Economic Developments in Contemporary China

A Guide

Ian Jeffries

• Publisher: Taylor & Francis
• Year: 2010
• eBook ISBN: 9781136965128
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

China's role in global affairs today continues to rise. This book provides an authoritative, comprehensive and detailed overview of contemporary economic developments in China. Key topics include agriculture; the market gradually replacing central planning; the global financial crisis; the reform of state-owned industrial enterprises; the non-state sectors; the 'open-door' policy (including the WTO, exchange rate policy, and inward and outward direct foreign investment); and China's economic performance in general.

The book continues - and adds to – the overview of developments up to May 2006 which were covered in the author's China: A Guide to Economic and Political Developments (2006), and is the companion volume to Political Developments in Contemporary China: A Guide (2010) - both published by Routledge.

1
Overview

(Developments after November 2009 have not generally been summarized in the Overview. Please see the main text.)

For 500 years, from the fourteenth century until the 1830s China accounted for a remarkable 30 per cent of world economic output. That is more than the US economy at the height of its global economic dominance after World War II – sustained for a half-millennium! But by 1979 … China’s share of global GDP was barely 1 per cent … Today China accounts for about 5 per cent of world output.

(Philip Auerswald, IHT, 12 August 2008, p. 8)

Perhaps it would be more accurate to speak of the country’s reemergence. In 1820 China accounted for about 30 per cent of the global economy … The United States then weighed in with less than 2 per cent. But by the 1950s America was dominant and China … accounted for only about 4 per cent of world economic activity.

(Roger Cohen, IHT, 13 April 2005, p. 2)

Up to the fifteenth century Chinese technological know-how was the most advanced in the world. China has been the largest economy in the world for 1,800 of the past 2,000 years. As recently as 1820 it produced one-third of global output, and it remained the world’s largest economy until 1885.

(John Lee, IHT, 13 November 2008, p. 8)

Angus Maddison has calculated that China’s share of GDP in 1820 … was more than 30 per cent … Between 1820 and 1952 … China’s output per head actually fell while its share of global GDP plunged from one-third to one-twentieth. Per capita income fell from level pegging with the world to a quarter of the global average over the period.

(FT, 12 November 2009, p. 13)

The economic reforms themselves have been variously described by China, e.g. ‘planned socialist commodity economy’ has given way to ‘socialist market economy’ (1992: formally enshrined in the new constitution in March 1993) as the reforms have proceeded and ideological concessions have become more and more accepted.

China is the best example of a generally successful policy of gradual and partial economic reform. The Third Plenum of the Eleventh Central Committee in December 1978 was the crucial political event. Since then China, with occasional setbacks, has moved broadly towards a market economy and allowed the non-state sector to gradually play a much greater role. China, however, had no detailed blueprint for economic reform and so groped its way forward.

Those advocating ‘big bang’/‘shock therapy’ for the countries of Eastern Europe and the former Soviet Union generally argue that, despite the country’s achievements, China’s model cannot be adopted in these cases because circumstances are different. Among other things, China was generally in a more favourable position in 1978 than the countries of Eastern Europe/the former Soviet Union generally were in 1989/1991. For example, China had a relatively low foreign debt, did not suffer from severe inflationary pressures and had substantially reorientated its trade towards the West. (China had quarrelled with the Soviet Union; e.g. in 1960 the Soviet Union withdrew its aid personnel.) The structure of the Chinese economy in 1978 was far more agrarian in nature, allowing a vast flow of cheap labour to the towns to boost the export of manufactured goods, including those produced by foreign companies. China’s socalled ‘floating population’ of rural workers in urban areas is difficult to estimate, but may be of the order of 130 million to 150 million in more recent times. (Woo is an exception in that he argues that ‘gradual reform in China was not the optimal reform for China’: 1994: 306.)

The discrediting of such extreme and extreme-left policies as the Great Leap Forward (1958–60) and the Cultural Revolution (1966–76) has helped keep the policy of gradual reforms on track. There have been occasional setbacks, but there seems to be no chance of any substantial reversal of the reforms which have been gradually introduced since 1978. China is now a key figure in the global economy, as regards both its exports and imports. Entry into the WTO (the successor to Gatt) on 11 December 2001 helped ensure the irreversibility of the general economic reform process.

The policy of gradualism has been influenced by such factors as the consequences of making drastic mistakes in a poor country with a history of natural and man-made disasters, and disagreements within the ruling elite. The Great Leap Forward (1958–60) and the Cultural Revolution (1966–76; a chaotic and anarchic period and one which was basically a means of reasserting Mao’s personal power after his authority had waned in the wake of the disastrous Great Leap Forward) were the result of extreme-left policies. The discrediting of such extreme and extreme-left policies has had a profound effect, both on the decision to implement economic reforms after the watershed year 1978 and on the basic continuity of the reforms.

Economic reforms have sometimes been put on hold or even regressed, e.g. after the Tiananmen crisis in 1989 and the Asian financial crisis (which started with the attack on the Thai baht in July 1997). Periodic worries about inflation or deflation have led to setbacks and there has at various times been resistance to, for example, agricultural tax reform, housing reform and the sale of state assets. Property and bankruptcy laws were slow in coming.

China adopted a policy of gradual and partial price reform. A ‘dual’ pricing system was used (market prices being allowed for products bought and sold on the market as opposed to state-controlled prices for outputs or inputs forming part of the state plan). Controls have gradually been relaxed over time. Nevertheless, the state still exercises considerable direct and indirect control over price setting. In addition, temporary retrenchment has occurred, such as the reintroduction of price controls to combat inflation (such as in the latter half of 1998, the latter half of 2007 and early 2008) and combat deflation (price floors for a while after October 1997). The unusually severe snowstorms in parts of China that started on 10 January 2008 led to further (temporary) food price controls.

China lifted its controls on food prices Monday [1 December], the latest sign of how drastically priorities have shifted from earlier this year, when the county was focused on fighting inflation … Companies would now be free to decide that for themselves, the National Development and Reform Commission said in a statement … Under the controls manufacturers had to apply for approval for any substantial price increases. Beijing will still keep an eye on prices, however, and work to ensure that no one manipulates them … ‘We must work further on how to address abnormal price movement.’ the commission said.

(www.iht.com, 1 December 2008; IHT, 2 December 2008, p. 20)

‘Starting 1 January [2009] Beijing will allow gasoline and diesel prices to move more regularly in line with the global market’ (www.iht.com, 5 December 2008).

China unveiled a shake-up of its oil pricing system yesterday [5 December], combining a big increase in fuel taxes for consumers with the first steps in liberalizing prices for petrol and diesel. From next year [2009] Beijing will allow prices for refined oil in the Chinese market to ‘reflect fluctuations of international oil prices’, ending a system of periodic price changes.

(FT, 6 December 2008, p. 8)

‘China will cut domestic fuel prices on Friday [19 December] for the first time in almost two years’ (www.ft.com, 19 December 2008).

‘China took a step back from its promise to move towards more marketorientated domestic fuel prices, warning on Friday [8 May] that Beijing would limit petrol, diesel and other fuel price increases when oil prices rose above $80 a barrel’ (www.ft.com, 10 May 2009).

‘[Companies such as PetroChina have] benefited from two governmentsanctioned fuel price increases in June [2009] – part of Beijing’s fuel price reforms that guarantee refiners a profit margin if crude oil stays below $80 a barrel’ (FT, 29 August 2009, p. 15).

Economic success has been achieved on a broad front, in terms of such criteria as output growth, living standards, poverty reduction and inflation. (See Table 1.)

China’s rapid expansion of late (the fastest growing large economy) has been of global significance, such as its important contribution to global economic growth and its effects on the world market prices of commodities such as oil. China came through the 1997 Asian financial crisis in good shape and is coping relatively well with the global financial crisis.

But the costs of rapid growth include horrendous levels of pollution. Party leaders are also concerned about increasing inequalities in the distribution of income and wealth.

In December 2005 China announced that it had upwardly revised its official estimate of GDP in 2004 by 16.8 per cent. The main reason given was the considerable underestimation of the private service sector. In January 2006 China presented revised figures for GDP growth rates. From 1993 to 2004 inclusive only the figure for 1998 remained unchanged, while all the others were revised upwards. (See Table 1.)

China said Tuesday [20 December 2005] that its economy was far bigger than previously estimated and that the new figures suggested that it had probably passed France, Italy and Britain to become the world’s fourth largest economy … trailing only that of the United States, Japan and Germany.

(IHT, 21 December 2005, p. 17)

‘China could displace Britain as the world’s fourth largest economy this year [2005] after Beijing unveiled a 16.8 per cent upward revision to official GDP that pushed it into sixth place in 2004’ (FT, 21 December 2005, p. 10).

‘[China has] the world’s fourth largest economy’ (The Economist, 1 November 2008, p. 67).

‘Revised figures published this week show that in 2007 China overtook Germany to become the world’s third biggest economy’ (www.economist.com, 14 January 2009).

China on Wednesday [14 January 2009] revised upwards its GDP [growth rate] for 2007 to 13 per cent from 11.9 per cent, which would m...

Table of contents

• Guides to economic and political developments in Asia
• Contents
• Acknowledgements
• Introduction
• 1 Overview
• 2 Agriculture
• 3 The market gradually replacing central planning
• 4 The reform of state industrial enterprises
• 5 The ‘open door’ policy
• 6 Economic performance
• Postscript
• Bibliography
• Index