China Economic Reform: Achievements, Strategies and perspectives

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China Economic Reform Achievements, Strategies
and perspectives
Development Research Center of the State Council,
P.R.C
DRC
Junkuo Zhang Chile-China Conference Santiago,
Chile June 9, 2004
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Main Contents

• I. Background of Economic Reform
• II. Major Achievements of Economic Reform
• III. Major Strategies of Economic Reform
• ?. Perspectives of Economic Reform
• Brief Summary

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I. Background of Economic Reform
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• China began to practice highly concentrated
  planning economy after 1949
• Basic features of Planning economy a. Almost
  all enterprises are State-owned or
  quasi-State-owned. b. Main production decisions
  are made by central planning authorities. c.
  Degree of openness to the outside world is very
  low.
• Although this economic system demonstrated some
  advantages in the quick economic recovery in its
  early stages, it eventually obstructed economic
  development.
• Since 1978, China has been in a period of
  economic reform and opening-up.

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II. Major Achievements of Economic Reform
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1. Rapid and Continuing Economic Growth

• During the 25 years from 1979 to 2003, the
  average annual GDP growth rate was about 9.3,
  very rare in economic history for a big
  developing country.
• In 2003, Chinas GDP has reached USD 1405.6
  billion , No. 6 in term of total economic
  volume.
• But due to the huge population, GDP per capita is
  still very low. In 2003, it is only a little bit
  more than USD 1000.

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2. Remarkable increase in peoples living standard

• Chinas poverty population decreased from 250
  million in 1978 to 29 million in 2003.
• The Engle Coefficient of urban and rural family
  decreased from 67.7 and 57.7 in 1978 to 45.6
  and 37.1 in 2003 respectively.
• Per Capita Floor Space of Residential Buildings
  in urban and rural area increased from 6.7 M² and
  8.1 M² in 1978 to 27.2 M² and 23 M² in 2003
  respectively.
• By the end of 2003, major durable consumer goods
  per 100 household color TV, 130 refrigerator,
  88.7 washing machine, 94.4 mobile phone, 90.1
  fixed phone, 95.4.

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3. Notable changes in ownership structure

• In manufacture sector in 1978, 78 of output was
  produced by state-owned enterprises, 22 produced
  by collective enterprises, no private enterprise
  existed. But at present, only less than 30 come
  from state-owned enterprises, more 70 come from
  non-state enterprises.
• In term of employment structure, 78 of total
  urban employees working in state-firms or
  organizations, while in 2003, only 26.8 of
  urban labors working in state sectors.

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4. Market plays fundamental role in resource
allocation

• The scope of mandatory plans reduced greatly. For
  example, in manufacture sector, the number of
  products on which the state still set mandatory
  plan targets reduced from 120 in 1981 to 5 at
  present.
• Before 1978, almost all prices of commodities and
  services were set by the government, while at
  present, 97 of total retail commodities sales,
  94 of total farm products sales and 91 of total
  capital goods sales are traded at
  market-determined prices.
• Generally speaking, both State enterprises and
  non-state enterprises now have autonomy to decide
  the what, how and to whom problems
  according to the markets.

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5. The degree of openness of the economy
increased markedly

• Currently China has 5 SEZs, 56 state-level ETDZs,
  53 state-level HIDZs, 15 state-level FTZs and 36
  state-level EPZs.
• In 2003, China has a total export and import
  volume of 851.0 billion USD, accounted more than
  60 of GDP, meaning quite a high foreign trade
  dependence of Chinese economy.
• Export structure also improved remarkably. In
  1980, export of manufacture goods only accounted
  for 8.6 of Chinas total export value, while in
  2003, the situation is reversed, the share of
  manufacture goods has reached the high level of
  92.8.

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III. Major Strategies of Economic Reform
--why China reform relatively successful?
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1. Promoting SOE reform by developing non-State
economies

• SOE reform is both crucial and difficult for all
  transitional economies.
• In the early stage of reform, when it was too
  difficult to carry out the SOE reform on a large
  scale, stress was put on promoting the
  development of non-state economies
• In China, the concept of non-State economies
  includes both the private and the collective
  enterprises for example, the township
  enterprises are a typical form of collective
  ownership firms.
• This policy gained quite a big success. The rapid
  development of non-state economies has been a
  remarkable feature of Chinas economic
  development in the past more than two decades.

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1. Promoting SOE reform by developing non-State
economies (Cont.)

• The development of non-state economies benefits
  the SOE reform in three aspects
• (1) Making SOEs less important and therefore
  easier to be reformed
• (2) Playing as a competitor to SOEs and therefore
  forcing the latter to reform
• (3) Preparing some preconditions for the SOEs
  reform(e.g. absorbing laid-off works)

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2. Promoting domestic reform by opening up to
outside world

• Chinas opening up policy was put forward at the
  same time with the domestic reform policy. The
  original idea of the opening up policy is to
  attract foreign investment by formulating a
  series of favorable policies.
• Usually the extent and scope of these kinds of
  favorable policies were different among regions
  and industries. Generally, SEZs, ETDZs, coastal
  cities etc are more open than other places, while
  ordinary manufacture industry is more open than
  other industries.
• Interaction between opening up policy and
  domestic reform is another important factor to
  the reform success.

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2. Promoting domestic reform by opening up to
outside world (cont.)

• The opening up policy benefits the internal
  reform in three aspects
• (1) Broadens peoples mind and makes the reform
  irreversible. When the door opened, Chinese
  people were shocked when they realized how far
  China has been lagged behind. The more the door
  opens, the bigger the reform pressure.
• (2) Most convenient and effective way for
  reformers to get necessary knowledge and
  information in formulating development and reform
  plans.
• (3) Provides strong and constant push to advance
  reform.

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3. Promoting total reform by conducting
incremental and partial reforms

• By incremental reform, it means, when some reform
  policies seem to have too significant an
  influence on the whole economy and the peoples
  lives, and therefore a comprehensive reform plan
  is difficult to be adopted, then those policies
  may usually be first practiced incrementally. For
  example, old (existing) people old (existing)
  system, new people new system.
• By partial reform, it means, when a reform
  policy, for some reasons, cannot immediately be
  carried out over the whole country, it then may
  be first practiced in some areas, for example a
  province(s), a special economic zone(s) or even
  one or more cities. Most of the past reform
  policies had first been practiced in some areas
  before they were adopted as universal policies.

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3. Promoting total reform by conducting
incremental and partial reforms (cont.)

• Incremental and partial reform strategy has both
  negative and positive effects
• Positive (1) Helps to reduce resistance to
  reform. (2)Helps policy-makers to acquire
  experience and to reduce errors in making reform
  policies.
• Negative some policies became economic roots of
  corruption, for example, the Dual Track Price
  System.

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It should be noted that these three strategies
are not something clearly described in government
reform plans. Instead, they are actually implied
in various reform practices. To some extent,
these strategies reflect the acting styles of
Chinese people, and also reflect some features of
the so-called gradualism reform.
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?. Perspectives of Economic Reform
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1. Goal and phases of China economic reform

• The overall goal of Chinas economic reform is to
  build a Socialist Market Economy, which was
  first put forward in 14th National Congress of
  the Communist Party of China (CPC) in 1992.
• According to 16th National Congress of CPC in
  2002, the basic framework of the socialist market
  economic system has been established by the end
  2000. The task for the future is to further
  complete the existing framework, so as to
  establish a full-fledged socialist market economy
  by around 2020.

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2. Major tasks facing future economic reform

• In 2003, the 3rd plenary of 16th CPC Congress
  approved Decisions on Issues relating to the
  Completion of Socialist Market Economic System.
  According to the Decisions, there are 12 aspects
  of tasks facing Chinas future reform, among
  which, the most important ones include
• (1) Further promoting SOE reform
• (2) Reducing development difference between urban
  and rural areas and among different regions.
• (3) Completing competition policies and promoting
  fair competition
• (4) Consummating social security system

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(1) Further promoting SOE reform

• Currently China has about 170,000 SOEs, of which,
  only about 5 are large ones. Major measures for
  SOE reform are
• Most small and medium-sized SOEs are to be
  transferred to private management through various
  ways.
• For large SOEs, the goal is to pluralize their
  shareholders and to establish effective corporate
  governance structures through IPO,
  reorganization, etc.
• For those large SOEs in monopoly industries such
  as telecommunication, electricity, railway, post,
  etc, the major measure is to loose entry
  restricts and to introduce competition.

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(2) Reducing development difference

• While the economy as a whole grew very rapidly
  during the past more than 20 years, there are big
  differences in development levels between urban
  and rural areas and among different regions. For
  example, in 2003, income per capita in urban area
  is 3.23 times that in rural area GDP per capita
  in Zhejiang, a southeast-coastal province, is 5.5
  times that in Guizhou, a southwest-mountainous
  province.
• To gradually establish a coordinating development
  mechanism and to accelerate economic and social
  development in the West and rural areas has now
  become one of key tasks of the Chinese central
  government, and a series of plans and policies
  have also been developed to fulfil the task.

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(3) Promoting fair competition

• Anti-competitive conducts in China today include
  both business and administrative conducts, for
  the former, such as Cartels, abuse of market
  dominance, and various unfair competition
  behaviors, and for the latter, such as regional
  protectionism and complicate approval procedures.
• Two aspects of efforts are needed to promote fair
  competition
• One is to enhance competition legislation and law
  enforcement.
• Another is to deepen administrative reform and to
  eliminate various administrative anti-competitive
  conducts.

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(4) Consummating social security system

• Chinas existing social security system has two
  major problems one problem is that its coverage
  is very limited, it only covers urban business
  sector another problem is that the fund is not
  enough.
• To consummate the social security system, the
  government has decided to gradually expand the
  coverage of the system and to explore different
  ways, including selling out some state shares, to
  replenish the fund gap.
• China is also exploring effective ways for
  managing social security funds, and in this
  regards, Chilean experience is very worthy to
  examine and to learn.

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Brief summary

• 1?During the past 25 years, through economic
  reform and opening up policies, China has not
  only established the basic framework of the
  socialist market economic system, but also
  realized rapid growth in the national economy and
  the peoples living standard.
• 2?Three strategies, among others, contributed to
  the relative success of Chinas reform a
  combination of promoting development of private
  economy and reforming the state economy, a
  combination of opening-up with domestic reform,
  and a combination of partial (incremental) reform
  with overall reform.
• 3?The task facing Chinas reform in the next 15
  years is to establish a full-fledged market
  economic system.

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Thanks