China Mongolia - International University of Japan · disunity. The last imperial dynasty, the Qing (1644-1911), was “foreign”, composed of a Manchu nobility from the north-east,

COUNTRY PROFILE 2000

China

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EIU Country Profile 2000 © The Economist Intelligence Unit Limited 2000

Comparative economic indicators, 1999

1

© The Economist Intelligence Unit Limited 2000 EIU Country Profile 2000

Contents

China

4 Basic data

5 Political background5 Historical background

11 Constitution and institutions13 Political forces18 International relations and defence

23 Resources and infrastructure23 Population24 Education25 Health26 Natural resources and the environment27 Transport and communications28 Energy provision

29 The economy29 Economic structure31 Economic policy42 Economic performance44 Regional trends

45 Economic sectors45 Agriculture and forestry48 Mining and semi-processing49 Manufacturing50 Construction51 Financial services

56 The external sector56 Trade in goods59 Invisibles and the current account62 Foreign reserves and the exchange rate

64 Appendices64 Sources of information65 Reference tables65 Population65 Labour force66 Transport statistics66 National energy statistics66 Government finances67 Investment in assets by source and purpose

2


67 Money supply and credit67 Gross domestic product and gross national product68 Gross domestic product by expenditure68 Gross domestic product by sector69 Price indices69 Agricultural production69 Gross agricultural output value, by sector70 Total sown area, by crop70 Miscellaneous agricultural statistics70 Industrial production71 Sources and uses of credit funds by state banks71 Exports72 Imports72 Balance of payments, IMF estimates73 External debt73 Official development assistance74 Position of China vis-à-vis BIS-reporting banks74 Foreign reserves74 Exchange rates

Mongolia

75 Basic data

76 Political background76 Historical background77 Constitution and institutions78 Political forces79 International relations and defence

80 Resources and infrastructure80 Population80 Education and health81 Natural resources and the environment81 Transport and communications81 Energy provision

82 The economy82 Economic structure83 Economic policy84 Economic performance

85 Economic sectors85 Agriculture and forestry86 Mining and semi-processing86 Manufacturing86 Construction87 Financial services

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87 Other services

87 The external sector87 Trade in goods88 Invisibles and the current account89 Capital flows and foreign debt89 Foreign reserves and the exchange rate

90 Appendices90 Sources of information91 Reference tables91 Population91 Labour force91 Government finances92 Government revenue92 Government expenditure92 Money supply and credit93 Gross domestic product93 Gross domestic product by expenditure93 Gross domestic product by sector94 Consumer prices94 Crop production94 Livestock numbers94 Meat production95 Mineral production95 Output of selected industrial products95 Main trading partners96 Balance of payments, IMF estimates97 External debt97 Net official development assistance98 Foreign reserves98 Exchange rates

4 China


China

Basic data

9,561,000 sq km

1.3bn (end-1999)

Population (m), end-1999

Chongqinga 30.7 Tianjina 9.6

Shanghaia 14.7 Shijiazhuang 8.7

Beijinga (Peking, capital) 12.5 Wuhan 7.4Chengdu 10.0 Qingdao 7.0Harbin 9.3 Guangzhou (Canton) 6.8

a Includes the surrounding counties.

Continental, with extremes of temperature; subtropical in the south-east

Hottest months, July and August, 23-32°C (average daily minimum andmaximum); coldest month, January, 1-8°C; driest month, December, 36 mmaverage rainfall; wettest month, June, 180 mm average rainfall

Mainly Putonghua, based on northern Chinese (the Beijing dialect known asMandarin); local dialects and languages also used

The metric system is used alongside certain standard Chinese weights andmeasures, of which the most common are:

1 catty or jin=0.5 kg 2,000 catties=1 tonne (approx)1 picul or dan=50 kg 20 piculs=1 tonne1 mu=0.0667 ha 15 mu=1 shang=1 ha

1 yuan/renminbi (y/Rmb)=10 jiao=100 fen. Average exchange rate in 1999:Rmb8.28:US$1. Exchange rate on October 25th 2000: Rmb8.28:US$1

January-December

Zone I (Urumqi) 6 hours ahead of GMT; zones II, III and IV (Chongqing,Lanzhou, Beijing, Shanghai, Harbin) 6 hours ahead of GMT; 9 hours ahead ofGMT during Beijing summer time, mid-April to mid-October

January 1st (New Year’s Day), February 4th-7th (Chinese New Year), May 1st(Labour Day), October 1st-2nd (National Days)

Land area

Population

Main towns

Weather in Shanghai(altitude 7 metres)

Language

Weights and measures

Currency

Fiscal year

Time

Public holidays, 2000

Climate

China 5


Political background

The Chinese Communist Party (CCP) has ruled China since 1949. The highestformal organ of power is the Politburo Standing Committee (PSC) of sevenmembers, currently headed by the general secretary of the CCP, Jiang Zemin.Mr Jiang is also state president and chairman of the Central MilitaryCommission (CMC). Other important institutions are the State Council, led bythe premier, Zhu Rongji, and the National People’s Congress (NPC), a largelyrubber-stamp parliament. Since March 1998 the NPC has been chaired by LiPeng. Although restrictions on intellectual freedom have been eased since thelate 1970s, the leadership will not tolerate any organisation that it believesthreatens the CCP’s political monopoly.

Historical background

Some of the defining features of Chinese civilisation, such as its unique writingsystem, have endured since the country was first unified by the founder of theQin dynasty, the first recorded emperor of the whole country, Qin Shi HuangDi, in 221 BC. Traditional Chinese historians interpreted subsequent history asfollowing a “dynastic cycle”. Over a period, sometimes lasting several hundredyears, a dynasty would expand, flourish, decline and finally lose power in aninsurrection sparked by a discontented peasantry, or in a foreign invasion.Long periods of unity were interrupted several times by long periods ofdisunity. The last imperial dynasty, the Qing (1644-1911), was “foreign”,composed of a Manchu nobility from the north-east, whose language andculture differed from that of the majority Han Chinese population. But like theMongol Yuan dynasty (1276-1368) before them, the Qing became assimilated;the heyday of the Qing was in the 18th century. In the 19th century theChinese political and economic system, which was by then moribund, wasfurther weakened by long and debilitating internal revolts and by thedepredations of foreign powers seeking to carve out spheres of interest inChina. The imperial system finally collapsed in 1911.

The republic established in 1911 proved unable to preserve China’s territorialintegrity. Centrifugal pressures emerged, and by the early 1920s the countryhad disintegrated into a patchwork of warring fiefdoms. The national govern-ment was led by the Nationalist Party (the Kuomintang, or KMT), a bourgeoisparty founded by Sun Yat-sen and then led by Chiang Kai-shek, which wasreorganised in 1924 along Leninist lines. A united front, formed in 1924 withthe infant CCP, ended in 1927 when the KMT turned against the CCP. Thisprompted the CCP, after a few failed attempts at urban insurrection, to becomepredominantly a rural, peasant-based party. It survived several encirclementattempts by the KMT in its remote rural strongholds in southern China, and in1934-35 trekked across vast distances to a new base in Yan’an, in Shaanxiprovince in the north-west—the famous “Long March”. It was during thisarduous and dangerous journey that Mao Zedong established his position asthe supreme leader of the CCP, a position he retained until his death in 1976.

Five millennia of history

The communists’ rise topower

6 China


A second, uneasy united front, imposed on Chiang by mutinous officers inDecember 1936, was formed when the CCP and the KMT combined to resistJapanese aggression. (Japan annexed Manchuria in 1931 and mounted a full-scale invasion of China proper in 1937.) The Japanese surrender in 1945,however, was followed by the eruption of full-scale civil war in China betweenthe CCP and KMT. The KMT was divided and corrupt and its troops ill-disciplined. Its support base was also quickly eroded by rampant inflation andcorruption. Thus, the US-backed KMT forces were routed with unexpected easeby armies of the not so well-equipped but better-disciplined CCP. In 1949 theKMT established a government-in-exile in the “unliberated” island province ofTaiwan, and on October 1st Mao proclaimed the founding of the People’sRepublic of China (PRC), with Beijing as its capital.

Until his death in 1976, Mao, who sought to gather absolute power into hisown hands, dominated politics in China. Mao’s towering personality alsoweakened the institutional basis of the party-state, because it precluded theestablishment of a secure succession mechanism or consensus-building system.During the Great Proletarian Cultural Revolution, which was launched in1966, Mao, seeing his own influence eroded after the disastrous “Great LeapForward” of 1958 and the consequent famine in 1959-60, turned to the“masses” to overthrow his rivals in the party hierarchy, with the ideologicalpretext of pursuing his own millennarian brand of egalitarian socialism againstthe forces of pragmatism and “revisionism”. The chaos of the early years of theCultural Revolution left the army as the only viable political institution, andMao turned to the military to restore order in 1968-69. After the death in 1976of both Mao and his widely respected lieutenant, the premier, Zhou Enlai,senior military figures moved quickly to arrest the most prominent of Mao’s“leftist” colleagues, including his wife, Jiang Qing, and the other members ofthe so-called Gang of Four.

Mao’s designated successor, Hua Guofeng, presided over a period ofnormalisation, which was marked by the return to power of Deng Xiaoping,the most senior of the purged pragmatists to survive the Cultural Revolution.In December 1978, at a watershed meeting of the party’s 11th CentralCommittee, Deng and his supporters achieved predominance over Mr Hua andother “leftists”. In 1980 the Cultural Revolution was reassessed as a nationaldisaster and Mao himself was deemed to have been only 70% “good”.

Apart from the chairmanship of the CMC, Deng never took the most seniorofficial positions for himself. He sought to ensure the continuity of the reformsthat he instituted by ruling through a succession of younger men who sharedhis belief in the priority of economic advance over political purity. But, as aresult of China’s tradition of “rule of man” rather than “rule of law”, combinedwith the damage done during the later Mao years to the institutions of partyand state, Deng’s personal imprimatur was necessary to maintain the pace ofreform and secure the all-important acquiescence of the army. Tensionsbetween “reformers” like Deng and “conservatives” worried about the dilutionof socialist orthodoxy brought about by greater economic liberalism were apersistent feature of Chinese politics in the 1980s and 1990s. Thus Deng’s

Mao and internal partystruggles, 1949-76

The 1980s: economic butnot political change

China 7


personal intervention was at times necessary to push forward the reformprocess. One reason for Deng’s prestige, especially with the army, is that he wasnever seen as anything other than orthodox politically. This was illustrated bythe harsh crackdown on dissidence after the “democracy wall” movement oflate 1978 and early 1979 had outlived its usefulness. Deng was committed tothe maintenance of order, which to the Chinese leadership is synonymouswith the continued monopoly of power of the CCP.

Market-oriented reforms, growth in the personal incomes of millions of city-dwellers, a rapid expansion of foreign trade and links with developed countriesinevitably brought a desire for political change as well as for greater culturalopenness. These demands were voiced by intellectuals, students and, mostworrying for the party, urban workers. Such demands were perceived byChina’s leaders as challenging the authority of the CCP and so as tantamountto sedition. Deng’s first two chosen party leaders were ditched for having leanttoo far in the direction of political reform. The first, Hu Yaobang, was oustedfollowing student demonstrations in 1987. The second, Zhao Ziyang, wassacked in 1989, after large-scale street protests (triggered by the death ofMr Hu) were ended only by the massacre of unarmed civilians in theapproaches to Tiananmen Square in Beijing on the night of June 3rd-4th 1989.As party leaders, both had to take the blame for the failure of communistindoctrination.

The 1989 massacre was followed by widespread condemnation from the West,a period of political repression in China and an obsession with “stability”.However, the collapse of communism in the Soviet Union and in easternEurope led to a rethink. The main threat to the CCP’s rule, it was argued, didnot lie in pressure for political change but in the failure to achieve healthy andrapid economic growth. In 1992 Deng, then aged 88 and in theory fullyretired, re-emerged in a famous tour of the rapidly growing areas of the southto launch a new campaign—his last—for faster and bolder economic reform. Asin the mid-1980s, the emphasis of political rhetoric was no longer on theimportance of Marxist orthodoxy but on the need to achieve growth bywhatever means were most appropriate, albeit with the caveat that CCP rulewould be preserved. Deng’s last appointed heir was Jiang Zemin, a formermayor of Shanghai. By the time Deng died in February 1997, Mr Jiang, whowas first elevated following the fall of Mr Zhao, had used his period as heir-apparent to consolidate his position among important constituencies. Hemoved gradually to combine the important roles of party leader, state presidentand chairman of the CMC.

Mr Jiang now heads a collective leadership, the contours of which wereclarified at two important meetings in late 1997 and early 1998. At the first,the 15th congress of the CCP, a new Politburo and PSC were elected. At theannual meeting of the NPC in March 1998 delegates chose a new government.Mr Jiang’s immediate subordinates are the former premier, Mr Li, who is nowthe chairman of the NPC and of its standing committee, and Mr Zhu, whosucceeded Mr Li as premier at the meeting of the NPC in March 1998.

The Beijing massacre

The 1990s: Marx and themarket

The collective leadership:Jiang Zemin’s technocracy

8 China


At the 15th congress, the two vacancies created by the retirement of Qiao Shiand Admiral Liu Huaqing on the most important committee in the country,the PSC, were filled by two relatively young newcomers to the top echelon:Wei Jianxing (born 1931), and Li Lanqing (born 1932). Mr Wei, regarded asclose to Mr Qiao, has headed the important Central Commission for DisciplineInspection since 1992 and took over as temporary party secretary of Beijing in1995, replacing the disgraced Chen Xitong. Mr Li, a vice-premier withexperience in international affairs and education, took the seventh place onthe PSC. He is regarded as a reformist but lacks a broad power base.

Also on the PSC are Li Ruihuan, the chairman of the Chinese People’s PoliticalConsultative Conference (CPPCC, a pseudo-democratic advisory body thatincorporates the few non-communist political organisations allowed), and theslightly younger Hu Jintao, a former governor of Tibet and now president ofthe central party school, who specialises in doctrinal matters. Mr Hu, whobecame state vice-president at the March 2000 meeting of the NPC, is viewedas a possible successor to Mr Jiang.

Over the last few years, Mr Jiang has managed to have his protégés andassociates promoted to senior positions in the People’s Armed Police (PAP) andthe military. At the 1995 meeting of the NPC he was able to secure thepromotion to the rank of vice-premier of Wu Bangguo (formerly party secretaryof Shanghai) and Jiang Chunyun (formerly party secretary of Shandong), andplaced them in charge of overseeing industry and agriculture respectively. Morerecently, one of his closest aides, Zeng Qinghong, an alternate member of theCCP Central Committee, who heads the party’s Organisation Department, hasbeen seen as a rising star. Mr Jiang has also felt sufficiently secure to allow hisown son, the US-educated Jiang Mianheng, who runs a number of technologycompanies in Shanghai, to assume a prominent role.

It has frequently been remarked that Mr Jiang’s leadership is necessarilycollective, because he lacks the charisma and personal authority of the “LongMarch” generation of leaders. Because of this Mr Jiang’s leadership is alsoconsensus-driven and therefore more dependent on compromise than was thecase when Deng acted as the ultimate, behind-the-scenes arbiter. That said, asound consensus appears to exist behind the current cautious and technocraticapproach of Mr Jiang. Mr Jiang and his senior allies, notably the current andformer premiers, Mr Zhu and Mr Li, appear to agree that the currentsocioeconomic system requires reform rather than fundamental change andthat the political system can be made to function better by a vigorous attemptto purge corruption and by the introduction of a more open and responsivestyle by government at all levels.

To the extent that a collective leadership involves building an institutionalrather than a purely personal base for the exercise of authority, it must be seenas a further step forward in the institutionalisation of the CCP regime. A stresson the need to establish the rule of law, rather than government by personalfiat, is a key part of institution building. Even if the Chinese political systemcannot survive the reform process in the long run, there are signs that it is

A collective leadership

China 9


maturing. Mr Jiang may be China’s Brezhnev, but China’s Gorbachev has yetto emerge.

The fault lines under the surface of the unified face presented by this collectiveleadership are usually hidden, but they do emerge from time to time. It isgenerally believed, for example, that the “reformist” Mr Zhu and the“conservative” Mr Li are at odds. Their enmity has taken concrete form inconflicting public statements about the vast Three Gorges Dam project on theYangtze river. After decades of procrastination, work on this project started inthe mid-1990s, during Mr Li’s second term as premier and mainly because ofhis support. As soon as he became premier, Mr Zhu began to make publicremarks critical of the way in which the project had been supervised, drawingattention to corruption and incompetence. These remarks were taken to implydoubts about the value of the whole project. Mr Li, meanwhile, who is atrained hydraulic engineer and has sponsored several major dam projects, tookpains to make public his continued support for the Three Gorges Dam.

Mr Jiang is determined to pursue efforts to preserve the legitimacy of the CCP,not only by pursuing economic growth, but also by rebuilding the party’scredibility. A continuing campaign against corruption in the party andlawlessness in society, pursued since 1995, is central to this effort. Corruption iswidely perceived to run wide and deep within the party, and the fact that onlya few high-level officials (most notably, the above-mentioned former secretaryof the Beijing municipal Communist Party committee, Mr Chen) have beenexposed as corrupt tends to confirm the cynicism with which much of thepopulation regards the party and even the conduct of politics.

Attempts are being made to reinvigorate the CCP and to strengthen itsideological basis by means of nationwide emulation campaigns that, in the late1990s after nearly 20 years of economic reform, have a curiously anachronisticring. Mr Jiang is also determined to rebuild the party from the grassroots andspends much time and energy pursuing this goal. The prominent role playedby the military fighting the floods that affected China in mid-1998 allowed theregime to re-emphasise the links between party, people and army—ties onwhich so much emphasis was placed during the Maoist era.

Important recent events

1995: The president of the Philippines, Fidel Ramos, accuses China ofstationing warships around the Spratly Islands in the South China Sea inFebruary. Parts of this area are claimed by China, Taiwan, Vietnam, thePhilippines, Malaysia and Brunei. China is outraged at the US decision to allowthe president of Taiwan, Lee Teng-hui, to make a private visit in June to CornellUniversity, from which he has a doctorate. Relations with the US and withTaiwan come under severe strain. The publication of a Proposal for Formulatingthe Ninth Five-Year Plan at the fifth plenary session of the 14th CentralCommittee signals a renewed commitment to gradual reform.

1996: China’s truculence in the run-up to the first democratic elections inTaiwan in early 1996, which includes the holding of military exercises usinglive ammunition, causes widespread anxiety. Jiang Zemin continues to

Fighting corruption andlawlessness

10 China


strengthen his hold on power by intensifying a drive against corruption andcrime, and appointing his supporters to key positions in the military. SouthAfrica announces its intention to switch recognition from Taiwan to China,effective from the beginning of 1998.

1997: Deng Xiaoping dies in February, aged 92. Mr Jiang steps smoothly intogreater prominence, a role confirmed as the year progresses by his ability topromote his allies. In July China resumes the exercise of sovereignty over HongKong, which becomes a Special Administrative Region (SAR) of China. The15th congress of the CCP further consolidates the leadership around Mr Jiang.

Mr Jiang makes the first visit to the US since 1985 by a Chinese head of statein November. The improvement in bilateral relations that the visit signals isconsolidated by the release, on medical parole, of the dissident WeiJingsheng, who flies to the US in November.

1998: The new premier, Zhu Rongji, is confirmed in his position at theNational People’s Congress (NPC) meeting in March. The US president, BillClinton, goes to China on a reciprocal visit in June and appears to giveconcessions over Taiwan.

1999: At the March meeting of the NPC, the state constitution is amended,following changes to the CCP’s constitution in 1997. “Deng Xiaoping Theory”is added to the ideological buttresses that support CCP authority. The bombingof the Chinese embassy in Belgrade by NATO in May places further strain onan already difficult relationship with the US and further delays China’s entry tothe World Trade Organisation (WTO). In July Lee Teng-hui raises the stakes inthe potentially flammable cross-Strait relationship by announcing that bilateralrelations should be conducted on a “special state-to-state” basis. In OctoberMr Jiang’s claim to be the political heir to Mao and Deng is symbolised by hisprominence at the celebrations of 50 years of CCP rule. In November Chinaand the US reach a market-opening agreement, removing a significant obstacleto China’s accession to the WTO.

2000: In March the election of the leader of the pro-independence DemocraticProgressive Party, Chen Shui-bian, as Taiwan’s president presents the Chineseleadership with a serious challenge. Although China reacts with heated words,a comparatively conciliatory public position from Mr Chen helps to preventescalation for the rest of the year. In May the US House of Representatives votesto grant Permanent Normalised Trade Relations (PNTR) status to China, withthe Senate following suit in October. Also in May China concludes a market-opening deal with the EU, which removes another obstacle to its WTO entry.Relations with the US remain difficult and shared concerns about the USNational Missile Defence system plans bring China and Russia closer.

In mid-1998 Mr Jiang took his campaign to eradicate corruption a step furtherby ordering the military to give up its business empire. During the reform era,the military developed thousands of businesses, ranging from cellular-telephone networks and aerospace companies to karaoke lounges and massageparlours. Non-military entrepreneurs have long complained that the army usesits influence to eradicate competitors and circumvent the law, for example,

The army

China 11


through smuggling. In mid-2000 it was announced that the process ofdisbanding or selling off enterprises owned by the People’s Liberation Army(PLA), and of those run by judicial organs had been partly completed, with52% of them disbanded.

The call for renewed ideological purity rings hollow with almost everybody inChina, but there is deep and widespread concern about crime and corruption,especially when the privileged abuse their positions. Public executions andpurges, largely, but no longer exclusively, of minor party functionaries, willcontinue and may increase as the regime seeks legitimacy.

The realisation that the quasi-religious Falun Gong, a sect that practises qigong(a form of traditional Chinese exercise) and Buddhism, has many thousands ofadherents all over the country and is well organised, has alerted the authoritiesto a new potential danger. In July 1999 the sect was banned and a concertedattack launched on its US-based leader, Li Hongzhi. Repression of Falun Gongadherents and those belonging to similar groupings, as well as pressure onChristians of various denominations continued unabated during 2000.

Constitution and institutions

The constitution is essentially descriptive rather than normative and has beensubject to frequent revision. The latest version, which was promulgated in1982 and amended in 1988, describes China as a people’s socialist dictatorshipled by the working class and based on an alliance of workers, peasants andintellectuals. Despite much talk and some limited action on “political reform”during the 1980s, the basic political structure remains that of an authoritarianone-party state.

China is divided into 22 provinces, five autonomous regions and fourmunicipalities. The provinces range from the most populous and crowded,Henan, with 93.9m people, to Qinghai, with 5.1m. The most recentadjustment was in March 1997, when the 30.8m-strong administrative area ofChongqing, a city of 15m and surrounding districts and counties, were hivedoff from Sichuan, previously the most populous province. Previous changesincluded the separation of Hainan from Guangdong province in 1988 tobecome a separate province, as well as a special economic zone (SEZ). Fourother SEZs were established in 1980 on the southern seaboard. The SEZs enjoyconsiderable financial autonomy and offer a more liberal climate for foreigninvestors. The role of the SEZs was undercut by the opening in 1984 of 14 more“coastal cities” offering similar incentives for foreign investment. The situationfor the SEZs worsened further in 1990 when cut-throat competition for foreigninvestment by localities all over China broke out, whether or not they hadbeen designated for the task by Beijing. Most have now created their owndevelopment zones, replete with a range of investment incentives.

The so-called autonomous regions have no more autonomy than provinces.The name, however, recognises the pre-revolutionary predominance of non-Han ethnic groups in Guangxi (Zhuang, an ethnic group in south-west China),

The constitution is subjectto frequent changes

Provinces, SEZs andautonomous regions

Religious rights

12 China


Tibet, Xinjiang (Turkic, Uighur Muslims), Inner Mongolia (Mongols) andNingxia (Chinese, Hui Muslims). The four municipalities of Beijing, Shanghai,Tianjin and Chongqing are provincial-level entities.

Below the provincial level, administration of the provinces is furthersubdivided into prefectures, counties and townships, and, within cities, intodistricts. The “people’s communes” established during the Great Leap Forwardof 1958 as the country’s basic administrative unit have been disbanded. Insome places, however, the communes’ village-level subdivisions or “productionbrigades” still function within the new framework of the contractresponsibility system. Production brigades comprise several villages, and“production teams” of either part or all of a village. By the end of 1999 therewere 95 rural prefectures, 236 prefecture-level cities, 427 county-level cities and2,109 counties. There were 663 cities, including four municipalities with thestatus of provinces, and 749 districts, the urban administrative subdivision. Asurbanisation proceeds, the tendency is for the number of administrativedivisions classified as urban to rise at the expense of rural areas, reflecting avery real urbanisation process.

In theory, the supreme organ of state power is the National People’s Congress(NPC). It is elected every five years, passes laws and treaties, nominates theexecutive and approves the constitution. It has roughly 3,000 members,indirectly elected from lower-level people’s congresses. It meets in plenarysession for two to three weeks each year, usually in March-April. Betweensessions many of its powers are vested in a standing committee of around 200members, that drafts laws and handles NPC business when the parliament isnot in session. In most Stalinist party-states, the legislature, like the rest of thestate apparatus, is subordinate to the party. The NPC is no exception and hasbeen a rubber-stamp body, approving decisions made by the ChineseCommunist Party (CCP). However, during Mr Qiao’s term from 1993 to 1997as chairman of the NPC and its standing committee, it showed more muscle.Delegates took to questioning the premier more closely when he delivered theannual address to the full session and on occasion voted against appointees ofthe top leadership. Although the casting of protest votes is likely to continue,the current NPC chairman, Mr Li, appears keen to ensure that the NPC remainsunder tight CCP control.

Under Deng Xiaoping a measure of direct electoral democracy was introducedat the lower-level people’s congresses, at the township (or district) and countyand village levels. There are triennial elections. In theory, any candidate canstand if nominated by ten voters, and there have to be between 30% and 50%more candidates than seats. In practice, however, all candidates are required tosupport the leading role of the CCP. There has been talk about extending directelections to higher levels, but no action has been taken yet. The highest organof state administration is the State Council, which is, in effect, the cabinet. Itscomposition is decided by the NPC, acting on party recommendations. It isheaded by a premier, whose term is, in theory, concurrent with the five-yearlife of the NPC. The work of the State Council is presided over by an executiveboard, usually with about 15 members, composed of the premier, his deputies

Sub-provincialadministration

The legislature

The State Council

China 13


(there are currently four vice-premiers), state councillors and a secretary-general. Below the State Council come the various ministries and commissions,as well as a number of important state-owned industrial enterprises.

The State Council

Premier: Zhu Rongji

Vice-premiers: Li Lanqing, Qian Qichen, Wu Bangguo, Wen Jiabao

State councillors: Chi Haotian, Luo Gan, Wu Yi, Ismail Amat, Wang Zhongyu

Secretary-general: Wang Zhongyu

Ministry of Agriculture: Chen Yaobang

Ministry of Finance: Xiang Huaicheng

Ministry of Foreign Affairs: Tang Jiaxun

Ministry of Foreign Trade & Economic Co-operation: Shi Guangsheng

Ministry of Justice: Gao Changli

Ministry of Labour & Social Security: Zhang Zuoji

Ministry of National Defence: Chi Haotian

Ministry of Public Security: Jia Chunwang

Ministry of State Security: Xu Yongye

State Development and Planning Commission: Zeng Peiyan

State Economic and Trade Commission: Sheng Huaren

Political forces

As of mid-2000 the Chinese Communist Party (CCP) had about 60m membersand is the world’s largest political party. Party membership is a benefit in bothmaterial and professional life, and in some government bodies effectively aprerequisite of advancement.

The CCP’s structure parallels and supervises that of the government andlegislature. Its main decision-making body is a Central Committee consisting,as of 1997, of 151 full members and 191 alternates. The Central Committee iselected at a party congress every five years, normally in the months precedingthe first session of a new National People’s Congress (NPC). The most recentparty congress, the 15th, was held in September 1997. The next is due in 2002.The Central Committee meets in plenary session about twice a year. In the in-terim most of its power is vested in a Politburo that currently has 22 members.

Uniquely, the CCP adds a further tier of centralised leadership, the PolitburoStanding Committee (PSC), of seven members, who are the most powerfulpeople in the country. Usually, the Politburo will include some people ofpurely party standing and provincial- or municipal-level party secretaries. It

The role of the ChineseCommunist Party

The Central Committee

The Standing Committee

14 China


may also include the premier and his deputies, other important statecouncillors, and representatives of the military.

The 15th quinquennial congress of the CCP, the first since the death of DengXiaoping, was held in September 1997. As well as performing the task ofelecting the new Central Committee, the congress approved the policy linehammered out in meetings held in the run-up to the congress and presented ina keynote speech by the president, Jiang Zemin. The centrepiece of thecongress was the decision to elevate “Deng Xiaoping Theory” to form part ofthe constitutional ideology of the CCP. This endows the leadership with thepragmatic ideology necessary to pursue reform, for example of the ownershipof industrial assets.

In the late 1980s there was much talk of the “separation of functions” of partyand government. The party would concentrate on its proper role of providingideological leadership, while day-to-day economic and administrative manage-ment would be in the hands of the government. This separation has not takenplace, however, and at the national level it still seems irrelevant whether it isthe State Council or the CCP that makes administrative decisions, since the topechelons of both bodies are staffed by almost the same people.

The apparently clear-cut line of pyramidal control within the CCP iscomplicated by its various secretariats and commissions. The central secretariathandles the day-to-day business of the party. The general secretary is the partyleader, following the abolition in 1980 of the post of chairman, and has thepower to convene Politburo meetings. The Central Commission for DisciplineInspection, with responsibility for the internal discipline of the party—andhence managing a strong network of informers and spies as well as personnelfiles—is a particularly powerful body.

One of Deng’s aims was to demilitarise politics. He did this by making use ofhis prestige as a legendary military commander in the revolutionary war andhis status from 1973, and again from 1977 to 1980, as the chief-of-staff of thePeople’s Liberation Army (PLA). Representation of the PLA in the top organs ofstate and party has steadily diminished. Until the 14th party congress in 1992only one Politburo member, the then defence minister, Qin Jiwei, was a“military man”, although the president, Yang Shangkun, also a Politburomember, had strong links with the army. The PLA’s share of the governmentbudget similarly declined from about 6% of GNP in the late 1970s to less than3% in the late 1980s. The army was reduced in size by about 25%, to 3m.

However, following the bloody crackdown by the military on populardemonstrations in 1989, the army’s presence was more felt in the Politburo;there were reports that a number of generals attended its meetings, albeit in anon-voting capacity. The increased politicisation of the military could also beseen in the role that the PLA played in the conduct of foreign policy,particularly towards Taiwan. It was widely believed that the large-scaleintimidatory military exercises by China in the Taiwan Strait in 1995 and 1996

The 15th party congress

Party and government arestill intertwined

The secretariats andcommissions

The People’s LiberationArmy

China 15


were a result of Mr Jiang and other leaders pandering to military demands forChina to take a more hardline stance towards Taiwan.

The retirement of Liu Huaqing from the PSC in 1997 suggested that thecivilian leadership was once again trying to reduce the direct political power ofthe PLA. A directive issued by Mr Jiang in July 1998 ordering the military togive up its business empire further indicated that the PLA’s influence was onthe wane. The military is, however, unlikely to be fully pushed out of politics.There was evidence in mid-1999 that the process of handing over large (andoften unprofitable) parts of the military business empire to civilian, oftenprivate, management, was not going smoothly. The army was reportedlydissatisfied by the amounts of compensation on offer; many of the enterprisesin question were proving hard to dispose of. The profile and clout of the PLAwere again raised by the heightened tension with Taiwan in 1999. Ultimatelythe PLA’s political power is guaranteed by the military’s role as the protector ofparty rule in China.

Since 1989 Mr Jiang has put much effort into building up the People’s ArmedPolice (PAP). This has partly been aimed at easing dissatisfaction within thePLA about having to take up responsibility for civilian crowd control. Mr Jiang,who initially had little authority within the military, also built up the PAP tostrengthen his own political power base.

Control over the army was vested in two parallel commissions, the StateCentral Military Commission and the Party Central Military Commission. Thebodies usually have identical membership, and the State Central MilitaryCommission is rarely reported as meeting, leaving no doubt as to the intendedtruth behind the oft-repeated maxim that “the party controls the gun”. Thechairmanships of the two commissions were the last posts Deng held, until1989-90, when he handed both jobs to his designated successor, Mr Jiang, aman with no previous military experience.

The CCP has tried hard to maintain China’s monolithic power structure,leaving various identifiable interest groups in effect under-represented.Although there are national organisations supposedly looking after theinterests of women, farmers and workers, all are tame bodies pliant to the willof the CCP. It is noteworthy, for example, that even before the CCP mobilisedagainst student protesters in 1989, it had denounced as “counter-revolutionary” the independent trade unions that had sprung up during theprotests. The CCP remains extremely nervous of any sign of worker organ-isation, mindful of the role of Solidarity in the downfall of Communist Partyrule in Poland.

The party has enforced social control and political discipline in large measurethrough the pervasive role of the “work unit”. State factories provide not just asalary but housing, education and political indoctrination. The so-calledneighbourhood committees, often composed of the retired, provide anothermechanism of control in the cities, in such areas as family planning and crimeprevention. But these systems of social control are gradually breaking down.This is partly because of the government itself, which is pursuing structural

The Central MilitaryCommission

Worker organisation isdiscouraged

The People’s Armed Police

16 China


reform of the state-owned enterprises (SOEs). It is also because social mobility,and the aspirations that nearly 20 years of strong income growth have broughtwith them, have made people less susceptible to constant surveillance.

The bloated government bureaucracy began to be streamlined in 1998. InMarch of that year the NPC voted to cut the number of central governmentministries to 29 from 40 and to lay off half the 8m civil servants. Ministry-levelreform is now underway and thousands of civil servants have lost their jobs.Local governments started to do their share of job-cutting, belatedly, in 2000,but progress appears to be much slower than at the central government level.

China is almost the same size as the US. Many of its provinces, autonomousregions and municipalities are the size of European countries. The provincesextend over a large landmass and have widely differing resource endowments.Some are sparsely populated; others, mainly along the eastern seaboard, havefor many decades been among the most densely populated places on earth.Lines of communication are poor and, apart from the Yangtze river region,tend to follow a north-south axis. Sheer size, diversity and difficulty ofcommunication have meant that even at times of comparatively strong centralcontrol the unitary state has been far from uniform.

After 1949 there was a centralising thrust, based on the Soviet model of controland development. Both economic and political decisions were of a top-downnature. But some local variation was inevitable, and in the 1960s the “ThirdFront” industrialisation policies adopted in response to the Sino-Soviet rift,which prompted a wave of investment in manufacturing activities in theinterior of the country, helped to create an economic model characterised bylocal autarky, de-concentrating the economy and encouraging a measure ofdevolution of economic initiatives. It was on local initiatives that many of thereforms of the late 1970s were based.

The reform era has greatly increased the de facto autonomy of localgovernments, mainly as a result of a devolution of resource mobilisationpowers and spending responsibilities. This has tended to encourage the time-honoured practice of resistance, albeit usually passive rather than active, todirectives from above when these are not perceived to be in the interests oflocal areas.

Local governments have also increasingly become entrepreneurs and majorstakeholders in local enterprises. The culture of commerce has spread downinto the bureaucracy, and local governments tend to regard their mandate asbeing heavily economic in content, consisting largely of the requirement tomaximise employment and revenue-raising opportunities in the areas undertheir jurisdiction.

These attitudes and actions create a particularism that can frustrate the aims ofthe central government and in the competition to attract foreign investment,for example, can lead to wasteful duplication of effort. Local governments arealso anxious to maximise their ability to retain revenue collected locally andthis makes it difficult for the central government to increase its tax take. A

The shrinking bureaucracy

Post-1949 centralisation

Recent local autonomy

China 17


continuing tussle between local and higher level governments is occurring overthe closure of SOEs that are not viable. Responsibility for the welfare of workersat SOEs that are closed down devolves upon local governments, which have avested interest in allowing the banking system, and hence the entire economy,to continue to support SOEs. So they tend to resist central government ordersto hasten the reform and closure of SOEs.

At the moment, the central government can usually command compliance,albeit sometimes reluctant and slow, with its major policies. But mostprovincial bureaucrats and cadres are now appointed locally and the loyaltiesthat they are building up present an increasing constraint on policy at thenational level. There are those that argue that devolution is irreversible andthat it will increase so that the Chinese state is eventually organised on federallines. The powers of political patronage enjoyed by the central government are,however, still considerable and there is a centralising thrust to currenteconomic policy.

Main political figures

Jiang Zemin: President, Chinese Communist Party (CCP) general secretaryand head of the military, Mr Jiang rose to the top because he was the candidatemost acceptable to China’s senior political figures following the popularprotests of 1989 and the military crackdown that ended them. He is nowattempting to fill the role of political arbitrator and senior statesman in theleadership, rather than becoming involved in day-to-day policy imple-mentation. This makes him less vulnerable to policy failure than other front-line figures, such as the premier, Zhu Rongji.

Li Peng: After stepping down as premier in March 1998, Mr Li is nowchairman of the National People’s Congress (NPC) and remains number two inthe political hierarchy. This is despite the unpopularity generated by hispersonal involvement in putting down the 1989 demonstrations. He is likely toforce the pace of legislation through the NPC to keep abreast of the reformprogramme, but uncertainty remains over the state of his health, and a heavyworkload could force his premature departure.

Zhu Rongji: Mr Zhu was elevated to third in the leadership behind Mr Jiangand Mr Li at the 15th congress of the CCP in September 1997, and appointedto the top executive post at the March NPC meeting in 1998. He is, however,not universally politically popular, especially in the provinces where anabrasive and no-nonsense manner has earned him few friends.

Hu Jintao: Mr Hu has made rapid progress in the political hierarchy, and isnow the youngest member of the Politburo Standing Committee (PSC).Appointed vice-president in March 1999, Mr Hu is emerging as the heir-apparent to Mr Jiang. His age makes him acceptable to the younger generationof leading figures at home and overseas. But heirs-apparent have not so farsucceeded in attaining the highest office of state in communist China.

Li Ruihuan: Mr Li is the chairman of the Chinese People’s PoliticalConsultative Conference (CPPCC) and a member of the PSC. He rose fromhumble origins under the protection of key veteran luminaries, including

18 China


Deng Xiaoping, who elevated him to the PSC along with Mr Jiang in 1989.Mr Li can be counted on to keep the CPPCC to its historical role ofinsignificance.

Wei Jianxing: Head of the Central Commission for Discipline InspectionCommittee, Mr Wei was made head of the Beijing municipal party committeefor a period following the ousting of the discredited Chen Xitong. Mr Wei waselevated to the PSC at the 15th CCP congress.

Li Lanqing: Elevated to the PSC at the 15th CCP congress, Mr Li has beenone of the country’s vice-presidents since 1993. He features regularly in themedia, expounding on economic and other issues.

International relations and defence

Foreign relations since 1949 can be divided into four periods. From 1949 to1960 China was in alliance with the Soviet Union, although this relationshipwas already under severe strain in the late 1950s. There followed, in 1960-72, aperiod of isolation, during which China sought to identify itself as a naturalleader of the developing world in its resistance to “US imperialism”. From 1972China found itself in de facto alliance with the US against perceived Sovietexpansionism. That epoch ended in 1989 when relations with the SovietUnion were normalised and the Beijing massacre introduced new and severestrains into Sino-US relations.

Since then, and especially after the collapse of the Soviet Union in 1990, Chinahas tried to project itself on the world stage as the next superpower-in-waiting.Its relations with the US are subject to continual strain over human rights andtrade issues. The demise of the Soviet Union has, if anything, made China’salways uneasy relationship with the US more problematic still. Developmentsin Taiwan are a further irritant. Despite US warnings to Taiwan that an opencall for independence would not get US support, the fact that the US Senateharbours loyalty and support for Taiwan and its fledgling democracy is wellknown on the island and resented on the mainland.

During 1997-98 some ground was laid for a more positive Sino-US relationshipwhen there was an exchange of visits by the Chinese president Jiang Zeminand the US president, Bill Clinton. However, the ground laid in 1998 was lostin 1999, when a number of the bilateral irritants flared up (see box: Sino-USflashpoints). The US Congress’s approval of Permanent Normalised TradeRelations (PNTR) and China’s role in easing tensions on the Korean peninsulahave been positive features of 2000, but many problems remain. China’srelationship with Japan is marked by sensitivities about Japan’s imperial past.There is also a feeling in China that Japanese investment is inadequate andthat Japanese companies are reluctant to transfer technology. Relations withEurope have been cordial by and large, although before 1997 ties with the UKsuffered from disagreements over Hong Kong. In the modernisation of China,the Beijing leadership has found eager help from the large community ofoverseas Chinese in Hong Kong, Taiwan, South-east Asia and even further

Four periods of foreignpolicy

The next superpower

Prickly relations withJapan

China 19


afield. It has tried to stay on good terms with both North and South Korea, afeat that has sometimes proved difficult in the past, but is now standing it ingood stead as a broker of peace between the two. Ties with Russia becamecordial in the 1990s, and the two countries have moved closer together inreaction to shared concerns about US dominance. Relations with countries inCentral Asia are strongly coloured by the fear that Muslim separatists, mainlyfrom Xinjiang province, might find refuge and succour there.

Further afield, China’s newfound assertiveness in pursuit of its territorial claimsin the South China Sea, notably its stationing in early 1995 of militarypersonnel on Mischief Reef, an atoll in the Spratly Islands claimed by thePhilippines, causes consternation in the region. China’s reluctance to agree tomultilateral negotiations on the Spratly Islands, which are claimed by severalAsian countries, and its apparent belief that it can claim to be an archipelagicstate, despite having ratified the UN Law of the Sea, make its behaviour appearirrational. Observers have detected the undue influence of the military in theseareas. Although, as noted, the Chinese military lacks the capacity to pressclaims so far from the mainland (as of 2000, for example, it has no aircraftcarrier), the fact that it undoubtedly intends to acquire such capacity is amatter of concern in the region.

During the development of the financial crises that affected countries in Asiaand elsewhere in 1997-98, China tried to project itself as a good neighbourwilling to deploy resources to preserve regional economic stability. To that end,China contributed to the IMF-brokered rescue packages for Thailand andclaimed credit for not devaluing the renminbi, earning plaudits for its restraintin not setting off a further bout of competitive devaluations after the first waveof the crisis had receded.

China’s behaviour towards Taiwan demonstrates its obduracy about what itconsiders to be an internal matter. The Chinese government sees Taiwan as aninalienable part of China and therefore insists that it is not answerable inworld forums for its conduct vis-à-vis Taiwan. The same is true, but moreimmediately so, of China’s attitude towards Hong Kong.

The private visit of the then Taiwan president, Lee Teng-hui, to the US in mid-1995 infuriated a Chinese leadership already seriously worried by Taiwan’ssuccessful efforts to raise its international profile and thereby bolster its de factoindependence. The process of negotiating trade, investment and commun-ications links across the Taiwan Strait ground to a virtual standstill. Relationsreached a nadir during the run-up to the first direct presidential election inTaiwan, which was held in March 1996. China indulged in military exerciseswith the apparent aim of influencing the outcome of the election byintimidating voters in Taiwan to choose a less assertive president. Contactsbetween the semi-official bodies charged with fostering relations across theStrait resumed only in late 1998. However, relations once again moved to thebrink when Mr Lee said in mid-1999 that bilateral relations should beconducted on the basis of parity, rather than on the assumption that Taiwan ispart of China.

Relations with Taiwan

20 China


A further serious challenge to bilateral relations was posed by the election ofChen Shui-bian as Taiwan’s president in March 2000. Despite his party’srecorded support of formal independence for Taiwan, Mr Chen’s circum-spection since his election has prevented the cross-Strait relationship fromdeteriorating further. As Mr Jiang nears the end of his term as president he isbound to feel himself under ever-increasing pressure to make progress on the“historic task” of reunification, and there has been no real improvement inrelations. Although China is arming as fast as it can, it lacks a realistic militaryoption to reabsorb Taiwan by force. However, it could, despite the economicand diplomatic cost of such action, subject Taiwan to economic blockade andstands ready to resume sabre-rattling at any provocation from Taiwan.

The problems that can often bedevil China’s foreign relationships are apparentin the protracted negotiations towards admitting (or rather re-admitting—China was a founder member of the General Agreement on Tariffs and Trade orGATT) China to the World Trade Organisation (WTO).

From China’s perspective its difficulty in being re-admitted to the WTO, inparticular the fact that it did not join in time to count as a founder member, ispositive proof of discrimination. Chinese leaders have long pointed to the verysubstantial liberalisation of the import tariff regime as evidence of theircountry’s genuine intention to join the WTO. Such liberalisation measuresinclude the reduction of the average tariff rate on imports from 43% in 1992 to17% in 1999, as well as other measures that have opened up the economy.

Sino-US flashpoints

Economic issuesChina’s large trade surplus with the US, which the US regards as being atleast partly a function of various restrictive aspects of the Chinese trade regimeand of dumping and cheating by Chinese exporters.

Military issuesIn mid-1999 long-standing US suspicions that China was gaining access to USmilitary and technological secrets by underhand means appeared to beconfirmed by the findings of a US Congressional report that was madepublic at the end of May 1999, just after the embassy bombing. The reportalleged that China had been systematically stealing nuclear secrets from USlaboratories over the past 20 years. China has angrily denied these allegations,but influential US figures remain unconvinced. The US also strongly suspectsChina of supplying nuclear technology to Pakistan and possibly to other states,despite the fact that China has signed the Nuclear Non-Proliferation Treaty.

From China’s standpoint, the technological superiority of the US military,proved in the Gulf war and in the Kosovo conflict, represents an increasinglyserious threat because of the willingness of the US to share aspects of thistechnology with Japan and with Taiwan. China objects, in particular, to theUS-Japan military guidelines, which it fears will enable Japan to assist any USattempts to protect Taiwan.

Political and diplomatic issuesChina resents what it regards as the hypocritical hegemonism of the US, an

China’s long-drawn-outWTO accession bid

China 21


insistence that all countries follow rules of international engagement that aregenerally defined by the US and work in its interests. It is particularly alarmedby the willingness of the US, using what China regards as the fig-leaf ofinternational organisations, to intervene in the affairs of other countries.

China is resentful about what it sees as US interference in its internal affairs, inparticular on the matter of human rights (of which China offers an alternativedefinition), on Tibet and in many other areas.

The US is frustrated by what it sees as China’s willingness to obstruct thelegitimate aims of the UN Security Council by the use of its veto as one of itspermanent five members.

There is also concern in the US that China has made attempts to influence theUS political process by channelling political funds to support the election ofthe outgoing president, Bill Clinton. China’s belief that the technologicalprowess of the US military is such that the bombing of its embassy in Belgradecannot have been purely accidental is mirrored by a US reflex that assumesthat the activities of Chinese citizens are all at the behest of the ChineseCommunist Party (CCP).

TaiwanThe Taiwan question is potentially the most intractable of the issues that divideChina and the US and is becoming more problematic as Taiwan becomes moreassertive of its de facto independence from China. Although it switchedrecognition in 1982 and has always honoured the principle of “One China”since, the US is still committed, by treaty and by public opinion, to the survivalof Taiwan as a separate entity, as long as opinion on the island favours this. Itcontinues to supply military technology and to offer backing to Taiwan, to therage and frustration of China, which insists that this support constitutes yetmore US interference in the internal affairs of another country.

Trade partners, chiefly the US backed by Japan and the EU, argued that reform,particularly of the services sector, had not gone far enough and that the sheersize of the Chinese economy gave China the potential to disrupt world tradingpatterns. Specific conditions should therefore be attached to China’s entry,binding it to further measures. China argued that its underdeveloped economyentitled it to join the WTO as a developing country, exempt for the time beingfrom some of the measures demanded of WTO members.

In 1999 the momentum behind China’s WTO membership bid increased. InApril the premier, Zhu Rongji, visited the US and made a market-opening offergoing far beyond the scope of concessions previously proposed by the Chineseleadership. However, the US rejected the offer. To make matters worse, the USside released details of the package. This caused an uproar in China as Mr Zhuhad apparently not sought a consensus of support for his offer from interestedChinese parties. Accession negotiations continued for a few weeks, but came toa halt after NATO’s May bombing of the Chinese embassy in Belgrade.

The NATO bombing seemed to end China’s hopes of joining the WTO beforethe launch of a round of global trade talks at the end of November 1999.However, China’s accession bid was revived by a meeting between Mr Jiang

The US and China sign aWTO-related agreement

22 China


and Mr Clinton at the Asia Pacific Economic Co-operation (APEC) forum inSeptember. On November 15th 1999 the US and China finally signed a WTO-related market-opening agreement (see Economic policy box: China’s market-opening agreement with the US and the EU). This was followed, shortly beforethe US Congress passed the Permanent Normalised Trade Relations (PNTR) bill,by an agreement with the EU, which made significant further concessions andclarifications that will be incorporated into China’s overall WTO accessioncommitment.

It was believed that the successful conclusion of these two agreements wouldlead to a fairly rapid resolution of all remaining bilateral issues and thus pavethe way for a speedy finalisation of the protocols needed to enable accessionwith the WTO itself. The former has proved to be true, with remainingcountries swiftly concluding agreements with China. The latter has provedmore difficult. The concessions in the various agreements are such, and theirimplementation will require such complex enabling and monitoring thatChina and the WTO are moving very slowly towards drawing up the finalprotocols, and arguing all the way. There is a suspicion that, in the light of thedisarray facing the WTO after the failure of the meeting in Seattle in late 1999,China is now using delaying tactics to gain more time to prepare the domesticeconomy for the sweeping changes and challenges that the terms it has agreedto will present.

Shortly after the founding of the People’s Republic of China (PRC) in 1949,China became involved in the Korean war on the North’s side. It has also beenengaged in a territorial dispute on its borders with India and a punitiveexpedition against Vietnam. By the late 1990s there were no obvious militarythreats. In 1994 China and Russia agreed not to target each other with nuclearmissiles. The army is now engaged in an expensive programme of modern-isation. It will, however, take China several decades to close the technology gapbetween its armed forces and those of Taiwan or Japan, let alone those of theUS. China’s determination to acquire the potential to project its military powerfar beyond its borders nevertheless gives rise to worldwide concern, heightenedby secrecy about spending on military technology and a refusal, to date, to betied down by any bilateral or multilateral security arrangements.

Military forces in the region, 1999/2000North South

China Japan Russia Korea Korea

ArmyPersonnel 1,830,000 145,900 348,000 950,000 560,000Main battle tanks 8,300 1,080 15,500 3,500 2,130

NavyPersonnel 230,000 43,800 171,500 46,000 60,000Frigates 35 46 10 3 9Submarines 71 16 70+ 26 19

Air forcePersonnel 420,000 45,200 184,600 86,000 52,000Combat aircraft 3,520 330 1,800 593 488

Source: International Institute for Strategic Studies, The Military Balance 1999/2000.

The priorities of themilitary have changed

China 23


The army is most likely to be called on to use its new technology in a conflictover disputed waters and islands in the South China Sea, in a new Koreanconflict, or, conceivably, in the recovery of Taiwan. Under Deng Xiaoping thearmy lost about 25% of its manpower, but the slimmed-down fighting forceremains the world’s largest standing army.

Resources and infrastructure

Population

China’s huge population is both its greatest resource and its greatest challenge.The population grew at an average rate of 1.1% a year in 1993-99, and at theend of 1999 was estimated at 1.3bn. A harsh one-child family policy wasintroduced in 1980 with the aim of limiting the population to 1.2bn by 2000.So unpopular was the policy in the countryside that it was relaxed in manyareas to allow families whose first child was a girl a second chance. China’spopulation is expected to continue growing until the middle of the 21stcentury. (See Reference table 1 for historical population data.)

Population control experts have praised China as a role model because birthrates have fallen, although in the last decade that process seems to have endedas birth rates have reached a natural low. In part, lower population growthrates are attributable to a demographic trough, but foreign and Chinesedemographers credit the family planning drive with “averting” as many as200m births in the 1980s. However, 1986-97 is regarded as a “baby-boomperiod”, a legacy of an earlier baby bulge in the last years of the rule of MaoZedong, who believed in national strength through numbers. It is estimatedthat between 11m and 13m women reached child-bearing age each year duringthis period.

The crude birth rate fell from 37 per 1,000 population in 1952 to 15.2 per1,000 in 1999. The death rate fell from 17 per 1,000 in the early years of thePeople’s Republic to 6.5 per 1,000 in 1999. It is this lag between the sharpdecrease in the mortality rate achieved under communist rule (although withan interruption in the famine years of the early 1960s, when tens of millionsdied of starvation) and the slower drop in the fertility rate that leaves Chinawith its enormous population problem today.

A consequent problem is that the population is ageing. The proportion of theelderly of the total population (defined as males aged 60 and over, and femalesaged 55 and over) increased from 9.3% in 1982 to 10.3% in 1990. One of thereasons families in the countryside found the one-child policy so harsh wasbecause of the traditional obligation of sons to care for their parents in old age.Estimates for 1999 suggest dependency ratios of 25% for children under aged15 and 11.2% for the elderly, over aged 64. The labour force (the economically

The 1986-97 “baby boom”

One-child policy

A falling birth rate

An ageing population

24 China


active population) was estimated at 706m at the end of 1999, and grew at arate of around 1.5% a year in the 1990s.

However, there are, in effect, tens of millions of other new workers in thecountryside. Because large numbers of farm workers are underemployed formuch of the year, industrial growth also raises the expectations of potentialmigrants, who do not figure in the unemployment statistics. It is the pressureof the steady increase in the size of the workforce that, more than any othersingle factor, has dictated the strategy of pursuing high economic growthdespite the attendant social and political risks. (For data on the labour force seeReference table 2.)

Population indicators(m unless otherwise indicated; census results)

1982 1990

Population 1,004 1,131

Crude birth rate (per 1,000 population; %) 20.9 17.7

Natural growth rate (per 1,000 population; %) 14.6 11.2

Average size of household 4.5 4.1

Han Chinese 937 1,039

Minority population 67 91

Sex ratio (male/female; %) 105.5 106.0

Urban population 206.3 296.1 % of total population 20.6 26.2

Population aged 0-14 337.3 313.0

Population of working age 550.9 679.0

Men over aged 60 & women over aged 55 93.0 116.8

Source: National Bureau of Statistics, China Statistical Yearbook.

At the time of the 1990 census China’s population was still dominated byethnic Han Chinese, who made up 91.9% of the total. Ethnic minorities,which include the Zhuang, Turkic groups, Tibetans, Mongols and several dozenothers, had been growing much faster than the Han population, with a 35.8%increase on figures in the previous census (in 1982), compared with 10.9% forthe Han. Some minorities have been granted exemptions from the one-childfamily policy. Tibetan and Mongol nomads, for example, are usually “allowed”three children and often disregard restrictions anyway.

Education

Although, judging by the 1990 census, China had made considerable strides inreducing the number of illiterate people between 1980 and 1990—from 284mto 205m—the provision of basic education remains a problem. Spending oneducation fell as a share of GNP, from 2.5% in 1980 to 2.3% in 1996, accordingto World Bank data, representing a considerable lost opportunity at a time ofrapid economic growth. Many rural schools are inadequately funded, relyingon charges to the local families who send their children there, and there iswidespread truancy and absenteeism, despite a notional nine years of

Ethnic minorities aregrowing quickly

Low attendance insecondary school

China 25


compulsory education. Although primary education is universal, only two-thirds of children of secondary school age attend school. An even biggerproblem is the very small percentage of people in higher education. In 1995only 5% of the people in the relevant age group were enrolled in tertiaryeducation (up from only 2% in 1980, at the beginning of the reform period),according to the World Bank.

China suffers, and will continue to suffer in the future, from an acute shortageof skilled personnel. In part, this is the legacy of the Cultural Revolution, wheneducation was seriously disrupted. It is also owing to years of underfunding ofthe educational system. Under Deng Xiaoping, the prejudice againstintellectual activity encouraged by Mao was reversed. Examination-basedentrance systems were reintroduced for universities and have become highlycompetitive. More than 100,000 students have attended courses abroad, inparticular in the US, but tens of thousands have never returned. In secondaryeducation, the trend in recent years has been towards the development ofvocational schools to prepare students directly for their role in the workplace.In universities, however, the old system of “job assignments” for graduates isbeing abandoned, with university leavers more often competing in themarketplace for work. Funding of education, especially in rural areas, remains aproblem and there is an increasing incidence of children, especially girls,dropping out of primary schools.

Health

The increase in life expectancy since 1949 is partly the result of greatlyimproved healthcare systems. By 1975 insurance coverage and the ruralCo-operative Medical System (CMS) operated by the communes reached nearly90% of the population. Basic healthcare facilities were available to nearlyeverybody, free of charge or at a nominal cost. There was, however, a big gapbetween the facilities available in the big cities and those on offer in poorerrural areas. Now that the communes have disappeared the CMS has virtuallybroken down in many rural areas, leaving the rural population to fend foritself. Only about 10% of the rural population are now covered by community-financed healthcare.

The urban population has been better insulated against the market forcessweeping through the healthcare system. Half the urban population is coveredby health insurance systems, which are being extended to cover the removal ofhealthcare provision from state-owned enterprises, although many still offerthis facility to their workforce. In practice, however, medical care is beingincreasingly commercialised. According to national figures, in 1999 there were1.7 doctors per 1,000 people, up from 0.9 in 1970. There were 2.4 hospital bedsper 1,000 people in 1999, up from 1.3 in 1970 and only 0.2 in 1949.

A lack of skilled personnel

Healthcare is increasinglycommercialised

26 China


Natural resources and the environment

China’s land area totals 9,561,000 sq km. It is notable for the small proportionof land cultivated (only 13.5% in 1999) and the large share of land that isirrigated (40.9% in 1999), reflecting centuries of intensive land use. Anestimated 156.4m ha were sown to crops in 1999. Irrigation efforts in aridwestern areas are failing to keep pace with the loss of arable land to building inthe more fertile areas.

There are three main farming zones:

• south of the Yangtze river, where there is abundant rainfall, two crops ofrice and one of spring wheat, as well as jute, sugarcane and other subtropicalcrops;

• between the Yangtze and Yellow rivers, where a two-crop system of wheatand rice is used; and

• in the north, where the climate is cold and dry, and there is a one-cropwheat system.

China is also well endowed with most minerals and metals. Sizeable reserves offerrous and ferro-alloy minerals support a major iron and steel industry. Chinais a world leader in the production of some 17 minerals, including phosphate,tungsten, molybdenum and titanium.

However, the rate of exploitation of some mineral resources is such that ashortfall looms. A government report issued in October 1997 forecast demandfor iron ore to reach 350m tonnes by 2000, compared with an estimatedmaximum domestic output of 230m-250m tonnes. Copper demand wasexpected to reach 1.3m-1.5m tonnes by 2000, but current annual production ismuch lower, at between 500,000 and 600,000 tonnes. China already has aminerals trade deficit of US$10bn a year, and is the world’s second largestconsumer and third largest importer of minerals.

In 1996 the concept of sustainable development was enshrined in China’sAgenda 21—a document that set policy goals to be met by 2010. Investment inenvironmental projects is set to rise to 1.7% of GDP by 2010, from 0.7% now.In 1996 a white paper on the environment was published and numerous lawswere passed. In 1997 the law on water pollution was revised and a law on noisepollution was passed. The State Environmental Protection Administration(SEPA) became a ministerial-level body and a Ministry of Land and NaturalResources was established, combining the former Ministry of Geology andNatural Resources with other bodies responsible for land use and surveying.The SEPA announced in late 1997 that US$21.7bn would be invested inenvironmental projects up to 2000.

The serious flooding that affected the Yangtze river in mid-1998 focused officialminds on the man-made causes of what appears to be an increase in theincidence of natural disasters, as well as on pollution. Land reclaimed from

A shortfall of someimportant materials looms

Environmentaldegradation

China 27


Dongting Lake in Hunan is to be returned to the lake to reduce the risk offlooding. Afforestation efforts are to be stepped up, especially in Sichuanprovince in the upper reaches of the Yangtze river, to reduce silting.

Air pollution, loss of water and land resources, and destruction of the culturalheritage are, meanwhile, serious and continuing problems and will remain sofor many years. Water shortages in northern China are becoming ever moresevere, the result of inappropriate industrial location policies and excessive useof rivers for irrigation purposes. During 2000 drought affected crops and manycities in the areas affected are rationing water.

Transport and communications

China’s inadequate transport system constitutes a serious obstacle to futureeconomic growth, with virtually every facet of it already run to capacity. Thebackbone of the system remains the railway, which typically carries over one-third of cargo and passengers. Coal transport still clogs the railway system, andthe network is congested and overloaded for both cargo and passengers,especially around the annual Chinese New Year holiday, after which tens ofmillions of migrant workers flock to the railway stations. New railways recentlyconstructed include a 2,381-km north-south link bisecting the existing coastalroute (via Shanghai) and the inland route, the Beijing to Kowloon (HongKong) line that crosses the Yangtze river at Macheng, Hubei, and is expected tobring prosperity to the central inland provinces through which it runs. It wasbuilt in only three years and opened in 1997.

The road network has also failed to keep pace with a rapid increase in thenumber of cars. By the end of 1999 China had 7.4m passenger vehicles. Thelength of the highway network increased to 1.4m km in 1999, compared with1.2m km in 1995. (See Reference table 3 for transport statistics.)

Similar problems affect ports, of which Shanghai remains the most important,accounting in 1999 for 17.7% of sea cargo handled. A new port is to bedeveloped south of Shanghai, and in 1994 a new container port was opened atShenzhen Special Economic Zone (SEZ) neighbouring Hong Kong.

Civil aviation is undergoing a boom, expanding at a rate of 15.5% per year interms of passengers in 1990-99 and 18.5% in terms of tonnage carried. In 1988the national flag carrier, the Civil Aviation Authority of China (CAAC), ceasedto operate as an airline and became a regulatory authority. There are now about30 Chinese airlines, including an international company, Air China, and thenumber of domestic and international routes has expanded drastically, to1,115 in 1999, from 437 in 1990. Not surprisingly, the industry has faced safetyproblems, and the government is encouraging airlines to merge and improveco-operation.

There has been a parallel boom in telecommunications. As late as 1997, havinga terrestrial telephone at home was a privilege, enjoyed by one person in every

Railways

Roads

Ports

Civil aviation

Telecommunications

28 China


four. The number of subscribers to pagers and mobile telephones has sinceballooned. Telephone users (fixed and mobile) reached 109m in 1999, havinggrown by 198% since 1996. Use of the Internet is growing very rapidly and itscontrol is a major preoccupation for the security authorities, fearful of thespread of organised dissidence. The number of Internet subscribers, accordingto official data, rose from zero to 3m between 1994 and 1999, and is expectedto reach between 80m and 100m by 2005. In 1994 China launched its ownfirst commercial satellite, APSTAR 1, owned by a consortium of Chinese stateenterprises with Thai, Hong Kong and Singapore interests. Since 1984 Chinahas launched several satellites for foreign operators.

Energy provision

China is rich in energy resources. The rapid development of these in the 1990sproduced a situation of overall surplus in electricity supply by 2000, althoughlocal shortages persist. China is the world’s largest producer of coal, which isstill the most important source of primary energy, providing about 70% of totaloutput. (For national data on coal, oil and gas production, see Referencetable 4.) Much of the coal is of poor quality and it is a major contributor to airpollution. About 80% of coal deposits are in the north and west, far from theregions where demand is booming and also far from adequate supplies of waterfor coal-washing at the pithead. Small and inefficient coal mines and powerstations are to be closed down in order to reduce pollution.

Onshore oil production, which provided much of the foreign exchange thatfuelled the trade growth of the early 1980s, has expanded only slowly in recentyears. China is now a net importer of crude oil. Efforts since the early 1980s todevelop a big offshore industry have yet to make an impact. Hopes now centreon supposedly vast oil reserves in the Tarim Basin in the far west. Developingthem, and the necessary system for transporting oil to the coast, has become anational priority. Huge pipelines are to be constructed for this purpose.

Natural gas has been discovered in the south, off Hainan, and in Sichuanprovince, but has not as yet made a big contribution to energy supplies. Thereis a wealth of hydroelectric resources and a number of grandiose schemes todevelop more, including the massive Three Gorges Dam project at Sandoupingin Hubei province on which work started in earnest in 1997. The Three Gorgesplant will be at the centre of a new Central China electricity grid; there are,however, considerable doubts as to whether sufficient demand exists for theelectricity produced by Three Gorges and the Ertan hydroelectric station (inSichuan). There are now also two functioning nuclear power plants, and plansto build several more. According to data from the International Atomic EnergyAgency in 1999 China had three functioning nuclear power plants and afurther eight under construction.

Efforts to develop the oilindustry

The world’s largest coalproducer

The Three Gorges Damproject

China 29


Energy balance, 1999(m tonnes of oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Primary supplyProduction 159 22 512 59a 210 962Imports 63 0 1 0a 0 64Exports –14 –3 –21 –2a 0 –40Stock change –1 0 19 0 0 18Total 207 19 511 57a 210 1,004

Processing & transformationLosses & inputs to refining & transformation –210 -10 –261 21 0 –285Transformation output 1,705 0 105 0 280 n/aTotal –40 –5 –261 21 0 –285

Final consumptionTransport fuels 66 0 5 1b 0 72Industrial fuels 24 7 175 52b 0 258Residential etc 37 3 60 25b 210 335Non-energy uses 40 4 10 0 0 54Total 167 14 250 78b 210 719

a Expressed as input equivalents on an assumed generating efficiency of 33%. b Output basis.

Source: Energy Data Associates.

The economy

Economic structure

China is in the throes of a twofold industrial revolution. On the one hand, asin other industrial revolutions, there is and will continue to be movementfrom the countryside to the towns. But an industrial revolution is also beingencouraged in the countryside. While the majority of the labour force isclassified as rural (496m out of a labour force of 706m in 1999), as many as150m of these according to some estimates have moved to cities in search ofhigher pay. Millions more who live in the countryside are not employed on theland. An agricultural survey conducted in 1996 found that nearly one-quarterof the rural labour force had taken employment in rural industry or services.Including dependants, the true peasantry now numbers between 480m and530m. The “non-agricultural village population” included in 1999 about 97memployed in township and village enterprises (TVEs).

The process of industrialising the countryside is encouraged for many reasons:finding non-farm employment for millions in the countryside is vital if theproductivity of agriculture is to rise; established urban centres are alreadylacking in infrastructure; and the existing, already stretched, social controlsystem could not withstand a larger rural-urban migration. Nevertheless such amigration is inevitable in the long run; jobs cannot be produced in the rural

“Leaving the land, but notthe countryside”

30 China


areas in sufficient numbers to absorb the huge surplus labour force and ensurecontinued rapid economic growth well into the next century.

Main economic indicators, 1999

Real GDP growth (% change, year on year) 7.2

Consumer price inflation (av; %) –1.3

Current-account balance (US$ bn) 15.7

External debt (year-end; US$ bn) 164.8a

Exchange rate (av; Rmb:US$) 8.28

Population (year-end; bn) 1.3

a EIU estimate.

Sources: National Bureau of Statistics, China Statistical Yearbook; IMF, International Financial Statistics; EIU, CountryData.

Economic growth has, for many years, been led on the supply side by increasesin industrial output. Even before Deng Xiaoping’s reforms, the Chineseeconomy was characterised by industry’s unusually large share in gross outputvalue. This was particularly striking because so much of the workforceremained on the land. At first, in the early 1980s, the reforms represented ashift of national resources towards agriculture, through a sharp rise in theprocurement price paid for agricultural crops and what amounted to theprivatisation of agriculture. However, by the late 1980s industry’s contributionwas again increasing as parts of the countryside industrialised. Meanwhile,services have also been growing rapidly, as controls on the economy have beenlowered and demand for personal services has grown.

Industry has undergone a fundamental shift. Until 1978 output was dominatedby large state-owned enterprises (SOEs). Since then, much of the boom inmanufacturing output has been produced by “collective” enterprises, under theaegis of local governments, by TVEs or, increasingly, by private entrepreneursor foreign investors either in wholly-owned enterprises or in joint ventureswith Chinese interests. By the late 1990s the share of the official state sector inindustrial output had shrunk to about one-quarter. Nevertheless the statesector tends to contain industries that are the most capital-intensive and oftenthe largest in scale, and financing them absorbs a large share of nationalresources, especially financial resources.


China India Germany US Japan

GDP (US$ bn) 989 435 2,107 9,299 4,351

GDP per head (US$) 786 441 25,549 34,046 34,442

Consumer price inflation (av; %) –1.3 4.7 0.6 2.2 –0.3

Current-account balance (US$ bn) 15.7 –2.8 –19.3 –338.9 106.9 % of GDP 1.6 –0.6 –0.9 –3.6 2.5

Exports of goods fob (US$ bn) 194.7 37.5 543.0 685.3 403.7

Imports of goods fob (US$ bn) 158.5 45.6 471.0 1,030.2 280.4

External debt (US$ bn) 164.8 99.8 n/a n/a n/a

Debt-service ratio, paid (%) 9.1 18.5 n/a n/a n/a

Sources: National Bureau of Statistics, China Statistical Yearbook; EIU, CountryData.

State share of industrialoutput shrinks

The dominant role ofindustry

China 31


The coastal areas on China’s eastern seaboard have benefited from theiraccessibility, their links with overseas Chinese and their more developedinfrastructure. They have consistently achieved far higher rates of growth thanthe western provinces. This trend is by no means new. Western China is inmany places arid, mountainous or otherwise infertile. The main populationcentres have always been the wheat-growing plains of northern China and therice paddies of the Yangtze Delta. The ninth Five-Year Plan aimed to addressthe widening inequalities of wealth and income between the coast and theinterior by concentrating investment, both domestic and foreign, in theinterior provinces, and the tenth Plan (currently being formulated) is likely tocontinue this emphasis.

Economic policy

Throughout the reform era, the priority of economic policy has been tomaintain an overall growth rate high enough to keep unemployment in checkand provide improved living standards for the maximum possible number ofpeople, yet not so rapid that it fuels inflation. There has been considerabledebate about this rate of growth. A consensus emerged in the late 1990s thatan average annual rate of real GDP growth of around 7-8% per year issustainable and necessary for China. At the time of Deng Xiaoping’s lastdecisive intervention in 1992 it was thought that this rate could be as high as10% a year.

In the 1980s and until the late 1990s a major part of the impetus behind rapidgrowth was the incremental role of economic reforms. The effectivedismantling of the rural commune system in the early 1980s, the raising ofprocurement prices for agricultural commodities and the removal of a panoplyof controls and quotas, for example on most prices, were accompanied by theprogressive opening of enclaves of economic activity to foreign trade andinvestment. The result was the unleashing of energies previously suppressed,including an investment hunger that exacerbated existing infrastructure andsupply bottlenecks and helped, on several occasions, to fuel economicoverheating and inflation.

The reform process remains incomplete. In the mid-1990s it was announcedthat the goal was to move towards a “socialist market economy”, but theprecise delineation of such an economy has remained blurred. The “socialist”connotation remains important, as the “state sector” is officially considered toform the backbone of the economy, particularly in the industrial sphere. Ahybrid economy seems to be envisaged, one in which ownership of the mostimportant fixed assets, land and natural resources, remains vested in the state,but management, for example in the case of family farms, can be devolved tothe private sector. Large and important enterprises, including industrial andfinancial enterprises of national importance, will continue to be managed bythe state, and will be encouraged to merge into nationwide conglomerates.However, large chunks of ownership of major state-owned corporations arenow being disposed of by massive share flotations, both in China and abroad.

Economic policy prioritisesgrowth

Inland regions lose out

The reform process isincomplete

32 China


Smaller enterprises will be subject to private, collective and other hybridownership structures, including foreign ownership.

In place of the administrative orders, quotas and procurement that charac-terised the economy in the pre-reform era, market signals will predominate.Most prices have been decontrolled and the participation of foreigninvestment in many sectors of the economy will be permitted, especially afterChina’s accession to the World Trade Organisation (WTO). The state will standback from many of its previous areas of direct control, and will, eventually,encourage the channelling of personal savings into investment by the creationof effective national capital markets. The various forms of ownership currentlyrecognised—state (national), collective (an entity owned by its participants),private and foreign—will be allowed to coexist in various combinations andpermutations.

Recent reforms: a brief chronology

1995: New commercial banking law; People’s Bank of China (PBC) law;provisional regulations guiding foreign investment; insurance law; move to afive-day week; legislation to regulate the securities and debt markets;announcement of tariff reduction of 30% for 4,000 of 6,000 lines; 179 non-tariff barriers (30% of total) to be replaced with tariffs.

1996: Programme of transforming 1,000 enterprises into fully autonomouscorporations announced; smaller enterprises to be encouraged to merge;average unweighted tariff falls to less than 23%, with implementation ofreductions from April.

1997-99: Experimentation with different forms of ownership, including joint-stock shareholding, is declared to be compatible with socialism; it becomesclear that the authorities are willing, indeed eager, to countenance the merger,closure or privatisation of thousands of smaller state-owned enterprises (SOEs)while ensuring retention by the state of its majority stake in larger enterprisesand its total control of around 500 of the very largest enterprises. Thegovernment slashes the number of industrial ministries.

1999-2000: Progress is made in restructuring SOEs. It is reported that of the6,599 large and medium-sized SOEs, 52.5% are in the black and that the sectoroverall made profits of Rmb4bn (US$477m) in the first five months of 2000.This improvement results from a continuing process of merger andrestructuring, layoffs, interest rate reductions, and placing large amounts ofnon-performing loans in asset management corporations, thus removing baddebts from the books of banks and their creditors. There is also progresstowards the creation, through mergers and other alliances, of largeconglomerates, some of which raise capital on international stockmarkets.

Many parts of the economy have now slipped the leash of central state control.The government has some difficulty in maintaining macroeconomic controlwhen, on the one hand, its fiscal and monetary policy levers remain deficientand, on the other, its formal power to run the economy by administrative fiathas been eroded. The reform period has led to the devolution of economicdecision-making powers, including command over resources, from central to

State control over theeconomy is reduced

China 33


provincial, and even more to subprovincial, government entities. The latterseek to maximise the employment and revenue-generating potential ofenterprises under their control or influence. They often compete for resourcesand much of their economic behaviour has undesirable consequences.

The progress of reform has rendered fiscal and monetary policy instrumentsmore effective tools of macroeconomic management. Since 1997 they havebeen used to stimulate the economy. The effects of the Asian currency crisis onexport demand, combined with very sluggish domestic consumer spending,threatened to reduce economic growth below the rate considered compatiblewith continued social stability. As a result, demand-boosting measures wereintroduced from mid-1997. Interest rates were reduced on seven occasionsbetween May 1996 and June 1999.

The response of the economy, in particular of consumers, to these signals hasbeen muted, and there has been a considerable lag between the application oflooser monetary policy and an economic upturn. In November 1999, in afurther bid to stimulate consumer spending, withholding taxes on savingsdeposits were introduced, at a rate of 20%. These moves had some impact onthe level of private savings, and also on retail demand. In addition, from 1997there has been a large-scale infrastructure spending programme, valued atabout US$2bn, that has been stimulating investment and increasing thespending and borrowing of the central government. During 2000 thegovernment helped to stimulate an acceleration in retail spending byextending two national holidays into week-long holidays during whichconsumers were enjoined to engage in internal tourism and shopping. (SeeReference table 5 for government finances data; for money supply and creditdata see Reference table 7.)

In part, the rising budget deficit has been the product of the reformsthemselves—the growing expense of subsidising both urban consumer pricesand loss-making SOEs—as well as an inadequate tax take. There has also been acontinuing debate about the division of tax revenue between Beijing andprovincial and lower-level governments. In 1994 a reform of the tax systemwas undertaken, designed both to redress what was seen as an imbalance infavour of provincial governments and to clarify and simplify a system ofbewildering complexity. From that year the central government pledged that itwould cease to monetise its deficit by borrowing from the People’s Bank ofChina (PBC, the central bank).

Revenue rose more sharply than expenditure in 1994-96, reducing the growthof the deficit. However, the true public-sector deficit is much higher than the3% of GDP that the 1999 figures imply: borrowing is treated in thegovernment’s finances as revenue; many of the public sector’s financialobligations, for example, military expenditure, are not fully recorded in thebudget. The deficit also does not take account of the high and rising cost oflending through the banking system to loss-making SOEs.

A growing budget deficit

Fiscal and monetary policy

34 China


Budget, 2000(Rmb bn)

1999 2000 %Actual Budget change

Total state revenue 1,137.7 1,233.8 8.4Total state expenditure 1,313.7 1,463.7 11.4Balance –176.0 –229.9 30.6

Central revenue 639.6 690.4 7.9Central expenditure 819.3 920.3 12.3Balance –179.7 –229.9 27.9

Source: Xinhua, quoting finance minister’s speech to the National People’s Congress.

The World Bank argues that more accurate representation of governmentactivities is provided by the concept of the consolidated government deficit.This consists of the fiscal (budget) deficit plus the part of the PBC lending tothe financial system that finances the government-directed expenditure of theSOEs. Calculated in this way, the consolidated annual government deficit isestimated to be 5-6% of GDP.

As noted above, the process of reform of the state-owned sector of theeconomy is far from complete. Nor does it proceed at a regular pace. In early1997 before the Asian crisis began to affect China and while domestic demandwas still growing strongly, the premier, Zhu Rongji, set 2000 as the deadline forthe substantial completion of the restructuring, by closure, merger or sale, ofhundreds of SOEs. Since many, perhaps most, of the 100,000-odd SOEs werelosing money, this implied the reform promised to save the governmentsubstantial sums, but would also lead to a sharp increase in unemployment. Asgrowth started to slow, it is not surprising that the authorities, especially inareas where large-scale, loss-making industry predominates, have been lessthan enthusiastic about seeing though these industrial reforms. The processgathered considerable momentum in 1999-2000, with several specific sectors,including coal mining, textiles and steel, facing restructuring and capacityreduction. As the country faces the prospect of stiffer competition fromimports after China joins the WTO, reform efforts are likely to be intensified.

Because they have traditionally been used to channel investment to the state-owned industrial sector, the state banks are burdened with large amounts ofnon-performing debt. Estimates of the size of this debt range upwards ofUS$200bn. Most banks are probably insolvent when judged by internationallyaccepted accounting standards (although newer institutions have sounderbalance sheets and have been subject to less political intervention in theirlending practices). The banks have been allowed to build up such large stocksof bad debt by the high propensity of Chinese citizens to save. Thegovernment cannot, however, rely on consumers to keep saving. The poorcondition of the state banks’ balance sheets also restricts their ability tosupport economic growth in China. The authorities have therefore beenattempting to resolve the bad loan problem, for example by establishing assetmanagement companies for the main state banks.

Pursuing reform of thestate-owned sector

Financial restructuring

China 35


One of the problems facing investors in China is the high degree ofuncertainty and confusion that still surrounds the legal status of economicentities and transactions between them. As part of the process of bolstering therule of law a raft of legislation covering matters such as land ownership,contract and securities has been prepared in recent years, and more is on theway. But there is still much more to be done both in the field of legislation andeven more in the recruitment and training of a professional legal cadre.

One of the reasons why it is so difficult to tackle the issue of SOE reform is thatthe welfare benefits—such as education, housing, healthcare and evenpensions—have traditionally been the responsibility of enterprises. This hascontributed to a very rigid labour market and has burdened enterprises withlarge fixed costs. These welfare functions are now being divested. Some arebeing hived off into separate service companies. Others are being assumed bythe state, which generally means local government. This is an onerous burden,especially in the old industrial rustbelt areas of the north-east, where theeconomy is dominated by SOEs. Pension and health insurance schemes bypayroll deductions are also gradually being established.

China has been remarkably successful in attracting foreign investment. By theearly 1990s it was the largest recipient of foreign direct investment (FDI) in thedeveloping world. At first, a cordon sanitaire was erected around foreigninvestments, with the establishment in 1980 of four special economic zones(SEZs) in the south, offering tax and other incentives. Such privileges were laterextended across most of the country. By the 1990s, and especially after DengXiaoping’s “southern tour” in 1992, localities were competing with each otherto offer foreign investors the most attractive terms. From 1979 to the end of1999, 341,538 enterprises received approval to receive foreign capital, andcontracted FDI totalled US$613.7bn, of which US$307.6bn was actuallyrealised. Of this latter figure, about 80% went to coastal areas and provinces,with Guangdong province alone accounting for over 20% of total investment.In the early 1980s FDI represented an insignificant proportion of GDP and alsoof industrial production and fixed capital investment; by 1998 it constituted13% of all fixed investment and produced one-quarter of national industrialoutput measured by value.

The largest source of foreign funds was Hong Kong, with over half of totalinvestment. In more recent years the volume of investment from Hong Konghas included a sizeable but unknown proportion of mainland Chinese money;in order to qualify for tax exemptions and to make it easier to take capital outof the country, a large number of Chinese investors have established HongKong shell companies and posed as “foreign investors”, so-called roundtripping. Taiwan, with about 8% of the total, comes after Japan, but the actualamount from Taiwan is larger because the restrictions imposed by the Taiwangovernment mean that most of that investment is also routed through HongKong. The share of “foreign” capital in China of overseas Chinese origin ishigh—higher still if ethnic Chinese investors from the US, Canada, Thailandand Australia are included.

The legal framework

Providing a welfare net

Opening to the outsideworld

Hong Kong as a conduit toinvestment

36 China


In 1979-99 the US was the second largest foreign investor with 8.3% of thetotal, after Hong Kong with 50.3%, and just before Japan and Taiwan, eachwith about 8%. These percentages, however, understate the importance ofinvestment by industrialised countries, which tends to be in higher value-added sectors involving a degree of badly needed technology transfer, ratherthan in the labour-intensive processing and assembly operations favoured byinvestors from Hong Kong and Taiwan, which have helped to fuel the boom inTVE output along the eastern seaboard.

The government has announced its wish to level the uneven playing fieldbetween domestic and foreign investors. One reason for this is a feeling thatthe economy has matured to the point where special incentives are no longerneeded to attract foreign funds, as overseas investors will seek entry to Chinasimply because of the potential of its vast market. There is also a pressing needto improve the government’s fiscal position by being able to tax all enterprisesat the same rate and a desire to bring an end to “round tripping”. Although thetiming of the change has not been made clear and exceptions will also begranted by the many authorities at lower levels, “national treatment” is alreadybeing offered to foreign capital in Shenzhen. This will mean forfeiting taxprivileges in exchange for better access to the domestic market.

The slowdown in the rate of contracted investment—contracted investmentfell by 20% year on year in 1996 and by 31% in 1997, before a slight rise of2.2% in 1998 and a further fall of 21% in 1999—prompted the government torethink this policy, or at least its timing. The removal of duty exemptions oncapital goods imports for foreign-invested enterprises from April 1997 is said tohave deterred new investment commitment and so was reversed. At the sametime, the sluggish state of domestic demand in 1998-99 prompted thegovernment to take action to close off sectors such as telecoms and retailing,that foreign companies are keen to penetrate. These measures will, however, bereversed when China joins the WTO. The market-opening measures that thegovernment will have to implement after acceding to the trade body willprobably result in renewed FDI inflows to China (see box).

Meanwhile, the government is going to have to offer incentives and sweetenersto lure foreign investment, especially for projects with long payback periods,into the interior of China, where infrastructure is poor. Incentives willcontinue to be a feature of the investment regime for some time. (For data oninvestment in assets, see Reference table 6.)

The Chinese currency, the renminbi, is still not fully convertible, although theauthorities have emphasised that convertibility is the ultimate goal. For mostof the 1980s they adopted what amounted to a policy of parallel exchangerates. An “official” rate covered the imports of some SOEs and currencyconversions by foreign residents and tourists, who had their own legal tender,called foreign-exchange certificates (FECs). Meanwhile, a growing share offoreign trade was conducted at a lower rate closer to a true market price,available on a number of “swap” markets. Usually, there would be a thirdparallel-market rate as well, reflecting the demand for foreign exchange. At theend of 1993 the swap and official rates were merged and FECs abolished. A

Currency stability

Fewer incentives forforeign investors

China 37


primitive interbank market was set up, although most traders still foundthemselves having to use the swap markets.

On December 1st 1996 the Chinese government established the de factoconvertibility of the currency on the current account by announcingconformity with the requirements of Article VIII of the IMF agreement.Convertibility on the capital account, which has been the aim of thegovernment, has been put off as a result of the global currency marketvolatility of 1997 and 1998 (see Foreign reserves and the exchange rate).

Terms of the Sino-US and Sino-EU Agreements on China’s WTO entry

Industrial TariffsUS: Industrial tariffs to fall from an overall average of 24.6% in 1997 to an overallaverage of 9.4% by 2005. Tariff cuts to 7.1% on US priority products, mostly by 2003.EU: Specific upper limits and time scales for a number of products accounting for largeshares of EU exports, including machinery and appliances, cosmetics, footwear,ceramics, and glass.

Information Technology (IT)US: Tariffs on IT products to be removed by 2005, from a current average of 13.5%.

Automobile sectorUS: Tariffs on cars to be cut to 25% by 2006, from 80-100%, and tariffs on parts by anaverage of 10% by 2006.

TextilesUS: Safeguards to remain in place until end-2008, after the WTO Agreement on Textilesand Clothing expires.

Agricultural productsUS: Overall tariffs to fall to 17% by 2004, and on US priority agriculture products tariffsto fall from an overall average of 31.5% to 14.5% by January 2004.EU: List of specific products to have reduced tariffs, including wine, spirits and pasta.

QuotasUS: Quotas and quantitative limits to be removed within five years; top US priorities tobe unrestricted on accession. Car quotas to be out by 2005; meanwhile, the level togrow by 15% a year. 20 films to be imported each year.EU: Quotas on fertiliser NPK and rape oil eased.

In 1997-98 when many countries saw their currencies depreciate steeplyagainst the US dollar, China came under conflicting pressures in its currencymanagement. On the one hand, large sections of domestic industry, cut offfrom export markets and threatened at home by inflows of cheap imports,pressed for an early devaluation of the Chinese currency to restore thecomparative competitiveness of exports. On the other hand, there was a fearthat devaluation would worsen the debt-service burden of many enterprisesthat had assumed foreign-currency obligations and did not enjoy foreign-exchange revenue streams. There was also a perceived need to protect, to the

De facto currencyconvertibility in 1996

38 China


extent possible, China’s good name and comparatively high credit rating. Astime went on the commitment to stability became an article of national prideand as such currency policy became a matter of politics rather than economics.Now that the Asian crisis is over Chinese leaders have put the issue back in therealm of economics.

Like other developing countries, China has used tariffs and taxes and non-tariffbarriers on imports—and, to a lesser extent, on exports—as a policy tool. Non-tariff barriers include controls, canalisation, the trade plan, and the export andimport licensing system. Tariffs are not an important source of govern-ment revenue.

In the early 1990s China’s average tariffs were among the world’s highest: theweighted average most favoured nation (MFN) tariffs were 30.6% in 1991-93.Under the reductions that were announced at the 1995 meeting of the Asia-Pacific Economic Co-operation (APEC), the trade-weighted average tariff fellfrom 28.1% to 19.8%, and it currently stands at 17%. The variability of thetariff regime is also being reduced, although effective rates of protection inmanufacturing are high and variable, and protection will remain high in heavyindustries. Non-tariff barriers, meanwhile, are fairly extensive.

In recent years, progressive measures have been made to liberalise, simplify andstreamline China’s trade regime. A foreign trade law was promulgated in 1994,but couched in very broad terms. During 1995 a number of enablingregulations designed to bolster China’s application to join the WTO wereannounced, including cuts in tariffs. The mandatory plan for exports has beeneliminated, although the state retains control through canalisation andlicensing of a few goods that are still classified by category. China’sforthcoming entry to the WTO will lead to a further improvement in the traderegime, with foreign firms being allowed greater access to the domestic market(see box). Despite the improvements that will follow accession, however,China’s trade regime will remain far from perfect. Barriers to trade at the locallevel are likely to remain significant even after China has joined thetrade body.

Services

Telecommunications

US: Telecoms service corridor to open immediately in Beijing, Shanghai andGuangzhou; all geographical restrictions on paging to be removed now, and onmobile/cellular in five years and value-added services in two years.EU: The Beijing-Shanghai-Guangzhou inter-city market to be opened;liberalisation of domestic-leased circuit services and increased competition inthe provision of international corporate communications.

Insurance

US: Over five years the scope of foreign insurance activities to be increased toinclude group, health and pensions. All geographical restrictions to be removedin three years and foreign property and casualty firms to be unrestrictednationwide on accession. Licences to be awarded solely on prudential criteria.

China joins the WTO

Use of trade barriers as apolicy tool

China 39


EU: Scope of business to expand within two years to allow health, pension,and group insurance and all non-life except statutory. Faster opening ofShenzhen and Foshan; brokers allowed to undertake large-scale commercialrisk and reinsurance.

Banking

US: Full market access for US banks within five years; foreign banks to conductlocal-currency business with Chinese enterprises two years after accession andwith individuals five years after. All restrictions on geography and customers togo in five years and national treatment for foreign banks in designated areas.EU: Zhuhai banks to accelerate access to domestic market. Distributors andother non-financial institutions to be allowed to provide credit for trucks,tractors and motorcycles.

Tourism

US: Hotels allowed full access to the market. Travel agents to provide full rangeof services. Government resorts to be open to travel agents as well as Beijing,Shanghai, Guangzhou and Xi’an.EU: Faster opening and corporate services allowed.

Audio-visual

US: Foreign enterprises to be allowed to distribute video and sound recordings.

Legal

US: Foreign firms to be allowed majority control except for practising Chineselaw.EU: Foreign firms to provide services in Chinese law. Foreign lawyers toinstruct Chinese lawyers. Experience requirement of local managers reduced.Solicitors to be covered by the agreement.

Accountancy

US: Mandatory localisation requirement to be removed and transparency to beimproved.EU: No need for local partner, and consulting, accounting and taxationservices to be allowed.

Architecture

EU: Crossborder services to be provided.

Market Research

EU: Current controls on confidentiality to be relaxed.

Investment-related measures

Vehicles

US: Non-bank foreign financial institutions to be allowed to provide carfinancing and liberalisation of importation, distribution, sale, repair andmaintenance.

40 China


EU: Freedom to decide product range within two years; reduction of red tape.Wholly-owned foreign enterprises to be allowed in engine manufacture.

Telecoms

US: In value-added and paging services 49% foreign ownership in year one,50% in year two. In mobile services 49% foreign ownership in five years.International and domestic mobile services to allow 49% foreign ownership insix years.EU: Foreign investment in local mobile operators of 25% in year one, rising to49% within three years. Resolution of Unicom claims.

Insurance

US: In life insurance 50% foreign ownership, for non-life, branches or 51%foreign ownership and wholly-owned foreign subsidiaries within two years.Reinsurance to open after accession.EU: Allow effective control of equal share joint ventures. Grant of seven newlicenses, five life and two non-life, and additional two companies to be allowedto open in a second city. Brokers to be unrestricted within five years.

Distribution and auxiliary services

US: Rights to distribute in rental and leasing, air courier, freight forwarding,and storage, and restricted sectors to be opened so that all restrictions onauxiliary services are removed within three to four years.EU: Large retailers’ equity shares will no longer be restricted to 50%.

Tourism

US: Hotel operators to be allowed 100% foreign-owned hotels within threeyears.EU: Capital requirements to be eased to parity with local investors at parityand minimum annual turnover to be reduced for qualification as foreigninvestors.

Construction

EU: Foreign majority on joint ventures on accession, and wholly foreignventures to be allowed to carry out projects financed by foreigners within threeyears.

Audio-visual

US: 49% foreign participation in distribution joint-ventures, and foreignersallowed to invest in cinemas.

Other

National treatment

EU: Specific commitment to national treatment under WTO principles inpharmaceutical pricing, after-sales service of imported goods, retail of importedcigarettes and spirits.

China 41


State trading

US: Private trade in agriculture and new rights to import and distribute.EU: Gradual opening of silk, fertilisers and oil products sectors to privatetraders.

Sanitary and phytosanitary measures

US: Agreement on Sanitary and Phytosanitary measures and elimination ofnon-scientific barriers. EU: Agreement concluded.

Export subsidies

US: Subsidies on agricultural products to be removed. EU: Export subsidies on industrial goods to be removed and on offsetrequirements in civil aircraft.

Internal trade was discouraged by the autarkic policies encouraged in the pre-reform era. This led to a widely dispersed industrial development structure inwhich each province sought to produce as wide a range of goods as possible.Internal trade has now been stimulated by reforms and the greater economicspecialisation that has accompanied liberalisation. But some local governmentsseek, illegally, to erect internal trade barriers, both to collect taxes on cross-provincial trade and to protect local producers.

Economic reform itself has also tended to reduce internal trade in some goods.The comparatively developed eastern seaboard, which is the springboard ofexport-oriented manufacturing, is becoming more closely linked to regionaltrading partners than to the interior of China. This is exemplified by the lowdomestic value added in many assembly operations. For example, in 1991imports for processing represented 77% of the value of processed exports. Thecurrent tariff structure exacerbates this because it allows relatively high-costproduction of intermediate inputs to continue for the domestic market,encouraging exporters to favour imported intermediates. Exemptions onimport duty for export processing had been so important that the value ofexports associated with concessional imports had reached 64% of the value ofmanufactured exports in 1993.

It will be evident from the above that the process of policy formulation andimplementation is in a state of flux. While the broad thrust of policy, towardsthe market, is generally agreed, there are twists and byways along this path.Preservation of stability periodically takes priority over reform. The centralgovernment is also engaged in a continuing low-level battle with localgovernments to have its policies implemented in cases where they do notcoincide with local interests. In the countryside, in particular, local officialsoften abuse their power by extracting illegal fees and levies from an angrypeasantry and the central government can do little more than fulminateagainst such practices.

In reaction to the autarky of the pre-reform era and the devolution ofeconomic power during it, there is a centralising thrust to much economic

Centralisation as a policytool

Stimulation of internaltrade

42 China


policymaking and an attempt to redefine and reimpose nationally determinednorms on a wide range of activities. The use of fiscal and monetary policy is anexample of this thrust, but the central government reported in 1999-2000continuing and widespread misappropriation and abuse of funds by localgovernment officials throughout the country and appears to be havingconsiderable difficulty in preventing this.

Drafting and revising the next, tenth, Five-Year Plan (2001-05) is now wellunderway and was agreed at the annual seaside gathering of the leadership atBeidaihe in August. It is expected that the plan will be mainly indicative andthat its priorities will include the development of inland areas and preparationof the industrial and financial sectors for WTO membership.

Economic performance

China’s striking—and, in recent years, spectacular—rates of real economicgrowth have been led, on the supply side, by huge increases in industrialproduction and, on the demand side, by a combination of rapid growth inpersonal consumption and consistently high rates of fixed investment. (SeeReference tables 8-10 for GDP data.) This investment has been made possibleby very high domestic savings rates that have been placed largely with theformal banking sector and used to keep state-owned industry afloat. However,the statistics should be treated with some caution. The Chinese mediathemselves have carried official complaints about the inaccuracy of the datathat make up the national growth figures. In particular, local officials andexecutives have been accused of inflating production figures in order to curryfavour with their superiors. It is also unclear whether the value figuresproduced as evidence of “real” growth have been deflated in a rational orconsistent way to take account of inflation. The fact that a growth rate of 7.8%in 1998 was regarded as tantamount to recession and that the 7.2% of 1999was achieved only by dint of vigorous pump-priming is another sign that theindustrial output-led GDP data may be misleading.

Gross domestic product(% real change)

Annual average1999 1995-99

Private consumption 5.0 6.5

Government consumption 7.0 6.9

Gross fixed investment 7.0 10.8

Exports of goods & services 7.1 9.9

Imports of goods & services 13.5 9.0

GDP 7.2 8.8 Agriculture 2.7 3.8 Industry 8.5 10.9

Source: EIU CountryData.

The tenth Five-Year Plan

Official statistics areunreliable

China 43


Nevertheless there is no doubting the vibrancy of economic activity in China.The boom of the early 1990s was fuelled by huge increases in investment,much of it destined for property development and manufacturing industry.The boom in this sense differed from the two earlier peaks in China’s economiccycle that have occurred since the reforms were launched in 1978. Those surgesin output had been led on the demand side by increases in consumptionfollowing the austerity of the Cultural Revolution and by rapid rises in ruraldisposable income.

Hence, as it became clear in mid-1993 that the economy was in danger ofseriously overheating, the rate of investment growth became a prime target ofgovernment concern. The problem was exacerbated by the diverse sources offunds available to the localities. Senior officials in Guangdong, for example,noted that central government austerity had little effect on them, since theyraised about one-third of their funds from their local tax base, one-third fromthe local banking system and one-third from abroad.

In the 1990s the government wanted to break out of a “boom-bust” cycle—periods of rapid growth accompanied by rising inflationary pressures andfollowed by sharp slowdowns in periods of retrenchment. There was muchdebate about achieving a sustainable rate of annual economic growth. Theeighth Five-Year Plan, produced in 1991, and a Ten-Year Development Strategy,produced in the same year, estimated this growth rate at around 6%. Anyfaster, it was argued, and the shortcomings of infrastructure development andof basic industries, such as agriculture and energy, would lead to intolerableinflationary and social tensions. However, this strategy was abandoned in 1992by the then paramount leader, Deng Xiaoping. Double-digit growth came to beseen as sustainable, desirable and even essential in order to create theopportunities China’s massive population was coming to expect. Once again,however, when overheating became a serious problem in 1993-95 theauthorities decided that sustainable growth would be in single digits, this timeat 8-9%.

Rapid growth, until 1996-97, led to high rates of price inflation (see Referencetable 11), although the overall retail price index has tended to understate theextent of inflation in urban areas, where it is most felt among civil servantsand others on fixed salaries. In 1994 overall national retail price inflation wasnearly 22% per year, a rate previously seen only briefly in 1988, when it helpedto provoke panic buying and hoarding. Austerity measures, mainly admini-strative, aimed at cooling down the economy were applied in mid-1993 buthave been relaxed since 1996, when interest rates and reserve requirementswere adjusted to give relief to state-owned enterprises (SOEs) and banks.Inflation was reduced to single-digit rates in 1996 and the fairly sharpslowdown in domestic demand growth that has been in evidence since mid-1997 contributed to falling consumer prices in 1998-99. Indeed, thegovernment now fears a deflationary spiral and is seeking to boost growth andto discourage saving.

Inflation has beensuppressed

Growth of 6-8% is desired

Investment-led growth inthe 1990s

44 China


Inflation(% change, year on year)


Overall retail prices –3.0 3.0

Overall consumer prices –1.4 5.0

Urban consumer prices –1.3 5.2

Rural consumer prices –1.5 4.9

Farm products purchasing prices –12.2 –0.7

Rural retail prices of farm products 0.7 3.2


From mid-1993 efforts were made to slow the pace of growth, especially ofinvestment, by means of a tight credit policy, supplemented by the impositionof price controls on food in the cities and towns. This, and an increasedreluctance by banks to fund the working capital and investment of SOEsunable to meet their debts, helped to slow the rate of GDP growth to 9.7% in1996 and further to 8.8% in 1997, 7.8% in 1998 and 7.2% in 1999, after anannual average of 12% in 1991-95. Radical reform of the SOE and financialsectors is required to keep growth in the desired 7-8% range that is likely to bethe target during the period of the next, the tenth, Five-Year Plan (2001-05). Inthe short term, slowing or halting the process of rationalisation of the SOEsand the banks will boost growth by keeping employment levels up andsupporting industrial output growth, even if SOEs are producing for thestockpile. In the long run the diversion of scarce resources to such ends willconstrain the growth of total factor productivity.

Regional trends

Under Mao Zedong regional policy was torn between the conflicting ideals ofegalitarianism and local self-sufficiency, which are in conflict because of thepoverty, inaccessibility and inhospitable terrain of most of the interiorcompared with the more fertile coastal deltas and plains. The contradiction hasbeen exacerbated by the reforms. The coastal areas have been far more able toachieve rapid growth. Guangdong province and the Pearl River Delta, inparticular, bordering Hong Kong, have been able to tap that territory’s wealthof capital, technology and entrepreneurial skill.

Further north, the Yangtze Delta is the focus of an effort to create a foreigninvestment-led boom like that in the Pearl River Delta. Shanghai wouldbecome the “dragon’s head”, or the Hong Kong of central China. Shandongand the north-east are also well placed to capitalise on growing links withJapan and South Korea. Taiwan’s growing investments in China have tended tobe concentrated in Guangdong and in Fujian, just across the Taiwan Strait.

However, the interior provinces have been left behind. The hope thatdevelopment in the coastal areas would “trickle down” to the inland regionshas not been entirely misplaced. In particular, tens of millions of migrantworkers send remittances back home. But some official Chinese commentators

Reforms exacerbateregional disparities

Interior provinces are leftbehind

China 45


have claimed that capital is being drained out of the poorer regions to invest inthe coastal boom towns. In 1997 a serious effort to draw investment, bothdomestic and foreign, into central and western China, got under way and ishaving some success.

Gross domestic product by region, 1999

Population GDP GDP/head GDP/head(m) (Rmb trn) (Rmb) (US$)

Beijing 12.6 217.4 17,254.0 2,078.8

Tianjin 9.6 145.0 15,104.2 1,819.8

Hebei 66.1 456.9 6,912.3 832.8

Shanxi 32.0 150.6 4,706.3 567.0

Inner Mongolia 23.6 126.8 5,372.9 647.3

Liaoning 41.7 417.2 10,004.8 1,205.4

Jilin 25.6 166.9 6,519.5 785.5

Heilongjiang 37.9 289.7 7,643.8 920.9

Shanghai 14.7 403.5 27,449.0 3,307.1

Jiangsu 72.1 769.8 10,676.8 1,286.4

Zhejiang 44.7 536.5 12,002.2 1,446.1

Anhui 62.4 290.8 4,660.3 561.5

Fujian 33.2 355.0 10,692.8 1,288.3

Jiangxi 42.3 196.3 4,640.7 559.1

Shandong 88.8 766.2 8,628.4 1,039.6

Henan 93.9 457.6 4,873.3 587.1

Hubei 59.4 385.8 6,494.9 782.5

Hunan 65.3 332.7 5,094.9 613.8

Guangdong 72.7 846.4 11,642.4 1,402.7

Guangxi 47.1 195.3 4,146.5 499.6

Hainan 7.6 47.1 6,197.4 746.7

Chongqing 30.7 148.0 4,820.8 580.8

Sichuan 85.5 371.2 4,341.5 523.1

Guizhou 37.1 91.2 2,458.2 296.2

Yunnan 41.9 185.6 4,429.6 533.7

Tibeta 2.6 10.6 4,076.9 491.2

Shaanxi 36.2 148.8 4,110.5 495.2

Gansu 25.4 93.2 3,669.3 442.1

Qinghai 5.1 23.8 4,666.7 562.2

Ningxia 5.4 24.1 4,463.0 537.7

Xinjiang 17.7 116.8 6,598.9 795.0

All Chinab 1,259.1 8,191.0 6,505.4 783.8

a Includes military personnel. b 1997.


The 1994 tax reforms represented an attempt by the central government tosecure some of the benefits of increased growth by redistributing tax receipts.The system of revenue collection and sharing between centre and provincesbegan to be streamlined. For the first time, the finance minister’s budgetspeech included a breakdown of the division of revenue and expenditurebetween Beijing and the provinces.

1994 tax reforms

46 China


The figures show that the central government made a net transfer to theprovinces in 1994 of Rmb150.6bn (US$17.5bn), which rose to Rmb225.1bn in1997. It also shouldered the entire budget deficit. Since it is not known whatarrangements were previously applied, it is impossible to judge how thecentre’s relative position has changed. However, the figures demonstrate thatthe cost to the centre of subsidising the poorer provinces, which are largely inthe interior, far outweighs the transfers from locally collected tax revenue inthe surplus provinces of the coastal seaboard. At the time, it was reported thatthe intention was to increase the centre’s share of total tax revenue fromaround 30% to around 60% over a period of years.

Economic sectors

Agriculture and forestry

Hailed as a spectacular success when they were initiated, the agriculturalreforms of the early 1980s faced criticism a decade later that they had been a“one-shot deal”. The big production rises that followed the reforms were onlypartly attributable to the introduction of material incentives. The oldcommune system, which awarded farmers work-points, had also explicitlyrelated output to reward.

The reforms did lead to big one-off gains from the rationalisation of crops thatresulted from giving individual farmers a measure of freedom over how to usetheir land. However, individual land plots are in many areas very small, andtitle to them still belongs to the state. There is a serious problem ofunderinvestment in the land, and hence of degradation. There is also a legacyof many decades of abuse of the natural environment, which now threatensagricultural production. The government has tried to encourage a degree ofrecollectivisation, now known as scale-farming, in order to counter theseproblems and encourage mechanisation.

An equally important problem since the mid-1980s has been the decliningterms of agricultural trade. Despite regular procurement price increases and acampaign against the illegal extortion of levies and fees by local officials, thereis still concern about the exploitation of farmers and the concomitant risk ofrural unrest. Besides “fees” charged for entertaining visiting inspection teamsor for investment in industrial enterprises, many farmers are still being chargedexorbitant prices for inputs such as fertiliser, seeds and pesticide. Discontent inthe countryside has been heightened by periodic cash shortages among localgovernments, which have resorted to paying farmers for their contracted grainwith white slips, or IOUs. Farmers also face the possibility of arbitrary evictionif their land is diverted to other uses. One of the reasons why the governmentis encouraging so-called grassroots democracy, as in the election of villageleaders, is to give local communities an increased sense of control of their ownfate, and responsibility for locally made decisions.

Farmers suffer from pricedistortions

China 47


As a result of such pressures the government has had difficulty in persuadingfarmers to continue to grow grain. It had to emphasise that its “contracts” withhouseholds were mandatory. In 1995-96 it appeared that problems in grainproduction were continuing. The total area under cultivation was reported tohave shrunk by 0.9% in 1995; the area planted to grain shrank by 0.4% andthat to rice, wheat and corn by a “comparatively big margin”. Total output wasdown in 1994, at 445.1m tonnes. Strenuous efforts to improve matters broughtan increase to 466.6m tonnes in 1995 and, further, to a record 504.5m tonnesin 1996 and a bumper 494.2m tonnes in 1997. In 1998, the year when floodsravaged the Yangtze Delta, the total harvest was another record, at 512.3mtonnes, falling to 508.4m in 1999. (For data on agriculture, see Referencetables 12-15.)

The reforms also appear to have exacerbated the effects of the almost annualclimatic disasters to which Chinese agriculture is subject. In 1994 seriousflooding in the south was accompanied by a prolonged drought in the northand west. This experience was bad but by no means exceptional. Flood-prevention measures have been neglected in many areas because of thecollapse of the old collective systems that were responsible for them. Irrigationtechniques in northern China have had the effect of lowering the water table,to such an extent that it is often said the capital will have to be moved fromBeijing. The situation is now widely accepted as being acute. The floods thatoccurred in the Yangtze basin in southern China and those of the Sung andNen rivers in northern China in mid-1998 were acknowledged to have beenexacerbated by environmental degradation. Floods are a perennial problem inChina and 1998 was a very bad year; figures released in mid-October 1998stated that natural disasters of various kinds had “covered” (inundated) 44.2mha and “affected” 17.3m ha—a vast swathe of China; there had been 4,610deaths and direct losses were estimated at Rmb80bn (US$9.7bn), of whichRmb72.5bn were sustained in flood-affected areas.

Deforestation has also been a factor in the flooding. With the emphasis, inMao Zedong’s words, on “taking grain as the key link”, many forestsdisappeared in the 1960s. According to one estimate, as much as one-seventhof China’s land—an area five times the size of the UK—has suffered soilerosion, destroying farmland, silting up rivers and reservoirs, and thuscontributing to serious flooding. Tree-planting is now actively beingencouraged. The area under forest has expanded, but China still remains atimber-starved country, and it is the world’s second largest importer of logs.The problem has been made worse in recent years by the construction boomamong newly prosperous farmers in the countryside, as well as by mass theft,forest fires and pests. The Chinese media have warned that in just a few yearsChina may run out of trees to fell, and have focused on the economicconsequences of this, notably unemployment for millions of timber workers.But there is mounting concern, too, about the ecological consequences.

Among the many problems that decades of ill-considered development havebrought to the agricultural sector is drought. Water shortages are becoming asserious a threat in the north-east and north-west as the floods that occur

Deforestation is recognisedas a serious problem

Drought

48 China


annually along the reaches of the Yangtze river, and drastic measures to movewater from the south-east to the north are planned. Meanwhile, drought isexpected to cut the 2000 grain harvest by up to 10%.

Environmental degradation, diversion of land to other uses and chronicoverpopulation are among the factors depressing the growth of agriculturalproductivity and rural incomes in many areas. The rural-urban terms of tradehave moved against the rural population in the 1990s. The state iswithdrawing from subsidised purchase of staple crops and years of bumperharvests are depressing market prices for staples. The grain distribution systemis only partly reformed. The government recognises an incipient crisis inagriculture, in which farmers’ incomes could fall even further behind those oftown dwellers. Market opening mandated by the World Trade Organisation(WTO) threatens to exacerbate this. The many problems are not susceptible tosweeping solutions and need to be tackled piecemeal.

Mining and semi-processing

China’s mining industry has been plagued by a skewed pricing system and bysafety problems. Coal mines, in particular, have a reputation as death-traps.Industry ownership is mixed. State-run mines are responsible for nearly 60% ofChina’s annual output but are, in many cases, as unsafe as the thousands ofprivately run mines. The low price of coal has discouraged investment in safetyprecautions and in exploitation of some deposits. Many small and/oruneconomic mines are being closed.

Similar problems have dogged the gold industry. In late 1995—before thengold output figures were a state secret—China claimed its gold output rankedsixth in the world and revealed a total that year of 105 tonnes, up by 16% on1994, which implies output of 90.5 tonnes in 1994. Production rose sharplyfrom 117 tonnes in 1996 to 166.3 tonnes in 1997; it is estimated to havereached 170 tonnes in 1998 and was planned to remain at that level in 1999.

Plans are in place to allow a floating gold price to stimulate production. Gold isofficially a state monopoly, but the gap between the state purchasing price andthe parallel-market price has led to widespread illegal mining. In 1994 Chinaannounced that it would in future allow foreign participation in gold mining.A gold mining joint venture, involving a Canadian company, Asia MineralsCorporation, and the Shandong Zhaoyuan Gold Industry Group Company, hasbeen formed. There is enormous potential consumer demand. In both 1992and 1993 China imported more than 200 tonnes of gold, almost 10% of worldproduction. But gold consumption per head is only around 0.2 g, comparedwith around 6-7 g per head in other ethnic Chinese societies such as HongKong and Taiwan. Total deposits are estimated at 4,500 tonnes.

China has recently emerged as an important producer and exporter of raremetals crucial to high-technology industries such as aerospace and electronics.These metals include vanadium, titanium, germanium and gallium.

Coal

Rural problems

Gold

Rare metals

China 49


Polycrystalline silicon exports are also important. China is thought to hold theworld’s largest reserves of rare earths at the Bayan Obi mine in Inner Mongolia.

Manufacturing

Despite the reservations noted earlier (see Economic performance), there is nodoubting that industrial output has increased at huge rates in China in recentyears. Industrial output growth averaged 12.6% a year in real terms throughoutthe 1980s. For most of that period, it was led by the township and villageenterprises (TVEs). In effect, local agricultural surpluses were invested inmanufacturing, often in small, low-technology and labour-intensive processes.In the 1990s, and especially since 1992, the sector called “private and other”,which includes the fast-growing foreign-invested enterprises (FIEs), made anoticeable impact on production figures.

Although, in absolute terms, the contribution of private entities and FIEsremains small, the proportion is growing rapidly. In 1999 FIEs contributed15.9% of national gross industrial output. State-owned industry, meanwhile,saw its share of total output fall from 54.6% in 1990 to 28.2% in 1999, whilethe proportion contributed by collectively owned enterprises remained stable,at just over 35%.

Industrial output(Rmb bn)

1998 1999

Gross outputa 11,904.8 12,611.1 State enterprises 3,362.1 3,557.1 Collectives 4,573.0 4,460.7 Private enterprises 2,037.2 2,292.8 Others 2,727.0 3,296.2

a Totals do not add in source.


The process of industrial rationalisation had reduced the number of industrialstate-owned enterprises (SOEs)—including ones partly privatised, but withmajority state ownership—to 61,300 by the end of 1999 with 24.1memployees, down from 118,000 with 44m in 1995. In 1997 the number ofindividually owned enterprises reached 6m, down from 8m in 1994. Themajority of these were based in rural areas and the fall in their number owedmuch to the difficult operating conditions.

In terms of the structure of industrial output, the trend has been for a gradualshift away from the traditional dominance of heavy industrial productsproduced by the state-owned sector towards light industry. The acute shortageof consumer goods at the end of the 1970s created enormous pent-up demandfor both domestic and imported goods. There has, however, been a continualproblem of overproduction in many sectors, exacerbated by the easing of creditsince 1997 in an attempt to boost growth. Stockpiles have built up and theywere a major factor in the mounting “triangular debt” between banks,

Problems ofoverproduction persist

50 China


enterprises and their suppliers that pre-occupied policymakers in 1991 andagain in 1994-99.

In trying to control overproduction, the government has faced a dilemma. TheSOEs are quickest to respond to austerity measures such as credit controls, butthey are also the weakest sector of the industrial economy and most vulnerableto bankruptcy. A bankruptcy law introduced in 1988 has rarely been enforced,because of the social consequences of unemployment in the cities. Time andagain since then senior government leaders have suggested that bankruptcywas an issue that they were about to tackle. The latest attempt came in 1998when the government of the new premier, Zhu Rongji, outlined a programmeof rapid reform of the SOEs. However, faced with a rapid slowdown in the rateof economic growth, the government soon began to back down on itspromises and the process has not been as rapid as many expected. This led toan acceleration in SOE output growth in 1999, to 7.4% in industrial valueadded at constant prices, from only 4.9% in 1998.

The state sector appears to cry out for a dose of the “reform” meted out tomuch of the rest of the economy. Many SOEs, especially the smaller ones, arestill loss-making, and subsidising them is a major strain on the public-sectorfinances. The financial system that has to be maintained to protect them is aserious obstacle to the development of other parts of the economy. There aremany powerful vested interests fighting for the protection of state-ownedindustries. More fundamentally, the social consequences of large-scalebankruptcies—in terms of rapid unemployment with an inadequate socialsecurity system—make market discipline hard to enforce. In the 1990s effortswere made to develop a social security system that would leave more politicalroom for manoeuvre. (Production statistics for light and heavy industrialproducts are given in Reference table 16.) But there have been signs of arenewed vigour in the drive to reform in 2000, as the state concentrates on thecreation of industrial conglomerates.

Construction

Chinese official statistics make a distinction between “productive” and “non-productive” investment. The central government’s consistent difficulty inrecent years has been to allocate enough funds to “productive” investment,especially in much-needed infrastructure projects, while restraining investmentin residential construction, hotels, town halls and, increasingly, pure propertyspeculation.

Land-use plans have been enhanced

As one of the main measures designed to cool the economy in mid-1993,regulations about “basic construction” were tightened. This foreshadowed anannouncement that the country’s overall land-use plan would be enhanced.Any type of land used in construction projects, including land used fordevelopment zones, would be listed from then on in the state’s annual land-use plans. Hitherto, the plans had covered only land used by the state, major

China 51


collective projects and that used for rural housing. Hence, far more arable landwas being developed for housing or industry than the state intended. In 1992the state had set aside 266,600 ha of land for construction, but more than400,000 ha were actually used. However, in July 1994 it was found thatinvestment in property development or speculation was up by 95.8%compared with July 1993, while investment in capital projects had risen by76.8%. There were 5,447 new projects in “fixed assets” sectors, a 20% increaseon the year-earlier period. Much foreign investment, mainly from Hong Kong,was now also going into property speculation. In Fuzhou, for example, suchinvestment accounted for 45% of all foreign investment.

The result has been a property bubble along the southern coast, with largeareas of arable land left fallow for development that may never happen. Therelaxation of credit that took place in 1996 prompted fears of a renewed boutof property speculation, and there is now serious overcapacity in major cities.Office prices in Shanghai fell by 50% between 1997 and 1998. The residentialproperty market, which the government is seeking to stimulate by theconstruction of affordable housing for sale to urban workers who have in thepast relied on employers to house them, is suffering from poor demand in theface of prices that are too high.

Financial services

Reform of the banking system—dominated by the state-owned commercialbanks that account for the lion’s share of lending and deposit-taking—isinseparable from state-owned enterprises (SOEs) reform. Long a policy target,the restructuring of the balance sheets and reform of the operations andlending policies of the commercial banks has been a matter of urgency sinceWTO entry became a real prospect.

The first major step came in 1994, when the “specialised banks”—the Bank ofChina, the Agricultural Bank of China, the Industrial and Commercial Bank ofChina and the China Construction Bank—were officially renamed“commercial banks”. At the same time, three policy banks reporting directly tothe State Council were incorporated to assume the task of fundinggovernment-mandated projects from the commercial banks. These are theAgricultural Development Bank, the State Development Bank and the Export-Import Bank of China.

The rules governing the new commercial banks were laid out within theCommercial Bank Law, passed by the National People’s Congress (NPC) in1995. This law includes detailed provisions on the commercial banks’responsibilities, interests, liabilities, and business scope and conduct. Theirorganisational structure, means of supervision, procedures for liquidation andprotection of depositors are also specified. The Central Bank Law, passed at thesame time, gives the People’s Bank of China (PBC, the central bank)supervisory authority over the commercial banking sector.

The Commercial Bank Law gives all commercial banks operationalindependence. But in emergencies the State Council can direct China’s

Reforming the banks

52 China


commercial banks to “conduct their loan business in accordance with the needfor the development of the national economy”, a clause that was called intouse in 1998, when the regime was concerned to boost the economy bystimulating lending to SOEs. Since 1995 the PBC has expanded the supervisoryframework for the commercial banks through numerous decrees coveringoperation, management and staff qualifications, internal control and riskmanagement techniques, and credit authorisation and monitoring tools.

As mentioned above, the policy banks are to take the burden of state sectorlending away from the commercial banks. The brief of the Agricultural StateDevelopment Bank and the State Development Bank is to engage inagricultural, industrial policy and infrastructure lending, thus effectivelyshadowing the policy lending of the former specialised banks. The Export-Import Bank is to provide long-term finance for machinery and equipmentimports and exports. The four state policy banks have been officiallyresponsible for all policy lending since their incorporation in 1995, but all suchloans extended before that date are still on their books. Non-performing loansmake up anywhere from 20% to 65% of their total loan portfolios, varyingwidely by region. Nor has the dividing line between the policy and commercialbanks been as clear as envisioned in their mandates. Rumour has it that theState Development Bank in particular has so far avoided policy lending beyondfunding infrastructure.

Banking reform slowed in 1998-99 as the difficulties of embarking on SOEreform in the midst of a regional economic crisis became apparent. In June1998 the PBC advised the state commercial banks to increase their financialsupport of ailing SOEs. The banks were also asked to provide more workingcapital facilities for loss-making SOEs with marketable products and exportorders. In 1999 banks were still encouraged to provide working capital, but theoversupply in certain industrial sectors meant that the government sought toblock lending for expansion of output across a broad spectrum.

Early in 2000 there was a management reshuffle among the four large state-owned banks and supervisory committees, to be appointed by the StateCouncil. This move heralds a stepping-up of the process of banking reformthat has been going on in 2000. Efforts to increase the provision of credit tosupport small and medium-sized enterprises, which have found it hard to raisefinance, are being supported by the creation of credit guarantee schemes. Thebig four major commercial banks are basically insolvent, carrying upwards ofUS$200bn in non-performing loans. Though central authorities say just 6-7%of this amount is irrecoverable, Western estimates place that figure muchhigher, at about two-thirds of the total. Most loans have never been classifiedas long-term, but as one-year loans, rolled over indefinitely with no repaymentdeadline. Approximately three-quarters of the banks’ non-performing debt issaid to result from this practice.

Efforts to improve the quality of decision-making in the financial sector arecontinuing, although sometimes thwarted in practice by the perceived need toprop up SOEs. What is needed is an interest-rate structure that prices risk and

The policy banks

Reform slows

Non-performing loans

China 53


makes it worthwhile for banks to lend to smaller-scale enterprises. Among thereforms currently planned is a wider permitted band for interest rates. To easethe collection of the withholding taxes introduced on savings in 1999 to boostspending, a real names policy for deposit accounts has been introduced.Following a central bank conference in November 1997 new limits wereintroduced on loans above US$1m, and the closure of hundreds of bankbranches and plans to reclassify all outstanding loans were announced,without a firm timetable. The commercial banks’ networks—currently in excessof 150,000 branches employing over 1.7m people—will have to shrinkdrastically in order for their directors to implement enforceable and verifiablelending guidelines. The PBC has ordered that loans be divided into fivecategories: normal, special mention, substandard, doubtful and lost. Twice in1998, “special bonds” were issued to recapitulate the commercial banks andallow them to write off unrecoverable loans. Other recent PBC laws give thecommercial banks more responsibility for their lending while placing stricterguidelines on their credit policies. In January 1998 the PBC abolished creditquotas, transferring ultimate lending decisions to the banks themselves.

To fulfil their mandate, the commercial banks must improve theirmanagement quality and control systems at all levels, and introduce modernrisk evaluation methods and professional credit analysis. In short, the banksare required to move towards lending based on commercial decisions ratherthan politics. But in many cases the banks’ local branches continue to followthe guidelines of the local party chief rather than their head office.

During 1998-99 four asset management companies (AMCs) were set up, one foreach of the big state banks, to take over the bad debts and free the banks tolend on a business basis rather than to government order. China Cinda AssetCorp will handle the debt of the Construction Bank; China Orient AssetManagement will handle the bad debts of the Bank of China; the Great WallAsset Management Corporation will deal with those of the Agricultural Bank ofChina (ABC); and Huarong Asset Management will deal with those of theIndustrial and Commercial Bank of China. The process of debt-equity swapshas got under way, but has a long way to go before the balance sheets of thecommercial banks are healthy. Nor is it yet clear how the AMCs will manageand dispose of the assets they acquire.

Smaller-scale financial institutions exist in China, but are not large enough tomake any real impact as yet. During 1997 the PBC granted approval for theconversion of all city and urban credit co-operatives into city and urbancommercial banks. In addition, select foreign banks in Shanghai and Shenzhenhave been granted permission to engage in renminbi business.

Though the introduction of foreign competition has been highlighted as amajor step towards financial sector liberalisation by Chinese authorities, itsimpact, which could be profound, will not be felt until WTO membership.Today, the foreign banks may only serve foreign corporate clients, and may notsource renminbi from domestic companies and individuals. Moreover, they arepermitted to borrow on the interbank market for day-to-day needs only, andcannot extend this capital as loans to clients. These measures are specifically

Introducing competition

Asset managementcompanies

54 China


designed to limit their renminbi business and thus the competition they poseto domestic banks.

Support for financial institutions regarded as sound or indispensable has beenmade available. In 1998 three financial institutions, Guangdong InternationalTrust and Investment Corp (GITIC), China Venture-Tech Investments and theHainan Development Bank, were closed, for insolvency. The closure of GITICpresages the demise of many of China’s other International Trust andInvestment Corporations (ITICs), the country’s oldest non-bank financialinstitutions. Conceived of at the launch of Deng Xiaoping’s reforms in 1979 asvehicles to channel foreign capital and technology into the country, by theend of 1988 there were over 700 ITICs in various disguises owned by provincialgovernments, government departments and SOEs. The ITICs have been ahotbed of unregulated activities with state enterprises and provincial govern-ments. Since 1994 authorities have been trying to clamp down on illegal ITICsand their number has fallen. The government has announced its intention toclean up the ITICs, an unknown number of which are teetering under theburden of bad lending decisions and risky investments.

The PBC was formally constituted as the central bank in 1995, to supervise thebanking system and oversee monetary policy. At the end of 1998 the PBC had2,440 branches, each of which employed hundreds of workers (187,466 intotal) and had conflicting ties to local government officials. In 1999 a majorrestructuring plan reduced this network. Nine regional branches now reportdirectly to PBC headquarters in Beijing and will have an unfettered mandate,exactly mirroring that of the PBC as a whole, of implementing monetarypolicy and supervising local bank branches, thus, it is hoped, cutting the directlinks between provincial governments and local central bank branches.

Banking sector reforms were placed at the top of the government’s economicpolicy tasks for 2000, with an eye on WTO membership. Among recentinitiatives is Rmb20bn (US$2.4bn) in loans to rural credit co-operatives (RCC)to support agriculture, after Rmb15bn in both 1998 and 1999. By the end ofApril 2000, deposits in RCCs had reached Rmb1.4trn (12% of financialinstitution deposits) and their lending had reached Rmb986bn (10% of thetotal outstanding loans). In early April the PBC confirmed its liquidity supportto city commercial banks to meet their payment obligations. Most of the 90city commercial banks, which emerged from the merger of urban credit co-operatives at the municipal level, are believed to be insolvent.

A major personnel reshuffle at the apex of the central bank, the ChinaSecurities and Regulatory Commission (CSRC) and the state banks, was madepublic in early 2000. The China Association of Banks (CAB) was established inMay. Its first members include 22 banks, three policy banks and 11shareholding commercial banks. Its role will be to supervise members’compliance with banking laws and regulations, and provide services to itsmembers. The PBC will gradually transfer some of its non-supervisory work tothe CAB. The big four banks are planning to connect their bank card networksto the National Bank Card Switching Centre managed by the PBC by the end

Closure of unsoundinstitutions, notably ITICs

Streamlining the PBC

Recent initiatives

China 55


of 2000. All other commercial banks are scheduled to connect their internalcard networks shortly.

The Chinese population has a phenomenal propensity to save and it is thesesavings, which are the chief component of a national savings ratio of the orderof 40% of GDP, which underpin the continued, if fragile, stability of thefinancial system. Recent changes that have undermined job security andcommercialised services, as well as the emergence of a private-sector propertymarket, have further encouraged saving. The government has been careful toensure that interest rates paid to depositors remain positive. It takes pains toretain the confidence of Chinese savers in the soundness of the institutions inwhich they place their money and this limits its ability to close downunsound banks.

At the local level various scams in which people are duped into investment inpyramid schemes have been well publicised. The financial authorities areanxious to clamp down on such illegal or semi-legal ventures, one reason fortheir determination to control ITCs and manage the growth of thestockmarkets.

The development of secondary capital markets will provide another vehicle forprivate savings. In part it has been necessitated by the government’s consistentbudget deficits. It was perceived that funding the deficits by printing moneywas a prime cause of the inflationary surge that began in 1993 and would havebeen worse were it not for the increasing demand for cash and increasingwillingness to save displayed by the population in the second half ofthe 1990s.

It had been difficult to raise money through selling Treasury bonds, except bythe coercive deduction of bond payments from state workers’ pay packets, apractice that was much resented. The paper was seen as illiquid. Thus, from1990 the government started issuing bonds underwritten by financialinstitutions. During the second half of the 1990s issues of more thanRmb100bn could be disposed of, apparently without much difficulty.

The securities exchanges where Treasury bonds were sold formed the basis forChina’s first two stock exchanges, which opened in 1990, in Shanghai andShenzhen. About 800 large SOEs have listed some stock on the markets and arenow known as joint-shareholding companies, although the state still holds amajority stake in them. The markets, while shallow, have been extremelyvolatile, and measures were introduced in mid-1997 to try to dampen themarket by forbidding banks from speculating or from lending for that purpose.

There have been attempts to improve regulation in the financial sector.Supervision of the insurance and securities markets, previously theresponsibility of the PBC, is now undertaken by separate bodies. The ChinaSecurities Regulatory Commission has authority over stock trading, and theChina Insurance Regulatory Commission supervises the country’s insurancecompanies. A securities law was finally brought into effect in mid-1999.

Looking after depositors

Bond sales help establishsecurities markets

The stockmarkets are beingclosely regulated

56 China


There are two categories of shares. “A” shares, denominated in renminbi, areopen only to Chinese investors. By the end of 1998, 434 companies were listedon the Shanghai exchange, and at the end of 1997 there were 382 companieslisted on the Shenzhen exchange. In addition, in 1997 there were 56 “B”shares, also denominated in renminbi, but traded in US dollars in Shanghaiand in Hong Kong dollars in Shenzhen; these, at least in theory, are onlyavailable to foreign buyers. Expectations that the distinction will be abolishedremain, but are as yet unfulfilled. By mid-1999 a total of 41 China-incorporated enterprises were listed on the Hong Kong Stock Exchange. Severalother Chinese stocks are listed in New York and one in London. Demand forChinese equity and debt was diminished by the Asian financial crisis and itsaftermath, but some initial public offerings by fledgling Chinese conglomerateshave been successful during 2000. It was announced in September 1999 thatforeign-invested enterprises will be able to issue both “A” and “B” shares onChinese stock exchanges. (For banking statistics, see Reference table 17.)

The external sector

Trade in goods

Until recently, the growth of Chinese exports has outpaced world exportgrowth. Furthermore, every year, apart from 1983 and 1984, the importance ofmanufactures has increased as a proportion of merchandise exports. Since thelate 1980s a rising share of exports and imports has been accounted for by re-exports from processing facilities with foreign investment—foreign investedenterprises (FIEs); FIEs’ share of exports has risen above 40% and their share ofimports has now exceeded 50%.

Trade by type of enterprise, 1999(US$ m)

Exports % change Imports % change Balance

SOE 98,486 1.8 74,181 23.7 24,305

FIE 88,628 9.5 85,884 11.9 2,744

Collective 6,824 26.3 4,080 66.1 2,744

Other 994 63.6 1,573 48.1 –579

Total 194,931 6.1 165,718 18.2 29,213

Source: Economic Information and Consultancy Company, China’s Customs Statistics.

In 1994 export growth was boosted by the effective devaluation of therenminbi at the beginning of the year. In 1995 exports were being overstatedbecause of changes to the value-added tax (VAT) rebate system that wereintroduced at mid-year and again in January 1996. This led to implausible risesin recorded exports in US dollar terms, especially in the first half of the year.For 1995 as a whole the US dollar value of exports was reported by customsfigures as having risen by 23%, to US$148.8bn. This distorted the base forcomparison during 1996, when revenue in US dollar terms rose by only 1.5%.In 1997, despite difficult trading conditions in Asia and stiff competition from

Export growth has beenrapid

China 57


exporters whose currencies slid heavily against the US dollar, exports revenuewas once again rising in the 20% range, as inventories built up during 1996were put on the market. But the pace of export growth slowed quite sharply inthe face of loss of competitiveness and poor demand in Asian markets in1998-99. Exports rose by only 6.1% in US dollar value in 1999, but have surgedonce again in 2000, thanks to improved world demand.

China’s competitive advantage as an exporter lies in its massive and cheaplabour force. Too often this has been wasted by low productivity and poor-quality work. However, this now appears to have been successfully overcome insome of the thousands of enterprises in Guangdong producing for exportunder the watchful eye of expatriate quality controllers.

There seems, on the face of it, no reason why China should not follow HongKong, Taiwan and South Korea in moving upmarket and conquering newmarkets, especially in electronics, on the basis of the assembly-typearrangements it has used so successfully for light manufactures such asgarments and clothes. In 1999 clothing and garments accounted for 15.4% ofChinese exports. Pharmaceuticals have already shown impressive growth,because of the popularity of traditional Chinese medicines among overseasChinese and the wider availability of chemicals for Western medicines.

Imports are dominated by manufactures. Their share of the total was 83.7% in1999, compared with 16.2% for primary products. However, the manufacturesbill includes a high proportion of intermediates, notably chemicals and relatedproducts (14.5% of total imports in 1999), but also raw materials, iron andsteel, and textiles yarn.

This pattern is unlikely to undergo a radical change in the next five years,although food imports may well rise in years of bad harvest, even if the overallgoal of increased grain production is met. The emphasis on the grain harvest isalso likely to lead to greater imports of non-staple foods. Crude oil imports arelikely to rise sharply, as domestic production fails to keep pace with demand,and, in particular, as new refining and petrochemicals capacity comes on stream.(For data on foreign trade by commodity, see Reference tables 18 and 19.)

Continued rapid growth in exports, however, relies on a hospitableinternational environment and on continued reform of China’s foreign tradesystem. The biggest question mark over future export growth was removed in1994 when the US president, Bill Clinton, renewed China’s most favourednation (MFN, now known as normal trade relations, or NTR) trading statusunconditionally, without making further annual renewals conditional, as theyhad been in the past, on China’s human rights policies. However, traderelations with the US remain fraught. The root of the problem is China’smassive and growing bilateral trade surplus.

In the short term, further export growth will be constrained by tougherenforcement of quota restrictions on imports of textiles and some other goodsinto both the US and European markets. The US, in particular, has found large-scale Chinese “cheating” on quotas through transshipment and relabelling incountries such as Honduras. In the long term, China’s relations with the US

Imports are dominated bymanufactures

58 China


may benefit from the phasing out of the Multi-Fibre Arrangement (MFA) underthe Uruguay Round of the General Agreement on Tariffs and Trade (GATT),although China may face limited sanctions for its failure to protect intellectualproperty rights. The relationship is crucial. The US probably takes as much asone-third of Chinese exports, a proportion disguised in Chinese figures by thelarge volume that is transshipped in Hong Kong, much of which appears in theUS figures as being of Chinese origin. China’s imminent entry into the WorldTrade Organisation (WTO) should smooth trade relations with other countries.

Major export commodities, 1999(fob; US$ m)

US Hong Kong Japan EU Total

Food, beverages & tobacco 703 1,630 4,283 965 11,161 of which: meat & fish & preparations 345 380 2,319 287 4,023 fruit & vegetables & preparations 175 157 1,464 437 3,070Mineral fuels 196 939 1,123 311 4,646Chemicals 3,122 1,921 1,618 3,264 14,896 of which: organic & inorganic 911 334 792 1,431 5,901 plastics & manufactures 1,702 1,019 472 1,047 5,124Leather manufactures, handbags, travel goods 1,363 769 634 1,305 5,237Textile fibres & manufacturesa 4,074 11,274 10,262 3,937 41,772 of which: cotton & manufactures 138 1,474 153 86 3,291 synthetic fibres & manufactures 70 867 120 210 2,565 clothing 2,989 6,992 8,662 2,574 18,956Footwear 4,357 594 842 945 8,673Non-metallic mineral manufactures 748 359 623 630 3,413Precious stones, metals & jewellery 364 1,699 29 281 2,528Base metals & manufacturesb 2,604 1,797 1,384 2,291 12,574 of which: iron & steel & manufacturesb 1,347 670 781 1,141 6,392Machinery excl electric 5,224 2,595 1,667 4,295 19,136Electric machinery 7,198 7,356 5,023 5,261 32,947Transport equipment 1,342 939 483 1,155 6,583 of which: road vehicles & tractors 987 149 357 344 2,787Scientific instruments etc 1,693 1,509 1,298 1,216 6,787Furniture etc 2,562 631 539 926 5,403Toys etc 3,911 992 561 1,397 7,703Total incl others 41,946 36,891 32,399 30,211 194,931

a Including clothing. b Including scrap.


Imports remain much more tightly controlled by administrative fiat and quotathan do exports, and there have been moves to raise such barriers in the face ofan influx of smuggled imports and a loss of competitiveness in 1997-98. Theintention is gradually to replace administrative controls on imports by a tariff-based system, in which the exchange rate would also perform a significantregulatory function; it is a reform the government is nervous about pursuing. Itfears that a lifting of absolute import quotas would be followed by a flood ofimports, as in 1985-86. There is also a worry about the difficulty of collecting

Imports remain tightlycontrolled

China 59


tariffs and the possibility of a new avenue of corruption for the officialsinvolved. Given the degree of domestic protection through quotas at themoment, tariffs would have to be set at unrealistically high levels to achievethe same effect. There is also a great deal of opposition and passive resistanceto market-opening measures from bodies with entrenched interests, such aspowerful ministries in Beijing, and in domestic industries that could sufferfrom difficulties under free competition.

Major import commodities, 1999(cif; US$ m)

Japan Taiwan US EU Total

Food, beverages & tobacco 278 39 685 502 3,832 of which: cereals & preparations 9 2 58 140 624Ores, slag & ash 50 32 43 97 2,198Mineral fuels 235 61 189 323 8,930Chemicals 4,798 4,021 3,606 2,825 25,310 of which: organic 1,480 249 598 810 5,525 dyeing & tanning materials 248 299 114 208 1,299 fertilisers incl crude 1 4 1,084 131 2,248 plastics & manufactures 2,361 2,885 964 680 11,610Rubber & manufactures 311 232 86 118 1,469Hides, skins & leather 54 461 386 244 2,328Wood & manufactures 6 44 144 394 2,922Paper & manufactures 552 406 632 473 3,983Textile fibres & manufacturesa 2,927 3,128 245 401 13,930 of which: synthetic fibres & manufactures 1,362 1,647 144 84 5,707Base metals & manufacturesb 4,053 2,647 800 1,082 15,094 of which: iron & steel & manufacturesb 2,785 1,623 236 542 8,754 copper & manufacturesb 668 577 261 140 3,086 aluminium & manufacturesb 375 237 200 231 2,139Machinery excl electric 6,852 3,104 4,454 7,753 27,833Electric machinery 9,651 4,309 3,564 6,668 35,250Transport equipment 965 157 1,717 2,341 6,013 of which: road vehicles & tractors 832 156 239 835 2,373 aircraft 2 0 1,465 1,239 3,177Scientific instruments etc 2,195 363 1,291 1,002 6,178Total incl others 33,768 19,528 19,480 25,465 165,718

a Including clothing. b Including scrap.


Having been in deficit in the late 1980s, the merchandise trade account swunginto surplus in 1990 and, apart from 1993, when there was a rapid rise indomestic demand, has remained in surplus. This surplus is partly the result ofthe demand management of 1989-90 and after 1993, which slashed the importbill, and partly the result of the surge in export manufacturing, often based onforeign investment, that has occurred since 1992 along the eastern seaboard.The trade surplus has also been swollen by over-reporting of export values inorder to benefit from rebates on VAT. Although the incentive to do this was

The massive trade surplusof 1997-99 is temporary

60 China


reduced with the reduction of the rebate rates in 1995 and again in January1996, over-reporting probably increased with the raising of rebates on certaincommodities during 1998-99. Meanwhile, after the announcement that tariffconcessions on capital goods imports of foreign-invested enterprises would bereduced from April 1996, a surge in such imports took place, further confusingthe trade data. The requirements of China’s development are such that thevolume of import growth is likely to be faster than that of exports over thenext ten years, during which time the trade surplus will disappear.

Invisibles and the current account

The current account, 1999(US$ bn)

Merchandise trade balance 36.2

Net services balance –7.5

Net income balance –18.0

Net transfers 4.9

Current-account balance 15.7

Source: IMF, International Financial Statistics.

The current-account surplus fell from US$6.9bn in 1994 to only US$1.6bn in1995; it rose back up to US$7.2bn in 1996 and then rocketed to US$29.7bn in1997, thanks to another surge in export revenue. In 1998 the current-accountsurplus is estimated to have remained above US$29bn, falling to a still largeUS$15.7bn in 1999 thanks to a continuing large trade surplus. The surplus onthe travel account is insufficient to pull overall services into surplus. In 1995the income account deficit soared as outward payments of interest rose, andprofits and dividends outflows were recorded for the first time ever. This castsdoubt upon the previous data for the 1990s and may lead to retroactiveadjustments, perhaps reducing some of the large errors and omissions thatappear on the capital account. (For balance-of-payments data, see Referencetable 21.)

The two major items on the services account are tourism and shipping. Chinahas been running a sizeable surplus of about US$1.5bn per year on the travelaccount, and the continued boom in foreign trade and investment will bringin further large numbers of foreign travellers, of whom the majority areoverseas Chinese. The shipping account, however, has tended to be in deficit.

China also has some invisibles income from tens of thousands of constructionworkers, mainly in the Middle East but increasingly in recent years in theRussian Far East. Overall, the healthy rise in foreign-exchange reserves in1994-99 will tend to boost invisibles income, but the invisibles account willcontinue in deficit.

China’s total foreign debt rose to US$154.5bn in 1998, according to WorldBank figures, requiring debt service of US$18.4bn, with a debt-service ratio of8.6%. China has few, and usually only temporary, difficulties in raising funds

Tourism and shippingdominate invisibles

Capital flows and foreigndebt

China 61


on the international capital markets and can be expected to remain a majorborrower in the future. Nor will debt service be a serious constraint in thelonger term. But in the short term the effects of the Asian crisis and the doubtsthat ratings agencies and banks now have about the creditworthiness of all butthe most sovereign of Chinese borrowers will act as a disincentive to the raisingof new foreign debt. (For data on external debt, see Reference table 22; for dataon aid, see Reference table 23; for information on assets and liabilities, seeReference table 24.)

The pledges of large inflows of foreign capital witnessed in recent years,however, have begun to slow. Actual inflows, meanwhile, remain high,reflecting previous large commitments. Much of the foreign investment so farhas been drawn by China’s comparatively cheap labour force and other lowproduction costs. There are signs that rising costs are already deterring someinvestors from the prosperous southern provinces such as Guangdong. In lessadvanced provinces labour costs are lower, but the bureaucratic and infra-structure hurdles may be much greater. Despite China’s commitment to theintroduction of a level playing field for domestic and foreign investmentregimes, it seems certain that incentives will continue to be needed to attractforeign funds to the interior of the country for projects where payback periodswill be long. In addition, China faces increasing competition from othercountries for investment directed at manufacturing for the US market.Membership of the WTO is crucial to protect China’s competitiveness as aninvestment location for export into developed markets.

However, direct investment is being drawn by the prospect of China’s ownmarket and this will remain a powerful lure to multinationals. Some 200 of theworld’s top 500 companies are already present in China and more will surelyfollow. Most joint ventures are still required to export at least 80% of theiroutput, but an increasing number are now concentrating on the desirableprospect of a genuine opening of the Chinese domestic market. AlthoughChina remains a very poor country in terms of GDP per head, even on apurchasing power parity (PPP) basis, the pockets of comparative prosperity inthe east are large enough in themselves to constitute a sizeable market.

One new feature of foreign investment in the late 1990s was the growingimportance of the services sector. Foreign retailers, fast-food chains and otherservices industries began to see a real market developing. Although this islimited, by and large, to the more prosperous south and south-eastern regions,it still represents a new “middle class” numbering some tens of millions, withrapidly rising purchasing power. The main shopping streets of cities such asShanghai and Guangzhou are coming to be occupied by shops owned orfranchised by some of the world’s leading fashion and other brand names.Moreover, these are now beginning to spread inland.

The capital-account and foreign investment figures are confused by thecommon practice of “round tripping”. Billions of US dollars have left thecountry, mostly to be parked in Hong Kong, where mainland enterprises arebig investors in the local property- and stockmarkets. A fair proportion of thatmoney is then reinvested in China, ostensibly as foreign investment.

Capital account depends ondirect investment growth

“Round tripping”

62 China


The tax incentives available to foreigners are gradually being whittled away infavour of the notion of a level playing field for domestic and foreign investors.However, the attraction of keeping money offshore is such that the practice isunlikely to disappear. Some estimates put the amount of such “hot money”leaving China each year as high as US$10bn-20bn. It thus has a big impact onthe capital account and helps explain some of the large figures that moveabout China’s national accounts, often identified merely as “errors andomissions”, which amounted to US$14.7bn in 1999, down from a peak ofUS$16.8bn in 1997. The amount of foreign direct investment (FDI) is alsoexaggerated by the practice of disguising foreign debt as foreign investment.The State Administration for Foreign Exchange (SAFE), with which all foreigndebt is supposed to be registered, has signalled that it will take a hard line onhonouring unofficial foreign borrowing by Chinese enterprises that cannotmeet their obligations.

Utilisation of direct foreign investment(US$ m)

Year Cumulative

1979-82 1,769 1,769

1983 916 2,685

1984 1,419 4,104

1985 1,956 6,060

1986 2,214 8,274

1987 2,314 10,588

1988 3,194 13,782

1989 3,393 17,175

1990 3,487 20,662

1991 4,366 25,028

1992 11,008 36,036

1993 27,515 63,551

1994 33,767 97,318

1995 37,521 134,839

1996 41,726 176,565

1997 45,257 221,822

1998 45,463 267,285

1999 40,319 307,604


Foreign reserves and the exchange rate

China’s officially posted foreign-exchange reserves stood at US$22bn at the endof 1993, less than half the US$46bn recorded in September 1992. Most of thefall was attributable to a technical change. In 1993 China ceased to include theforeign-exchange holdings of the Bank of China, the foreign trade bank, in itscalculations of the size of its reserves. These are now limited to the holdings ofthe People’s Bank of China (PBC, the central bank) itself. The reform is in linewith the attempts to turn the PBC into a “real” central bank and also to

China 63


enhance the autonomy of state-owned enterprises (SOEs)—the Bank of China’s“reserves” included its foreign-currency liabilities to SOEs. Foreign-exchangereserves rose healthily in 1994 as export growth picked up from thedisappointing slowdown in 1993. By end-1994 reserves (excluding gold) stoodat US$52.9bn, and they continued to rise during 1995, reaching US$75.4bn bythe end of the year and soaring to US$107bn by the end of 1996. During 1997they continued to mount, reaching US$142.8bn by the end of the year. Theythen remained at just over this level for most of 1998 before rising furtherduring 1999 to reach US$157.2bn at the end of the year as a result of theimposition of controls on outflows of foreign currency in late 1998. Foreign-currency reserves continued to rise in 1999, reaching US$157.7bn at the end ofthe year, and they are likely to exceed US$160bn by the end of 2000. (For dataon foreign reserves, see Reference table 25.)

The renminbi fell from Rmb8:SDR1 at the end of 1993 to Rmb12.3:SDR1 at theend of 1994. During 1995 the Chinese currency was stable against the SDR butappreciated in annual average terms against a weak US dollar. It then held firmagainst a strong US dollar in 1996-97. The renminbi was devalued by 50%against the US dollar in January 1994, but the inflation differential turned themodest appreciation against the US dollar that took place in 1995 and itsstability in 1996 into a significant appreciation in real terms. This was helpfulin restraining domestic inflation but damaged export competitiveness. Therenminbi remained remarkably stable during the Asian economic crisis, duringwhich most other currencies in the region plunged sharply in 1997-98. Theauthorities in China were happy to take credit for keeping the renminbiexchange rate against the US dollar at Rmb8.28:US$1, thereby appearing toprevent a further downward twist in the devaluation spiral in South-east Asiaand South Korea. While China did perhaps lose some export pricecompetitiveness as a result, the damage was not great, as the fall in domesticprices and the retention of export subsidies provided an “effective devaluation”that helped to preserve an element of competitiveness. (For data on theexchange rate, see Reference table 26.)

64 China


Appendices

Sources of information

BBC, Summary of World Broadcasts (daily and weekly), London

Beijing Review Press, Beijing Review (weekly), China Daily, Beijing

Beijing Review Press, China Daily, Beijing

Economic Information and Consultancy Co, China’s Customs Statistics(quarterly), Hong Kong

Economic Information and Consultancy Co, China Economic News (weekly),Hong Kong

Far Eastern Economic Review, China Trade Report (monthly), Hong Kong

Japan External Trade Organisation, China Newsletter (bi-monthly), Tokyo

National Bureau of Statistics, China Statistical Yearbook (annual), Beijing

US-China Business Council, The China Business Review (bi-monthly),Washington, DC

US Department of Commerce, Doing Business with China, Washington DC

Bank for International Settlements, International Banking and Financial MarketDevelopments (quarterly)

Energy Data Associates, Bishops Walk House, 19-23 High Street, Pinner,Middlesex HA5 5PJ

IMF, International Financial Statistics (monthly)

OECD, Geographical Distribution of Financial Flows to Aid Recipients (annual)

UN, Monthly Bulletin of Statistics

UN, World Investment Report (annual)

World Bank, Global Development Finance (annual)

World Bank, World Development Report (annual)

Jung Chang, Wild Swans, London, 1992

Nicholas Lardy, China’s Unfinished Economic Revolution, Washington DC, 1998

Perry Link, Evening Chats in Beijing, New York, 1992

Harrison E Salisbury, The New Emperors, London, 1993

Vaclav Smil, China’s Environmental Crisis, New York, 1993

Jonathan D Spence, The Search for Modern China, London, 1990

National statistical sources

International statisticalsources

Select bibliography

China 65


Georgina Wilde, China to 2010: The Pace of Reform, Economist IntelligenceUnit, Research Report, No. M228, 1998

Reference tables

These reference tables provide the most up-to-date statistics available at the time ofpublication.

Reference table 1

Population(m; year-end)

1995 1996 1997 1998 1999

Urban 351.7 359.5 369.9 379.4 388.9

Rural 859.5 864.4 866.4 868.7 870.1

Total 1,211.2 1,223.9 1,236.3 1,248.1 1,259.1 Male 618.1 622.0 631.3 636.3 641.9 Female 593.1 601.9 605.0 611.8 617.2


Reference table 2

Labour force(m; year-end)

1995 1996 1997 1998 1999

Urban state-owned units 112.6 112.4 110.4 90.6 85.7 of which: manufacturing 33.3 32.2 30.1 18.8 16.5 government agencies & people’s organisations 10.2 10.7 10.7 10.8 10.8

Collectives in towns 30.8 29.5 28.2 19.0 16.5 of which: manufacturing 14.2 13.5 12.4 7.4 6.2 trade & food services 6.9 6.7 6.4 4.1 3.4

Urban private enterprises 4.8 6.2 7.5 9.7 10.5

Self-employed in towns 8.8 17.1 19.2 22.6 24.1

Rural employed 488.5 490.3 493.9 492.8 495.7 of which: township & village industries 128.6 135.1 130.5 125.4 127.0

Total incl others 679.5 688.5 696.0 699.9 705.9 Primary industries 354.7 347.7 347.3 348.4 353.6 Secondary industries 156.3 161.8 165.0 164.4 162.3 Tertiary industries 168.5 179.1 183.7 186.8 189.9


66 China


Reference table 3

Transport statistics

1995 1996 1997 1998 1999

RailwaysLength of track (‘000 km) 54.6 56.7 57.6 57.6 57.9Passengers carried (bn person-km) 354.6 332.5 354.8 377.3 413.6Freight traffic (bn tonne-km) 1,287.0 1,297.1 1,325.3 1,251.7 1,283.8

RoadsHighways (‘000 km) 1,157.0 1,185.8 1,226.4 1,278.5 1,351.7Passengers carried (bn person-km) 460.3 490.1 554.1 594.3 619.9Passenger vehicles (‘000) 4,179.0 4,880.2 5,805.6 6,548.3 7,402.3Freight trucks (‘000) 5,854.3 5,750.3 6,012.3 6,278.9 6,769.5

WaterWaterway freight traffic (bn tonne-km) 1,755.2 1,786.3 1,923.5 1,940.6 2,126.3


Reference table 4

National energy statistics

1995 1996 1997 1998 1999

Coal (m tonnes) 1,361 1,397 1,373 1,250 1,045

Crude oil (m tonnes) 150 157 161 161 160

Natural gas (bn cu m) 17.9 20.1 22.7 23.3 25.2

Sources: National Bureau of Statistics, China Statistical Yearbook; Economic Information and Consultancy, China Economic News.

Reference table 5

Government finances(Rmb bn)

1995 1996 1997 1998 1999

Revenue 624.2 740.8 865.1 987.6 1,144.4 of which: tax 603.8 691.0 823.4 926.3 1,063.3 net subsidies to enterprisesa –32.8 –33.7 –36.8 33.3 29.0 borrowingb 155.0 196.7 247.8 331.0 371.5

Expenditure 682.4 793.7 923.3 1,079.8 1,318.8 of which: capital construction 78.9 90.7 101.9 138.8 211.7 defence 63.7 72.0 81.2 93.5 107.6 culture, health & education 146.7 170.4 190.3 215.4 240.8 administration 87.3 104.1 113.7 160.0 202.1 price subsidies 36.5 45.4 55.2 71.2 69.8Debt serviceb 88.7 131.2 191.8 235.3 192.3

Balance –58.2 –52.9 –58.2 –92.2 174.4

a The net of direct income from enterprises and subsidies to cover their losses. b It is Chinese practice to include borrowing and the principalelement of debt service in the budget. The measured deficits would be higher without these.


China 67


Reference table 6

Investment in assets by source and purpose(Rmb bn)

1995 1996 1997 1998 1999

By source of fundsa

State budget 62.1 62.6 69.7 119.7 185.2Domestic loans 419.9 457.4 478.3 554.3 572.6Foreign investment 229.6 274.7 268.4 261.7 200.7Self-generated funds 1,340.9 1,541.2 1,709.6 1,936.0 2,017.0

By purposeConstruction 1,317.3 1,510.9 1,561.4 1,787.5 1,879.6Equipment 426.2 492.6 604.5 652.9 705.3Other 258.3 287.8 328.2 400.3 400.6

Total investment 2,001.9 2,291.4 2,494.1 2,840.6 2,985.5

a Figures grouped by sources of funds do not always sum to total.


Reference table 7

Money supply and credit(Rmb bn unless otherwise indicated; end-period)

1995 1996 1997 1998 1999

Currency in circulation 788.2 879.8 1,017.5 1,120.1 1,345.2

Demand deposits 1,520.2 1,876.5 2,381.0 2,648.6 3,238.2

Money (M1) incl others 2,559.7 3,066.3 3,834.3 4,321.7 5,079.8 M1 growth (%) 18.8 19.8 25.0 12.7 17.5

Quasi-money 3,514.7 4,543.3 5,352.4 6,234.3 7,024.4

Money (M2) 6,074.4 7,609.6 9,186.7 10,556.0 12,104.2 M2 growth (%) 29.5 25.3 20.7 14.9 14.

Domestic credit 5,333.4 6,641.1 7,950.3 9,542.4 10,697.5 Domestic credit growth (%) 23.7 24.5 19.7 20.0 12.1 Claims on central government (net) 166.7 218.0 243.8 584.9 704.5 Claims on other domestic transactors 5,166.7 6,423.0 7,706.4 8,957.6 9,993.0

Net foreign assets of monetary authorities 637.0 921.4 1,366.1 1,504.2 1,702.8


Reference table 8

Gross domestic product and gross national product(Rmb bn; at current prices)

1995 1996 1997 1998 1999

GDP 5,847.8 6,788.5 7,466.3 7,834.5 8,191.1

GNP 5,749.5 6,685.0 7,314.3 7,696.7 8,042.3


68 China


Reference table 9

Gross domestic product by expenditure(Rmb bn; constant 1990 prices)

1995 1996 1997 1998 1999

Private consumption 1,517.1 1,685.5 1,815.7 1,855.6 1,948.4 % change 6.8 11.1 7.7 2.2 5.0 % of GDP 46.4 47.1 46.6 44.2 43.3

Government consumption 384.2 420.7 455.0 473.2 506.3 % change 5.9 9.5 8.2 4.0 7.0 % of GDP 11.8 11.8 11.7 11.3 11.2

Gross fixed investment 1,131.9 1,252.0 1,355.1 1,551.6 1,660.2 % change 13.6 10.6 8.2 14.5 7.0 % of GDP 34.7 35.0 34.8 36.9 36.9

Stockbuilding 179.9 167.7 144.7 195.0 295.0 % of GDP 5.5 4.7 3.7 4.6 6.6

Exports of goods & services 578.5 610.3 751.3 766.3 820.9 % change 13.2 5.5 23.1 2.0 7.1 % of GDP 17.7 17.0 19.3 18.2 18.2

Imports of goods & services 525.1 556.1 626.7 642.4 729.1 % change 10.8 5.9 12.7 2.5 13.5 % of GDP 16.1 15.5 16.1 15.3 16.2

GDP 3,266.5 3,580.1 3,895.1 4,199.4 4,501.8 % change 10.5 9.6 8.8 7.8 7.2

Source: EIU, CountryData.

Reference table 10

Gross domestic product by sector(Rmb bn; current prices)

1995 1996 1997 1998 1999

Primary 1,199.3 1,388.4 1,421.1 1,455.2 1,445.7

Secondary 2,853.8 3,361.3 3,722.2 3,861.9 4,041.8 of which: industry 2,471.8 2,908.3 3,241.2 3,338.7 3,497.5 construction 382.0 453.0 481.0 523.1 544.7

Tertiary 1,794.7 2,042.7 2,302.8 2,517.3 2,703.6 of which: transport, post & telecommunications 305.5 349.4 379.7 412.1 446.0 domestic trade 493.2 556.0 615.9 657.9 684.2

GDP 5,847.8 6,792.4 7,446.1 7,834.4 8,191.1


China 69


Reference table 11

Price indices(1978=100 unless otherwise indicated)

1995 1996 1997 1998 1999

Overall retail pricesa 356.1 377.8 380.8 370.9 359.8 % change on previous year 14.8 6.1 0.8 –2.6 –3.0

Overall consumer pricesb 302.8 327.9 337.1 334.4 329.7 % change on previous year 17.1 8.3 2.8 –0.8 –1.4

Urban consumer prices 429.6 467.4 481.9 479.0 472.8 % change on previous year 16.8 8.8 3.1 –0.6 –1.3 of which: foodc 552.8 595.4 595.4 576.9 569.4 % change on previous year 22.9 7.7 0.0 –3.1 –1.3

Rural consumer pricesb 291.4 314.4 322.3 319.1 314.3 % change on previous year 17.5 7.9 2.5 –1.0 –1.5

Farm products purchasing prices 527.9 550.1 525.3 483.3 424.3 % change on previous year 19.9 4.2 –4.5 –8.0 –12.2

Rural retail prices of industrial products 274.6 291.6 294.8 288.3 280.5 % change on previous year 14.7 6.2 1.1 –2.2 0.7

a Includes prices of consumer goods and agricultural producer goods sold to farmers. b 1985=100, includes consumer goods and servicesconsidered necessities of daily life. c Derived from a separate index.


Reference table 12

Agricultural production(m tonnes unless otherwise indicated)

1995 1996 1997 1998 1999

Grain 466.6 504.5 494.2 512.3 508.4

Cotton 4.8 4.2 4.6 4.5 3.8

Oil-bearing crops 22.5 22.1 21.6 23.1 26.0

Sugarcane 65.4 66.9 78.9 83.4 74.7

Sugarbeet 14.0 16.7 15.0 14.5 8.6

Tea 0.6 0.6 0.6 0.7 0.7

Aquatic products 25.2 32.9 36.1 39.1 41.2

Meat 52.6 46.0 52.7 57.2 59.5

Pigs (m head) 441.7 362.8 400.3 422.6 430.2

Sheep & goats (m head) 276.9 237.3 255.8 269.0 279.3

Cattle & other large animals (m head) 158.6 133.6 145.6 148.0 150.2


Reference table 13

Gross agricultural output value, by sector(% of total; current prices)

1995 1996 1997 1998 1999

Crop cultivation 54.3 53.7 56.4 58.0 57.5

Forestry 3.5 3.3 3.3 3.5 3.6

Animal husbandry 29.7 30.2 31.0 28.6 28.5

Fishery 8.4 8.6 9.2 9.5 10.3

Other 4.1 4.2 0.1 0.4 0.1


70 China


Reference table 14

Total sown area, by crop(% of total)

1995 1996 1997 1998 1999

Grain crops 73.4 73.9 73.3 73.1 72.4 of which: rice 20.5 20.6 20.6 20.0 20.0 wheat 19.3 17.5 19.5 19.1 18.5 maize 15.2 16.1 15.4 16.2 16.6 tubers 6.4 6.4 6.3 6.4 6.6 soybeans 7.5 6.9 7.2 7.5 7.2

Industrial crops n/a n/a n/a n/a n/a of which: cotton 3.6 3.1 2.9 2.9 2.4 oil-bearing crops 8.7 8.2 8.0 8.3 8.9 of which: rapeseed 4.6 3.1 4.2 4.2 4.4 peanuts 2.5 2.3 2.4 2.6 2.7 sugar 1.2 1.2 1.2 1.3 1.1 tobacco 1.0 1.2 1.5 0.9 0.9

Vegetables & melons 6.3 6.9 7.3 7.9 8.5


Reference table 15

Miscellaneous agricultural statistics

1995 1996 1997 1998 1999

Grain yields (kg/ha) 4,659 4,894 4,823 4,953 4,945

Cotton yields (kg/ha) 879 890 1,025 1,009 1,028

Irrigated area (m ha) 492.8 503.8 512.4 523.0 531.6

Chemical fertiliser applied (m tonnes) 35.9 38.3 39.8 40.8 41.2

Chemical fertiliser produced (m tonnes) 25.5 28.1 28.2 30.1 32.5

Afforested area (m ha) 12.9 12.9 13.4 13.4 15.9

Grain imports (m tonnes) 20.8 12.2 4.2 2.4 1.7


Reference table 16

Industrial production(m units unless otherwise indicated)

1995 1996 1997 1998 1999

Light industrial productsBicycles 44.7 33.6 30.0 23.1 24.0Television sets 35.0 35.4 36.4 35.0 42.6Wristwatches 481.2 479.8 295.0 n/a n/aCloth (bn metres) 26.0 20.9 24.9 24.1 25.0Refrigerators 9.2 9.8 10.4 10.6 12.1Washing machines 9.5 10.7 12.5 12.1 13.4

Heavy industrial productsCement (m tonnes) 475.9 491.2 511.7 536.0 573.0Crude steel (m tonnes) 95.4 101.2 108.9 115.6 124.3Plastics (m tonnes) 5.2 5.8 6.9 6.9 8.7Pig iron (m tonnes) 105.3 107.2 115.1 118.6 125.4Motor vehicles (‘000 units) 1,452.7 1,475.2 1,582.5 1,630.0 1,832.0Tractors (‘000 units) 63.3 83.7 82.4 67.8 65.4


China 71


Reference table 17

Sources and uses of credit funds by state banks(Rmb bn unless otherwise indicated; year-end balances)

1995 1996 1997 1998 1999

SourcesDeposits 3,878.3 4,959.3 8,239.0 9,659.8 10,887.9Liabilities to international financial institutions 38.2 29.5 19.6 17.4 37.2Bonds 166.4 246.5 3.0 5.6 4.0Currency in circulation 788.5 880.2 1,017.8 1,120.4 1,345.6Funds of banks 227.2 274.5 191.1 n/a n/aOther 39.5 –65.4 221.4 328.8 58.5

UsesLoans to industrial production enterprises 878.9 1,078.2 1,652.6 1,782.2 1,794.9Loans for industrial supply & marketing 106.3 111.8 n/a n/a n/aLoans to commercial enterprises 1,216.3 1,441.7 1,835.7 1,975.2 1,989.1Loans to construction enterprises 103.5 169.5 159.1 162.8 147.8Loans to individual proprietors 3.4 5.4 38.7 47.2 57.9Loans to urban collectives & households 106.6 120.0 503.6 n/a n/aLoans to agriculture 192.2 236.8 331.5 444.4 479.2Loans for fixed assets 1,002.6 1,203.4 n/a n/a n/aOther loans 329.5 376.6 831.6 842.7 1,005.4Government debts 158.2 158.2 158.2 158.2 158.2Foreign exchange 677.4 957.9 1,346.7 1,372.8 1,479.2Other 363.2 465.2 n/a n/a n/aTotal funds 5,138.1 6,324.7 9,500.8a 11,042.0 12,320.3Rural credit co-operatives (no.) 365,492 n/a n/a n/a n/aRural credit co-operatives’ deposits 717.3 n/a n/a n/a n/a

a Figures do not add in source.

Sources: National Bureau of Statistics, China Statistical Yearbook; People’s Bank of China, China Financial Outlook.

Reference table 18

Exports(US$ m; fob)

1995 1996 1997 1998 1999

Primary goods 21,487 21,925 23,953 20,589 19,941 Food & live animals etc 9,954 10,232 11,075 10,613 10,458 Beverages & tobacco 1,369 1,342 1,049 975 771 Non-edible raw materials 4,375 4,046 4,195 3,519 3,921 Mineral fuels, lubricants etc 5,335 5,929 6,987 5,175 4,659 Animal & vegetable oils, fats, waxes 454 376 647 307 132

Manufactured goods 127,283 129,141 158,839 163,220 174,990 Chemicals & related products 9,094 8,879 10,227 10,321 10,373 Light industrial products, rubber, minerals, iron etc 32,243 28,511 34,432 32,477 33,262 Machinery & transport equipment 31,391 35,313 43,709 50,217 58,836 Miscellaneous products 54,548 56,426 70,467 70,200 72,510 Products not classified elsewhere 7 12 4 5 9

Total 148,770 151,066 182,792 183,809 194,931


72 China


Reference table 19

Imports(US$ m; cif)

1995 1996 1997 1998 1999

Primary goods 24,411 25,440 28,620 22,952 26,846

Food & live animals etc 6,131 5,672 4,304 3,793 3,619 Beverages & tobacco 394 497 320 179 208 Non-edible raw materials 10,158 10,697 12,006 10,715 12,740 Mineral fuels, lubricants etc 5,127 6,877 10,306 6,776 8,912 Animal & vegetable oils, fats, waxes 2,601 1,697 1,684 1,491 1,367

Manufactured goods 107,667 113,398 113,741 117,288 138,853 Chemicals & related products 17,300 18,106 19,297 20,158 24,030 Light industrial products, rubber, minerals, iron etc 28,772 31,391 32,224 31,075 34,317 Machinery & transport equipment 52,638 54,771 52,759 56,845 69,453 Miscellaneous products 8,264 8,484 8,552 8,456 9,701 Products not classified elsewhere 693 646 909 754 1,352

Total 132,078 138,838 142,361 140,237 165,699


Reference table 20

Balance of payments, IMF estimates(US$ m)

1995 1996 1997 1998 1999

Exports: goods fob 128,110 151,080 182,670 183,529 194,716

Imports: goods fob –110,060 –131,542 –136,448 –136,915 –158,509

Trade balance 18,050 19,538 46,222 46,614 36,207

Exports of services 19,130 20,601 24,581 23,895 23,778

Imports of services –25,223 –22,585 –30,306 –26,672 –31,288

Income credit 5,191 7,318 3,174 5,584 10,571

Income debit –16,965 –19,755 –19,097 –22,228 –28,545

Transfers credit 1,827 2,368 5,477 4,661 5,368

Transfers debit –392 –239 –333 –382 –424

Current-account balance 1,618 7,246 29,718 31,472 15,667

Direct investment abroad –2,000 –2,114 –2,563 –2,634 –1,775

Direct investment in China 35,849 40,180 44,236 43,751 38,753

Portfolio investment assets 79 –628 –899 –3,830 –10,535

Portfolio investment liabilities 710 2,372 7,703 98 –699

Other investment assets –87 –1,126 –33,929 –35,041 –24,394

Other investment liabilities 4,122 1,282 8,430 –8,619 6,317

Financial balance 38,673 39,966 22,978 –6,275 7,667

Capital-account balance 0 0 0 0 0

Net errors & omissions –17,822 –15,504 –16,818 –18,902 –14,656

Overall balance 22,469 31,705 35,878 6,248 8,652

Financing (– indicates inflow)Movement of reserves –22,469 –31,705 –35,878 –6,248 –8,652Use of IMF credit & loans 0 0 0 0 0


China 73


Reference table 21

External debt(US$ m unless otherwise indicated; debt stocks as at year-end)

1994 1995 1996 1997 1998

Total external debt 100,457 118,090 128,817 146,697 154,926 Long-term debta 82,974 95,764 103,410 115,233 126,993 Short-term debt 17,483 22,325 25,407 31,464 27,933

Public & publicly guaranteed long-term debt 82,391 94,675 102,260 112,821 99,424 Official creditors 28,973 36,982 39,433 39,755 45,146 Multilateral 13,588 16,302 17,695 18,973 22,283 Bilateral 15,385 20,680 21,737 20,782 22,863 Private creditors 53,418 57,693 62,828 73,066 54,278 of which: banks 21,475 23,869 24,437 34,873 24,400 bonds 11,087 10,684 11,106 12,616 13,941

Total debt service 11,135 15,066 15,756 18,445 18,435 Principal 6,343 9,070 10,260 11,527 11,209 Interest 4,792 5,996 5,496 6,918 7,226 of which: short-term debt 948 1,340 812 1,365 1,651

Ratios (%)Total external debt/GNP 18.6 17.2 16.0 16.6 16.4Debt-service ratiob 8.9 9.8 8.6 8.4 8.6Short-term debt/total external debt 17.4 18.9 19.7 21.4 18.1Concessional long-term debt/total long-term debt 19.2 18.8 18.1 15.7 n/aVariable interest long-term debt/total long-term debt 28.0 29.6 29.6 39.2 n/a

a Long-term debt is defined as having original maturity of more than one year. b Debt service as a percentage of earnings from exports of goodsand services.

Source: World Bank, Global Development Finance.

Reference table 22

Official development assistance(US$ m)

1994 1995 1996 1997 1998

Bilateral OECD 2,393.9 2,531.3 1,670.9 1,228.6 1,731.6 of which: Germany 300.0 684.1 461.1 381.9 321.3 France 97.7 91.2 97.2 50.1 29.8 Austria 32.4 66.2 4.9 3.3 –2.5

Arab countries 24.4 35.7 18.4 –29.2 –12.2

Multilateral 820.0 967.3 928.3 841.0 639.5 of which: IDA 671.0 798.2 790.7 687.1 553.8 UNDP 38.4 38.3 28.7 43.2 14.4 EC 14.1 32.7 34.8 15.5 21.7

Total 3,213.9 3,498.6 2,599.2 2,069.6 2,371.1

Source: OECD Development Assistance Committee, Geographical Distribution of Financial Flows to Aid Recipients.

74 China


Reference table 23

Position of China vis-à-vis BIS-reporting banks(US$ m; end-period)

1995 1996 1997 1998 1999

Assets 67,061 79,750 89,091 81,663 67,511

Liabilities 57,428 57,428 65,074 71,800 67,809

Source: Bank for International Settlements, International Banking and Financial Market Developments.

Reference table 24

Foreign reserves(US$ m unless otherwise indicated; end-period)

1995 1996 1997 1998 1999

Foreign exchange 73,579 105,029 139,890 144,959 154,675

SDRs 582 614 602 676 741

Reserve position in the IMF 1,216 1,396 2,270 3,553 2,312

Total reserves excl gold 75,377 107,039 142,762 149,188 157,728

Gold 660 637 601 624 608

Gold (m fine troy oz) 12.7 12.7 12.7 12.7 12.7


Reference table 25

Exchange rates(Rmb per unit of currency; annual averages)

1995 1996 1997 1998 1999

US$ 8.351 8.314 8.290 8.279 8.280

HK$ 1.080 1.075 1.071 1.069 1.065

¥ (‘000) 89.23 76.35 68.60 63.50 80.70


Mongolia 75


Mongolia

Basic data

1,566,500 sq km

2.38m (January 5th 2000)

Population in ‘000 (1999)

Ulaanbaatar (capital) 773,700Darkhan 84,800Erdenet 73,900

Continental with extremes of temperature. Weather in Ulaanbaatar (altitude1,350 metres): rainy season, June-August; mean winter temperature, –20°C;mean summer temperature, 15°C but with wide daily fluctuations

Mongolian

Metric system

Togrog. Average free market rate in 1999: Tg1,072.4:US$1

January-December

8 hours ahead of GMT

January 1st (New Year’s Day); February 6th-8th (Mongolian Lunar New Year);June 1st (Women and Children Day); July 11th-13th (National Days, Naadam);November 26th (Republic Day); December 31st (New Year’s Eve)

Land area

Population

Main towns

Climate

Language

Measures

Currency

Fiscal year

Time

Public holidays, 2000

76 Mongolia


Political background

In 1990 the Soviet-backed, one-party state in Mongolia gave way to a moredemocratic political system. However, the transition has not been easy. TheDemocratic Coalition came to power in 1996 but the unity of its memberparties was shaky and easily undermined by the former communists, who arestill a strong force in Mongolian politics. Three prime ministers have resignedsince 1996, and the Democratic Coalition collapsed in early 2000. The formercommunists won a landslide victory in the 2000 election.

Historical background

Mongolia separated from China in 1911. From 1921 the Mongolian People’sParty (renamed the Mongolian People’s Revolutionary Party, MPRP, in 1924)ruled with backing from the Soviet Union, and it was the only permittedpolitical party until 1990. During this period relations with the Soviet Unionwere close. Soviet aid contributed substantially to the transformation ofMongolia’s social and economic life but the cost was high and about 100,000Mongolians died or disappeared in the 1930s in Soviet-style purges.

From December 1989 a series of pro-democracy demonstrations forced theMPRP to surrender its “guiding role” in Mongolia. The constitution wasamended and the first multiparty election for the national assembly, thePeople’s Great Khural, was held in July 1990. Although representatives fromfour other parties and several independents were elected, the MPRP gained80% of the seats. The Great Khural elected Punsalmaagiin Ochirbat, a formermember of the MPRP, as the country’s first president.

A new constitution was adopted in February 1992 replacing the People’s GreatKhural with a unicameral 76-seat State Great Khural. At the election for thenew body in June 1992, the MPRP took 70 seats. The MPRP governmentsubsequently clashed with the president, Mr Ochirbat, when he blockedlegislation he regarded as unconstitutional. As a result Mr Ochirbat lost thebacking of the ruling party but won Mongolia’s first direct presidential electionin June 1993 as the opposition’s candidate. The opposition’s success wasrepeated in the general election of June 1996 when the Democratic Coalition,of the Mongolian National Democratic Party (MNDP) and the MongolianSocial Democratic Party (MSDP), took 49 of the 76 seats in the parliament. Aleader of the MNDP, Mendsaikhany Enkhsaikhan, became prime minister.

The democrats faced stiff opposition from the MPRP. In 1997 Mr Ochirbat lostthe presidential election to the MPRP candidate, Natsagiin Bagabandi. Inparliament the MPRP attacked government policies and staged successivewalkouts. In 1998 a succession of prime ministers further weakened thecoalition. In April Mr Enkhsaikhan was replaced as prime minister by theleader of the MNDP, Tsakhiagiin Elbegdorj, following a change to thegovernment law to allow MPs to serve as ministers. His government was

Soviet backing pushes theMPRP into power

MPRP rule lasts until theearly 1990s

Opposition parties takepower

Government crises in1998-99

Mongolia 77


brought down in July on a no-confidence vote after attempting to forcethrough a controversial bank merger. Then for five months there was noproper government because the Democratic Coalition could not produce acandidate acceptable to the president, Mr Bagabandi. The crisis deepened whenthe acting minister of infrastructure, Sanjaasürengiin Zorig, was murdered, thereasons for which are still unclear. In November the Constitutional Courtoverruled the government law amendments. The mayor of Ulaanbaatar andleader of the MNDP, Janlavyn Narantsatsralt, then became prime minister inDecember 1998, but only lasted until July 1999. He was brought down forapproving the sale of Russian shares in Erdenet, a Mongolian-Russian jointventure, an act deemed illegal by the State Great Khural. Mr Narantsatsralt’sdemise was largely instigated by the MSDP. Rinchinnyamyn Amarjargal(MNDP) became prime minister until the end of term.

The political events of 1998 and 1999 fomented divisions between the MNDPand the MSDP and within the two parties, weakening the coalition andundermining public confidence. In early 2000 members of the MNDP resignedand formed two new parties, the Mongolian Democratic Party and the CivilCourage Party. Then the MSDP decided to campaign independently for thegeneral election, held on July 2nd. In all, 24 parties fielded candidates but theMPRP was the clear winner taking 72 seats. The MPRP leader, NambarynEnkhbayar, was appointed prime minister in July. However, another politicalcrisis could be looming. Mr Enkhbayar and some of his ministers are MPs. InDecember 1999 parliament voted to amend the constitution to permit MPs tohold cabinet posts but in March 2000 the Constitutional Court declared theamendments unconstitutional. However, since parliament failed to respond tothe ruling within the statutory 14 days the matter is still unresolved and couldcause the new government problems.

Constitution and institutions

Under the constitution of February 1992 the state is headed by a directlyelected president. The president heads the National Security Council and thearmed forces. The legislature is the State Great Khural, a unicameral body of 76members, elected for a four-year term. The president has the power to vetolegislation but can be overruled by a two-thirds majority in the State GreatKhural. The judiciary is independent of both the legislature and the president.A separate Constitutional Court rules on questions of the legality of legislationand the activities of members of the government.

Administratively, the country is divided into 21 aimags (provinces) includingthe capital, Ulaanbaatar, Darkhan-Uul and Orkhon (Erdenet) are also urban.The aimags have elected assemblies but governors are appointed by the StateGreat Khural. Aimags are subdivided into sums which also have electedassemblies.

The MPRP wins the 2000election

78 Mongolia


Important recent events

1996: The Democratic Coalition, consisting of the Mongolian National DemocraticParty (MNDP) and the Mongolian Social Democratic Party (MSDP), takes 49 of the 76seats in the parliament in the June general election. The MNDP leader, MendsaikhanyEnkhsaikhan, becomes prime minister.

1997: Mr Ochirbat is defeated by the MPRP’s presidential candidate, NatsagiinBagabandi, in the May presidential election.

1998: The government law is amended to allow MPs to serve as ministers.Consequently, Mr Enkhsaikhan is replaced as prime minister by the leader of the MNDP,Tsakhiagiin Elbegdorj, in April. However, his government is forced to resign in July after avote of no-confidence by the opposition following a controversial bank merger. Theamendment is subsequently overturned. It is not until December that the new MNDPleader, Janlavyn Narantsatsralt, takes office as prime minister.

1999: The Narantsatsralt government falls in July because of a Russian share salescandal. Rinchinnyamyn Amarjargal becomes prime minister at the end of July and theprevious cabinet is re-appointed. In October three democratic MPs are jailed forcorruption.

2000: Members of the MNDP resign to form the Mongolian Democratic Party and theCivil Courage Party. The Democratic Coalition then collapses. The MPRP take 72 seats inthe July general election and Nambaryn Enkhbayar becomes prime minister.

Political forces

The MPRP, founded in 1920 as the Mongolian People’s Party, was the onlypolitical party in Mongolia until the 1990s. Initially communist, the MPRPnow regards itself as a social democratic party. In 1990 the formation of otherparties was legalised, and there are now 24. The Mongolian NationalDemocratic Party (MNDP) and the Mongolian Social Democratic Party (MSDP),which made up the Democratic Coalition, were the most important of theother parties until their defeat in the 2000 election. Following the 2000election the MNDP, the Civil Courage Party (CCP) founded in March 2000, andthe Mongolian Democratic New Socialist Party (MDNSP) have one seat each. Itis not yet clear whether they and the one independent member will act as aunited opposition.

In addition to formal parties there are also pressure groups, such as theMongolian Democratic Union, which spearheaded demands for reform in1989-90. A law on non-government organisations (NGOs), in force since 1997,has improved the status of lobby groups. Women’s NGOs are working toimprove social and economic conditions for women, whose presence innational politics is small. There are legal restrictions on the involvement of

The former communists arestill a powerful force

Lobby groups and NGOsplay a role

Mongolia 79


monasteries and other religious groups in national politics but respect forBuddhism no longer incurs exclusion from public life.

Main political figures

Natsagiin Bagabandi: Chairman of the State Great Khural parliament in 1992-96 andcurrent president. Mr Bagabandi was the Mongolian People’s Revolutionary Party(MPRP) candidate in the presidential election in May 1997. However, there have beensigns that his agenda is different from that of the parliamentary MPRP. During thepolitical crisis of 1998 Mr Bagabandi blocked the nominees for prime minister proposedby the Democratic Coalition. Instead he put forward his own candidates, leading to thecharge that he was seeking a greater executive role in government.

Nambaryn Enkhbayar: Formerly an official of the Writers’ Union and minister ofculture in 1992-96. He was appointed head of the MPRP after the party lost the 1996general election and became an MP as a result of a by-election in October 1997. He wasa fierce opponent of the Democratic Coalition and its reform programme. He ledfrequent MPRP boycotts, staying away for eight weeks prior to the fall of the Elbegdorjgovernment. He was appointed prime minister in July 2000 after the election.

Lkhamsürengiin Enebish: Has held various posts including mayor of Ulaanbaatar,deputy prime minister in the 1992-96 government and secretary of the MPRP in 1996-2000. He was appointed speaker of parliament in July 2000 and is likely to play aleading role in resolving the problem created by the 1999 constitutional amendment.

International relations and defence

Until the early 1990s Mongolia relied almost exclusively on the Soviet Unionand other countries of the Council for Mutual Economic Assistance (Comecon,the communist states’ economic bloc). The end of the cold war andconsequent withdrawal of Soviet troops from the Sino-Mongolian border haveallowed the development of a new foreign policy based on pragmaticeconomic considerations rather than ideology. Mongolia has sought to balanceits relations with China and Russia. It has also built up relations with countriessuch as Japan, South Korea, Germany and the US, all of which are generousdonors of aid. Membership of Asian organisations is also an objective.Mongolia joined the Association of South-East Asian Nations (ASEAN) RegionalForum in 1998 and is seeking membership of the Asia-Pacific Economic Co-operation (APEC) forum.

Armed forces, 1999-2000

Defence forces 9,100 of which: army 7,500 air force 800

Paramilitary (mainly border guards) 7,200

Reserves 140,000

Source: International Institute for Strategic Studies, The Military Balance, 1999/2000.

Traditional relations areshifting

80 Mongolia


Resources and infrastructure

Population

Pro-natal policies caused a doubling of the population between 1960 and 1990,and as a result 36% of the population is under aged 15. Population density isvery low at 1.5 people per sq km. Between 1989 and 2000 population growthaveraged 1.4% per year although the government target is 1.8% per year.Migration from rural to urban areas is a significant trend and in 2000, 58.6% ofthe population lived in urban areas, mainly Ulaanbaatar, Darkhan and Erdenet.(See Reference table 1 for historical population data.)

Real unemployment, including underemployment, is estimated at about 20%of the working population and is higher in urban than rural areas. Povertyincreased in the 1990s, stabilising at around 36% of the population in 1998.(See Reference table 2 for historical labour force data.)

Population and health indicators, 1999(per 1,000 population unless otherwise indicated)

Total population (m) 2.4

Population growth rate (%) 1.4

Life expectancy (years) 65.1

Crude birth rate 21

Crude death rate 6.1

Infant mortality (per 1,000 live births) 37.3

Maternal mortality (per 100,000 live births) 175

Sources: National Statistical Office website; UN Human Development Report 2000.

Education and health

Under communism both education and health were fully funded by the state.Hence, Mongolia has a pool of highly literate and well-educated people. Noweducation is provided by both the state and the private sector. The proportionof the state budget spent on education fell from 16.2% in 1994 to 14.7% in1998, and rural education services have been particularly hard hit. Free stateeducation is available at primary and secondary levels, and vocational andtertiary education is partly state funded. A restructuring programme supportedby the Asian Development Bank (ADB) should improve provision in ruralareas, rationalise the use of personnel and cut school dropout rates.

External humanitarian aid, as well as the government’s Poverty AlleviationProgramme, ensured that the basic indicators of health improved in the 1990s.By 1998 infant mortality had fallen to 35.3 per 1,000 live births from 64.4 in1990, and the overall death rate from 8.5 to 7.5 per 1,000 people per year.Government spending on health was cut after 1991. Rural health services

Education is beingrestructured

Health reforms areunderway

Mongolia 81


declined and the poor cannot afford health insurance. Reforms are in progressto provide more primary care and preventive medicine, and better distributionof health workers.

Natural resources and the environment

Mongolia’s 1.6m-sq-km land area includes mountain, forest, steppe and semi-desert regions. The country is mineral rich, with significant oil reserves anddeposits of other ores. Most of the country is designated pasture land, wherecamels, horses, cattle, sheep and goats are reared. The severe continentalclimate restricts other agricultural activities. Water is scarce and the growingseason is no more than 100 days long. Land quality is also limited bydesertification, which affects 30% of pasture, and by overgrazing, especiallyby goats.

Transport and communications

The most crucial transportation link is the Ulaanbaatar Railway, which movesfreight and passengers into Russia, China and beyond. It serves the threelargest industrial conurbations, Ulaanbaatar, Darkhan and Erdenet. Transportwithin the country is limited by a poor road network, of which only 1,471 kmwas paved in 1996, by limited supplies of imported fuel, and by a national aircarrier, MIAT, that is deeply in debt. Roads, bridges, and airport and railwayfacilities have been refurbished and new ones constructed, mainly withexternal aid. MIAT is being prepared for privatisation.

Telecommunications improved considerably in the 1990s. Direct internationalcalls can be made to and from many parts of the country and fax machines areincreasingly available. Ulaanbaatar got its first Internet link in 1996 and otherareas gained access in 1999. State control of the media was banned fromJanuary 1st 1999. However, the transition of the state press to the private sectorand the formation of a public broadcasting corporation are not yet complete.

Energy provision

The Central Electricity System (CES), powered by five coal-fired power stations,supplies Mongolia’s main industrial region with electricity and heat. A newgrid serves the three western aimags and both grids are linked to the Russianelectricity network. The CES is being renovated with external aid. Hydroelectricstations and renewable energy systems are beginning to replace some of thesmall provincial diesel stations. However, the whole system is in debt andpower cuts are common. Communities without electricity still use wood ordried dung as fuel.

Aid improves transportinfrastructure

Internet links are extendedto some provinces

Coal-fired power stationsundergo refurbishment

82 Mongolia


Energy balance, 1999(m tonnes oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Primary production 0.01 0.00 1.70 0.00 0.09 1.80Imports 0.42 0.00 0.01 0.07a 0.00 0.50Exports –0.01 0.00 0.00 0.00 0.00 –0.01Primary supply 0.42 0.00 1.71 0.07a 0.09 2.29

Losses & transfers –0.11 0.00 –0.54 –0.11 0.00 –0.76Net transformationb 0.00 0.00 0.00 0.22b 0.00 0.22Final consumption 0.31 0.00 1.17 0.18b 0.09 1.75

a Expressed as input equivalents, on an assumed generating efficiency of 33%. b Output basis.

Source: Energy Data Associates.

The economy

Economic structure

Main economic indicators, 1999

Real GDP growth (% change, year on year) 3.5

Consumer price inflation (av; %) 7.6

Current-account balance (US$ m) –112.2

Exchange rate (av; Tg:US$) 1,021.9

Population ( m) 2.5

Sources: IMF, International Financial Statistics; EIU.

Mongolia depended almost exclusively on livestock herding until the 1960s.An industrial sector developed from 1960 to 1980 with Council for MutualEconomic Assistance (Comecon) aid, and by the mid-1970s industrialproduction had overtaken agricultural output. By 1990 industry (excludingconstruction) accounted for 35.6% of GDP and agriculture for 15.2%. In 1991the assets of herding collectives and state farms were privatised and pricesliberalised. Herds grew from 25.5m in 1991 to 33m in 1998. Agricultureaccounted for 32.8% in 1998 whereas industry accounted for only 24.1%of GDP.


Mongolia China Malaysia Russia Thailand

GDP (US$ bn) 1.0 989.3 78.7 184.6 125.9

GDP per head (US$) 391 786 3,473 1,260 2,040

Consumer prices (av; % change) 7.6 –1.3 2.7 85.8 0.2

Exports of goods fob (US$ bn) 0.5 194.7 83.9 74.7 56.8

Imports of goods fob (US$ bn) 0.5 158.5 61.2 –39.4 43.3

Current-account balance (% of GDP) –11.5 1.6 16.0 13.5 8.8

Sources: EIU; national sources.

Agriculture is again moreimportant than industry

Mongolia 83


Economic policy

Until the early 1990s Mongolia’s economy was managed using a centralplanning model similar to that of the Soviet Union and co-ordinated with theplans of other Comecon countries. Modernisation had already begun withSoviet and Chinese aid in the 1950s and collectivisation was completed in1959. From the 1960s Comecon aid promoted the rapid expansion of industry,infrastructure and urbanisation. In the 1970s mining developed through jointventures with the Soviet Union, Czechoslovakia and Bulgaria.

In 1990 Mongolia turned its back on the command economy and opted for amarket-led system. A rapid transition was to be achieved by “shock therapy”through three main mechanisms: privatisation, currency reform, and price andwage liberalisation. In 1991 Mongolia joined the World Bank, the IMF and theAsian Development Bank (ADB), which agreed to help the country toovercome the difficulties of loss of Soviet aid, and guaranteed deliveries andexternal markets.

In the 1980s the Soviet Union covered up to a third of Mongolia’s budgetdeficit, equivalent to 17.6% of GDP from 1986 to 1990. From 1991 thegovernment began to cut spending and from 1993 the IMF has supported thebudget as revenue reforms (see Major tax reforms box) helped to reduce thedeficit to 5.5% of GDP in 1993-97. In 1997 the ruling Democratic Coalitionmade further cuts, simplified taxes and introduced value-added tax (VAT). Atthe same time a radical new privatisation programme was introduced toprovide additional revenue. However, it was widely opposed in and out ofparliament on the grounds that it would damage national security. In 1999 18companies were excluded from auction and may only be privatised on a case-by-case basis so privatisation receipts fell below target. In addition, Mongoliawas adversely affected by the Asian financial crisis and suffered further loss ofincome as a result of the Russian crisis in 1999. (See Reference tables 3-5.)

Government finances, 1999(Tg m)

Total revenue 259,400Current revenue 240,800 Tax 182,500 Non-tax 58,300Capital revenue 11,900Grants 6,700

Total expenditure 344,400Current expenditure 235,300Capital expenditure 34,800Net lending 74,300

Budget balance –85,000 % of GDP –

Sources: Bank of Mongolia, Annual Report 1999; EIU.

Central planningdominates until the 1990s

The move to a market-ledsystem

Government financesremain firmly in deficit

84 Mongolia


In the early years of the reform period growth in money supply was rapid: in1993 broad money supply (M2) grew by 228% year on year. The Bank ofMongolia (the central bank) has had some success in taming this rapid growth,partly through the imposition of credit controls. In 1996 M2 growth fell to17.2%, but it picked up once again in 1997. The Asian crisis had an effect in1998, and M2 contracted by 1.7% year on year (see Reference table 6). In 1999the Bank of Mongolia established monetary policy guidelines consistent withIMF agreements aiming to stabilise the togrog, hold down inflation andincrease net reserves to better enable Mongolia to manage external shocks andreduce poverty.

Major tax reforms

1997: New income tax rates and a simplified and progressive business tax wereintroduced. Most customs tariffs were abolished.

1998: On July 1st a value-added tax was introduced at 10%, but it was quickly raised to13% in an attempt to close the government’s widening budget deficit. A 10% gold taxwas imposed on November 6th.

1999: Customs duty on all imported goods, except medical equipment, was reinstatedat 10%.

Economic performance

According to ADB figures, GDP grew at an average annual rate of 6.2% duringthe 1980s. The collapse of Comecon in 1990-91 had a severe effect onMongolia’s economy, ending the investments and subsidised deliveries of rawmaterials, spares and consumer goods. A shortage of foreign exchange reducedoil deliveries and damaged transport and energy production. As a result outputcontracted, and GDP contracted by 9.5 in 1992.

Gross domestic product(% real change)


GDP 3.5 3.9

Regional comparisonsChina 7.2 8.8Russia 3.2 1.7Kazakhstan 1.7 1.2

Sources: Asian Development Bank, Economic and Resource Centre website; EIU, CountryData.

GDP has risen in real terms every year from 1995 to 1999, at an average annualrate of 3.5%. Output in the livestock sector soared after privatisation. Industriesproducing for export, especially copper, gold and cashmere, benefited fromhigh export prices in the mid-1990s. At the same time, medium-term aid for

A severe contraction in theearly 1990s

GDP grows steadily in1995-99

State bank tries to reducemoney supply growth

Mongolia 85


infrastructure strengthened transport and communications. By 1996 theprivate sector was contributing about two-thirds of GDP. However, recoverywas mixed, and state-sector industries in need of renovation, especially thosebased on agricultural inputs, were still struggling. Further recovery and growthwere held back by falling world prices and the slowdown in the privatisationprogramme, and GDP growth remained at its 1998 level of 3.5% in 1999 (seeReference tables 7-9).

Inflation(% change, year on year)


Consumer prices 7.6 32.0

Regional comparisonsChina –1.3 5.2Russia 85.8 72.6Kazakhstan 8.2 49.6

Sources: IMF, International Financial Statistics; EIU, CountryData.

Inflation soared to 325% in early 1993 owing to price and wage liberalisationand the rapid fall in the value of the togrog. Thereafter, price increases havesince slowed reaching an annual average of 7.6% in 1999. The Asian crisis of1998 and the Russian crisis of 1999, which pushed up the cost of imported oil,sent inflation up toward the central bank’s target ceiling of 15% year on yearduring 2000. (See Reference table 10 for historical inflation data.)

Economic sectors

Agriculture and forestry

The agricultural sector has been progressively liberalised since the early 1990s.Privatisation of the negdel (herding collectives) assets began in September 1991.By the latter part of 1992 most government procurement had ceased (theexception was meat, which continued to be rationed). During this period,many herdsmen reverted to a subsistence economy, discouraged from sellinglivestock products by low domestic prices. As a result there was a slump inmany agricultural product-processing industries.

The arable sector has also been liberalised. Assets of state farms were disposedof in 1991 to create over 300 small farms. Arable production then fell becausefarmers lacked both access to funds and the necessary management skills tooperate the new enterprises. The area of land under cultivation fell steadilyyear by year. Wheat yields per hectare fell also, according to the UN, from1,301 kg/ha in 1989 to 737 kg/ha in 1995—although there has been someimprovement more recently. Since 1997 family vegetable gardens set up underthe Green Revolution programme have provided additional produce. (See

Inflation falls

Agricultural sectorprogressively liberalised

86 Mongolia


Reference tables 11-13 for historical data on crop, livestock and meatproduction.)

Mining and semi-processing

The minerals sector is active, and the government has been keen to developthe industry further. A new mining law was passed in June 1997 to simplify theprocedure for mining exploration and to reduce licence fees. The country hasan estimated 100bn tonnes of coal reserves and about 17 productive but loss-making mines. The Erdenet Company, owned by Mongolian and Russianinterests, produces copper concentrates and molybdenum. Together withrelated processing concerns, Erdenet generates the majority of Mongolia’sexport earnings. Other mining joint ventures include six fluorspar mines. Goldproduction has risen dramatically since 1993 and 11.1 tonnes were extracted in1998. Mongolia also has an estimated 5bn barrels in oil reserves. Oil wasexported to China in 1998 and construction of a refinery began in 2000. (SeeReference table 14 for data on mineral production.)

Manufacturing

Until the 1990s most industries were state owned and the pattern of industrialdevelopment was based on trade relations with the Soviet Union and theCouncil for Mutual Economic Assistance (Comecon). The collapse of Comeconinflicted much damage on Mongolian industry in 1991-93. Since thenMongolia’s industrial sector has begun to grow again in real terms. Reform ofindustry began in 1991 with the break-up of large enterprises and someprivatisation, although the state generally retained a majority share. Two majorproblems for industry are the inability to provide enough raw materials to runthe large production lines, and insufficient investment. The privatisationprogramme of 1997-2000 set out to correct the latter but widespreadopposition has delayed results. (See Reference table 15 for output data ofselected industrial products.)

Construction

Much construction was carried out by Soviet and Mongolian teams during the1970s and 1980s. In the 1990s the Soviet builders departed and the Mongolianteams were split up into smaller construction companies. However, a shortageof funds and materials resulted in unfinished buildings (which were rapidlystripped) and high rates of unemployment. The start of projects financed withforeign aid—almost half of all building work in 1996—is now helping toregenerate the construction industry. About 50% of the work is carried out byMongolian companies.

Mongolia 87


Financial services

Since 1990 Mongolia’s monolithic banking system has been progressivelyreformed. In 1991 the central and commercial functions of the Mongol Bankwere separated. Two commercial banks were created to hold the accounts ofindividuals and companies, and provide loans. More commercial banks openedbut the system was weak, and by 1996 over 50% of loans were non-performing.A new banking law came into force in 1996, and minimum reserverequirements were raised and credit ceilings enforced. Financial restructuring isnow under way with the help of the World Bank and the IMF. The closure ofinsolvent banks is politically controversial but seven had their licences revokedin 1999. The remaining 12 include six state-owned and six private banks. Someof the former are being prepared for privatisation.

Other services

In spite of limited accommodation and transport facilities, Mongolia’spopularity as a tourist venue is growing. In 1999 there were over 158,743visitors including 34,049 leisure tourists. In 1998 tourism accounted for 3.7%of GDP. A National Tourism Development Plan is to run from 2000 to 2015.

The external sector

Trade in goods

Foreign trade, 1999(US$ m; customs basis)

Merchandise exports fob 454.3

Merchandise imports cif –510.7

Trade balance –56.4


According to figures from the Asian Development Bank (ADB), Mongoliarecorded a trade deficit throughout the 1980s. The deficit lessened with thecollapse of the Council for Mutual Economic Assistance (Comecon) in 1990-91and a surplus was recorded in the early 1990s. However, the improvement waslargely a result of a collapse in imports rather than an improvement in exports.In the second half of the decade the trade balance deteriorated, and a deficit ofUS$56.4m was recorded in 1999.

The renewed trade deficit has been partly the result of poor exportperformance. Mongolia is heavily dependent on commodity exports: mineralproducts, of which copper concentrate is the largest single item, accounted for47% of the country’s total export earnings in 1998. This makes the economy

Tourism

Poor export performanceresults in trade deficits

88 Mongolia


vulnerable to shifts in world commodity prices. Although the volume ofmineral exports has increased, its share of total export earnings has fallen fromthe 65.5% recorded in 1995. Mongolia also exports agricultural commoditygoods, such as cashmere—Mongolia accounts for 30% of world cashmereproduction—textiles, and meat and meat products.

In 1999 Russia, previously Mongolia’s principal market, purchased only 12.5%of Mongolian exports. China has become an increasingly important tradepartner since 1990, accounting for 57.1% of Mongolia’s exports in 1999, andsupplying 15% of its imports. Other important trading partners includeSwitzerland, Japan, South Korea and the EU. (See Reference table 16 for data onmain trading partners.)

Main trading partners, 1999

Exports fob to: % Imports cif from: %

China 57.1 Russia 32.6

US 13.8 China 15.0

Russia 12.5 Japan 12.5

UK 4.0 South Korea 8.2

Italy 3.7 US 6.8

Japan 3.3 Germany 5.3

Source: Bank of Mongolia, Annual Report 1999.

Changes in trade regulations

1994: Duty on 33 items of staple foods and manufacturing inputs was reduced from10% to zero. A 100% import duty was imposed on luxury items such as alcohol, andthe export of a small number of commodities, including rare species and gold, wasbanned.

1997: Mongolia joined the World Trade Organisation (WTO).

1997: Import duty was abolished on all but a few items such as alcohol, tobacco, oilproducts and motor vehicles.

1998: Seasonal 15% import duty was re-imposed on all flour and vegetable imports.

1999: Import duty of 5% was re-imposed on all goods except medical equipment.

Invisibles and the current account

The current account was chronically in deficit in the 1980s, owing to persistentimbalances in trade with Comecon countries. The changes of the early 1990s,which helped to reduce the trade deficit (balance-of-payments basis), helpedpush the current account into surplus in 1993. However, the deterioration inthe trade balance after 1994, and the fall in official transfers, caused the current

Recent changes in thedirection of trade

Mongolia 89


account to move into deficit from 1996. The Asian crisis of 1998 and theRussian crisis of 1999 contributed to the trade deficit. However, in 1999 an18.9% fall in the value of the togrog against the US dollar helped to improvethe balance of trade. (For IMF balance-of-payments figures see Referencetable 17.)

Current account, 1999(US$ m)

Exports: goods fob 454.3

Imports: goods cif –510.7

Trade balance –56.4

Services balance –69.9

Net unrequited transfers 14.0

Current-account balance –112.2


Capital flows and foreign debt

In the first two years following the collapse of Comecon, emergency aidpredominated. This has since been replaced by more project aid forinfrastructure renovation and development, and short- and medium-termdevelopment. In 1991-98 almost US$2bn of aid was pledged through donorconferences called by the UN Development Programme (UNDP), Japan and theWorld Bank. (See Reference table 18 for a breakdown of external debt; seeReference table 19 for net official development assistance.)

Foreign reserves and the exchange rate

Total reserves (excluding gold) rose from US$81.4m at the end of 1994 toUS$175.7m at the end of 1997. They then fell in 1998 to US$94.1m as thegovernment intervened in the foreign-exchange markets to support thecurrency, the togrog, because the merchandise trade deficit had widened. (SeeReference table 20 for data on foreign reserves.)

The togrog was pegged to the transferable rouble from 1973 to 1990, atdifferent rates for commercial and non-commercial transactions. In 1990 thegovernment pegged the currency to the US dollar at a rate of Tg5.63:US$1.Since then it has been devalued several times. In June 1991 the commercialand non-commercial rates were unified at Tg40:US$1. In May 1993 thecurrency was allowed to float, and since then it has fallen steadily, reachingTg1,072.3:US$1 by the end of 1999. After recovering slightly in early 2000 theexchange rate then drifted out against the US dollar in mid- and late-2000. (SeeReference table 21 for historical exchange rate data.)

Mongolia has benefitedfrom aid inflows

90 Mongolia


Appendices

Sources of information

Bank of Mongolia, Annual Report, 1999

National Statistical Office of Mongolia, Mongolian Statistical Yearbook 1998,Ulaanbaatar, 1999State

Statistical Office of Mongolia, National Economy of the MPR for 70 Years:Anniversary Statistical Yearbook, Ulaanbaatar, 1991

Bank of Mongolia: http://mglbank.com.mn

Mongolian government: http://pmis.gov.mn

Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries

Asian Development Bank, Economic and Development Resource Centrewebsite

Energy Data Associates, Bishops Walk House, 19-23 High Street, Pinner,Middlesex HA5 5PJ

IMF, International Financial Statistics (monthly)

World Bank, Global Development Finance (annual)

World Bank, World Development Report (annual)

Asian Development Bank, Mongolia: A Centrally Planned Economy in Transition,Oxford University Press, New York, 1992

Ole Bruun and Ole Odgaard, Mongolia in Transition: Old Patterns, NewChallenges, Curzon, Richmond, Surrey, 1996

Keith Griffin, Poverty and the Transition to a Market Economy in Mongolia,Macmillan, London, 1995

Mongol Messenger (weekly), Montsame, Ulaanbaatar

United Nations Development Programme, Human Development Report Mongolia2000: Reorienting the State, Government of Mongolia and UNDP, Ulaanbaatar, 2000

World Bank, Mongolia, Toward a Market Economy, Washington DC, 1992

International statisticalsources

Select bibliography

Internet home pages

National statistical sources

Mongolia 91


Reference tables

These reference tables provide the most up-to-date statistics available at the time ofpublication.

Reference table 1

Population(‘000 unless otherwise indicated)

1995 1996 1997 1998 1999

Urban 1,202.8 1,226.3 1,252.3 1,236.6 n/a

Rural 1,114.7 1,127.0 1,134.7 1,183.9 n/a

Total (m) 2,317.5 2,353.3 2,387.0 2,420.5 2,620.0a

a Estimate.

Sources: National Statistical Office of Mongolia, Mongolian Statistical Yearbook 1998; IMF estimates.

Reference table 2

Labour force(‘000)

1995 1996 1997 1998 1999

Labour force 1,186.7 1,212.8 1,229.6 1,256.8 1,279.3 of which: economically active 839.8 847.2 852.0 859.3 869.3

Employed 794.7 791.8 788.3 809.5 830.0 of which: agriculture 354.3 358.1 374.5 394.1 402.4 industry 108.1 104.6 100.4 97.9 98.8 construction 29.5 29.7 27.4 27.5 27.6 transport & communication, trade & technical 31.6 31.6 30.3 33.4 34.9

Unemployed 45.1 55.4 63.7 49.8 39.8

Source: National Statistical Office of Mongolia, Mongolian Statistical Yearbook 1998.

Reference table 3

Government finances(Tg m)

1995 1996 1997 1998 1999

Current revenue 135,684 155,933 206,001 216,834 240,796 Tax 105,510 120,978 163,971 154,004 182,511 Non-tax 30,174 34,955 42,030 62,830 58,285Capital revenue 3,855 2,582 10,488 14,614 11,949Grants 5,084 4,409 6,039 8,550 6,693Total revenue 144,623 162,924 222,528 239,998 259,437

Current expenditure 101,508 129,786 192,693 222,420 235,274Capital expenditure 26,659 75,199 96,978 107,716 100,614Net lending 3,986 6,284 –1,941 12,008 8,487Total expenditure 149,350 211,265 287,730 342,145 344,375

Budget balance –4,727 –48,341 –65,121 –102,147 –84,938 % of GDP –1.1 –8.2 –8.6 –11.1 n/a

Sources: National Statistical Office of Mongolia, Mongolian Statistical Yearbook 1999; EIU.

92 Mongolia


Reference table 4

Government revenue(Tg m)

1995 1996 1997 1998 1999

Tax revenue 105,510 120,978 163,971 154,004 182,511 Income tax 48,537 45,608 62,620 41,481 41,933 Social security contributions 15,765 18,474 21,242 26,059 29,707 Property tax 54 n/a 78 240 821 Domestic taxes on goods & services 28,107 37,231 63,307 84,715 101,539 value-added tax 16,254 21,528 38,134 46,066 58,864 excise tax 8,580 11,120 20,338 24,484 26,668 other taxes 3,273 4,583 4,836 14,165 16,008 Taxes on int’l trade & transactions 9,572 13,917 8,791 1,509 9,011 Other taxes 3,475 5,748 7,933 n/a n/a

Non-tax revenue 30,174 34,955 42,030 62,830 58,285

Capital revenue 3,855 2,582 10,488 14,614 11,949

Grants 5,085 4,409 6,039 8,550 6,693

Total revenue 144,623 162,924 222,528 239,998 259,437


Reference table 5

Government expenditure(Tg m)

1995 1996 1997 1998 1999

General public services 12,814 19,045 23,233 31,883 28,851Education 23,525 31,188 42,161 58,383 61,066Health 15,959 21,044 26,314 32,915 32,752Social security & welfare 23,378 28,571 42,727 51,688 58,028Housing & community amenities 2,371 2,323 3,378 3,794 5,484Agriculture & forestry 4,156 4,255 5,263 5,089 4,861Industry, construction & mining 2,719 2,739 1,998 2,771 1210Fuel and energy 12,397 8,184 8,042 9,203 4,515Transport & communications 4,278 4,542 5,240 6,766 6,867Other economic services 3,604 7,895 2,545 4,752 3,105

Total expenditure incl others 149,350 211,265 287,649 342,145 344,375


Reference table 6

Money supply and credit(Tg m unless otherwise indicated; end-period)

1995 1996 1997 1998 1999

Demand deposits 17,045 20,702 26,341 26,136 27,544

Money (M1) 42,637 60,838 76,109 82,582 114,826 M1 growth (%) 29.0 42.7 25.1 8.5 39.04

Quasi-moneya 59,408 58,757 93,957 84,668 105,341

Money (M2) 102,045 119,595 170,066 167,250 220,167 M2 growth (%) 32.6 17.2 42.2 –1.7 31.63

Domestic credit 41,730 93,206 69,315 116,752 107,111

a Time, savings & foreign-currency deposits.


Mongolia 93


Reference table 7

Gross domestic product(market prices)

1994 1995 1996 1997 1998

Total (Tg m)At current prices 283,263 429,207 586,529 758,926 875,859At constant (1995) prices 403,723 429,207 439,350 457,063 472,963Real change (%) 2.3 6.3 2.4 3.3 3.5

Per head (Tg)At current prices 124,785 186,612 250,653 320,222 364,941At constant (1995) prices 177,852 186,612 187,756 192,854 197,068Real change (%) n/a 4.9 0.6 2.7 2.2

Sources: Asian Development Bank, Economic and Development Resource Centre website; IMF, International Financial Statistics.

Reference table 8

Gross domestic product by expenditure(Tg m; current market prices)

1994 1995 1996 1997 1998

Private consumption 155,046 270,605 373,466 459,923 486,202

Government consumption 96,165 64,924 96,407 132,867 153,515

Gross fixed capital formation 62,215 123,500 135,251 180,300 208,018

Change in stocks 7,962 –10,200 12,281 17,055 18,077

Net exports of goods & services –15,884 8,544 –11,617 –19,764 –50,568

Statistical discrepancy –22,241 –28,165 –19,259 –11,454 60,614

GDP 283,263 429,207 586,529 758,926 875,859

Source: Asian Development Bank, Economic and Development Resource Centre website.

Reference table 9

Gross domestic product by sector(Tg m; constant 1995 prices; % change year on year in brackets)

1995 1996 1997 1998 1999

Agriculture 209,146 218,277 227,707 242,248 249,404 (n/a) (4.4) (4.0) (3.5) (3.0)

Mining, manufacturing & electricity, gas & water 9,237 9,479 9,224 9,125 9,076 (n/a) (0.7) (0.4) (3.2) (3.0)

Construction 9,665 9,734 9,770 10,082 10,386 (n/a) (2.6) (–2.7) (1.1) (–0.5)

Trade 93,566 93,853 109,884 106,458 109,270 (n/a) (0.3) (17.1) (–3.1) (2.6)

Transport & communications 35,074 38,990 41,253 44,319 46,970 (n/a) (11.2) (5.8) (7.4) (6.0)

Public administration & defence 16,651 17,234 17,613 17,948 18,394 (n/a) (3.5) (2.2) (1.9) (2.5)

GDP incl others 550,254 563,201 585,720 606,410 624,723 (6.3) (2.4) (4.0) (3.5) (3.0)


94 Mongolia


Reference table 10

Consumer prices

1995 1996 1997 1998 1999

Consumer prices index (1995=100) 100.0 149.3 203.9 223.0 239.9 % change, year on year 56.7 49.3 36.7 9.5 7.6


Reference table 11

Crop production(‘000 tonnes)

1994 1995 1996 1997 1998 1999

Cereals 330.7 261.4 220.1 240.4 194.9 171.3 of which: wheat 321.9 256.7 215.3 237.7 191.8 n/a

Fodder crops 29.1 18.7 18.8 14.3 14.7 n/a

Potatoes 54.0 52.0 46.0 54.6 65.2 63.8

Vegetables 22.8 27.3 23.8 34 45.7 39.0

Sources: National Statistical Office of Mongolia, Mongolian Statistical Yearbook 1998; Press reports; Bank of Mongolia website.

Reference table 12

Livestock numbers(‘000 head)

1995 1996 1997 1998 1999

Camels 367.5 357.9 355.4 356.5 355.5

Horses 2,648.4 2,770.5 2,893.2 3,059.1 3,200.0

Cattle 3,317.1 3,476.3 3.612.8 3,725.8 3,800.0

Sheep 13,718.6 13,560.6 14,165.6 14,694.2 15,200.0

Goats 8,520.7 9,134.8 10,265.3 11,061.9 10,900.0

Sources: National Statistical Office of Mongolia, Mongolian Statistical Yearbook 1998; Bank of Mongolia website.

Reference table 13

Meat production(‘000 tonnes)

1995 1996 1997 1998 1999

Meat, slaughter weight 211.7 259.9 240.5 268.3 289.0 of which: beef 69.4 90.0 86.6 99.3 104.6 mutton & goat 111.5 121.3 104.4 120.2 128.9 pork 0.6 0.3 0.2 0.2 0.3

Source: National Statistical Office of Mongolia, Mongolian Statistical Yearbook 1997; 1998.

Mongolia 95


Reference table 14

Mineral production(‘000 tonnes unless otherwise indicated)

1994 1995 1996 1997 1998

Coal 5,012.4 5,019.0 5,110.6 4,624.0 5,057.0

Copper concentrate 343.3 346.4 351.5 357.9 358.4

Molybdenium concentrate (tonnes) 4,396.0 3,906.0 4,684.0 4,238.3 4,240.0

Gold (kg) 1,789.5 4,504.0 6,967.4 8,451.0 9,531.4

Fluorspar 383.2 526.9 565.1 567.1 612.0

Source: National Statistical Office of Mongolia, Mongolian Statistical Yearbook 1997; 1998.

Reference table 15

Output of selected industrial products(‘000 tonnes unless otherwise indicated)

1994 1995 1996 1997 1998

Meat excl canned meat 11.3 11.3 8.5 7.5 6.7

Sausage (tonnes) 1,065.3 639.2 674.0 793.2 662.5

Flour 127.0 158.7 92.3 63.6 65.7

Bakery goods 33.9 36.8 30.0 19.7 19.4

Milk & milk products (m litres) 4.9 1.8 1.7 1.6 2.6

Alcohol (‘000 litres) 3,626.0 3,663.2 3,583.6 4,399.4 4,989.2

Carpets (‘000 sq metres) 681.5 595.7 666.7 643.6 587.7

Cashmere (tonnes) 232.1 420.8 517.0 432.2 502.1

Camel-wool blankets (‘000 metres) 24.1 19.4 31.4 23.6 22.1

Scoured wool 2.1 1.2 0.8 0.8 0.5

Leather boots (‘000 pairs) 406.6 245.5 86.6 41.7 33.1

Porcelain goods (‘000 pieces) 1,582.4 688.5 150.6 49.3 24.2

Cement 85.8 108.8 106.0 111.6 109.0

Doors & windows (‘000 sq metres) 8.1 7.4 3.4 5.2 2.9

Electricity (m kwh) 2,122.7 2,628.0 2,614.0 2,662.0 2,675.0


Reference table 16

Main trading partners(US$ m)

1995 1996 1997 1998 1999a

Exports fob to:China 77.8 81.0 101.6 110.1 208.2 Russia 68.9 87.5 46.6 40.6 48.2 US 25.8 17.8 25.4 29.4 46.3 Italy 11.4 10.7 11.3 10.1 14.6 UK 18.7 19.3 23.9 12.8 13.6 Japan 46.7 35.0 37.7 12.6 10.9 Germany 7.6 4.7 6.3 2.1 2.4 South Korea 26.1 34.0 44.3 33.2 2.1 Switzerland 76.9 103.1 139.8 70.5 0.6

continued

96 Mongolia


1995 1996 1997 1998 1999a

Imports cif from:Russia 208 154.9 165.9 150.2 149.8 Japan 45.3 77.8 34.8 59.3 115.0 China 44.5 66.0 63.3 66.6 77.6 South Korea 21.5 18.0 21.0 37.7 36.2 US 14.5 11.0 36.6 36.4 31.5 Germany 18.5 21.5 20.4 25.9 23.6 Singapore 7.4 13.4 17.6 17.3 9.1 Czech Republic 9.9 8.0 7.3 6.7 4.9 Switzerland 6.1 5.1 1.4 1.2 2.3

a From January 1st 1999 the export data are defined by the recipient countries.


Reference table 17

Balance of payments, IMF estimates(US$ m)

1995 1996 1997 1998 1999

Goods: exports fob 451.0 423.4 568.5 462.4 454.3

Goods: imports fob –425.7 –459.7 –453.1 –524.2 –510.7

Trade balance 25.3 –36.3 115.4 –61.8 –56.4

Services: credit 57.3 55.7 52.7 77.8 75.8

Services: debit –95.4 –112.8 –105.1 –146.8 –145.7

Income: credit 3.0 13.4 6.1 10.1 6.7

Income: debit –28.4 –26.7 –18.1 –9.7 –6.6

Current transfers: credit 77.1 6.2 4.2 5.5 17.6

Current transfers: debit 0 0 0 –3.6 –3.6

Current-account balance 38.9 –36.9 28.2 –76.5 –112.2

Capital-account nie balance 0 0 0 0 0

Direct investment abroad 0 0 0 0 0

Direct investment in Mongolia 9.8 15.9 25.0 18.9 30.4

Other investment assets –49.2 –76.4 –108.1 –54.8 –51.8

Other investment liabilities 22.5 101.8 110.1 162.1 91.0

Financial balance –39.0 41.3 68.8 126.2 69.9

Errors & omissions 9.1 –28.1 –75.6 –50.2 23.6

Overall balance 6.4 –4.6 25.3 –14.1 –18.7

Memorandum itemsFinancing movement of reserves (– indicates inflow) –22.6 19.6 –61.2 –6.3 –40.6Use of IMF credit & loans –9.5 –1.8 6.7 –1.3 4.2Exceptional financing 0 69.5 47.9 60.2 55.5Total change in reserve assets –32.1 4.6 –25.3 14.1 n/a


Mongolia 97


Reference table 18

External debt(US$ m unless otherwise indicated; debt stocks at year-end)

1994 1995 1996 1997 1998

Public medium- & long-term debta 400.5 463.8 481.1 533.4 633.6 Official creditors 311.3 358.9 428.5 496.1 607.9 Multilateral 113.1 169.9 204.3 289.2 358.7 Bilateral 198.2 216.0 224.3 206.9 249.2 Private creditors 89.2 78.0 52.5 37.3 25.7 of which: banks 19.6 14.6 10.3 6.0 2.4 bonds 0.0 0.0 0.0 0.0 0.0

Use of IMF credit 55.3 47.0 43.6 47.6 48.3

Short-term debt 5.5 13.7 6.8 27.5 56.9 of which: interest arrears on long-term debt 2.5 2.5 2.5 2.5 2.5

Total external debt 461.3 524.5 531.5 608.5 738.8

Total debt service paid 43.6 51.8 52.9 66.4 34.8 Principal 33.7 41.6 44.1 54.1 25.9 Interest 9.9 10.1 8.8 12.4 8.9 of which: short-term debt 0.5 0.4 0.2 0.6 1.7

Ratios (%)Total external debt/GNP 69.9 55.6 50.4 67.0 74.7Debt-service ratio, paidb 10.5 10.1 10.7 10.6 6.2Short-term debt/total external debt 1.2 2.6 1.3 4.5 7.7Concessional long-term debt/total long-term debt 56.5 65.8 74.3 79.4 81.3

a Long-term debt is defined as having original maturity of more than one year. b Debt service as a percentage of earnings from exports of goodsand services.

Source: World Bank, Global Development Finance.

Reference table 19

Net official development assistance($ m)

1994 1995 1996 1997 1998

Bilateral 108.1 126.9 136.2 118.1 134.0 of which: Japan 71.1 99.9 103.8 78.0 84.3 Germany 11.0 11.8 11.8 14.0 15.9

Multilateral 76.0 80.9 66.4 128.6 62.1 of which: ADB 26.7 55.8 34.8 67.4 31.9 IDA 17.4 8.4 11.0 33.8 16.7 IMF 21.2 0.0 8.1 7.7 0.0

Total 184.1 207.8 202.6 246.7 196.1

Source: OECD Development Assistance Committee, Geographical Distribution of Financial Flows to Aid Recipients.

98 Mongolia


Reference table 20

Foreign reserves(US$ m unless otherwise indicated; end-period)

1995 1996 1997 1998 1999

Foreign exchange 114.50 107.00 175.00 93.60 136.30

SDRs 2.52 0.43 0.70 0.48 0.16

Reserve position in the IMF 0.01 0.01 0.01 0.01 0.03

Total reserves excl gold 117.03 107.44 175.71 94.09 136.49

Gold (national valuation) 34.50 53.60 24.60 9.10 0.40

Total reserves incl gold 151.53 161.04 200.31 103.19 136.89

Memorandum itemGold (m fine troy oz) 0.10 0.15 0.08 0.03 0.00


Reference table 21

Exchange rates(Tg:US$)

1995 1996 1997 1998 1999

End-period 473.6 693.5 813.2 902.0 1,072.4

Period average 448.6 548.4 790.0 840.8 1,021.9


Editor: Ken DaviesConsulting editor: Graham Richardson

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