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Politica economica

'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 overseas businesses.

Question: Where is China's economic development going in 1999--up or down? What about the economic growth rate? How will China operate its economy?

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 products.

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 devaluation.

Q: What kind of market and opportunities will China provide for global investors?

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.