 Current receipts 0.3 0.4 0.2 0.3 0.8 1.2 1.3 1.3 1.8 2.4 5.5 Workers remittances 0.2 0.1 0.1 0.1 0.2 0.2 0.1 0.4 0.4 1.7 4.4 Other current transfers 0.1 0.3 0.2 0.2 0.6 1.0 1.2 0.9 1.5 0.7 1.1 Current payments 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.9 0.4 0.2 0.3 Current account balance before official grants 0.3 -3.8 -4.5 12.0 13.1 6.4 -11.9 7.0 1.6 7.4 29.7 Current account balance as a share of GDP (percent) 0.1 -1.2 -1.3 3.4 3.4 1.4 -2.0 1.2 0.2 0.9 3.3 Official capital grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Current account balance after official.grants 0.3 -3.8 -4.5 12.0 13.1 6.4 -11.9 6.9 1.6 7.3 29.7 Long term capital inflows 7.8 9.1 8.7 9.0 8.0 18.4 35.9 41.6 46.7 48.9 54.4 Direct investment Net 1.7 2.3 2.6 2.7 3.5 7.2 23.1 31.8 33.8 38.1 41.7 Net long term borrowing 6.1 6.8 6.1 6.3 4.5 11.3 12.8 9.8 12.9 10.8 12.5 Disbursements 8.0 9.1 8.4 9.7 8.7 16.5 19.6 16.2 22.0 21.1 24.0 Repayments due 2.0 2.3 2.4 3.3 4.1 5.2 6.7 6.3 9.1 10.3 11.5 Total other items (net) -3.2 -2.9 -4.8 -9.4 -7.2 -26.9 -22.6 -18.1 -25.9 -24.5 -48.2 Net short-term capital 0.2 0.1 -1.5 -3.2 0.4 -0.9 -3.9 -3.1 0.4 0.1 -11.4 Capital flows not elsewhere included 0.0 0.0 0.0 -3.0 -0.8 -17.8 -8.6 -5.9 -8.5 -9.1 -20.0 Errors and omissions -3.5 -3.0 -3.3 -3.2 -6.8 -8.2 -10.1 -9.1 -17.8 -15.5 -16.8 Changes in net reserves -4.7 -2.4 0.5 -12.1 -14.1 2.1 -1.8 -30.5 -22.5 -31.7 -35.9 Net credit from IMF 0.1 0.0 0.0 -0.4 -0.4 0.0 0.0 0.0 0.0 0.0 0.0 Reserve changes not elsewhere included -4.8 -2.3 0.5 -11.7 -13.7 2.1 -1.8 -30.5 -22.5 -31.7 -35.9 Escrow account 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Gross reserves (excluding gold)' 16.3 18.5 18.0 29.6 43.7 20.6 224 529 75.4 107.7 1428 Gross reserves (including gold)' 22.5 23.8 23.1 34.5 48.3 25.0 27.0 57.8 80.3 112.6 147.0 Exchange rates Nominal official (average) 3.7 3.7 3.8 4.8 5.3 5.5 5.8 8.6 8.4 8.3 8.3 Nominal official (end-of-year) 3.7 3.7 4.7 5.2 5.4 5.8 5.8 8.4 8.3 8.3 8.3 Manufactures unit value index (percentage change) 9.8 7.3 -0.7 7.8 2.2 4.3 -0.3 3.7 8.2 -4.4 -5.1 Real effective index 40.2 43.7 50.7 37.3 32.4 31.3 30.7 33.5 35.3 37.0 41.4 a. SinceAugust 1992 the authorities have defined gross intemational reserves as the sum of only state foreign exchange reserves (not total reserves), gold, reserve position in the Fund and SDR holdings b. Gold valued at London prices (Source: IFS). Source: SAFEPRC, IMF Internotional Finonciol Stc6stics. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 76 TABLE 6 Balance of Payments: Services (Millions of U.S. dollars) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 A Shipment offreight (induding port expenses) Credit 904 1,308 1,061 1,937 1,179 1,294 1,391 2,065 2,478 2,833 1,372 Debit 1,186 1,387 2,382 2,139 2,193 3,876 5,134 6,926 8,727 10,084 8,897 B. Insurunce Credit 252 345 332 227 342 486 452 1,700 1,852 123 174 Debit 142 214 187 84 214 274 362 1,880 4,273 233 1,045 C Other transportation Credit 441 754 672 769 832 785 539 1,014 874 237 1596 Debit 456 889 370 1,106 315 449 345 695 799 228 1351 D. TrGvel receipts Credit 1,693 2,078 1,707 1,738 2,346 3,530 4,683 7,323 8,730 10,200 12,075 Debit 387 633 429 470 511 2,512 2,797 3,036 3,688 4,474 10,167 E Investment income Credit 976 1,469 1,894 3,017 3,719 5,595 4,390 5,737 5,191 7,318 3,008 Debit 1,191 1,630 1,665 1,962 2,879 5,347 5,674 6,775 16,965 19,755 19,097 F Posts Credit 12 24 118 159 221 349 471 706 756 315 271 Debit 14 11 16 13 15 72 85 146 217 134 290 G. Interofficiol Credit 204 137 151 107 115 141 201 266 700 34 65 Debit 150 277 337 239 184 227 473 518 588 216 243 H. Labor income Credit 51 35 53 52 74 60 47 117 166 Debit 0 0 0 0 0 20 22 98 0 L Other services Credit 880 177 509 918 1,944 2,664 3,456 3,546 3,740 6,859 9,030 Debit 150 193 189 301 689 2,024 2,840 3,098 6,930 7,216 8,314 J. Totol services Net 1,737 1,094 922 2,610 3,772 103 -2,102 -698 -17,866 -14,421 -21,647 Credit 5,413 6,327 6,497 8,924 10,772 14,904 15,630 22,474 24,321 27,919 27,757 Debit 3,676 5,233 5,575 6,314 7,000 14,801 17,732 23,172 42,187 42,340 49,404 K Factor services (E+H) Net -164 -126 282 1,107 914 288 -1,259 -1,019 -11,774 -12,437 -15,923 Receipts (credit) 1,027 1,504 1,947 3,069 3,793 5,655 4,437 5,854 5,191 7,318 3,174 Payments (debit) I,191 1,630 1,665 1,962 2,879 5,367 5,696 6,873 16,965 19,755 19,097 L Nonfactor services (A+B+C+D+F+G+I) Net 1,901 1,220 640 1,503 2,858 -185 -843 321 -6,092 -1,984 -5,724 Receipts (credit) 4,386 4,823 4,550 5,855 6,979 9,249 11,193 16,620 19,130 20,601 24,583 Payments (debit) 2,485 3,603 3,910 4,352 4,121 9,434 12,036 16,299 25,222 22,585 30,307 Sourc SAFEPRQ IMF Intematonal Finoncial Statistcs. STATISTICAL ANNEX 77 TABLE 7 Transfers (Millions of U.S. dollars) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Private unrequited transfers Net 249 416 238 222 444 804 883 836 811 1,828 4,661 Credit 260 428 247 233 484 821 901 1,095 1,171 1,989 4994 Debit 11 12 9 11 40 17 18 259 360 161 333 Nonresidential remittances Net 163 125 73 119 189 213 93 376 350 1672 4225 Credit 166 129 76 124 207 228 108 395 350 1,672 4423 Debit 3 4 3 5 18 15 15 19 0 0 198 Migronts' tronsfers Net 86 291 165 103 255 591 790 460 461 156 436 Credit 94 299 171 109 277 593 793 700 821 317 571 Debit 8 8 6 6 22 2 3 240 360 161 135 Public unrequited transfers Net -25 3 143 52 387 351 289 -501 624 301 483 Credit 129 140 230 143 406 385 389 174 656 379 483 Debit 154 137 87 91 19 34 100 675 32 78 Intemabonol organizations Net 24 42 82 69 183 139 127 -121 153 46 Credit 58 61 120 84 192 173 160 24 185 124 Debit 34 19 38 I5 9 34 33 145 32 78 Grants and oid Net -49 -39 61 -17 204 212 162 -380 471 255 Credit 71 79 110 59 214 212 229 IS0 471 255 Debit 120 118 49 76 10 0 67 530 0 0 Total transfers Net 224 419 381 274 831 1,155 1,172 335 1,435 2,129 5,144 Credit 389 568 477 376 890 1,206 1,290 1,269 1,827 2,368 5,477 Debit 165 149 96 102 59 Sl 118 934 392 239 333 Source: SAFEPRC, IMF International Finonciol Statistics. TABLE 8 International Reserves (Millions of U.S. dollars) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total reserves (minus gold) 16,305 18,541 17,960 29,586 43,674 20,620 22,387 52,914 75,377 107,039 142,762 SDRs 640 586 540 562 577 419 484 539 582 614 602 Reserve position with fund 429 407 398 430 433 758 704 755 1,216 1,396 2,270 Foreign exchange reserves 15,236 17,548 17,022 28,594 42,664 19,443 21,199 51,620 73,579 105,029 139,890 Gold (million fine troy ounces) 13 13 13 13 13 13 13 13 13 13 12.7 Gold (national valuation)' 629 594 587 623 634 610 612 646 660 637 601 London gold price (US$peroz)b 484 410 401 384 362 343 360 384 384 388 331 Gold at London price (US$ million) 6148 5210 5093 4871 4600 4361 4569 4880 4879 4925 4205 Total reserves including gold (national valulation) 16,934 19,135 18,547 30,209 44,308 21,230 22,999 53,560 76,037 107,676 143,363 Total reserves including gold (London price) 22,453 23,752 23,053 34,457 48,274 24,981 26,956 57,794 80,256 111,964 146,967 a From August 1992 onwards the authorities have defined gross intemational reserves as the sum of only state foreign exchange reserves (not total reserves), gold, reserve position with the Fund and SDR holdings. b. Gold valued at SDR 35 per fine ounce. Sourcne World Bank IMF: Intemational Financial Stastics. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 78 TABLE 9 Commodity Composition of Merchandise Exports (Millions of U.S. dollars, customs basis) 1987 1988 1989 1990 1991 1992 1993 i994 1995 1996 1997 Primary goods 13,231 14,406 15,078 15,886 16,145 17,004 16,666 19,708 21,485 21,925 23,929 Food 4,781 5,890 6,145 6,609 7,226 8,309 8,399 10,015 9,954 10,232 11,054 Live animals chiefly for food 348 386 395 430 439 479 453 468 503 487 476 Meat and meat products 520 585 657 791 906 770 950 909 1,371 1,438 1,310 Fishes, shell-fish, molluscs 721 969 1,039 1,370 1,181 1,366 1,254 2,320 2,853 2,855 2,927 Grain and grain products 579 681 719 614 1,169 1,692 1,660 1,687 285 525 1,500 Vegetables and fruits 1,290 1,617 1,623 1,742 1,946 2,023 2,163 2,889 3,342 3,118 3,071 Coffee,tea,cocoa 488 524 568 534 491 499 510 484 516 552 622 Nonfood 3,650 4,257 4,212 3,537 3,486 3,143 3,052 4,127 4,375 4,046 4,193 Oil seeds and oil-containing fruits 674 684 645 619 741 867 793 666 522 479 279 Textilefibers 1,508 1,672 1,546 1,095 1,125 4,224 4,179 1,093 753 713 805 Animal and vegetable raw materials 645 724 845 809 705 606 617 1,136 1,351 1,244 1,284 Mineral fuels 4,544 3,950 4,321 5,237 4,754 4,693 4,109 4,069 5,332 5,929 6,987 Coal, coke, and briquettes 536 594 680 755 829 .. I,054 1,695 1,730 1,925 Petroleum and petroleum products 4,003 3,350 3,633 4,460 3,975 .. 2,789 3,243 3,902 4,247 Other 256 309 400 503 679 859 1,106 1,497 1,823 1,718 1,695 Manufactured goods 26,206 33,1 10 37,460 46,205 55,698 67,936 75,078 101,298 127,298 129,141 158,767 Chemical and related products 2,235 2,897 3,201 3,730 3,818 4,348 4,623 6,236 9,094 8,879 10,225 Organic 500 575 690 838 911 1,403 1,541 1,602 2,285 2,262 2,576 Inorganic 553 762 791 842 913 1,050 1,145 1,350 2,225 2,107 2,382 Light industry 8,570 10,489 10,897 12,576 14,456 16,135 16,392 23,218 32,243 28,511 34,406 Yarn, fabrics, manufactured goods 5,790 6,456 6,994 6,999 7,734 .. .. 11,818 13,919 12,112 13,815 -Nonmetallic minerals 439 579 792 1,316 1,668 .. .. 2,521 3,425 3,300 3,999 Metal products 797 1,006 1,210 1,283 1,669 .. .. 1,654 5,225 3,643 4,461 Machinery and transport equipment 1,741 2,769 3,874 5,588 7,149 13,219 15,282 21,895 31,407 35,313 43,702 Other 6,273 8,268 10,755 12,686 16,620 34,234 38,781 49,937 54,548 56,426 70,430 Clothing and garments 3,749 4,872 6,130 6,848 8,998 16,883 18,325 23,732 24,049 25,037 31,781 Products not classified elsewhere 7,387 8,687 8,733 11,625 13,655 .. .. 12 6 12 4 Total 39,437 47,516 52,538 62,091 71,843 84,940 91,744 121,006 148,780 151,066 182,696 Note: Data from 1987 to 1991 are based on Standard Industrial Trade Classification (SITC); 1992 to 1997 categories are based on the Harmonized System (HS). From 1992 Customs Statistics use new commodity categories; products not otherwise clssified have been included in different categories of commodities. Source: China Stotstical Yeorbook 1/998, p. 621, China Customs Statistics. STATISTICAL ANNEX 79 TABLE 10 Imports (Millions of U.S. dollars, customs basis) 1987 1988 1989 1990 1991 1992 193 1994 1995 I996 1997 Food 3,055 4,191 5,269 4,474 3,718 3,907 2,953 5,014 9,131 7,866 6,308 Food 2,443 3,476 4,192 3,335 2,799 3,143 2,206 3,137 6,132 5,672 4,304 Beverages 263 346 202 157 200 239 245 68 394 497 320 Animal fat 349 369 875 982 719 525 502 1,809 2,605 1,697 1,684 Petroleum (mineral fuels) 539 787 1,650 1,272 2,113 3,570 5,819 4,035 5,127 6,877 10,306 Intermediate 16,769 23,391 23,415 18,325 23,189 34,237 40,042 43,955 52,066 55,303 58,004 Chemicals and related products 5,008 9,139 7,556 6,648 9,277 11,157 9,704 12,130 17,300 18,106 19,297 Crude materials (nonfood) 3,321 5,090 4,835 4,107 5,003 5,775 5,438 7,437 10,158 10,697 12,006 Leather and cork 728 842 747 938 1,267 1,626 1,859 2,943 3,020 3,053 3,258 Leather 184 224 280 374 642 206 263 1,902 1,993 2,138 2,235 Cork 544 618 467 564 625 1,420 1,596 1,041 1,027 915 1,023 Textile yarn (yarn, fabrics) 1,848 2,388 2,845 2,748 3,689 3,690 3,145 9,347 10,914 11,980 12,267 Nonmetallic minerals 342 430 520 453 443 4,519 3,776 1,001 1,113 1,221 1,328 Iron and steel 4,787 4,624 5,797 2,852 2,694 5,051 13,896 9,438 6,878 7,244 6,665 Nonferrous metals 735 878 1,114 579 816 2,420 2,224 1,659 2,683 3,002 3,183 Consumer goods 1,743 1,757 1,866 2,051 2,506 7,949 8,666 6,987 8,277 9,182 9,813 Paper (paper and related products) 727 610 634 745 969 1,771 1,741 1,923 2,157 2,776 3,228 Rubber 45 51 50 50 76 555 598 186 224 304 320 Fumiture 42 61 68 72 49 178 218 III 90 64 83 Travel goods 3 8 6 6 7 302 327 50 42 24 14 Cothing 17 28 38 48 6 1 437 543 622 969 1,044 1,117 Footwear 1 2 3 9 11 506 513 325 341 353 358 Photo supplies 432 365 398 361 441 2,024 2,320 1,656 1,861 1,855 1,907 Miscellaneous 476 632 669 759 892 2,177 2,407 2,114 2,592 2,762 2,786 Manufactured 21,110 25,150 26,940 27,223 32,264 30,922 46,479 55,624 57,483 59,610 57,930 Total 43,216 55,275 59,140 53,345 63,791 80,585 103,959 115,614 132,084 138,838 142,361 Note Data firm 1987 to 1991 are based on Standard Industrial Trade Cassificaton (SITC); 1992 to 1997 categories are based on the Harmonized System (HS). Source: China Statistcal Yearbook 1998, p. 622 China Customs Statistics. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 80 TABLE I I External Debt. Disbursements and Repayments (Millions of U.S. dollars) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Disbursements Public and publicly guaranteed long-term debt 8,044 9,065 8,442 9,665 8,659 16,321 19,229 16,154 21,441 20,993 22,458 Official creditors 1,123 1,847 2,761 2,578 2,649 3,116 5,501 4,203 9,073 5,678 6,214 Multilateral 717 1,124 1,169 1,158 1,455 1,523 2,252 2,558 2,838 2,797 2,939 IDA 399 557 507 507 612 791 869 680 812 819 713 IBRD 303 553 604 591 668 552 977 1,383 1,457 1,286 1,563 Bilateral 405 724 1,592 1,420 1,194 1,580 3,248 1,642 6,235 2,872 3,275 Private creditors 6,921 7,218 5,681 7,087 6,010 13,204 13,729 11,951 12,368 15,316 16,244 Bonds 1,064 782 450 277 260 894 2,737 3,337 1,224 2,777 3,105 Commercial banks 4,605 4,470 2,016 3,247 2,623 5,062 5,624 2,380 4,977 4,915 5,889 Other private 1,252 1,967 3,206 3,564 3,127 7,248 5,367 6,234 6,167 7,624 7,249 Private nonguaranteed long-term 0 0 0 0 0 198 332 0 544 129 1,518 Total long-term disbursements 8,044 9,065 8,442 9,665 8,659 16,518 19,561 16,154 21,985 21,122 23,976 IMF purchases 0 0 0 0 0 0 0 0 0 0 0 Netshort-term capital 0 0 0 0 0 0 0 0 0 0 0 Total disbursements 8,044 9,065 8,442 9,665 8,659 16,518 19,561 16,154 21,985 21,122 23,976 Repoyment due Public and publicly guaranteed long-term debt 1,956 2,285 2,365 3,319 4,123 5,213 6,729 6,343 9,070 10,260 11,320 Official creditors 496 492 485 851 605 760 886 1,083 1,171 1,269 1,899 Multilateral 99 41 63 220 141 215 272 359 420 414 554 IDA 0 0 0 0 1 2 4 9 14 20 26 IBRD 97 39 62 216 130 196 245 315 350 343 351 Bilateral 397 451 421 631 464 545 614 725 751 854 1,345 Private creditors 1,460 1,793 1,880 2,468 3,517 4,453 5,843 5,260 7,899 8,991 9,421 Bonds 0 11 33 325 236 1,095 831 461 1,451 1,716 1,087 Commercial banks 466 754 867 808 2,010 2,046 2,895 1,803 2,645 4,132 5,159 Other private 993 1,028 980 1,335 1,272 1,312 2,117 2,997 3,803 3,143 3,175 Private nonguranteed long-term debt 0 0 0 0 0 0 0 0 0 0 207 Total long-term repayments due 1,956 2,285 2,365 3,319 4,123 5,213 6,729 6,343 9,070 10,260 11,526 IMF repurchases 81 83 79 490 451 0 0 0 0 0 0 Total long-term repayment and IMF repurchase 2,037 2,368 2,444 3,809 4,574 5,213 6,729 6,343 9,070 10,260 11,526 Net flows Official creditors 626 1,355 2,277 1,727 2,044 2,356 4,615 3,120 7,902 4,409 4,315 IDA 399 557 507 507 611 789 865 671 798 799 687 IBRD 206 514 542 376 538 356 732 1,068 1,107 943 1,212 Commitments IBRD commitments 692 868 1,221 75 1,312 1,253 1,445 2,930 2,777 1,400 2,120 Fast disbursing 0 200 0 0 0 0 0 0 0 0 0 IDA commitments 613 594 539 878 1,310 612 870 1,090 355 500 305 Fast disbursing 0 97 0 0 0 0 0 0 0 0 0 Source: World Bank World Debt Tables. STATISTICAL ANNEX 81 TABLE 12 External Debt: Interest and Debt Outstanding (Millions of U.S. dollars) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Interest due Public and publicly guaranteed long-term debt 1,125 1,611 2,511 2,534 2,953 2,708 2,618 3,818 4,623 4,631 5,498 Official creditors 402 434 457 531 635 678 827 1,131 1,288 1,310 1,785 Multilateral 126 143 179 226 263 319 376 480 619 684 730 IDA 12 15 14 19 23 29 34 41 49 52 56 IBRD III 126 161 200 227 264 299 364 460 496 507 Bilateral 276 290 278 305 372 358 450 651 669 626 1,055 Private creditors 723 1,178 2,054 2,003 2,319 2,030 1,792 2,687 3,336 3,321 3,713 Bonds 213 289 347 367 356 337 286 363 594 506 568 Commercial banks 137 457 1,062 959 1,071 776 738 1,034 1,333 1,351 1,441 Other private 373 432 646 677 892 917 767 1,290 1,409 1,464 1,704 Private nonguaranteed long-term debt 0 0 0 0 0 0 12 26 33 53 55 Interest arrears 0 0 0 0 0 0 0 0 0 0 0 Reduction in arrears H 0 0 0 0 0 0 0 0 0 0 0 Total long-term interest due 1,125 1,611 2,511 2,534 2,953 2,708 2,630 3,844 4,657 4,685 5,553 IMF service charges 50 51 67 65 24 0 0 0 0 0 0 Interest on short-term debt 640 534 628 649 754 697 809 948 1,340 811 1,365 Total interest due 1,815 2,196 3,206 3,248 3,731 3,405 3,439 4,792 5,997 5,496 6,918 Debt outstanding and disbursed (DOD) Public and publicly guaranteed long-term debt 25,963 32,620 37,118 45,515 49,479 58,463 70,076 82,391 94,674 102,260 112,821 Official creditors 9,496 10,536 12,039 14,514 17,073 19,105 24,339 28,973 36,982 39,433 39,755 Multilateral 2,852 3,753 4,783 6,111 7,576 8,614 10,690 13,588 16,302 17,695 18,973 IDA 1,330 1,819 2,296 3,016 3,672 4,286 5,160 6,097 7,038 7,579 7,830 IBRD 1,427 1,831 2,330 2,865 3,494 3,752 4,549 5,933 7,209 7,616 8,239 Bilateral 6,644 6,783 7,257 8,403 9,497 10,491 13,650 15,385 20,680 21,737 20,782 Private creditors 16,467 22,085 25,079 31,001 32,406 39,358 45,737 53,418 57,693 62,828 73,066 -Bonds 4,498 5,182 5,228 5,425 5,660 5,449 7,715 11,087 10,684 11,106 12,616 Commercial banks 6,087 10,393 11,432 14,520 14,963 17,913 20,678 21,475 23,869 24,437 34,873 Otherprivate 5,882 6,510 8,419 11,056 11,783 15,996 17,344 20,856 23,140 27,285 25,577 Private nonguaranteed long-term 0 0 0 0 0 200 556 583 1,090 1,150 2,412 Total long-term DOD 25,963 32,620 37,118 45,515 49,479 58,663 70,632 82,974 95,764 103,410 115,233 Use oflMF credit 1,155 1,013 908 469 0 0 0 0 0 0 0 Short-term debt 8,221 8,806 6,907 9,317 10,780 13,765 15,296 17,483 22,325 25,407 31,464 Total external debt 35,339 42,439 44,933 55,301 60,259 72,428 85,928 100,457 118,089 128,817 146,697 Memorondum items Percentage of debt on concessional terms 20 19 21 21 21 20 19 19 18 18 17 Percentage of debt at variable interest rates 34 39 38 36 33 28 29 28 30 30 34 Percentage of bilateral debt on concessional terms 11 10 12 13 11 10 12 12 1i II 10 Percentage of multilateral debt on concessionalterms 4 4 5 6 6 6 8 8 7 7 7 Preferred creditor debt service If 8 8 17 12 7 7 8 8 7 8 Source: World Bank World DebtTables. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS .82 TABLE 13 Domestic Debt (Billions of yuan) Year Amount issued Type Issued to issued 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1990 Spedal state bonds Enterprises 3.27 3.27 Fiscal bonds Financial institutions 7.11 7.11 1991 Treasury bonds Households 19.94 19.94 Spedal state bonds Enterprises 1.72 1.72 Fiscal bonds Financial institutions 6.46 6.46 1992 Treasury bonds Households 14.90 14.90 Treasury bonds Households 24.70 24.70 Fiscal bonds Financial institution 6.51 6.51 1993 Treasury bonds Households 22.64 22.64 Treasury bonds Households 8.84 8.84 Fiscal bonds Financial institutions 7.00 7.00 1994 Treasury bonds Enterprises 2.00 200 Treasury bonds Households 5.03 5.03 Treasury bonds Households 8.24 8.24 Treasury bonds Households 28.50 28.50 Treasury bonds Households 70.00 70.00 1995 Special state bonds Financial institutions 2.40 2.40 Treasury bonds Financial institutions 25.00 25 Treasury bonds Households 136.89 136.89 Treasury bonds Households 6.00 6.00 Treasury bonds Financial institutions 11.79 11.79 1996 Special state bonds Households 3.36 3.36 Treasury bonds Households 34.87 34.87 Treasury bonds Households 30.11 30.11 Treasury bonds Households 67.43 67.43 Treasury bonds Households 30.15 30.15 Treasury bonds Households 21.12 21.12 Treasury bonds Households 25.58 25.58 1997 Special state bonds Households 2.94 2.94 Treasury bonds Households 47.02 47.02 Treasury bonds Households 152.89 152.89 Treasury bonds Households 25.33 25.33 Treasury bonds Households 13.02 13.02 1998 Treasury bonds Households 82,00 82 Treasury bonds Households 71.00 71 Treasury bonds Households 42.35 42.35 Total amount maturing 1068.11 24.97 43.32 105.98 121.52 183.73 116.45 155.29 115.51 28.27 92.12 0.00 42.35 25.58 13.02 Treasury bonds Households 988.55 24.97 32.94 86.01 115.01 151.73 114.45 152.89 112.15 25.33 9212 0.00 42.35 25.58 13.02 Treasury bonds Enterprises 2.00 0.00 0.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Treasury bonds Financial institutions 36.79 0.00 0.00 11.79 Q00 25.00 0a00 0.00 0.00 0.00 0.00 QOO 0.00 0.0 0.00 Speciaistate bonds Enterprises 4.99 0.00 3.27 1.72 0,00 0.00 0,00 0.00 0.00 000 000 0.00 000 000 0.00 Special state bonds Households 6.30 0.00 0.00 0.00 000 0.00 000 000 3,36 2.94 0.00 000 0.00 0.00 0.00 Special state bonds Financial institutions 2.40 0.00 0.00 0.00 0.00 0.00 0.00 2.40 0.00 0.00 000 000 0.00 0.00 0.00 Fiscal bonds Financial institutions 27.08 0.00 7.11 6.46 6.51 7.00 000 000 000 0.00 0.00 aa00 00 0a00 0.00 Source: People's Bank of China, Quarterly Stotistical Bulletin. TABLE 14 Monetary Survey 1996 1997 1998 1993 1994 1995 March June Sept. Dec., March' June Sept. Dec. March June Billions of yuan, end of period Net foreign assets 222 506 637 729 748 871 952 1,120 1,182 1,325 1,422 1,468 1,487 Net domestic assets 3,098 3,976 5,188 5,495 5,828 6,084 6,409 6,671 6,910 7,067 7,475 7,536 7,757 Domestic credit 3,301 4,124 5,054 5,265 5,609 5,757 6,137 6,834 7,009 7,225 7,678 7,719 8,085 Loans to enterprises and individuals 3,158 3,937 4,871 5,011 5,357 5,510 5,889 6,302 6,497 6,706 7,086 7,160 7,402 Net credit to govemment 171 139 126 159 116 187 Net credit to central government 118 131 131 210 212 201 216 263 240 229 241 215 296 Claims on nomonetary financial institutions 25 56 52 44 40 46 32 361 373 393 433 443 496 Otheritems (net) -203 -148 134 230 219 327 272 -163 -99 -158 -203 -183 -328 Money plus quasi-money (broad money) 3,330 4,483 5,825 6,224 6,577 6,955 7,361 7,791 8,092 8,391 8,897 9,005 9,244 Money 1,628 2,054 2,399 2,391 2,462 2,634 2,851 2,963 3,107 3,224 3,483 3,311 3,378 Currency 586 729 789 817 767 841 880 928 912 943 1,018 1,020 972 Demand deposits 1,042 1,325 1,610 1,574 1,695 1,793 1,971 2,035 2,195 2,282 2,465 2,291 2,406 Household demand deposits .. .. .. Enterprise deposits .. .. .. -* Official institutions .. Quasi-money 1,702 2,429 3,426 3,833 4,115 4,321 4,510 4,828 4,985 5,167 5,414 5,694 5,866 cxz Twelve-month percentoge chonge 4I Net domestic assets 26 28 3 1 28 27 25 24 21 1916 17 13 12 Domestic credit 23 26 23 22 28 25 22 30 2525 25 13 15 Loans to enterprises and individuals .. 25 24 23 26 24 21 26 2 1 22 20 14 14 Money and quasi-money (broad money) 24 35 30 30 30 28 26 25 23 21 21 16 1 4 Currency 35 24 8 12 10 14 12 14 19 12 16 10 7 Note: Covers the operations of the People's Bank specialized and universal banks, rural and urban credit cooperatives, and the Agricultural Development Bank Level data from March 1993 have been revised on the basis of a new statistical methodology that includes an improved accounting system and expanded coverage. Growth rates from 1994 are based on these new statistics. a. China redefined many categories in 1997, so data before 1997 are not comparable. Source: PBC. TABLE IS Operations of the People's Bank (Billions of yuan, end of period) 1996 1997 1998 1993 1994 1995 March June Sept. Dec. March June Sept. Dec. March June Net foreign assets 155 445 667 733 789 873 956 1,066 1,144 1,252 1,323 1,318 1,317 Gold and intemational financial institutions 12 19 16 15 18 19 23 1 1 1 1 1 1 lntemationalreservesconvertedatexchangerate' 123 434 611 671 719 792 872 935 1,008 1,116 1,164 1,172 1,172 Other 20 -7 40 46 52 62 62 130 135 135 158 145 144 Net domestic assets 1,159 1,276 1,409 1,419 1,346 1,378 1,732 1,615 1,604 1,587 1,741 1,603 1,742 Domestic credit 1,165 1,230 1,298 1,293 1,218 1,214 1,565 1,610 1,572 1,546 1,670 1,606 1,621 Claims on deposit moneybanks 961 1,045 1,151 1,145 1,094 1,117 1,452 1,363 1,324 1,353 1,436 1,401 1,350 Claims on other financial institutions 25 27 18 17 12 12 12 166 183 190 207 214 240 Claims on government (net) 15 1 -14 10 -26 20 Claimsoncentralgovernment(net) III 85 61 62 45 18 36 107 102 88 92 73 129 Claims on nonfinancial sectors 68 73 68 68 67 67 66 66 64 17 17 17 11 Other items (net) -6 46 III 126 128 164 167 5 32 41 71 -3 121 Reserve money 1,315 1,722 2,076 2,151 2,135 2,251 2,689 2,681 2,749 2,838 3,063 2,921 3,059 Annual change, in percentb 36 31 21 22 23 20 30 25 29 26 14 9 11 Liabilities to banks 558 745 975 1,013 1,029 1,050 1,384 1,307 1,384 1,462 1,598 1,313 1,622 Required deposits 275 383 511 549 592 633 654 770 815 858 890 748 0.08 co Other deposits 229 303 395 396 369 344 666 451 485 519 628 479 1,539 Cash invault 54 60 69 68 68 73 63 86 84 85 80 86 83 Liabilities to nonbanks 757 976 1,101 1,139 1,106 1,201 1,305 1,374 1,365 1,376 1,465 1,609 1,437 Currency in circulation 578 729 789 817 767 841 880 928 912 943 1,018 1,020 972 Deposits of financial institutions other than deposit-money banks 50 61 61 60 65 66 IIS 153 147 112 93 221 72 Deposits of nonfinancial institutions 129 187 251 262 274 294 310 293 306 321 354 368 393 Memorondum items Money multiplier' 2.65 2.73 2.93 3.00 3.19 3.20 2.83 2.91 2.94 2.96 2.90 3.16 3.09 Ratio of excess reservesto deposits (percent)d 9.43 9.15 7.97 8.24 7.23 6.55 10.83 7.83 7.92 8.10 8.99 7.08 19.61 Note. Data from March 1993 have been revised on the basis of a new statistical methodology that indudes an improved accounting system and expanded coverage. a. Reserves converted at official rate pror to 1994. b. In November 1996 a strengthening in the enforcement of reserve requirements over rural credit cooperatives was accommodated by an expansion in reserve moneyThe growth rate of reserve money excluding this operation was just over 20 percent for the year as a whole. c. Ratio of broad money, as reported in the banking survey, to reserve money. d. Ratio of banks' excess reserves to deposits reported in the banking survey Source: PBC. TABLE 16 Banking Survey, 1993-98 (Billions of yuan, end of period) 1996 1997 1998 1993 1994 1995 March June Sept. Dec.' March' June Sept. Dec. March June Net foreign assets 222 506 637 682 700 837 921 1,068 1,128 1,278 1,366 1,406 1,430 Net domestic assets 3,257 4,185 5,437 5,770 6,113 6,368 6,688 6,89 1 7,153 7,311 7,733 7,816 8,037 Domestic credit 3,481 4,310 5,293 5,649 6,049 6,206 6,641 6,999 7,190 7,414 7,872 7,920 8,278 Claims on government (net) 174 141 128 162 117 189 Claims on central govemment (net) 118 133 132 212 214 203 218 266 242 230 244 217 298 Claims on nonfinancial sectors 3,363 4,177 5,161 5,437 5,835 6,003 6,423 6,818 7,044 7,282 7,706 7,798 8,084 Claims on nonmonetary financial institutions 7 5 4 4 5 5 Other items, net -224 -125 144 121 64 162 47 -108 -37 -103 -139 -104 -241 Broad money 3,480 4,691 6,075 6,451 6,813 7,205 7,609 7,959 8,281 8,590 9,100 9,221 9,466 Narrow money 1,620 2,053 2,399 2,391 2,462 2,634 2,851 2,963 3,107 3,225 3,483 3,311 3,378 Currency in circulation 578 728 789 817 767 841 880 928 912 943 1,018 1,020 972 Demand deposits 1,042 1,325 1,610 1,574 1,695 1,793 1,971 2,035 2,195 2,282 2,465 2,291 2,406 Quasi-money 1,860 2,638 3,676 4,060 4,351 4,571 4,758 4,996 5,174 5,365 5,617 5,910 6,088 Time deposits 125 194 332 372 430 467 504 569 606 650 674 676 735 Savings deposits 1,520 2,152 2,966 3,330 3,546 3,708 3,852 4,157 4,277 4,414 4,628 4,869 4,995 Other deposits 215 292 378 358 375 395 402 270 291 301 315 365 358 co Memorandum itemsb; twelve-month change, percent cE Net domestic assets .,, 28.5 29.9 27.6 25.9 23.9 23.0 19.4 17.0 14.8 15.6 13.4 12.4 Domestic credit ... 23.8 22.8 25,1 31.4 28.1 25.5 23.9 18.9 19.5 18.5 13.2 15.1 Broad money .. 34.8 29.5 28.3 28.2 26.8 25.3 23.4 21.5 19.2 19.6 15.9 14.3 Narrow money ... 26.7 16.8 13.7 14.9 17.1 18.9 23.9 26.2 22.4 22.2 11.7 8.7 Quasi-money ... 41.8 39.3 38.7 37.1 33.2 29.4 23.1 18.9 17.4 18.1 18.3 17.7 Currency in circulation 35.2 26.0 8.2 12.4 9.4 14.1 11.6 13.6 18.9 12.1 15.7 9.9 6.6 Note: Includes the operations of the People's Bank of China, the deposit money banks, and other banks (or specific depository institutions). Data for March 1996 and later include, in addition, operations of two policy banks (the Export-Import Bank and the State Development Bank). a. China revised many data categories in 1997, so data before 1997 are not comparable. b. Owing to a break in the series in 1993, growth rates for that year are not available. Source: Data provided by the Chinese authorities. TABLE 17 Balance Sheets of Urban Credit Cooperatives (Billions of yuan, end of period) 1996 1997 1998 1993 1994 1995 March June Sept. Dec. March June Sept. Dec. March June Total assets 118 214 304 311 313 333 374 422 440 470 500 491 502 Foreign assets (net) 0 0 0 0 0 0 0 0 0 0 0 0 0 Reserve assets 33 50 68 62 60 62 78 74 81 94 101 88 71 Required reserves 13 23 33 36 35 37 39 44 46 50 53 52 5 Deposits with the PBC 1 8 21 28 21 20 19 34 23 28 38 4 1 29 60 Cash invault 2 3 5 5 5 6 4 7 6 6 7 7 6 Central bank bonds 0 2 2 0 0 0 0 0 0 0 0 0 0 Claims on central govemment 7 7 10 12 9 9 10 22 18 21 25 24 36 Claimsonothersectors 78 144 207 218 224 241 263 300 317 331 352 359 374 Claims on nonmonetary financial institutions 0 14 19 19 20 21 24 26 25 24 22 20 21 Total liablilities 117 213 304 310 314 333 375 422 443 470 499 491 502 Liabilities to nonfinancial sector 134 235 336 340 341 362 400 452 477 499 538 531 540 Demand deposits 62 100 117 107 99 103 117 175 184 196 223 206 213 Time deposits 7 20 41 41 42 44 47 63 61 61 63 63 64 Savings deposits 38 73 126 144 157 168 183 205 222 232 242 254 255 Other deposits 27 42 52 47 44 47 52 9 10 10 10 9 9 co Liabilities to central bank 2 3 3 3 3 3 3 4 4 4 4 3 4 Liabilities to nonmonetary financial institutions 0 4 6 6 8 10 18 12 14 13 14 11 10 Bonds 0 0 0 0 0 0 0 0 0 0 0 0 0 Owners' equity 8 16 20 22 20 20 21 25 27 26 28 26 25 Paid-in capital 8 11 14 16 15 15 16 21 23 23 25 27 26 Other items (net), -27 -45 -61 -61 -58 -62 -67 -71 -79 -72 -85 -80 -77 a. In keeping with the authorities' presentation,"other items, net' is shown as a negative entry on the liabilities side, rather than a positive entry on the assets side and does not net out bonds and owners' equity. Source: The People's Bank of China Quartedy Statistical Bulletin, PBC. TABLE 18 Balance Sheets of Rural Credit Cooperatives (Billions of yuan, end of period) 1996 1997 1998 1993 1994 1995 March June Sept Dec. March June Sept. Dec. March June Total assets 375 505 645 684 758 797 871 917 936 967 1,012 1,054 1,074 Foreign assets (net) 0 0 0 0 0 0 0 0 0 0 0 0 0 Reserve assets 61 88 122 120 124 129 194 183 178 188 224 217 204 Required reserves S l 67 88 92 98 102 71 111 115 120 125 127 184 Deposts with the PBC I 9 19 5 S 12 13 107 52 43 47 80 70 Cash in vault 9 12 16 14 14 15 16 20 21 21 20 20 20 Central bankbonds 0 0 0 0 0 0 0 0 0 0 0 0 0 Claims on central govemment 0 0 0 0 39 40 41 13 14 1 5 19 24 25 Claims on other sectors 314 417 523 564 595 628 636 717 740 761 766 810 841 Claims on nonmonetary financial institutions 0 0 0 0 0 0 0 4 4 3 3 4 3 Total liabilities 375 506 645 684 759 798 871 917 935 969 1,012 1,054 1,074 Liabilities to nonfinancial sector 430 568 717 773 816 843 879 945 974 1,013 1,061 1,115 1,144 Demand deposits 68 81 89 79 85 89 101 97 103 III 126 116 120 Time deposits 4 6 9 9 11 11 12 12 14 15 16 16 19 Savings deposits 358 482 620 685 720 743 767 832 855 884 913 978 1,002 Other deposits 0 0 0 0 0 0 0 4 3 2 5 5 4 Liabilitiesto central bank 0 0 0 0 0 0 0 1 1 2 2 2 2 co Liabilities to nonmonetary financial institutions 0 0 0 0 0 0 0 I I 1 0 0 0 Bonds 0 0 0 0 0 0 0 0 0 0 0 0 0 Owners' equity 41 62 63 56 55 56 55 34 29 25 3 1 24 1 5 Paid-in capital 41 69 38 38 38 38 40 68 67 67 63 66 63 Other kems (net)a -96 -124 -135 -145 -112 -101 -63 -64 -70 -72 -82 -86 -87 a. In keeping with the authorities' presentation, "other items, net" is shown as a negative entry on the liabilities side, rather than a positive entry on the assets side and does not net out bonds and own- ers' equity. Source: The People's Bank of China Quarterly Statistical Bulletin, PBC. TABLE 19 Consolidated Government Revenue (Billions of yuan) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total revenue 257.6 280.3 326.4 355.0 367.2 392.8 475.9 558.4 657.0 774.5 900.8 Tax revenue 232.1 257.6 301.7 313.8 331.7 345.7 447.5 524.0 609.0 692.5 820.6 Taxes on income and profrts' 71.7 76.4 78.9 84.7 82.1 81.1 80.5 101.2 128.7 153.0 162.3 Enterprises income tax 66.5 68.2 69.4 74.5 73.1 72.1 67.9 70.9 87.8 96.8 94.7 State enterprises 56.3 57.1 58.3 60.4 62.7 62.5 58.3 61.0 75.9 82.2 78.1 Collectives 10.2 10.5 10.5 13.3 10.4 9.6 9.6 9.9 11.9 14.6 16.7 Others .. 0.6 0.6 0.8 .. .. .. .. Personal income tax (other) .. 0.8 1.0 1.4 .. .. .. 7.2 13.1 19.3 28.0 Agricultural income tax 5.2 7.4 8.5 8.8 9.0 9.0 12.6 23.1 27.8 36.9 39.6 Taxes on goods and services 111.9 130.8 158.2 164.0 175.5 206.6 287.8 346.5 400.9 463.6 526.6 General sales taxes 109.5 126.3 144.8 149.7 159.9 205.8 286.8 346.5 400.9 463.6 526.6 Product tax (consumption tax) 53.9 48.1 53.0 58.1 62.9 69.3 82.1 48.7 54.1 62.0 67.4 Value added tax 25.4 38.4 43.1 40.0 40.6 70.6 108.1 230.8 260.2 296.3 327.1 Business tax 30.2 39.8 48.7 51.6 56.4 65.9 96.6 67.0 86.6 105.3 132.1 Urban maintenance and development tax .. .. 8.6 9.2 10.0 .. .. .. Real estate tax .. 2.2 2.6 3.2 3.8 .. .. .. Special tax on oil 1.5 1.4 1.2 1.1 1.0 .. 0.2 .. Salt tax 0.9 0.9 1.0 0.8 0.8 0.8 0.8 .. Customs tax 14.2 15.5 18.2 15.9 18.7 21.3 25.6 27.3 29.2 30.2 31.9 Other taxes 34.3 34.9 46.4 49.2 55.4 36.7 53.6 49.0 50.2 45.7 99.8 Construction tax 3.0 2.6 2.8 3.8 3.1 3.2 3.8 4.3 5.3 6.2 7.8 Nontax revenue 25.5 22.7 24.7 41.2 35.5 47.1 28.4 34.4 48.0 82.0 80.1 Gross profit remittances from state owned enterprisesb 4.3 5.1 6.4 7.8 7.5 6.0 4.9 .. .. 32.6 6.5 Depreciation funds .. .. .. .. .. .. .. .. Other 21.2 17.6 18.3 33.4 28.0 41.1 23.5 34.4 48.0 49.4 73.6 Foreign grants (net) -0. I 0.0 0.5 0.2 2.1 1.9 1.7 4.3 5.0 2.5 Memorandum item Gross profit remittances from state owned enterprises 4.3 5.1 6.4 7.8 7.5 6.0 4.9 .. .. 32.6 6.5 GNP in current prices 1,195.5 1,492.2 1,691.8 1,859.8 2,166.3 2,665.2 3,456.1 4,667.0 5,749.5 6,685.1 7345.3 Note: According to the defnition contained in IMF, Manual on Government Finance Statisacs (GFS), 1986.This includes all govemment revenue, with the exception of extrabud- getary receipts of the various levels of govemment a. Beginning with 1985, profit taxes on state enterprises are included under tax revenue. b.As of 1988, only banks and financial institutions are subject to remittance. Source: IMF. STATISTICAL ANNEX 89 TABLE 20 Structure of Consolidated Government Revenue (Percentage of total revenue) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total revenue 100.0 100.0 100.0 100.0 I000. 100.0 0.0 100.0 100.0 100.0 00.0 Tax revenue 90.1 91.9 92.4 88.4 90.3 88.0 94.0 93.8 92.7 89.4 91.1 Taxes on income and profits 27.8 27.3 24.2 23.9 22.4 20.6 16.9 18.1 19.6 19.8 18.0 Enterprises incometax 25.8 24.3 21.3 21.0 19.9 18.4 14.3 12.7 13.4 12.5 10.5 State enterprises 21.9 20.4 17.9 17.0 17.1 15.9 12 3 10.9 11.6 10.6 8.7 Collectives 4.0 3.7 3.2 3.7 2.8 2.4 2.0 1.8 1.8 1.9 1.9 Others .. 0.2 0.2 0.2 .. .. .. .. Personal income tax (other) 0.3 0.3 0.4 .. 1.3 2.0 2.5 3.1 Agricultural income tax 2.0 2.6 2.6 2.5 2.5 2.3 2.6 4.1 4.2 4.8 4.4 Taxes on goods and services 43A 46.7 48.5 46.2 47.8 52.6 60.5 62.1 61.0 59.9 58.5 General sales taxes 42.5 45.1 44.4 422 43.5 52.4 60.3 62.1 61.0 59.9 58.5 Product tax 20.9 17.2 16.2 16.4 17.1 17.6 17.3 8.7 8.2 8.0 7.5 Value added tax 9.9 13.7 13.2 11.3 11.1 18.0 22.7 41.3 39.6 38.3 36.3 Business tax 11.7 14.2 14.9 14.5 15.4 16.8 20.3 12.0 13.2 13.6 14.7 Urban maintenance and development tax .. .. 2.6 2.6 2.7 .. .. .. Real estatetax .. 0.8 0.8 0.9 1.0 .. .. .. Special tax on oil 0.6 0.5 0.4 0.3 0.3 .. 0.0 .. Salt tax 0.3 0.3 0.3 0.2 0.2 0.2 0.2 .. Customs tax 5.5 5.5 5.6 4.5 5.1 5.4 5.4 4.9 4.4 3.9 3.5 Othertaxes 13.3 12.5 14.2 13.9 15.1 9.3 11.3 8.8 7.6 5.9 11.1 Construction tax 1.2 0.9 0.9 1.1 0.8 0.8 0.8 0.8 0.8 0.8 0.9 Nontax revenue 9.9 B.1 7.6 11.6 9.7 12.0 6.0 6.2 7.3 10.6 8.9 Gross profit remittances from state enterprises 1.7 1.8 2.0 2.2 2.0 1.5 1.0 .. .. 4.2 0.7 Depreciation funds .. .. .. .. .. .. .. .. Other 8.2 6.3 5.6 9.4 7.6 10.5 4.9 6.2 7.3 6.4 8.2 Foreign grants (net) 0.0 0.0 0.2 0.1 0.6 0.5 0.3 0.8 0.8 0.3 Memormndum item Gross profit remittances from state owned enterprises 1.7 1.8 2.0 2.2 2.0 1.5 1.0 .. .. 4.2 0.7 Source:Table )9. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 90 TABLE 21 Structure of Government Revenue (Percentage of GNP) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total revenue 21.5 i8.8 19.3 19.i (7.0 14.7 13.8 12.0 (i(A 1i.6 123 Tax revenue 19.4 17.3 17.8 16.9 15.3 13.0 12.9 i1.2 (0.6 10.4 11.2 Taxes on income and profits 6.0 5.1 4.7 4.6 3.8 3.0 2.3 2.2 2.2 2.3 2.2 Enterprises income tax 5.6 4.6 4.1 4.0 3.4 2.7 2.0 1.5 1.5 1.4 1.3 State enterprises 4.7 3.8 3.4 3.2 2.9 2.3 1.7 1.3 1.3 1.2 1.1 Collectives 0.9 0.7 0.6 0.7 0.5 0.4 0.3 0.2 0.2 0.2 0.2 Joint ventures .. 0.0 0.0 0.0 .. .. .. .. Personal income tax (other) 0.1 0.1 0.1 .. .. .. 0.2 0.2 0.3 0.4 Agricultural income tax 0.4 0.5 0.5 0.5 0.4 0.3 0.4 0.5 0.5 0.6 0.5 Taxes on goods and services 9.4 8.8 9.4 8.8 8.1 7.8 8.3 7.4 7.0 6.9 7.2 General sales taxes 92 8.5 8.6 8.0 7.4 7.7 8.3 7.4 7.0 6.9 7.2 Product tax 4.5 3.2 3.1 3.1 2.9 2.6 2.4 1.0 0.9 0.9 0.9 Value added tax 2.1 2.6 2.5 2.2 1.9 2.6 3.1 4.9 4.5 4.4 4.5 Business tax 2.5 2.7 2.9 2.8 2.6 2.5 2.8 1.4 1.5 1.6 1.8 Urban maintenance and development tax .. 0.5 0.5 0.5 .. .. .. Real estate tax .. 0.1 0.2 0.2 0.2 .. .. .. Special tax on oil 0.1 0.1 0.1 0.1 0.0 .. 0.0 .. Salt tax 0.1 0.1 0.1 0.0 0.0 0.0 0.0 .. Customs tax 1.2 1.0 1.1 0.9 0.9 0.8 0.7 0.6 0.5 0.5 0.4 Other taxes 2.9 2.3 2.7 2.6 2.6 1.4 1.6 (.0 0.9 0.7 1.4 Construction tax 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Nontax revenue 2.1 1.5 1.5 2.2 1.6 1.8 0.8 0.7 0.8 (.2 1.1 Gross profrt remittances from state owned enterprises 0.4 0.3 0.4 0.4 0.3 0.2 0.1 .. .. 0.5 0.1 Depreciation funds .. .. .. .. .. .. .. .. Other 1.8 1.2 1.1 1.8 1.3 1.5 0.7 0.7 0.8 0.7 1.0 - Foreign grants (net) 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.1 0.1 0.0 Memormndum item Gross profit remittances from state owned enterprises 0.4 0.3 0.4 0.4 0.3 0.2 0.1 .. .. 0.5 0.1 Source: Table 19. STATISTICAL ANNEX 91 TABLE 22 Structure of Government Expenditure 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total expenditure and net lending 282.7 313.7 363.8 391.7 415.2 453.9 545.9 632.6 750.8 876.4 1015.8 Current expenditure 207.1 237.6 288.2 306.9 328.5 364.0 424.3 538.5 622.5 733.4 853.8 Administration 19.5 23.9 28.5 33.3 34.3 42.5 53.6 72.9 87.3 104.1 120.1 Defense 21.0 21.8 25.1 29.0 33.0 37.8 42.6 55.1 63.7 72.0 81.2 Culture, education, public health, science, and broadcasting 40.3 48.6 55.3 61.7 70.8 79.3 95.8 127.8 146.7 170.4 197.6 Education 22.7 27.9 31.6 35.3 41.0 45.3 55.8 77.3 89.2 103.8 120.5 Economic services 26.0 28.9 34.6 37.9 46.0 47.8 57.4 69.6 63.4 74.2 85.2 Geological survey 3.0 3.3 3.3 3.6 7.8 4.4 4.9 6.4 6.6 6.9 7.8 Agriculture 13.4 15.4 19.7 22.2 24.4 26.9 32.3 40.0 43.0 51.0 57.9 Operating expenditure for industry, communication, and commerce 3.3 3.9 4.5 4.7 5.2 6.5 7.6 10.1 10.3 12.0 13.9 Development of new products 5.1 5.3 5.9 6.3 7.3 8.9 10.7 11.4 0.0 0.0 0.0 Working capital for state- owned enterprises 1.2 1.0 1.2 1.1 1.3 1.1 1.9 1.7 3.5 4.3 5.6 Social welfare relief 3.7 4.1 5.0 5.5 6.7 6.6 7.5 9.5 11.5 12.8 15.0 Subsidies 67.0 76.3 97.3 96.0 88.3 76.7 71.0 68.0 69.3 79.1 90.7 Daily living necessities 29.5 31.7 37.4 38.1 37.3 32.2 29.9 31.4 36.5 45.4 54.1 Agricultural inputs .. .. .. .. .. .. .. .. Operating losses of state- owned enterprises 37.5 44.6 59.9 57.9 51.0 44.5 41.1 36.6 32.8 33.7 36.6 Interest payments 2.8 3.0 2.8 4.4 7.8 14.2 9.7 16.7 35.6 48.9 59.6 Other 26.7 31.0 39.6 39.1 41.6 59.1 86.7 118.9 145.0 171.9 204.4 Capital expenditure 75.6 76.1 75.6 84.8 86.7 89.9 121.6 94.1 128.3 143.0 162.0 Capital construction 68.2 66.4 66.9 75.8 76.0 76.5 90.1 64.0 78.9 90.7 100.3 Development ofthe productive capacity of existing enterprises 7.4 9.7 8.7 9.0 10.7 13.4 31.5 30.1 49.4 52.3 61.7 Memorandum items Current expenditure 17.3 15.9 17.0 16.5 15.2 13.7 12.3 11.5 10.8 11.0 11.6 Subsidies 5.6 5.1 5.8 5.2 4.1 2.9 2.1 15 1.2 1.2 1.2 Daily living necessities 2.5 2.1 2.2 2.0 1.7 1.2 0.9 0.7 0.6 Operating losses of state- owned enterprises 3.1 3.0 3.5 3.1 2.4 1.7 1.2 0.8 0.6 0.5 0.5 Capital expenditure 6.3 5.1 4.5 4.6 4.0 3.4 3.5 2.0 2.2 2.1 2.2 Subsidies 23.7 24.3 26.7 24.5 21.3 16.9 13.0 10.7 9.2 9.0 8.9 Capital expenditure 26.7 24.3 20.8 21.6 20.9 19.8 22.3 14.9 17.1 16.3 15.9 Source: IMF. Data for 1997 based on MOF; PRC actual data. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 92 TABLE 23 Budget and Its Financing 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Billions of yuan Revenue 257.6 280.3 326.4 355.0 367.2 392.8 475.9 558.4 657.0 774.5 900.8 Expenditure 282.7 313.7 363.8 391.7 415.2 453.9 545.9 632.6 750.8 876.4 1015.8 Deficit -25.1 -33.4 -37.4 -36.7 -48.0 -61.1 -70.0 -74.2 -93.8 -101.9 -115.0 Financing 25.1 33.4 37.4 36.7 48.0 61.1 70.0 74.2 93.8 101.9 115.0 Domestic (net) 18.3 22.0 26.0 23.7 38.0 46.1 41.9 67.0 97.1 101.9 114.3 Banking system 7.9 22.0 26.0 23.7 16.1 88.9 -31.6 16.0 -0.5 87.0 -56.0 Nonbank' 10.4 0.0 0.0 0.0 2 i.9 -42.8 73.5 51.0 97.6 14.9 170.0 Foreign(net) 6.8 11.4 11.3 13.1 10.0 15.1 28.1 7.1 -3.3 0.0 0.7 Gross foreign borrowing 10.6 13.9 14.4 17.8 18.0 20.9 35.8 14.7 1.1 11.6 4.2 Amortization -3.8 -2.5 -3.1 -4.7 -8.0 -5.8 -7.7 -7.6 -4.4 -11.6 -3.5 Percentoge of GNP Revenue 21.5 18.8 19.3 19.1 17.0 14.7 13.8 12.0 11.4 11.6 12.3 Expenditure 23.6 21.0 21.5 21.1 19.2 17.0 15.8 13.6 13.1 13.1 13.8 Deficit -2.1 -2.2 -2.2 -2.0 -2.2 -2.3 -2.0 -1.6 -1.6 -1.5 -1.6 Financing 2.1 2.2 2.2 2.0 2.2 2.3 2.0 1.6 1.6 1.5 1.6 Domestic 1.5 1.5 1.5 1.3 1.8 1.7 1.2 1.4 1.7 1.5 1.6 Banking system 0.7 1.5 1.5 1.3 0.7 3.3 -0.9 0.3 0.0 Nonbank 0.9 0.0 0.0 0.0 1.0 -1.6 2.1 1.1 1.7 Foreign 0.6 0.8 0.7 0.7 0.5 0.6 0.8 0.2 -O. i 0.0 0.0 Gross foreign borrowing 0.9 0.9 0.9 1.0 0.8 0.8 1.0 0.3 0.0 0.2 0.1 Amortization -0.3 -0.2 -0.2 -0.3 -0.4 -0.2 -0.2 -0.2 -0. 1 -0.2 0.0 Percentoge of total deficit Financing 100.4 99.7 99.9 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Domestic 73.1 65.8 .69.5 64.6 79.2 75.5 59.9 90.3 103.5 100.0 99.4 Banking system 31.5 65.8 69.5 64.6 33.5 145.5 -45.2 21.6 -0.5 Nonbank 41.5 0.0 0.0 0.0 45.6 -70.0 105.0 68.7 104.1 Foreign 27.3 34.0 30.3 35.7 20.8 24.7 40.2 9.6 -3.5 0.0 0.6 Gross foreign borrowing 42.5 41.4 38.5 48.5 37.5 34.2 51.2 19.8 1.2 11.4 3.7 Amortization -15.2 -7.5 -8.2 -12.8 -16.7 -9.5 -11.0 -10.2 -4.7 -11.4 -3.0 a. Mainly govemment bonds issued to households and enterprises. Source: IME TABLE 24 Production of Major Crops 1987 1988 1989 19O 1991 1992 193 1994 1995 MI6 197 Total food grains 402.98 394.08 407.45 446.24 435.29 442.66 456.49 445.10 466.57 504.54 494.17 Rice 174.26 169.11 180.13 189.33 183.81 186.22 177.70 175.93 185.23 195.1 200.73 Wheat 85.90 85.43 90.81 98.23 95.95 101.59 106.39 99.30 101.96 110.57 123.29 Coin 79.24 77.35 78.93 96.82 98.77 95.38 102.70 99.28 111.97 127.47 104.31 Tuber 28.20 26.97 27.30 27.43 27.16 28.44 31.81 30.25 32.12 35.36 31.92 Total oil seeds 15.28 13.20 12.91 16.13 16.38 16.41 18.04 19.90 2250 22.1 21.57 Peanuts 6.17 5.69. 5.36 6.37 6.30 5.95 8.42 9.68 10.24 10.13 9.58 Rapeseed 6.61 5.04 5.44 6.96 7.44 7.65 6.94 7.49 9.78 9.2 9.54 Cotton 4.25 4.15 3.79 4.51 5.68 4.51 3.74 4.34 4.77 4.2 4.6 Sugarcane 47.36 49.06 48.57 57.62 67.90 73.01 64.19 60.93 65.42 66.88 78.9 Beetroots 8.14 12.81 9.36 14.53 16.29 15.07 12.05 12.53 13.98 16.72 14.97 Cured tobacco 1.64 2.34 2.41 2.26 2.67 3.12 3.01 1.94 2.07 2.95 3.91 Fruits 16.68 16.66 18.37 18.74 21.76 24.40 30.11 35.00 42.15 46.53 50.89 Apples 4.26 4.34 4.50 4.32 4.54 6.56 9.07 11.13 14.01 17.05 17.22 Citrus 322 2.56 4.56 4.86 6.33 5.16 6.56 6.81 8.22 8.46 10.1 Pears 2.49 2.72 2.57 2.35 2.50 2.85 3.22 4.04 4.94 5.81 6.42 Bananas 2.03 1.83 1.40 1.46 1.98 2.45 2.70 2.90 3.13 2.54 2.89 Source: China Stabstical Yeorbook 1998, p. 403. STATISTICAL ANNEX 93 TABLE 25 Yield of Major Crops (By sown area, kg/hectare) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total food grains 3,615 3,585 3,630 3,930 3,870 4,004 4,131 4,063 4,239 4,483 4,377 Rice 5,415 5,280 5,505 5,730 5,640 5,803 5,848 5,831 6,025 6,212 6,319 Wheat 2,985 2,970 3,045 3,195 3,105 3,331 3,519 3,426 3,533 3,734 4,102 Corn 3,915 3,930 3,885 4,530 4,575 4,533 4,963 4,694 4,916 5,203 4,387 Soybeans 1,470 1,440 1,275 1,455 1,361 1,394 1,576 1,645 1,591 1,698 1,680 Tuber 3,180 2,985 3,000 3,015 2,985 3,141 3,450 3,264 3,374 3,609 3,262 Peanuts 2,040 1,905 1,815 2,190 2,190 2,000 2,492 2,564 2,687 2,804 2,592 Rapeseed 1,260 1,020 1,095 1,260 1,215 1,281 1,309 1,296 1,416 1,367 1,479 Cotton 870 750 735 810 870 660 750 785 879 890 1,025 Sugarcane 55,140 53,115 50,850 57,120 58,350 58,605 59,012 57,671 58,136 56,225 60,158 Beetroots 16,350 17,190 16,245 21,660 20,790 22,832 20,124 17,936 20,132 25,483 24,475 Cured tobacco 1,785 1,800 1,605 1,680 1,710 1,687 1,654 1,491 1,584 1,750 1,809 Source China Statisticol Yeorbook 1998, p. 400-403. TABLE 26 Gross OutputValue of Industry 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Billions of yuon Total 1,381.3 1,822.5 2,201.7 2,392.4 2,662.5 3,459.9 4,840.2 7,017.6 9,189.5 9,959.5 11,373.3 By type of ownership State-owned 825.0 1,035.1 1,234.3 1,306.4 1,495.5 1,782.4 2,272.5 2,620.1 3,122.0 2,836.1 2,902.7 Collective-owned 478.2 658.7 785.8 852.3 878.3 1,213.5 1,646.4 2,647.2 3,362.3 3,923.2 4,334.7 Township 128.4 184.7 219.4 244.1 240.1 353.4 537.4 810.2 1,193.2 1,173.0 Village 116.5 170.4 211.8 239.4 234.7 363.2 516.3 965.8 1,184.7 1,590.0 1,794.0 Joint urban-rural 31.6 43.9 49.6 53.9 56.9 87.0 132.2 261.1 213.4 338.7 466.9 Joint urban 3.0 3.9 5.0 5.5 6.9 10.2 15.6 33.8 .. 75.1 91.7 - joint rural 28.6 40.0 44.6 48.4 50.0 76.8 116.6 227.3 .. 263.6 375.2 Individual-owned 50.2 79.0 105.8 129.0 128.7 200.6 386.1 708.2 1,182.1 1,542.0 2,037.6 Urban 5.0 6.8 9.0 10.7 12.9 19.5 39.6 86.7 .. 166.7 258.8 Rural 45.2 72.2 96.8 118.3 .. .. .. .. .. 1,375.3 1,778.8 Other 27.9 49.5 75.8 104.8 160.0 263.4 535.2 1,042.1 1,523.1 1,658.2 2,098.2 By type of industry Light 665.6 897.9 1,076.1 1,181.3 1,288.7 1,612.3 2,250.7 3,249.1 4,346.6 4,793.2 5,572.9 Heavy 715.7 924.5 1,125.6 1,211.3 1,373.8 1,847.6 2,589.5 3,768.5 4,842.8 5,166.3 5,800.4 Percentoge of total By type of ownership State-owned 59.7 56.8 56.1 54.6 56.2 51.5 46.9 37.3 34.0 28.5 25.5 Collective-owned 34.6 36.1 35.7 35.6 33.0 35.1 34.0 37.7 36.6 39.4 38.1 Township 9.3 10.1 10.0 10.2 9.0 10.2 11.1 11.5 13.0 11.8 Village 8.4 9.3 9.6 10.0 8.8 10.5 10.7 13.8 12.9 16.0 15.8 Joint urban-rural 2.3 24 2.3 2.3 2.1 2.5 2.7 3.7 2.3 3.4 4.1 Joint urban 0.2 0.2 0.2 0.2 0.3 0.3 0.3 0.5 .. 0.8 0.8 joint rural 2.1 2.2 2.0 2.0 1.9 2.2 2.4 3.2 .. 2.6 3.3 Individual-owned 3.6 4.3 4.8 5.4 4.8 5.8 8.0 10.1 12.9 15.5 17.9 Urban 0.4 0.4 0.4 0.4 0.5 0.6 0.8 1.2 .. 1.7 2.3 Rural 3.3 4.0 4.4 4.9 .. .. .. .. .. 13.8 15.6 Other 2.0 2.7 3.4 4.4 6.0 7.6 11.1 14.8 16.6 16.6 18.4 By type of industry Light 48.2 49.3 48.9 49.4 48.4 46.6 46.5 46.3 47.3 48.1 49.0 Heavy 51.8 50.7 51.1 50.6 51.6 53.4 53.5 53.7 52.7 51.9 51.0 Source- Chino Stcisticol Yeorbook 1998, p.431. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 94 TABLE 27 Output of Major Industrial Products 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Coal (million tons) 928 980 1,054 1,080 1,087 1,116 1,150 1,240 1,361 1,397 1,373 Crudeoil(milliontons) 134 137 137 138 141 142 145 146 150 157 161 Natural gas (billion cu m) 14 14 15 IS 16 16 17 18 18 20 23 Electricity (billion kWh) 497 545 585 621 678 754 840 928 1,008 1,081 1,136 Hydropower 100 109 118 127 125 131 152 167 191 188 196 Steel (milliontons) 56 59 62 66 71 81 90 93 95 101 109 Steel Products (million tons) 44 47 49 52 56 67 77 84 90 93 100 Cement (million tons) 186 210 210 210 253 308 368 421 476 491 512 Timber (million cu m) 64 62 58 56 58 62 64 66 68 67 64 Fertilizers (million tons) 17 17 18 19 20 20 20 23 26 28 28 Growth rates Coal 3.8 5.6 7.6 2.5 0.6 2.7 3.0 7.8 9.8 2.6 -1.7 Crude oil 2.6 2.0 0.1 1.0 1.9 0.8 2.2 0.6 2.7 4.6 2.5 Natural gas 0.9 2.7 5.5 1.7 5.1 -1.8 6.2 4.7 2.2 11.4 15.0 Electricity 10.6 9.6 7.3 6.2 9.1 11.3 11.4 10.6 8.6 7.3 5.1 Hydropower 5.6 9.2 8.3 7.1 -1.6 4.8 16.1 10.3 13.8 -1.4 4.3 Steel 7.8 5.6 3.6 7.7 7.0 14.0 10.6 3.4 3.0 5.9 7.9 Rolled steel 8.1 7.1 3.6 5.9 9.4 18.8 15.2 9.2 6.5 3.6 7.5 Cement 12.2 12.8 0.1 -0.3 20.5 22.0 19.4 14.5 13.0 3.2 4.3 Timber -1.4 -3.0 -6.6 -4.0 4.2 6.3 3.5 3.5 2.8 -1.5 -4.5 Fertilizers 23.0 4.1 4.6 3.3 5.3 3.5 -4.5 16.2 12.5 9.5 0.0 Source: China Statistical Yearbook 1998, p. 469. TABLE 28 Total Wage Bill of Staff and Workers by Employment Category 1987 1988 1989 1990 191 1992 1f3 194 195 1996 1997 Billions of yuon nominal Total wage bill 188.1 231.6 261.9 295.1 332.4 393.9 491.6 665.6 810.0 908.0 940.5 State-owned 145.9 180.7 205.0 232.4 259.5 309.0 381.3 517.7 608.0 679.3 721.1 Urban collectives 40.9 48.8 53.4 58.1 65.9 74.3 85.0 102.3 118.2 124.1 125.3 Other 1.3 2.2 3.4 4.6 7.0 10.6 25.4 45.6 63.8 76.1 94.1 Percent Total wage bill 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 97.5 96.9 100.0 State-owned 77.6 78.0 78.3 78.8 78.1 78.5 77.6 77.8 75.1 74.8 76.7 Urban collectives 21.7 21.1 20.4 19.7 19.8 18.9 17.3 15.4 14.6 13.7 13.3 Other 0.7 0.9 1.3 1.6 2.1 2.7 5.2 6.8 7.9 8.4 10.0 Growth rates Total wage bill 13.3 23.1 13.1 12.7 12.6 18.5 24.8 35.4 21.7 12.1 3.6 State-owned 13.3 23.8 13.5 13.4 11.7 19.1 23.4 35.8 17.4 11.7 6.2 Urban collectives 12.8 19.2 9.6 8.7 13.4 12.8 14.4 20.4 15.5 5.0 1.0 Other 50.0 70.6 57.7 35.7 53.0 50.0 140.2 79.7 40.0 19.3 23.7 Percentage share of wage bill in GDP 15.7 15.5 15.5 15.9 15.4 14.8 14.2 14.3 13.9 13.4 12.6 Source: China Statistical Yearbook 1998, p. i 57. STATISTICAL ANNEX 95 TABLE 29 Average Annual Wage by Sector and Employment Category (Yuan in current prices) Sector 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Staff and workers Total 1,459 1,747 1,935 2,140 2,340 2,711 3,371 4,538 5,500 6,210 6470 Farming and forestry 1,143 1,280 1,389 1,541 1,652 1,828 2,042 2,819 3,522 4,050 4,311 Excavation 1,663 1,964 2,378 2,718 2,942 3,209 3,711 4,679 5,757 6,482 6,833 Manufacturing 1,418 1,710 1,900 2,073 2,289 2,635 3,348 4,283 5,169 5,642 5,933 Electric power, gas, and water 1,677 1,971 2,241 2,656 2,922 3,392 4,319 6,155 7,843 8,816 9,649 Geological survey 1,768 2,025 2,199 2,465 2,707 3,222 3,717 5,450 5,962 6,581 7,160 Construction 1,684 1,959 2,166 2,384 2,649 3,066 3,779 4,894 5,785 6,249 6,655 Transport and communications 1,621 1,941 2,197 2,426 2,686 3,114 4,273 5,690 6,948 7,870 8,600 Commerce and services 1,270 1,556 1,660 1,818 1,981 2,204 2,679 3,537 4,248 4,661 4,845 Real estate 1,327 1,715 1,925 2,243 2,507 3,106 4,320 6,288 7,330 8,337 9,190 Social services 1,085 1,719 1,926 2,170 2,431 2,844 3,588 5,026 5,982 6,778 7,553 Health care, sports, and welfare 1,446 1,752 1,959 2,209 2,370 2,812 3,413 5,126 5,860 6,790 7,599 Education, culture, and arts 1,409 1,747 1,883 2,117 2,243 2,715 3,278 4,923 5,435 6,144 6,759 Scientific research 1,620 1,931 2,118 2,403 2,573 3,115 3,904 6,162 6,846 8,048 9,049 Banking and insurance 1,458 1,739 1,867 2,097 2,255 2,829 3,740 6,712 7,376 8,406 9,734 Govemment agencies 1,468 1,707 1,874 2,113 2,275 2,768 3,505 4,962 5,526 6,340 6,981 Others 3,371 5,213 6,295 7,184 6,838 Staff and workers in state-owned units Total 1,546 1,853 2,055 2,284 2,477 2,878 3,532 4,797 5,625 6,280 6,747 Farming and forestry 1,154 1,291 1,401 1,559 1,665 1,845 2,043 2,821 3,527 4,038 4,304 Excavation 1,734 2,038 2,449 2,763 2,982 3,239 3,856 4,863 5,944 6,709 7,091 Manufacturing 1,543 1,872 2,081 2,289 2,505 2,889 3,562 4,508 5,352 5,798 6,008 Electric power, gas, and water 1,692 1,994 2,248 2,648 2,883 3,354 4,317 6,124 7,734 8,701 9,541 Geotogical survey I,773 2,025 2,199 2,463 2,718 3,235 3,729 5,476 5,987 6,610 7,180 Construction 1,882 2,192 2,419 2,667 2,924 3,406 4,182 5,498 6,512 6,992 7,388 Transport and communications 1,773 2,140 2,423 2,697 2,967 3,452 4,604 6,212 7,572 8,546 9,303 Commerce and services 1,398 1,737 1,851 2,028 2,201 2,478 2,933 3,856 4,568 4,940 5,134 Real estate 1,500 1,750 1,992 2,247 2,476 3,082 4,278 5,997 6,884 7,897 8,570 Social services 1,545 1,842 2,028 2,307 2,547 3,008 3,661 5,098 5,949 6,695 7,425 Health care, sports, and welfare 1,481 1,793 1,999 2,263 2,417 2,883 3,494 5,267 6,009 6,967 7,794 Education,culture,andarts 1,422 1,764 1,899 2,134 2,257 2,732 3,292 4,944 5,457 6,161 6,810 Scientific research 1,624 1,935 2,123 2,411 2,580 3,230 3,898 6,212 6,835 7,984 8,974 Banking and insurance 1,540 1,842 1,960 2,200 2,355 2,967 3,885 7,017 7,595 8,679 10,012 Govemment agencies 1,472 1,709 1,875 2,115 2,277 2,774 3,512 4,967 5,528 6,344 6,985 Others 3,793 5,744 6,854 7,643 6,891 Staff and workers in urban collective-owned units Total 1,207 1,426 1,557 1,681 1,866 2,109 2,592 3,245 3,931 4,302 4,512 Farming and forestry 979 1,111 1,178 1,238 1,366 1,487 1,887 2,510 2,927 3,814 3,945 Excavation 1,016 1,208 1,433 1,844 1,960 2,000 2,327 2,793 3,680 3,968 4,164 Manufacturing 1,180 1,388 1,523 1,622 1,798 2,017 2,469 3,076 3,717 4,007 4,120 Electric power,gas, and water 1,250 1,294 1,625 2,133 2,588 2,737 3,539 5,734 /,461 8,324 9,064 Geological survey 1,333 1,500 1,000 1,212 1,765 2,188 2,843 3,692 4,294 4,784 6,342 Construction 1,380 1,597 1,763 1,935 2,216 2,554 3,182 3,936 4,677 5,092 5,466 Transport and communications 1,236 1,409 1,575 1,661 1,854 2,070 2,711 3,110 3,584 3,961 4,057 Commerce and services 1,118 1,335 1,417 1,548 1,691 1,827 2,213 2,823 3,449 3,818 3,873 Real estate 1,130 1,602 1,967 1,969 2,432 2,763 4,006 5,290 6,706 6,820 7,687 Soaal services 1,167 1,333 1,521 1,638 1,905 2,082 2,727 3,754 4,707 5,032 5,663 Health care, sports, and weifare 1,296 1,570 1,774 1,956 2,135 2,416 2,935 4,238 4,890 5,603 6,294 Education, culture, and arts 1,033 1,202 1,352 1,533 1,689 1,987 2,539 3,548 4,291 4,949 4,955 Scientific research 1,319 1,636 1,710 1,997 2,120 2,392 3,474 4,719 6,046 7,206 7,749 Banking and insurance 1,235 1,450 1,597 1,806 1,965 2,428 3,182 5,625 6,407 6,857 7,634 Govemment agencies 1,368 1,648 1,860 2,042 2,206 2,565 3,071 4,411 5,314 5,686 6,244 Others 2,547 4,067 4,935 5,675 5,780 CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 96 TABLE 29 Average Annual Wage by Sector and Employment Category (continued) Sector 1987 1988 1989 1990 1991 1992 1993 1994 199S 1996 1997 Staffand workers in units with other kinds of ownership Total 1,879 2,382 2,707 2,987 3,468 3,966 4,966 6,303 7,463 8,261 8,789 Farming and forestry 3,778 3,760 4,069 3,905 5,394 6,992 7,389 7,061 Excavation 2,270 3,855 3,579 3,423 4,233 5,174 5,2 i 7 5,385 Manufacturing 3,055 3,626 4,154 4,874 6,096 7,245 7,945 8,376 Electric power, gas, and water 3,088 3,333 4,238 6,309 8,005 10,746 12,030 12,127 Geological survey 3,571 4,641 5,061 4,464 5,766 6,798 6,937 7,517 Construction 5,714 4,615 5,263 7,441 4,362 5,408 6,464 5,770 Transport and communications 3,667 5,500 5,955 6,450 8,713 10,492 11,931 13,734 Commerce and services 3,284 3,585 4,368 4,975 6,460 7,190 7,862 8,051 Real estate 2,517 4,923 5,561 4,940 9,610 10,746 11,801 13,249 Social services 3,463 4,004 4,545 5,934 8,013 9,274 10,820 11,812 Health care, sports, welfare 2,793 2,903 2,945 5,430 4,817 5,46 i 3,665 7,051 8,668 11,014 11,863 Education, culture, and art 2,451 2,498 3,604 4,022 4,560 5,107 5,289 8,360 8,968 10,172 10,017 Scientific research 1,967 2,544 3,241 3,425 3,906 5,033 5,645 7,882 9,678 13,358 14,370 Banking and insurance 2,745 3,902 4,376 5,565 6,041 9,761 6,073 10,400 12,949 15,818 17,970 Govemment agencies Others 4,953 9,691 2,850 13,508 16,423 Source: China Statistical Yearbook 1998, p. 162-67. TABLE 30 Social Labor Force by Sector (Millions of workers) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Farming forestry, animal husbandry, fishery 316.6 322.5 332.3 341.2 349.6 348.0 339.7 333.9 330.2 329.1 330 Excavation 8.2 8.3 8.4 8.8 9.1 9.0 9.3 9.2 9.3 9 8.7 Manufacturing 83.6 86.5 85.5 86.2 88.4 91.1 93.0 96.1 98.0 97.6 96.1 Electric power, gas, and water 1.6 1.8 1.8 i .9 2.0 2.2 2.4 2.5 2.6 2.7 2.8 Geological survey and exploration 2.0 2.0 2.0 2.0 2.0 2.0 1.4 1.4 1.4 1.3 1.3 Construction 23.8 24.9 24.1 24.2 24.8 26.6 30.5 31.9 33.2 34.1 34.5 Transportation, posts, and telecommunications 14.5 15.2 15.2 15.7 16.2 16.7 16.9 18.6 19.4 20.1 20.6 Commerce, catering trade, supply and marketing of materials and warehouses 25.8 27.4 27.7 28.4 30.0 32.1 34.6 39.2 42.9 45.1 47.9 Real estate 0.4 0.4 0.4 0.4 0.5 0.5 0.7 0.7 0.8 0.8 0.9 Social services 5.0 5.3 5.5 5.9 6.0 6.4 5.4 6.3 7.0 7.5 8.1 Public health, sports and social welfare 5.0 5.1 5.2 5.4 5.5 5.7 4.2 4.3 4.4 4.6 4.7 Education, culture, art, radio, and television broadcasting 13.8 14.0 14.3 14.6 15.0 15.2 12.1 14.4 14.8 15.i 15.6 Scientific research, technical service 1.6 1.6 1.7 1.7 1.8 1.8 1.7 1.8 1.8 1.8 1.9 Banking and insurance 1.7 1.9 2.1 2.2 2.3 2.5 2.7 2.6 2.8 2.9 3.1 Govemments, parties, and organizations 9.3 9.7 10.2 10.8 I 1.4 11.5 10.3 10.3 10.4 10.9 10.9 Others 15.0 16.6 17.1 18.0 19.1 23.1 37.4 41.6 44.9 45.6 48.6 Total 527.8 543.4 553.3 567.4 583.6 594.3 602.2 614.7 623.9 628.2 635.7 Agriculture 316.6 322.5 332.3 341.2 349.6 348.0 339.7 333.9 330.2 329.1 330.0 Industry 117.3 121.5 119.8 121.2 124.3 128.8 135.2 139.6 143.2 143.4 142.1 Service 93.9 99.4 101.3 105.0 109.8 117.6 127.4 141.2 150.6 155.7 163.6 Source: China StatisticalYearbook 1998, p. 132, 128. STATISTICAL ANNEX .97 TABLE 31 Labor Force by Employment Category 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Millions of workers Total 527.8 543.4 553.3 639.1 648.0 655.5 663.7 672.0 679.5 688.5 696.0 Total urban laborers 137.8 142.7 143.9 147.3 152.7 156.3 159.7 168.2 173.5 175.5 177.0 Staff and workers 132.1 136.1 137.4 140.6 145.1 147.9 148.5 152.6 153.0 152.2 150.3 State-owned 965 99.8 101.1 103.5 106.6 108.9 109.2 112.1 112.6 112.4 110.4 Urban collective-owned 34.9 35.3 35.0 35.5 36.3 36.2 33.9 32.9 31.5 30.2 28.8 Other ownership 0.7 1.0 1.3 1.6 2.2 2.8 5.4 7.6 8.9 9.6 11.1 Urban individual 5.7 6.6 6.5 6.7 7.6 8.4 11.2 15.6 20.5 23.3 26.7 Rural laborers 390.0 400.7 409.4 472.9 478.2 483.1 487.8 487.9 4885 490.4 493.9 Statistical discrepancya 0.0 0.0 0.0 18.9 17.1 16.1 16.2 15.9 17.5 22.6 25.1 Percentage oftotal Total urban laborers 26.1 26.3 26.0 23.0 23.6 23.8 24.1 25.0 25.5 25.5 25.4 Staff and workers 25.0 25.0 24.8 22.0 22.4 22.6 22.4 22.7 22.5 22.1 21.6 State-owned 18.3 18.4 18.3 16.2 16.5 i 6.6 16.5 16.7 16.6 16.3 15.9 Urban collective-owned 6.6 6.5 6.3 5.6 5.6 5.5 5.I 4.9 4.6 4.4 4.1 Other ownership 0.1 0.2 0.2 0.3 0.3 0.4 0.8 1.1 1.3 1.4 1.6 Urban individual 1.1 1.2 1.2 1.0 1.2 1.3 1.7 2.3 3.0 3.4 3.8 Rural laborers 73.9 73.7 74.0 74.0 73.8 73.7 73.5 72.6 71.9 71.2 71.0 Statistical discrepancy' 0.0 0.0 0.0 3.0 2.6 25 2.4 2.4 2.6 3.3 3.6 Growth Totes Total 2.9 2.9 1.8 I5.5 1.4 1.2 1.3 1.3 1.1 1.3 1.1 Total urban laborers - 3.5 0.9 2.3 3.7 2.4 2.2 5.3 3.2 1.1 0.9 Staff and workers 3.2 3.0 1.0 2.3 3.2 2.0 0.4 2.8 0.3 -0.5 -1.2 State-owned 3.4 3.4 1.3 2.3 3.1 2.1 0.3 2.7 0.4 -0.2 -1.8 Urban collective-owned 2.0 1.1 -0.7 1.3 2.2 -0.2 -6.3 -3.2 -4.2 -4.0 -4.6 Other ownership 30.9 34.7 36.1 24.2 31.7 30.6 91.5 40.7 17.6 7.4 15.6 Urban individual 17.8 15.8 -1.7 3.4 13.4 10.5 33.3 39.3 31.4 13.7 14.6 Rural laborers 2.7 2.7 2.2 l5.5 1.1 1.0 1.0 0.0 0.1 0.4 0.7 Statistical discrepancy - - - - -9.5 -6.1 0.6 -1.6 9.9 29.3 11.1 aTotal labor force is based on sarnple survey data, while the subtotal is based on the reported data.The discrepancy between them is shown here. Source: China Stat,sscol Yearbook 1 998, p. 130. TABLE 32 General Price Indices (Annual growth rates) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Overall retail price 7.3 185 17.8 2.1 2.9 5.4 13.2 21.7 14.8 6.2 0.8 Overall retail price index (1990=l00) 70.2 83.1 97.9 100.0 102.9 108.5 122.8 149.4 171.5 182.1 183.5 Overall consumer price 7.3 18.8 18.0 3.1 3.4 6.4 14.7 24.1 17.1 8.3 2.8 Urban 8.8 20.7 16.3 1.3 5.1 8.6 16.1 25.0 16.8 8.8 3.1 Rural 6.2 17.5 19.3 4.5 2.3 4.7 13.7 23.4 17.5 7.9 2.5 Overall farm and sideline purchasing price i2.0 23.0 15.0 -2.6 -2.0 3.4 13.4 39.9 19.9 4.2 -4.5 Overall industrial products rural retail price 4.8 15.2 18.7 4.6 3.0 3.1 11.8 17.2 14.7 6.2 1.1 Overall industrial and agricultural products price parity -6.4 -6.3 3.2 7.4 5.1 -0.3 -1.4 -16.2 -4.4 1.9 5.9 Source: China StatsticalYeorbook 1998, p. 301. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 98 TABLE 33 Annual Rates of Inflation by Month (Percentage change in the index over the previous 12 months) Jan- Feb- Sept- Oct- Nov- Dec- uary ruary March April May June July August ember ober ember ember Overoll retail price index 1987 5.0 5.1 5.5 6.5 7.6 7.8 8.0 8.4 7.9 7.6 8.5 9.1 1988 9.5 11.2 11.6 12.6 14.7 16.5 19.3 23.2 25.4 26.1 26.0 26.7 1989 27.0 27.9 26.3 25.8 24.3 21.5 19.0 15.2 11.4 8.7 7.1 6.4 1990 4.1 4.1 3.3 3.1 2.6 3.0 0.7 0.4 0.8 1.1 1.6 2.2 1991 1.4 1.0 0.9 0.6 3.1 3.8 4.2 4.0 4.3 4.0 4.4 4.0 1992 5.1 4.9 5.0 6.2 4.1 4.2 4.3 4.7 5.7 6.4 6.6 6.7 1993 8.4 8.7 Q0.2 10.9 12.5 13.9 14.9 15.1 14.5 14.6 15.1 17.6 1994 18.8 20.9 20.2 19.5 18.9 19.6 21.4 23.5 24.6 25.2 25.0 23.3 1995 21.2 19.7 18.7 18.0 17.6 6.0 14.6 2.3 11.4 0.3 9.2 8.3 1996 7.6 7.7 7.7 7.4 6.5 5.9 5.8 5.8 5.0 4.7 4.6 6.1 1997 3.3 2.9 1.7 1.1 0.8 0.8 0.6 0.1 0.0 -0.4 -0.8 -0.2 1998 -1.5 -1.9 -1.2 -2.1 -2.7 -3.0 -3.2 -3.3 -3.3 -2.9 Cost of living index 1987 5.0 5.3 5.6 6.6 7.7 7.9 8.0 8.4 7.8 7.6 8.5 9.2 1988 9.7 10.7 11.6 126 14.5 16.7 19.8 24.1 26.4 27.0 26.8 27.7 1989 27.4 28.4 27.0 26.5 24.7 22.5 18.9 14.8 10.8 7.7 6.4 5.5 1990 3.5 35 2.7 2.5 2.0 2.4 0.2 -0.1 0.5 0.9 1.4 2.1 1991 1.5 1.0 0.8 0.4 3.0 3.8 4.3 4.1 4.4 4.0 4.6 4.0 1992 5.1 4.9 5.2 6.9 4.3 4.3 4.7 5.1 5.9 6.7 6.8 7.0 1993 8.6 8.9 10.2 10.4 11.9 13.3 14.3 14.6 14.1 14.4 15.2 17.9 1994 21.1 23.2 22.4 21.7 21.3 22.6 24.0 25.8 27.4 27.7 27.5 25.5 1995 24.1 22.4 21.3 20.7 20.3 18.2 16.7 14.5 13.2 12.1 11.2 10.1 1996 9.0 9.3 9.8 9.7 8.9 8.6 8.3 8.1 7.4 7.0 6.9 7.0 1997 5.9 5.6 4.0 3.2 2.8 2.8 2.7 1.9 1.8 1.5 1.1 0.4 1998 0.3 -0.1 0.7 -0.3 -1.0 -1.3 -1.4 -1.4 -1.5 -1.1 Free market price index of consumer goods 1987 22.0 7.9 7.4 14.2 15.6 20.1 16.9 20.0 16.5 19.9 22.6 20.8 1988 20.0 27.9 28.8 23.1 21.5 22.4 27.7 33.2 37.3 36.5 34.8 30.6 1989 27.5 26.9 19.2 21.0 20.1 15.0 14.9 9.1 3.3 0.9 -6.4 -6.6 1990 -5.1 -6.6 -5.1 -2.0 -5.7 -5.3 -7.3 -7.5 -4.4 -4.3 -3.8 -0.5 1991 -2.3 -0.8 -5.2 -6.9 -5.5 0.3 1.8 0.6 -0.2 1.7 1.0 0.8 1992 3.7 -0.3 2.0 1.6 2.5 -1.5 -0.2 2.5 3.1 6.5 3.7 3.1 1993 6.7 4.1 4.6 8.0 10.0 14.4 16.0 14.8 14.4 11.8 16.7 23.6 Source China Monthly Statistics. STATISTICAL ANNEX 99 TABLE 34 Total Investment in Fixed Assets 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Billions of yuan Total fixed investment 379.2 475.4 441.0 451.7 559.5 808.0 1,307.2 1,704.3 2,001.9 2291.4 2494.1 State-owned 244.9 302.0 280.8 298.6 371.4 549.9 792.6 961.6 1,089.8 1200.6 1309.2 Collective-owned 54.7 71.2 57.0 52.9 69.8 135.9 231.7 275.9 328.9 365.2 385.1 Individual-owned 79.6 102.2 103.2 100.1 118.3 122.2 147.6 197.1 256.0 321.1 342.9 Other 135.3 269.8 327.1 404.5 456.9 Fixed investment by center and local Center .. 105.8 116.8 128.0 150.5 184.7 282.4 354.4 437.9 522.5 576.5 Local .. 170.5 136.7 145.3 187.3 277.5 447.2 601.5 1017.3 1173.6 1302.6 Percentage of total Total fixed investment 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100 100 State-owned 64.6 63.5 63.7 66.1 66.4 68.1 60.6 56.4 54.4 52.4 52.5 Collective-owned 14.4 15.0 12.9 11.7 12.5 16.8 17.7 16.2 16.4 15.9 15.4 Individual-owned 21.0 21.5 23.4 22.2 21.1 15.1 11.3 11.6 12.8 14.0 13.7 Other 0.0 0.0 0.0 0.0 0.0 0.0 10.4 15.8 16.3 17.7 18.3 Fixed investment by center and local Center .. 22.3 26.5 28.3 26.9 22.9 21.6 20.8 21.9 22.8 23.1 Local .. 35.9 31.0 32.2 33.5 34.3 34.2 35.3 50.8 51.2 52.2 Total fixed investment/GDP (percent) 31.7 31.9 26.1 24.4 25.9 30.3 37.7 36.4 34.4 33.8 33.8 Note: In 1997,the cut-off point of investment statistics to be induded in statistical surveys on capital construction, on technical transformation and other investment statistics was changed from a minimum of 50,000 yuan to the minimum of 500,000 yuan, except statistics on investment in housing, rural collective investment and individual investment Data before 1996 were based on the old coverage and data after 1996 (including 1996) were based on the new coverage. Source CQhino StoasticolYeorbook 1 998, p. 186; previous issues for earlier years. TABLE 35 Investment in Fixed Assets by State-Owned Units 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Biljons of yuan Fixed investment 244.9 302.0 280.8 298.6 371.4 549.9 792.6 961.5 1,089.8 1,200.6 1,309.2 Capital construction 134.3 157.4 155.2 170.4 211.6 301.3 461.6 .. Technical updating 75.9 98.1 78.9 83.0 102.3 146.1 219.6 .. Others 34.7 46.5 46.7 45.2 57.5 102.5 111.4 .. Fixed investment by sector 244.9 302.0 280.8 298.6 371.4 549.9 792.6 961.5 1,089.8 1,200.6 1,309.2 Raw materials .. 69.5 64.0 71.8 85.9 68.8 85.7 .. Energy .. 64.5 70.6 82.4 95.7 114.9 148.8 .. Transport and communications .. 28.5 22.9 26.9 40.7 75.7 156.3 .. Construction including geography .. 2.8 2.2 1.8 2.1 3.9 7.6 .. Real estatea .. 18.8 14.8 11.3 16.7 26.5 52.0 .. Percentoge of total Fixed investment 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Capital construction 54.8 52.1 55.3 57.1 57.0 54.8 58.2 .. Technical updating 31.0 32.5 28.1 27.8 27.5 26.6 27.7 .. Other 14.2 15.4 16.6 15.1 15.5 18.6 14.1 .. Fixed investment by sector 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Raw materials .. 23.0 22.8 24.0 23.1 12.5 10.8 .. Energy .. 21.4 25.1 27.6 25.8 20.9 18.8 .. Transport and communications .. 9.4 8.2 9.0 11.0 13.8 19.7 .. Construction including geography .. 0.9 0.8 0.6 0.6 0.7 1.0 .. Real estate .. 6.2 5.3 3.8 4.5 4.8 6.6 .. a. Real estate includes real estate management public, residential and consultancy services. But excludes real estate development Source: China Statisticol Yearbook 1998, p. 186. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS ' 100 TABLE 36 Investment in Capital Construction by Sector 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Billions of yuon All sectors 134.3 157.4 155.2 170.4 211.6 301.3 464.7 603.2 740.4 857.1 99 1.7 Agriculture 2.0 2.3 2.0 2.6 3.3 4.4 4.6 5.7 7.7 10.9 15.4 Industry 68.3 81.3 82.2 95.3 114.7 145.8 200.4 276.2 323.6 372,8 411.9 Geology 3.0 2.9 3.6 4.6 5.9 8.2 9.8 12. i 16.6 22.8 27.7 Construction 1.5 1.5 1.4 1.0 1.3 2.3 11.5 13.8 14.6 18.3 I 5.1 Transport 19.5 21.6 17.0 21.1 34.0 45.8 90.1 137.3 158.8 184.5 219.7 Commerce 4.2 5.0 4.2 3.9 6.4 13.7 20.3 25.5 24.9 25.1 26.5 Real estate and social services 9.3 13.4 11.2 8.2 12.2 21.0 44.3 73.4 67.3 74.7 96.7 Education, health, and culture 12.6 13.2 12.9 13.8 15.2 19.7 27.1 35.5 45.8 54.1 67.8 Research 2.6 2.3 2.2 2.1 2.3 3.2 4.9 5.3 6.8 6.5 6.9 Banking and insurance 1.3 1.9 1.6 1.5 1.9 3.0 6.7 9.6 12.6 13.5 14.3 Govemment agencies and other 9.9 1 1.9 17.0 16.3 14.4 34.4 45.0 8.9 61.8 74.2 89.7 Percentage of total All Sectors 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100 100 Agriculture 1.5 1.5 1.3 1.5 1.6 1.4 1.0 0.9 1.0 1.3 1.6 Industry 50.8 51.6 53.0 55.9 54.2 48.4 43.4 42.9 43.7 43.5 41.5 Geology 2.3 1.8 2.3 2.7 2.8 2.7 2.1 1.9 2.2 2.7 2.8 Construction 1.1 1.0 0.9 0.6 0.6 0.8 2.5 2.1 2.0 2.1 1.5 Transport 14.5 13.7 11.0 12.4 16.1 15.2 19.5 21.3 21.4 21.5 22.2 Commerce 3.1 3.2 2.7 2.3 3.0 4.5 4.4 4.0 3.4 2.9 2.7 Real estate and social services 6.9 8.5 7.2 4.8 5.8 7.0 9.6 11.4 9.1 8.7 9.8 Education, health, and culture 9.3 8.4 8.3 8.1 7.2 6.5 5.9 5.5 6.2 6.3 6.8 Research 2.0 1.5 1.4 1.2 1.1 1.0 1.1 0.8 0.9 0.8 0.7 Bankingand insurance 1.0 1.2 1.0 0.9 0.9 1.0 1.4 1.5 1.7 1.6 1.4 Govemment agencies and other 7.5 7.6 10.9 9.6 6.8 11.4 9.1 7.7 8.3 8.7 9.0 Notes In 1997,the cut-off point of investment statistics to be included in statistical surveys on capital construction, on technical transfornation and other investment statistics was changed from a minimum of 50,000 yuan to the minimum of 500,000 yuan, except statstics on investment in housing, rural collective investment and individual investment Data before 1996 were based on the old coverage and data after 1996 including 1996) were based on the new coverage. Investment in capital construction in this table include not only that by State-owned units but also that by units of join-owned, share-holding,foreign-funded, Hong Kong-Macao-Taiwan-funded.which are included in the plan of capital con- struction and innovaton. Source: China StatisticolYeorbook 1998, p. 196. STATISTICAL ANNEX 101 TABLE 37 Foreign Direct and Other Investments Inflows (Millions of U.S. dollars) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total 2,646.6 3,739.7 3,773.5 3,754.9 4,666.6 11,29 .6 27,770.9 33,945.8 37,805.7 42,135.2 52,387.3 Hong Kong (China) and Macao 1,809.1 2,428.1 2,341.8 2,118.5 2,661.8 7,908.9 18,032.5 20,332.1 20,624.9 21,457.9 21,954.4 Japan 266.6 598.4 407.7 520.5 609.5 748.3 1,361.4 2,086.2 3,212.5 3,692.1 4,390.4 Korea, Rep. of .. .. .. .. .. 674.8 381.5 726.1 1,047.1 1,504.2 2,227.6 Taiwan (China) .. .. .. .. 471.9 1,053.4 3,139.1 3,391.3 3,165.2 3,482.0 3,342.0 United Kingdom 13.8 46.6 29.0 19.9 37.9 38.5 220.5 688.8 915.2 1,301.9 1,859.6 France 17.3 31.6 11.6 23.4 11.7 46.9 141.4 193.4 287.0 424.7 475.9 Italy 21.5 36.2 34.2 8.1 41.3 26.7 99.9 206.2 270.2 169.4 218.1 United States 271.3 244.4 288.2 461.2 330.7 519.4 2,067.9 2,490.8 3,083.7 3,444.2 3,461.2 Received by provinces Regional total 1,782.7 3,149.7 3,437.3 3,436.4 4,425.8 11,003.3 27,341.7 33,267.7 37,215.5 41,879.7 46,374.4 Beijing 105.8 503.2 320.2 279.0 245.0 349.9 666.9 1,371.6 1,080.0 1,552.9 1,592.9 Tianjin 133.1 61.2 31.4 36.9 132.6 107.8 613.7 1,015.0 1,520.9 2,006.4 2,511.4 Hebei 10.3 19.1 43.7 44.5 56.6 113.1 396.5 523.4 546.7 825.9 1,100.6 Shanxi 4.9 6.5 9.8 3.4 3.8 53.8 86.4 31.7 63.8 138.0 265.9 Inner Mongolia 5.1 6.4 4.4 10.6 1.7 5.2 85.3 40.1 57.8 71.9 73.3 Liaoning 90.8 130.6 126.1 257.3 362.4 516.4 1,279.1 1,440.1 1,424.6 1,737.7 2,204.7 Jilin 7.4 9.7 99.9 17.6 31.6 75.3 275.3 241.9 408.0 451.6 402.3 Heilongjiang 14.0 69.3 57.4 28.4 20.9 72.2 232.3 347.6 516.9 548.4 734.9 Shanghai 214.0 233.2 422.1 174.0 145.2 493.6 3,160.3 2,473.1 2,892.6 3,940.9 4,225.4 Jiangsu 86.4 125.5 126.9 134.0 219.2 1,463.2 2,843.7 3,763.2 5,190.8 5,210.1 5,435.1 Zhejiang 36.3 43.8 54.0 49.1 92.3 239.8 1,031.8 1,150.3 1,258.1 1,520.5 1,503.5 Anhui 3.2 27.9 8.8 13.5 10.7 54.7 257.6 370.0 482.6 506.6 434.4 Fujian 55.4 145.5 348.0 319.9 471.2 1,423.6 2,874.4 3,713.2 4,043,9 4,084.5 4,197.1 Jiangxi 5.4 8.9 9.2 7.5 19.5 99.7 208.2 261.7 288.9 300.7 481.0 Shandong 65.0 89.7 163.3 185.7 216.4 1,003.4 1,874.i 2,552.4 2,689.0 2,633.6 2,775.6 Henan 13.5 64.2 46.1 11.4 38.0 53.2 304.9 386.7 478.6 523.6 692.0 Hubei 26.0 22.3 28.6 31.8 46.6 203.1 540.5 601.9 625.1 680.0 790.2 Hunan 2.9 12.9 23.3 14.2 25.4 132.7 437.5 331.1 5077 703.4 917.0 Gtuangdong 736.9 1,251.1 1,323.2 1,582.3 1,942.9 3,701.1 7,555.8 9,463.4 10,260.1 11,754.1 12,635.0 Guangxi 45.1 20.9 53.0 35.6 31.9 182.0 884.6 836.3 672.6 663.1 885.8 Hainan .. 117.4 95.0 103.0 176.7 452.6 707.1 918.1 1,062.1 789.1 705.5 Chongqing 3.3 90.2 190.3 439.5 357.4 418.0 Sichuan 24.3 40.3 13.1 21.1 80.9 22.0 381.1 482.3 184.2 440.9 248.5 Guizhou .. 13.8 13.9 11.1 16.3 19.8 42.9 63.6 57.0 31.4 49.8 Yunnan 6.3 8.3 7.9 7.4 3.5 28.8 97.0 65.0 97.7 65.4 165.7 Tibet . .. .. .. .. .. Shaanxi 72.9 111.7 97.2 47.3 31.8 45.5 234.3 238.8 324.1 325.1 628.2 Gansu 0.2 2.4 0.0 1.2 4.8 0.4 12.0 87.8 63.9 90.0 41.4 Qinghai 0.0 2.7 0.0 0.0 0.0 0.7 3.2 2.4 1.6 1.0 2.5 Ningxia 0.0 0.3 1.1 0.3 0.2 0.4 11.9 7.3 3.9 5.6 6.7 Xinjiang 17.7 5.0 0.9 5.4 0.2 0.0 53.0 48.3 54.9 63.9 24.7 Source: China Sttistical Yearbook 1998, p. 639-42, 1 996-97, p. 608; previous issues for earlier years CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 102 TABLE 38 Production and Consumption of Energy 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Production (millions of tons of coal equivalent) 912.7 958.0 1,016.4 1,039.2 1,048.4 1,072.6 1,110.6 1,187.3 i,290.3 1,326.2 1,319.9 Percentage of total Coal 72.6 73.1 74.1 74.2 74.1 74.3 74.0 74.6 75.3 75.2 74.3 Crudeoil 21.0 20.4 i9.3 19.0 19.2 18.9 i8.7 i7.6 16.6 17.0 17.4 Natural gas 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.9 1.9 2.0 2.3 Hydro power 4.4 4.5 4.6 4.8 4.7 4.8 5.3 5.9 6.2 5.8 6.0 Consumption 866.3 930.0 969.3 987.0 1,037.8 1,091.7 1,159.9 1,227.4 1,311.8 1,389.5 1,420.0 Percentoge of tota/ Coal 76.2 76.2 76.0 76.2 76.1 75.7 74.7 75.0 74.6 74.6 73.5 Crude oil 17.0 17.0 17.2 16.6 17.1 17.5 18.2 17.4 17.5 18.0 18.6 Natural gas 2.1 2.1 2.0 2.1 2.0 1.9 1.9 1.9 1.8 1.8 2.2 Hydro power 4.7 4.7 4.9 5.1 4.8 4.9 5.2 5.7 6.1 5.5 5.7 GDP (billion of yuan, constant 1990 price) 1,542.2 1,716.5 1,786.9 1,854.8 2,025.4 2,313.0 2,625.3 2,956. 3,266.5 3,580.1 3,895.1 Energy consumption (million ton per billion yuan) 0.56 0.54 0.54 0.53 0.51 0.47 0.44 0.42 0.40 0.39 0.36 Notes: Excluding bio-energy, solar, geothernal and nuclear energy. All fuels are converted into standard fuel with thermal equivalent of 7,000 Iklocalories per kilogram. The con- version is I kg of coal (5,000 kcal) = 0.714 kg of standard fuel; I kg of crude oil (10,000 kcal) = 1.43 kg of standard fuel; I cubic meter of natural gas (9,310 kcal) = 1 .33 kg. of standard fuel.The conversion of hydropower into standard fuel is calculated on the basis of the consumption quota of standard coal for thermal power generabon for the year Source: China StatisticolYeorbook 1998, p.249. TABLE 39 Freight Traffic 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Biflion ton-km Rail 947.1 987.8 1,039.4 1,062.2 1,097.2 1,157.6 1,195.5 1,245.8 1,287.0 1,297.0 1,309.7 Road 266.0 322.0 337.5 335.8 342.8 375.5 407.1 448.6 469.5 501.1 527.2 Waterways 946.5 1,007.0 1,118.7 1,159.2 1,295.5 1,325.6 1,386.1 1,568.7 1,755.2 1,786.3 1,923.5 Pipelines 62.5 65.0 62.9 62.7 62.1 61.7 60.8 61.2 59.0 58.5 57.9 Civil aviation 0.7 0.7 0.7 0.7 1.0 1.3 1.7 1.9 2.2 2.5 2.9 Overall 2,222.8 2,382.5 2,559.1 2,620.7 2,798.6 2,921.8 3,051.0 3,326.1 3,573.0 3,645.4 3,821.2 Percentage of total Rail 42.6 41.5 40.6 40.5 39.2 39.6 39.2 37.5 36.0 35.6 34.3 Road 12.0 13.5 13.2 12.8 12.2 12.9 13.3 13.5 13.1 13.7 13.8 Waterways 42.6 42.3 43.7 44.2 46.3 45.4 45.4 47.2 49.1 49.0 50.3 Pipelines 2.8 2.7 2.5 2.4 2.2 2.1 2.0 1.8 1.7 1.6 1.5 Civil aviation - - - - - - 0.1 0.1 0.1 0.1 0.1 Overall 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Growth rates Rail 8.1 4.3 5.2 2.2 3.3 5.5 3.3 4.2 3.3 0.8 O.0 Road 25.6 21.0 4.8 -0.5 2.1 9.6 8.4 10.2 4.6 6.7 5.2 Waterways 9.5 6.4 11.1 3.6 11.8 2.3 4.6 13.2 11.9 1.8 7.7 Pipelines 2.1 4.0 -3.2 -0.3 -1 .0 -0.6 -1.5 0.7 -3.6 -0.8 -1 .0 Civil aviation 35.1 12.3 -5.5 18.8 23.2 32.9 23.8 11.9 20.0 12.1 16.0 Overall 10.3 7.2 7.4 2.4 6.8 4.4 4.4 9.0 7.4 2.0 4.8 Source hino StatisticalYeorbook 1998, p. 540. STATISTICAL ANNEX 103 TABLE 40 Passenger Traffic 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Billion passenger-km Rail 284.3 326.0 303.7 261.3 282.8 315.2 348.3 363.6 354.6 332.5 354.8 Road 219.0 252.8 266.2 262.0 287.2 319.3 370.1 422.0 460.3 490.9 554.1 Waterways 19.6 20.4 18.8 16.5 17.7 19.8 19.6 18.4 17.2 16.1 15.6 Civil aviation 18.2 21.7 18.7 23.0 30.1 40.6 47.8 55.2 68.1 74.8 77.4 Overall 541.1 620.9 607.5 562.8 617.8 694.9 785.8 859.1 900.2 914.3 1001.9 As a percentage of total Rail 52.5 52.5 50.0 46.4 45,8 45.4 44.3 42.3 39.4 36.4 35.4 Road 40.5 40.7 43.8 46.6 46.5 45.9 47.1 49.1 51.1 53.7 55.3 Waterways 3.6 3.3 3.1 2.9 2.9 2.9 2.5 2.1 1.9 1.8 1.6 Civil aviation 3.4 3.5 3.1 4.1 4.9 S.8 6.1 6.4 7.6 8.2 7.7 Overall 100.0 100.0 100.0 100.0 100.0 100.0 100.0 i00.0 100.0 100.0 o00.0 Growth rote Rail 9.9 14.7 -6.8 -14.0 8.2 11.5 10.5 4.4 -25 -6.2 6.7 Road 10.5 15.4 5.3 -1.6 9.6 11.2 15.9 14.0 9.1 6.6 12.9 Waterways 7.6 4.1 -7.7 -12.4 7.5 11.9 -1.0 -6.6 -6.4 -6.3 -3.1 Civil aviation 24.4 19.2 -13.9 23.4 30.7 34.8 17.6 15.5 23.5 9.8 3.5 Overall 10.5 14.7 -2.2 -7.3 9.8 12.5 13.1 9.3 4.8 1.6 9.6 Source: China StotisbcalYearbook f 998, p. 539. TABLE 41 Average Shipping Distance 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Kilometers Rail 673 681 686 705 718 734 735 791 807 768 772 Road 37 44 46 46 46 48 48 50 50 51 54 Waterways 1,174 1,128 1,281 1,447 1,554 1,433 1,415 1,465 1,551 1,402 1,696 Pipelines 413 416 402 398 399 417 409 406 386 366 362 Civil aviation 2,183 2,226 2,226 2,218 2,234 2,330 2,393 2,241 2,206 2,168 2,334 Overall 234 243 258 270 284 279 274 282 289 281 300 Growth rotes Rail 4.2 1.2 0.7 2.8 1.8 2.2 0.1 7.6 2.0 -4.8 0.5 Road 8.8 18.9 4.5 0.0 0.0 4.3 0.0 4.2 ao 2.0 5.9 Waterways 12.7 -3.9 13.6 13.0 7.4 -7.8 -1.3 3.5 5.9 -9.6 21.0 Pipelines 0.0 0.7 -3.4 -1.0 03 4.5 -1.9 -0.7 -4.9 -5.2 -1.1 Civil aviation 1.9 2.0 0.0 -0.4 0.7 4.3 2.7 -6.4 -1.6 -1.7 7.7 Overall -0.8 3.8 6.2 4.7 5.2 -1.8 -1.8 2.9 2.5 -2.8 6.8 Sourcne Chino Stosstical Yearbook 1998, p. 541. CHINA: WEATHERING THE STORM AND LEARNING THE LESSONS 104 References China National Bureau of Statistics. various years. China World Bank. 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