'99 Chinese Economy Stimulating Individual Consumption, Maintaining Steady Development
di Kou Zhenglin
in "Beijing Review", 42(1999), n. 1
Influenced by the Asian financial crisis and other factors, the global
economy has entered its most important restructuring period since the end
of World War II, and the possibility of a worldwide crisis cannot be ruled
out. Thus, the external environment for the Chinese economy in 1999 will
be far from ideal.
During a recent interview, Hou Ruoshi, a research fellow with the China
Institute of Modern International Relations and Member of the Standing
Committee of the China International Economic Cooperation Society, expounded
his views on the expected inter-relationship between the Chinese and global
economy, and the likely market and investment opportunities in China for
Question: Where is China's economic development going in 1999--up
or down? What about the economic growth rate? How will China operate its
Answer: The economic growth target is now an estimated objective,
rather than the compulsory one set during the previous planned economic
period. This target, catering to the needs of a market economy, should
be readjusted in accordance with changes in the domestic and international
economic situation. China has maintained a rapid economic growth rate for
20 consecutive years. Logically, double-digit growth is unlikely to be
maintained for a long time. Exports have made important contributions.
However, even the Southeast Asian financial crisis had not occurred, an
excessively high export growth rate could not be expected to last long.
China needs to stimulate domestic demand, individual consumption in particular.
This is commonly acknowledged in domestic economic circles. With an unfavorable
economic situation prevailing in neighboring countries, if China's individual
consumption can sustain a growth rate of more than 10 percent, the overall
increase may be 7-8 percent.
Despite four interest rate reductions in 1998, individual savings deposits
continued to rise. According to analysis, while the present commodity supply
exceeds market demand, the latter is far from reaching saturation. Many
factors have depressed the public's desire for consumption, including the
polarization of distribution, featuring fast growth of earnings in the
high-income strata, but slow growth for low-income families, and growing
importance attached to savings deposits as a result of unexpectedly high
spending on housing, health care, pensions and education. There is also
the psychological impact of an increasing number of laid-off workers, and
the poor economic returns of enterprises which have affected worker earnings
and indirectly held back growth of individual consumption.
To stimulate consumption, it is necessary to enhance transparency in
structural reform, establish a complete social security system, intensify
reform of the housing system, eliminate public worries depressing the desire
to consume, and meet the public's psychological expectations. This will
help divert part of the 6,000 billion yuan in savings deposits to the consumption
market. Meanwhile, it is essential to readjust the redistribution of the
national income, using fiscal means to stimulate consumption, and gradually
shifting the financial input that is used to stimulate economic development
to the aspect of increasing residents' income. While high-income consumers
deem many surplus commodities unnecessary, people with low incomes find
them unaffordable. Given this, an important measure to stimulate individual
consumption is to correct the unequal distribution system. Between 1980-96,
China's individual consumption increased by 7.7 percent per person, with
the rate standing at only 4.5 percent when the unequal distribution factor
is taken into account. Given the important role played by finance in national
income, fiscal policies should be applied to stimulate individual consumption.
In recent years, Chinese economists have been consistently exploring
ways to reinvigorate the market and stimulate demand. Policies and measures
to further stimulate demand are being formulated. At present, in the course
of seeking to increase investment and expand domestic demand, it is worth
noting that a process needs to be developed encompassing everything from
forming investment policies to implementation. The practice of blindly
expanding the investment scope will merely lead to sacrificing the quality
of economic growth in the coming years and force the government to once
again adopt "soft landing'' regulatory measures.
At present, China has entered a development stage involving industrial
upgrading and structural readjustment and enhancing economic quality. During
this period, efforts should be made to seek steady national economic growth,
with emphasis on economic restriction, financial security, structural optimization,
technological progress, environmental and resource protection, and long-term
economic operations of high quality. Meanwhile, importance should be attached
to switching promoting both investment and consumption. To stimulate consumption,
it is necessary to expand the scope of the work-relief program and investment,
so as to increase employment and income levels. The wages of low-income
urban employees should be raised appropriately, and the proportion of physical
goods in their fringe benefits and bonus increased.
China will face many difficulties and contradictions if it simply relies
on the domestic market to maintain economic prosperity and development.
However, the country's tremendous domestic market and huge market demand
will remain a major advantage. Even facing an unfavorable external economic
environment, China will still maintain sustained and steady growth.
Q: What will be the linkages between China and the global economy
by the turn of the century? How will China treat this relationship?
A: When the Southeast Asian financial turmoil was at its peak,
China made tremendous contributions to diminishing the crisis, resulting
in a rapid increase in the world ranking of its economy. In 1997, although
it had the seventh largest GDP, it was only 81st in per-capita terms. China's
economic strength is not very strong. The Southeast Asian financial turmoil
indicates, however, a country's status in the world economy lies not only
in its economic might, but also in its relationship with the global economy
and the correctness of its economic policies. During the course of opening
up, China has tightened up its relations with the world economy through
foreign trade. It has followed correct strategies and policies by taking
advantage of its labor-intensive, export-oriented industries, while absorbing
more foreign capital.
Moreover, finding out the reasons of the Southeast Asian financial turmoil
has a close bearing on China's economic development. There is a view that
the competitiveness of China's export products led to the Southeast Asian
financial crisis. This is groundless. Apart from incomplete financial systems,
early opening of the financial market, government corruption, nepotism
in business and other financial drawbacks, the most important reason lies
in their economic behavior, such as over-production and surplus of high-tech
From the late 1980s to the early 1990s, Southeast Asian countries took
the initiative to readjust their industrial structures, and increased the
export of high-tech products in place of labor-intensive ones. These so-called
high-tech products, however, are only peripheral products, such as semi-conductor
chips, computer drives, printers and monitors. During the time of fast
technological progress, the production of these peripheral goods often
failed to catch up with the rapid development of computer technology and
became outmoded. Over-production, inevitably, has led to price decline.
The root cause for the Southeast Asian financial turmoil, in fact, is the
over-production of high-tech products.
There are two points worth noting in China's economy. First, it has
achieved rapid growth in this decade through opening-up. The country has
taken fairly full advantage of its sufficient labor force, thus enhancing
the competitiveness of its labor-intensive products to fill in the market
gap vacated by Southeast Asian countries following economic restructuring.
It is one-sided to suggest that China's closed door has spared it from
the influence of the Southeast Asian financial crisis. China avoided crisis
because it has introduced the open policy that has helped increase its
exports--products not in the categories of over-production in other countries.
Second, China has used large amounts of direct foreign investment and
led developing countries in opening up. While absorbing overseas direct
investment, China has no equity restrictions. It encourages both exclusive
overseas investment and Sino-foreign joint investment, with the latter
allowed to hold more than 90 percent of the shares. This high-level opening
strategy has proved correct. Overseas statistics indicate that between
1990-96, China registered an average annual increase of 12.3 percent for
the national economy and 17.3 percent for exports, while direct foreign
investment jumped from 3.5 billion yuan to 40 billion yuan, or 80 percent
of the nation's total investment of 50 billion yuan.
Q: The overseas media have predicted that the US economy will go
downhill in 1999, which will affect China. In addition, the failure to
devalue the Renminbi (RMB) will also adversely affect the Chinese economy.
What's your view?
A: The Southeast Asian financial crisis accelerated the Sino-US
relationship in trade and direct investment. Between 1990-97, the annual
growth of US trade with China rose by 15.1 percent for exports and 22.4
percent for imports. Although China now ranks 15th among the importers
of American goods, it is fourth among exporters to the United States after
Canada, Japan and Mexico. Last year, Chinese exports to the United States
for the first time surpassed that of Japan, then obsessed with a sluggish
economy, turning America into China's second largest export destination
after Hong Kong. Meanwhile, Only Japan and Taiwan import more from the
United States than China.
Affected by the Southeast Asian financial turmoil, the consumption level
in the United States is expected to decline. Over the past few years, individual
consumption in the United States rose too quickly, with the growth rate
nearly double that of personal incomes. Consumption in advance has stimulated
economic progress. This momentum of economic growth, however, can hardly
be maintained. In accordance with the economic cycle, the US economy is
expected to enter a period of decline. Three economic crises took place
worldwide between 1970-97 (in 1973, 1982 and 1991), during which global
economic growth averaged 1.6 percent, against more than 3 percent in normal
years. The rate predicted by the International Monetary Organization for
1998 was 2 percent, approaching that of a period of economic decline. This
situation indicates that the historical law cannot be violated.
At present, the prospects for the US economy are not quite clear. Even
if the US economy declines, it will not exert a major influence on China's
export. In the early 1990s, despite a waning US economy, China recorded
a swift increase in its exports to the United States. This is because,
the per-capita annual income of developed nations has already exceeded
US$20,000, which determines that the public's basic consumption will not
be reduced even during a period of economic decline. Moreover, the majority
of China's exports to the United States are low-priced daily use goods.
But, the Southeast Asian financial crisis has exerted some adverse influence,
since China's exports to Southeast Asia used to make up a half of its total.
The growth dramatically slowed last year, chiefly due to considerable import
cuts imposed by Japan, the Republic of Korea and Southeast Asian countries.
Another view was that the currency devaluation by Southeast Asian countries,
as a result of financial crisis, would increase the competitiveness of
their exports. Increased exports would force the United States to resort
to trade protectionism. In fact, the United States has greatly benefited
from China's exports. In recent years, the US economy has been characterized
by the coexistence of low inflation and low unemployment. Apart from reduced
labor costs and high productivity, a major reason is a lowered import price.
Smart Americans will not seek trade protectionism. However, the possibility
of certain American parties with vested interests appealing for stronger
trade protectionism cannot be ruled out. Can their voice override the interests
of the general public? In my view, trade protectionism may gain some ground,
but will not become a prevailing force.
If the US economy declines, the devaluation of the US dollar will increase
the pressure on the RMB exchange rate, since basically there is a linkage
between the two. The United States cut interest rates on three occasions
last year, which was advantageous to China as it helped reduce the cost
of foreign capital raised by China. But a mass exodus of foreign capital
would certainly create an economic crisis in the United States. The fact
that the RMB is not devalued has affected China's exports. During the process
of opening, China has followed the correct strategy of absorbing direct
foreign investment. The influx of foreign capital reduces devaluation pressures
on the RMB. The growing demand for RMB from foreign-funded enterprises
helps support the RMB exchange rate. Hence, maintaining export growth and
keeping direct foreign investment at a certain level will help ward off
Q: What kind of market and opportunities will China provide for global
A: Two decades ago, China's standard of living lagged far behind
that of the United States, and Chinese consumer goods were low grade. Today,
however, the gap between China and developed countries in clothing, electrical
appliances, food and telecommunications facilities has been significantly
narrowed. Now, the main difference exists in public commodities, such as
air quality and transport, banking and telecommunications services. The
100 billion yuan worth of financial investment in 1998 is expected to launch
an upsurge in China's infrastructure construction. This will provide overseas
investors and exporters with a bigger market and greater opportunities.
As a developing country, China has many areas needing to be developed,
including highways, railways and other infrastructure facilities, higher
education, medical services, tertiary industries, the urbanization process,
and environmental protection and ecological improvement. These areas form
a tremendous market for investment. China's macro-control policies have
been transformed from retrenchment to enlarged investment. At present,
capital shortage is no longer a principal contradiction. As long as China
adheres to the principle of emancipating the mind, adopts lenient policies,
abandons unnecessary monopolies and encourages the active participation
of the private sector, its economy and market will be further invigo-rated.