Download Economic Development and Economic Reform in China Wang Cheng

Review and
Prospect of
Economic Reform
in China

Wang Cheng
(Institute of Economics,
Chinese Academy of Social Sciences)
I. Background and Purposes
of China’s Economic Reform
Economic Stagnation and Poor Efficiency
---Annual rate of GDP growth was 0.49% in 19001950. Total rate of growth for the 50 years was
28%. Growth rate of per capita GDP in 50 years
was -40%( average living standard declined).
---Annual rate of GDP was 6.2% in 1950-1978. But
the annual rate of TFP was -0.35%( it showed
technological and organizational retrogression for
about 30 years).
(Compare: during reform---Annual growth rate of
GDP was 9.5% with an annual rate of TFP 2.8%
in 1978-2000).

(Continued)
No Incentives to Pursue One’s Interests
---In urban area, workers got low and similar level
of wages. Nearly all needs were met in kind
through coupons and plan distribution system--food, clothes, daily necessities, traffic, housing.
---In rural area, peasants had no land and capital.
They got pay in kind through collective work
and work-points system. Basic needs were met.
---Strict barriers against labor-flows between
urban&rural, provincial&local areas, industries,
sectors, social statuses.

II. Start of China’s Reform---in
Rural Area
Innovation of the Villagers and
Recognition of the Government Later.
---Heads of a village in Anhui Province made
secret contracts with peasants for family
usage of land in exchange of paying part of
their products in 1978.
---More and more villages copied the above
mode and the rural life became better-off.
---Central government recognized the mode as
a direction of rural reform at the end of 1981.
---In 1984, 99% of villages took the form.

(Continued)
Growth Effect
---Annual agricultural growth rate: 8.2%
in 1980-1985. (Compare: 2.3% in 19501978, 4.7% in 1986-1990.)
 Equity Effect
---Gap of per capita income between
urban and rural people decreased from
2.57fold in 1978 to 1.86fold in 1985.

III. Reform in Urban Area--SOEs Transformation(I)

New Changes in SOEs and Their
Surroundings after 1st Stage Reform
1. SOEs occupied less and less share of
national employment and output, with
22% of business workers and 36% of
AVIO(added-value of industry-output), but
still with large capital ownership, 71% of
investment and 70% of bank loans in 2003.
(Other ownerships of enterprises appeared:
limited-responsible, collective, TVE,
cooperative, shareholding, foreign-funded,
individual, and joint-ventured, etc.)
(Continued)
2. Corporate governance has been
introduced into SOEs. Shareholding(or
non-share) limited-liability corporations took
shape. There were shareholders meeting,
board of directors (incl. independent
directors), board of supervisors and executive
management. To focus on improvement of
internal management. But difficulties
appeared everywhere above(State share is
too large to be one of the equal partners;
governments at each level claim differ
interests; how to merge old-3 into new-3).
(Continued)
3. Stock exchange markets have been built
in Shanghai(1990) and Shenzhen(1991)--most of the listed are reformed SOEs.
---Direct financing: with shares of 227b in stockexchange and 416b outside exchange (as state
and corporate shares), with total asset of
￥4246b and negotiable asset ￥1318b in 2003.
---Corporate development: with listed or public
companies of 1287, and about 80m
shareholders within China in 2003.
(Continued)
---Listed SOEs showed poor record(in P/NA)
Listed-in
1994 95
96 later
------------------------------------------------List-year(%) 14.5 19.2 22
1997(%)
4.9 12.5 12
?
1998(% for all)
7.36
1999(% for all)
2000(% for all)
2001(% for all)
2002(% for all)
8.06
7.52
5.34
5.60
(Continued)
4.SOE Budget constraints from government
and banks have been hardened.
---Commercial Bank Act issued in July 1995.
---Heads of bank branches would be dismissed or
sentenced if they made bad loans(e.g. 66 heads
were dismissed and one sentenced to 9 years
for 6m bad loans in 1998).
---Five grades of loan-quality-control set up for
banks in 1998.
---The government was not allowed to finance its
deficit caused by supporting SOEs through
issuing more currency since 1990s.
(Continued)
5. The Framework of Competitive Markets
have been Restructured.
---Entries of more and more industries have
been opened to other ownership’s
competitors(vs. SOEs) from home and abroad.
---Small and medium-sized SOEs were largely
reformed into private companies by MBO.
---large and huge-sized SOEs slowly retreated
from competitive markets to entering public
goods or non-competed production.
(Continued)
6. New machines and equipments have
gradually replaced the old ones in SOEs
(through various investments by listing,
mergers&acquisitions, fiscal fund, joint-ventures, etc).
7. Growth rates of SOEs’ and all firms’
average wage levels declined and then
recovered later.
---About 16% and 14% in 1979-1996.
---6.2% and 3.6% in 1997, -4.2 % and 0.2% in 1998.
---5.1% and 6.2% in 1999, 6.3% and 7.9% in 2000, and
9.8% and 11% in 2001.
---14.4% and 14.3% in 2002;15.5% and 13.0% in 2003.
(Continued)
8. Social security system has primarily
established in urban areas.
---Poverty relief fund received annual
contribution of ￥3b and ￥2.3b from local
and central government in 2001. The
beneficiaries were 15.9m which covered
82.1% of the qualified up to June 2002.
---Basic elderly insurance included
contributors of 108m and beneficiaries of
33.8m, with a fund of ￥242.6b and monthly
average benefit of ￥556 per person in 2001.
Employers contribute 20% and employees
6% over each employee wage.
(continued)
---Basic health insurance had contributors
and beneficiaries of 54.7m in work and 18.2m
retired, with annual income of ￥38.4b and
spending ￥24.4b and a sum surplus of
￥25.3b in 2001. Employers contributed 6-7%
and employees 2% over each wage unit.
---Unemployment insurance included
contributors of 103.6m and beneficiaries of
4.7m, with annual income ￥18.7b and
expenditure ￥15.7b in 2001. Employers
contribute 2.5% and employees 1% over
each wage unit.
IV. Reform in Urban Area--SOEs Transformation(II)
None or Little Changes in SOEs and
Their Surroundings after 1st Stage
Reform
1. Property rights have not yet been clearly
defined(from SAMB to SAMC).
2. Loss-making performance(The 40% of SOEs
made loss in 2002. The average profit ratio to
net assets of all SOEs in competed sectors
was only 0.5% in 2001. The government
expenditure on loss-subsidy to SOEs were
￥50.7b in 1985, ￥57.9b in 1990, ￥65.9b in
1998, ￥27.9b in 2000, ￥30b in 2001, ￥26b
in 2002, ￥23b in 2003).

(continued)
3. Banks making NPLs(non-performing
loans) by 25% and bad debt(debtors
being bankrupt or disappearing) by 6%
of loans in 2000. The two ratios
decreased to 18% and 5% in 2004.(4
AMCs setup for debt-to-equity swap—
cover 1/6 of loss-making SOEs of more
than 6000. The swap got repay 20%.)
(Continued)
4. Governments keep decision-making
power on some SOEs businesses.
(1) Changes in positions of managers and
employees(report scheme, inside laidoff, reemployment center, migrants).
(2) Investment and financial decisions.
(3) Mergers and acquisitions.
(4) Listing on stock exchange market.
V. Further Reform Tasks

1.
2.
3.
4.
5.
6.
Reform in Rural Area:
Agricultural taxation system
Education-cost paying system
Size and function of township government
Land utilization and transaction rules
Assistance system to grain and cotton
production
Rural finance system(small loans, coguarantors)
(Continued)

1.
2.
3.
4.
5.
Reforms of SAM System and SOEs.
Better the system of SA monitor and
management.
Standardize the SOEs ownership changes
and property distribution.
Standardize the reformed share-holding
companies and their governance.
Better regulation of SOEs in natural
monopoly industries and public utilities.
Improve legal and policy conditions for
private firms to expand.
(Continued)

1.
2.
3.
4.
5.
Reform in Finance Systems
Make banking firms into share-holdings.
Make insurance SOEs into share-holdings.
Legalize the status of policy bank system.
More marketization of monetary tools
(e.g. interest-rates, exchange-rate,
capital-flow, credit-securitization, etc.).
Complete systems of money market,
capital market, and insurance market.
(Continued)

1.
2.
3.
4.
5.
6.
Reforms in Fiscal System
Strengthen transfer-payment mechanisms
(from central to local level, from provincial to
county level).
Equalize the income taxation on domestic and
overseas firms.
Better tax-rebate system for exporters.
Gradually change VAT of firms from based on
input-cost to produced value.
Establish taxations on environment and
resources usage.
Open processes of public investment and
ratification to public-fund projects.
(Continued)

1.
2.
3.
4.
Reform of Governmental Institution
Clarify the governmental establishments,
their functions, division-of-labor in
between, and their necessary scales.
Downsize greatly the governments at
township and village level.
Make government independent of
business, asset-running, NGO affairs.
Improve the rule-of-law by transparency,
opening, hearing and public supervision.
Conclusions

The beginning of economic reform in
China faced vital economic difficulties,
such as no progress in citizen’ s life for a
long-time, and the poor efficiency brought
people with extremely low pay, low
consumption and highly exhausting labor,
resources, and capital goods.
(Continued)

After the procedures of economic
reform, the market mechanism with
decentralized decision-making,
decontrol to microeconomic activities
and anti-deprivation of personal
interest-pursuit proved to be of growth
and equity effects under the socialism
of China.
(Continued)

Although SOE reform was the hard-core
in economic restructure, the national
reform as a whole was an all-around
and systematic project. All the related
conditions and surroundings to SOE
reform should not be neglected.
(Relationships among economic, social,
political and cultural reforms deserved
close attention.)
(Continued)

China is still facing tough tasks of further
reforms on the base of merely $1000 per
capita GDP and imbalances in rural-urban
income opportunities, coastal-inland
developments, socio-economic happiness,
economic-natural growth. The fragile
characteristics of Chinese economy in the
future will likely come from the above
imbalances. So through reform and other
efforts, China needs to strengthen both its
physical and social infrastructures, and
balance its development.
Thanks for attention!
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