The Economy of China Eduard B' Vermeer

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The Economy of China Eduard B. Vermeer

• Lecture course (4 cr.) at CEAS,
• University of Turku, Finland
• Jan-Mar 2008

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In this series

• introduction
• state budget and investments
• agriculture

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Course requirements

• 16 hrs of lectures
• assignments for gathering information
• 14 articles and book chapters (240 pp.)
• written exam on lectures and literature
• Assignments count for 20 of final grade,
  lectures and literature have equal weight

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Course contents (1)

• transition from plan to market
• state budget, taxes, investments
• agriculture, rural development
• industry and mining
• energy, transport, telecom
• employment, wages, income
• social security

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Course contents (2)

• finance, banking, insurance
• water, environment
• housing, education, health care
• domestic and foreign trade
• foreign investment
• regional development
• hidden economy and corruption

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Student requests

• At the beginning of the course,
• students may request specific topics
• of interest to them!

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The role of the state budget

• Share of GDP19 (24 rise in 2006)
• National and local budgets
• Townships rely on charges, fees
• Most central taxes perceived locally
• VAT 49 - 9, business tax 14,
• company profit tax 12, cons. tax 6,
• customs 6. Income tax only 7.

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Budgetary expenses

• 1/3 of national budget goes to local
• Only central government can borrow
• Municipal investment companies
• Capital construction, innovation 17
• Administration 14, education and health 19,
  rural 5, defense 7.5?
• Social welfare increases rapidly.

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Budgetary expenditure 2006(Total (393 debt
service excl.) 3,393 bn yuan)

• capital construction, innovation 553
• education, health care 610
• administration, police, justice 484
• defense 247
• price subsidies 100
• farming, forestry, fishery 179
• social insurance, pensions 72
• industry, trade, transport 44

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Evaluation of China tax system

• Highly centralized with local dependency
• Weak sectoral or regional redistribution
• Perception weak for small business,private
• Rural towns,farmers excluded50 of pop.
• State debt is still reasonable
• Effect on consumption pattern, energy use
• Effect on SOE efficiency
• Effect on foreign trade and investment

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Consumption and savings

• Extremily high, mounting savings ratio
• gross investment rate 2007 43 of GDP
• hh consumption rate fell to 37 of GDP
• current account surplus rose 10 of GDP
• temporary cause increased (heavy) industrial
  profits from exports
• food prices have depressed consumption
• main causes are long-term, structural

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Causes of high savings

• lack of social insurance, pensions
• one-child policy depresses hh expenses
• farmers invest in their farm
• migrant savings, marriage savings
• high mortgage payments, home purchase
• savings for high education costs
• lack of consumptive credit
• low inflation, consumer durables
• slanted income distribution

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Investments

• Investments rose by 26-28 in 2003-5
• GDP increase 9.1-9.5, underestimate?
• Rising profits, GDP rise 10-11 in 2006-7
• Most investments (2005)
• by companies (profits 60, loans 20)
• in buildings 50, machinery 20
• foreign capital and state budget both 5
• under municipalities, not central government
• rural investment declining, to 14 of total

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Groei investeringen 2002-200625-30 per jaar
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(No Transcript)
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China's agriculture physical

• 130 m. ha cropland, 300 m. ha pasture
• climate, soils, water, access differ
• 250 mm and 800 mm isohyets
• 4000 km N-S, E-W 9.6 million sq.km.
• 40 is irrigated, uses chem. fertilizer
• Much heat, light, water (but North is short)
• Terracing for rice, also crops as tea, fruit
• Conservation of water, fertilizer, soil
• Since 1956 35 m. ha lost, 50 m. ha gained

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China's agriculture crops

• 75 grains (rice,wheat,maize) 400 m.t.
• "foodgrain" includes (soy)beans, potatoes
• Nwheat,maize,cotton,soybeans 1-1.5 mci
• S and central rice,rice,beans 2-2.5 mci
• terraces hamper mechanization, transport
• high yield, labor-intensive 3-500 days/ha
• chemical fertilizer use increases 4 p.y.
• grain output varies 5, cotton 25

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State intervention in agriculture

• land is owned by village, sold to state only
• 30-year family farm contracts sub-letting
• migrants keep land, social security
• "basis farmland", hh "own-grain farmland"
• 120-180 m. private plot (with house)
• guaranteed prices for some grain crops
• subsidized fertilizer, diesel oil, seeds
• agro-technical popularization, research
• improvement of market access, storage

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Other forms of rural support

• Subsidies to township government
• Abolition of agricultural tax
• Protection against illegal township fees
• Subsidies for education, health care
• Investments in irrigation
• Low rents and taxes for rural enterprises
• Compensating illegally dispossed farmers
• National, local poverty alleviation program
• "Grain for green" farm reduction 2000-6.

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Economics of Chinese farms

• agriculture 45 of labor, 12 of GDP
• average size 0.5 to 1 ha., in 3-5 plots
• commercial contracts for hills, wasteland
• contract violations, transfers often irregular
• productivity rise 2-4
• added value constant at 57-59
• p.c. average income 2005 (yuan) crops 1100,
  animals 285, trade 110, other 355, wages 1175,
  transfer and property 235

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Example rice in Hunan 2004(one mu equals 1/15
ha)

• Product cost/mu 137 yuan fertilizer 73, seed 17,
  pesticide 34, tools 3, water 1, irrigation and
  machine service 12 and 28
• Output sales (420 kg) 659 yuan
• Result pre-tax 477 yuan (labor, land)
• State subsidies 18 yuan
• (Labour 9.3 days/mu, so pre-tax income per labour
  day was 51 yuan)

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Technological farm inputs 2005

• fertilizer 750 kg/ha in rice, 350 in North
• pesticide improvements in quality
• improved coating and labeling of seeds
• seed potato,Bt cotton,GM tomato, rice?
• 40-55 m. ha irrigated water savings?
• mechanization plowing 51, sowing 31,
  harvesting 23, most irrigation by pumps
• mulching, hothouses prolong season

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Yields of major crops, 2005(tons per hectare)

• Rice 6.3 Wheat 4.3
• Maize 5.1 Beans 1.8
• Peanuts 2.7 Rape 1.9
• Vegetables 31 Fruit 16
• Cotton 1.1 Sugar beets 31
• Tea 2.0 Potatoes(1/5) 3.7
• There is large regional variation, depending on
  fertlizer, water, soil, and varieties

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Recent farming tendencies

• Prices of maize and wheat have doubled
• Pork, chicken follow (feed cost 70)
• Higher input prices (diesel,fertilizer,seeds)
• Market pushes quality,specialization,GM
• Grain area fell from 75 to 50 of total
• Land conversion subsidies have stopped
• Widening income differentials, less poverty
• Greater attention to education and health

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Agriculture's contribution

• Dietary improvement meat,fruit,dairy,fish
• Meat 75, eggs 30, dairy 25, fish 30 m.t. (annual
  increases 2-4)
• Pork, mutton, chicken bird flue problem
• Vegetables,meat,fruit juice exports (4-5 bn US
  each), also maize
• Soybean, cotton, sugar, dairy imports
• Market for industry, raw material supplies
• Cheap labor supply (half of youths leave)