Download Recent Development of China`s Economy

Recent Development of the Chinese Economy -And the Opportunities and Challenges Presented to Hong Kong
By Mr Dominic C. F. HO
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Questions put forward by Professor Lin Yifu:
1. can the Reminbi maintain its stability;
2. how to set off economic growth;
3. the long-term development prospect of Mainland’s economy;
4. the deeper-rooted problems that need to be solved in the transition to market
economy; and
5. opportunities and challenges for Hong Kong.

I am not an economist. It is only through my long-term contact with Mainland enterprises
and the government and my own observation that I have been able to accumulate some
experience and personal views.

There are already quite a number of theories and views concerning the value of the yuan.
However, if the currency value is too high (relative to the US dollar and the currencies of
China’s trade partners), it would pose pressure for exports. At the same time, it would
also have negative effects on foreigners who invest in China.

So, is the yuan too high today? Among the clients whom we deal with every day, such
worries do prevail.

Investors who have such worries would usually take a wait-and-see attitude. When we
prepare feasibility studies report for them, they all request to consider the value of the
yuan as an important risk factor among various other risks.
The reasons for their worries are :
- China’s way of dealing with currency values in the
past
- the unfavourable figures of recent China’s
economic development
- negative reportage by the media/analysts
- their own interest and responsibility

Foreign investment in China is expected to slow down.

Economic growth could only be set off based on the current economic situation and
historical background:
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Since the implementation of the reform programme, Mainland’s economic structure
has undergone radical changes.
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Currently, the country is in the midst of a
market economy.
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Accept “private ownership” as an integral part of the economic system.
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transition from a planned economy to a
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There are numerous examples of major reform measures. Among them the most
important ones are:
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the number of collective enterprises is increasing;
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establishment of the stock market;
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development of enterprises owned by individual business;
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commercialization of banks;
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determination to restructure and merge enterprises; and
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separation of the functions of government and enterprise.
Since many Mainland enterprises have long been operating under a planned economic
system, people who are living in a market economic environment will find it difficult to
understand how they functions. As a matter of fact, there are many complicated problems
which lead to these enterprises incurring losses.
-
Mainland enterprises perform functions which not only include production, but also
social and even government responsibilities. Thus when reforming enterprises, the
major obstacle is this phenomenon of “enterprises carrying out social functions”. If
the decision is to make people redundant, who should go first? For the people who
have been made redundant, who will take up the responsibility of providing them
with social services?
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During the transition to market economy, because of lack of experience at the
beginning, incorrect investment decisions were made which led to detrimental results
and these have continued to surface even up till today.
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As a matter of fact, the bad debt problem revealed by Professor Lin is triggered off by
the system itself. Furthermore, the trust and investment companies set up since the
implementation of the reform and open policies are also in a difficult position which
does not look promising.
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Since ownership is highly concentrated, the so-called loans put up by Mainland banks
are not commercial loans as defined under market economy. In most cases, these
special project loans are actually “investment” by the state in the enterprises.
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Under most circumstances, many enterprises are using “no-cost funds” to run their
business. It is a matter of opinion whether the “bad debts” of Mainland banks should
be truly regarded as bad debts. As to how these debts should be dealt with is another
matter.

In a nutshell, the above problems are issues which emerged in the course of economic
transition. Such transition has its own unique features.

All other problems encountered at this stage have their origin in the economic transition.
Among these problems, the most serious ones include some supporting systems for
reform have not yet been in place, such as the legal, accounting and financial systems.
For example, when banks provide loans to clients, what procedures should they follow in
verifying the credit and accounting and financial information? How to ensure relevant
personnel comply with professional ethical standards?
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How to deal with the various problems that have emerged during the reform process?
The present leaders of China well understand the above situations.

If the market economy is considered beneficial to China, then the reform process must be
intensified.

Should use all means to strengthen the provision of supporting “software” facilities such
as education, training, laws, accounting, systems etc.

In formulating macroeconomic policies, the government should not just copy
international economic theories which mainly apply in market economy, the reason being
China’s present economic system has not been completely converted to market economy.

Opportunities and challenges presented to Hong Kong:
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The “one country two systems” concept should not be interpreted as simply two
totally unrelated diverse systems existing inside one country.
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Hong Kong has rich experience and a sound system in operating and managing the
market. These should provide good reference for the Mainland.
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Hong Kong’s market economic system could provide Mainland with many channels
for raising funds, such as public listing and issuance of bonds etc.
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Hong Kong and the Mainland, in particular Guangdong Province, should depend on
each other and help each other in their development. Talents in high-tech fields from
the Mainland could provide impetus for Hong Kong’s economic development.
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In the past, Hong Kong has facilitated Mainland’s economic growth through investing
in the Mainland and engaging in processing industries with supplied drawings,
samples and materials and compensation trade. However, the contribution of Hong
Kong’s manufacturing industries have been disminishing.
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However, Hong Kong’s role as a channel and window for importing foreign
investment will not be eroded in the foreseeable future.
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