One Response to “ Market-economy In China? ”

1. 8^3relea on December 1st, 2009 5:48 pm

   Find details on the subjevt from Notes belo:China’s economy regained momentum in the early 1990s. Deng Xiaoping’s Chinese New Year’s visit to southern China in 1992 gave economic reforms new impetus. The 14th Communist Party Congress later in the year backed up Deng Xiaoping’s renewed push for market reforms, stating that China’s key task in the 1990s was to create a “socialist market economy”. Continuity in the political system but bolder reform in the economic system were announced as the hallmarks of the 10-year development plan for the 1990s.
   During 1993, output and prices were accelerating, investment outside the state budget was soaring, and economic expansion was fueled by the introduction of Special Economic Zones (SEZs) and the influx of foreign capital that the SEZs facilitated. The government approved additional long-term reforms aimed at giving still more play to market-oriented institutions and at strengthening the center’s control over the financial system; state enterprises would continue to dominate many key industries in what was now termed “a socialist market economy”. The government called in speculative loans, raised interest rates, and reevaluated investment projects. The growth rate was thus tempered, and the inflation rate dropped from over 17% in 1995 to 8% in early 1996. The economy slowed in the late 1990s, influenced in part by the Asian Financial Crisis, with official growth of 7.8% in 1998, and 7.1% for 1999.
   Growth accelerated to record highs early in the new century. This was due to an unprecedented move by China’s leaders to engage and accepted U.S. and U.N.-sponsored expertise in revitalizing and reinventing its economic structure.
   On March 3, 2000, the Chinese leadership ordered the immediate liberalization of foreign trade, prices, and currency. This entailed removing old practiced Mao-era price controls in order to direct goods back into urban and poor rural stores, removing all legal barriers to private trade and manufacture, and cutting all government sponsored subsidies to past state farms and industries while allowing foreign imports into the Chinese market in order to break the power of past state monopolies. As was with any state-sponsored economic overhaul, the process created winners and losers, depending on how particular industries, classes, age groups, ethnic groups, regions, and other sectors of Chinese society were positioned. Some greatly benefited by the opening of competition; others simply suffered especially those in the rural farming communities. Among the winners were the new class of university educated entrepreneurs, district party officials who controlled imports and exports (some who were corrupt), corporate officers mainly in Hong Kong and Macau who managed the mass influx of foreign investment capital, overseas agents of state-sponsored plants and factories, amongst a few others.
   However by liberalizing prices, it meant that the elderly and the poor who were on state-fixed incomes suffered a severe drop in economic standards, and a huge percentage experienced a lifetime of savings being wiped out almost overnight. China’s re-invention brought on high inflation in the double-digit mark, but the economic design team implemented macroeconomic mechanisms within their economic program features that stabilized and curbed the trend within a matter of three months. The Chinese government acknowledged early in 2000 that though the transformation created a new economic class of mostly rural poor, the structural adjustment of its economy was a austerity regime it must willingly undertake and follow as suggested by the four western economists. It let most prices float, raised interest rates to even record highs, raised heavy new taxes, sharply cut back on government subsidies to most industries, and made massive cuts in state welfare spending. State-owned enterprises found themselves without state operating capital nor financing which led to mass unemployment due to the shut down of many old state-run factories and manufacturers.
   The rationale of the programs implemented by the western economists was to squeeze the built-in inflationary pressure out of the economy so that producers would begin making sensible decisions about production, pricing and investment instead of chronically over-using resources. They set up the market rather than central planners to determine prices. In product mixes, output levels, and the like, the economists created an incentive structure in the economy where efficiency and risk would be rewarded and waste and carelessness were punished. Removing the causes of chronic inflation, the economists with government approval set a precondition mark for all other reforms: uncontrolled hyperinflation in due time will wreck both social and economic progress so it must be curbed. Such features over a period of six months greatly stabilized the state budget.
   2. Many factors have contributed to this strong productivity performance, including high rates of capital investment, increasing openness to trade, and a strengthening of the educational system.5 However, in my view, the single most important cause of the ongoing expansion in productivity is that China has moved, gradually but steadily, away from central planning and toward a greater reliance on markets. In 1978, almost no prices in China were determined by the market, and most production was controlled or directed by the state. Since then, the government has reduced its direct intervention in the economy and scaled back state-owned enterprises, in the process allowing more scope for market forces. By 1999, according to one estimate, about 95 percent of retail business, together with more than 80 percent of trade in agricultural commodities and producer goods, was conducted at market-determined prices.6
   Substantial experience has shown that modern economies, including those in early stages of development, are too complex to be managed effectively on a centralized basis. Prices set in free and competitive markets serve several critical functions, among them aggregating disparate information about supply and demand conditions and the relative scarcities of specific goods and services; directing resources to their most productive uses; and providing incentives to engage in cost reduction, innovation, and entrepreneurial activities.
   A free market for labor is particularly critical for sustained economic development. China has made substantial progress in this area over the past few decades, most notably by reducing barriers to the movement of workers among regions, sectors, and firms and by allowing greater flexibility in the determination of employment and wages.7 Indeed, the ongoing movement of workers from relatively low-productivity, low-wage jobs in agriculture to higher-productivity, higher-wage jobs in manufacturing and services has been a significant source of Chinese economic growth. The decline in the share of the population in rural areas, from more than 80 percent in 1970 to less than 60 percent in 2005, indicates the scale of the movement of labor out of agriculture in recent decades.
   Despite these shifts, differences in labor productivity among sectors remain large. For example, in 2005, estimated output per worker in agriculture and related sectors was about $800, whereas in industries such as manufacturing, utilities, and mining, output per worker was about $5,900, more than seven times as much.8 Moreover, a considerable portion of China’s labor force (specifically, in agriculture and in inefficient state-owned enterprises) remains underutilized. Thus, substantial additional gains in productivity for the economy as a whole might be realized through the further reallocation of the labor force to more productive and growing sectors. In particular, small- and medium-sized enterprises are emerging as an engine of job creation in China–as they are in the United States–even as they promote innovation and help to create a more dynamic and diversified economy. The government can support the process of reallocating labor to more productive uses by continuing to reduce barriers to labor mobility, helping workers obtain the education and training they need to be productive in new occupations, and encouraging entrepreneurship and small-business development.
   As significant as the reallocation of labor among sectors has been, more of the improvement in productivity in recent years has resulted from increasing efficiencies within the major sectors rather than from the reallocation of resources between sectors. Here again, markets and competition have played a vital role. In particular, the opening of the economy to international trade and investment, which has accelerated since China’s accession to the World Trade Organization in 2001, has done much to harness market forces in the service of the country’s development. Exposure to the competition of the global marketplace has forced Chinese producers–alone or in partnership with foreign firms–to increase their efficiency and improve the quality of their output. Notably, globally-engaged firms (or their affiliates) operating in China have helped to foster productivity growth in the country by introducing new technologies and managerial techniques, as well as by enhancing domestic competition.
   Although the expansion of the market-based portion of the economy has yielded impressive results, further gains could be achieved by allowing still greater scope for market forces. The energy sector presents one such opportunity. As you know, China’s appetite for energy has grown rapidly: China’s consumption of oil has risen by more than 50 percent since 2000, and the International Energy Agency estimates that Chinese oil usage has increased by about 400,000 barrels per day in 2006, representing nearly half of this year’s growth in world oil demand. This rapid expansion in energy use reflects both overall economic growth and a relatively energy-intensive pattern of development. Greater use of market pricing in the energy sector, including the elimination of remaining price controls on fuels and the liberalization of electricity prices, would support cleaner, sustainable economic growth by promoting more-efficient use of energy by households and firms and by encouraging the development of new energy supplies.9
   Significant benefits could also be obtained by allowing a larger role for market forces in guiding investment decisions. China’s economic growth owes much to the extraordinary share of GDP that is devoted to investment in new capital, such as factories, equipment, and office buildings, which is partly financed by a very large amount of business saving.10 However, the rapid pace of investment growth raises concerns about whether new capital is being deployed in the most productive ways. In particular, some analysts have questioned whether China is getting an adequate return on its investment. For example, from 1990 to 2001, fixed investment as a share of GDP in China averaged about 33 percent, and the economy grew at an annual rate of 10 percent. Between 2001 and 2005, fixed investment’s share of GDP rose to about 40 percent, but the economy’s average growth rate remained about the same, suggesting a lower return to the more recent investment. Comparisons can also be drawn to the rapid development phases of other Asian countries, such as South Korea and Japan. Average annual growth was between 9 and 10 percent in South Korea during the 1982-91 period and in Japan during the 1955-70 period; but for both countries during the relevant years investment’s share of GDP was about 30 percent, lower than it is in China today. In a few Chinese industries, heavy investments have continued even as signs of excess capacity have begun to appear–another possible indication of capital misallocation. An example is the steel industry, in which excess capacity appears to have tripled between 2002 and 2005 to reach more than 115 million metric tons.11 Allowing competitive financial markets to play a larger role in the allocation of capital would likely increase the returns to investment and reduce the risk that uneconomic investments could exacerbate the problem of nonperforming loans and contribute to future financial instability. Basing investment decisions on market signals also takes better account of the costs of inputs complementary to capital, such as labor (relatively abundant in China) and energy (relatively scarce). China has taken initial steps toward a greater reliance on markets for determining the allocation of investment–for example, by authorizing and beginning to liberalize the stock market. China has also strengthened its banking system by improving supervision, confronting the enormous problem of nonperforming loans, allowing domestic institutions to partner with foreign banks, and increasing the use of market-based criteria in bank lending. These trends are positive; however, a great deal more remains to be done, including broadening the range of financial instruments available to savers and borrowers; taking further steps to ensure that credit evaluation and extension are based on sound economic criteria; increasing competition in banking and finance; improving credit availability for consumers and smaller firms; removing the remaining controls on interest rates; and eliminating the use of quantitative and administrative measures to influence the amount and composition of capital investment. Finally, capital markets require an appropriate institutional foundation to function effectively: Well-defined property rights (including intellectual property rights), transparent accounting standards, good corporate governance, effective supervisory oversight of banks and markets, the consistent enforcement of contracts, and rules that allow for orderly bankruptcy proceedings for unprofitable firms all help to support efficient investment. China has made progress in developing these critical institutions, but continued focus on these areas would provide large economic benefits in the long run.
   In order to give a relatively complete and objective description of the current conditions in 2001 in which the government was adapted to marketization, the following will be an analysis on the reforms carried out by the government to adapt to the needs of marketization since 1992 when establishing a socialist market economy was determined as our goal, focusing mainly on the size of the government and government’s control over economy, so as to understand the influence of governmental behavior on market economy.
   Under the conditions of a market economy, as far as the relationship between the government and the market is concerned, a smaller size of the government will be favorable to the free operation of the market. But, when confronted with market failure, the government should not remain inactive. The government should be appropriately sized to maintain a certain degree of intervention in economy. Internationally, economic freedom is often used in measuring the market-oriented development. The two well known reports on research of economic freedom, the Index of Economic Freedom compiled jointly by the Heritage Foundation and the Wall Street Journal of the United States, and the Economic Freedom of the World Annual Report by Fraser Institute of Canada, both used the size of the government in measuring the government’s intervention in market economy, and both of them believed that the size of the government and the degree of marketization are in inverse relations, i.e., the greater the size of the government, the lower level of market-oriented development of economy. We will borrow the methods they used, based on the data from the years between 1992 and 2001, to measure the size of China’s government in terms of the government revenues, the government institutions and staff, government expenditures, government investment and government subsidies, and to analyze, after 10 years of reforms since 1992 when the establishment of a socialist market economy was determined as our goal, the changes in the Chinese government’s size and their impacts on the market economy.
   It was the government that initiated the process of marketization. For this reason, the government must raise huge amounts of funds in promotion of the reforms and in promoting, developing and maintaining social stability. The Chinese government raised its funds through a diversity of revenue sources, which may be divided into three major parts, namely, budgetary, extra-budgetary and non-budgetary sources. The fiscal budgetary revenues consist of taxes, super-taxes, revenue funds, special revenues and regulation charges. The extra-budgetary revenues include administrative charges, government fund revenues and other miscellaneous revenues. Extra-budgetary revenues are distinctly different from budgetary revenues in that they are widely scattered, and that they are complicated in structure, unstable in availability and have special purposes in use. Non-budgetary revenues mainly include social securities funds, government raised funds, funds obtained by unauthorized replacing of system funds, “private coffers” accumulated from “revenue creating” activities and funds raised by rural township governments etc. In the governmental revenue system of China, budgetary revenues accounted for about 60 percent, and have always been the mainstay of the government revenue. With the improvement in government control according to standardized market rules, extra-budgetary and non-budgetary revenues will be gradually reduced and will be managed within budget.
   The proportion of government revenue in GDP represents the share directly controlled by the government and forms the government’s influence on national economy. The proportion of government revenue has always accounted for about 20 percent of the GDP since 1992, in which year the percentage was 42 percent however. The drastic decline in the proportion of the government revenue was due to the following reason: in 1992, the reform of small-sized state-owned enterprises was initiated focusing on the reform of property ownership system, and the reform of large-and-medium sized state-owned enterprises was initiated aiming at establishing a modern enterprise system. Tremendous changes took place in the way the government controls the enterprises. The government started to function in the capacity as a mere owner of the stats assets, and the state-owned enterprises were turned into microeconomic entities responsible for their own operations and losses and profits, resulting in a drastic reduction in revenues obtained by the government from the enterprises. After the year 1993, however, the decline in the proportion of government’s revenue in GDP was curbed and a slight recovery was brought about, from 20.38 percent in 1993 to 25.78 percent in 2001, up by 4.95 percent. This is mainly due to three reasons: the first is the financial resources: the growth in economy and higher efficiency of enterprises brought about a wider ranges of financial resources; the second is the policies: preferential tax policies were either cleared up or their grace periods were expired; the third is the controlling, intensified tax collection effectively checked the loop-holes for tax evasions, tax arrears and short payment of taxes by enterprises were restrained. From the policy point of view, terminating all preferential tax policies that have already expired satisfied the requirement of a market economy for fair tax burden. It is beneficial to tax collection and control on the one hand, and facilitates the standardization of taxation system on the other. From the administration point of view, intensified tax collecting and controlling has the strongest impact on increasing the government revenues. Previously the ineffective tax collecting and controlling in China resulted in losses in tax revenues and a relatively large differential between the nominal tax rates and the actual tax rates. In this sense, the rise of proportion in government revenues in GDP is mainly due to the reduction in losses in tax revenues. In a word, between the years of 1992 and 1993, the proportion of government revenue in GDP dropped sharply, but in the following ten years it recovered slightly and was kept at a relatively low level.
   Although China’s government revenue is calculated on a different basis from that of other countries, since there are some incomparable factors (for instance, China’s government revenue includes not only the budgetary, but also the extra-budgetary and non-budgetary revenues), when compared with other countries’ proportion of government revenue in GDP (usually above 30 percent), China’s proportion of government revenue in GDP is relatively low. The reason this proportion is kept low lies in the fact that the functions of the government has changed since the initiation of market-oriented reforms, where the market has become the basic means for allocation of resources. In addition, China is currently experiencing economic take-off, the principal function of the government is to regulate the economy and to provide public goods, and is therefore not able to conduct re-distribution of revenues on a large scale like the developed countries. Higher efficiency resulted from improved tax policies and taxation system led to an expanding size of the government revenue. However, when compared with other countries, the size of China’s government revenue is still relatively small.
   2. Government Institution and Staff
   The sizes of government institutions and the number of government staff are also frequently used as criteria for judging the size of the government. The more institutions within the government and the more staff members working for them would mean the large the size of the government. All the past reforms in government institutions were aimed at cutting down the size of the government. Since 1998, in order to adapt the administrative system to the needs of the market economy system, a new round of reform of governmental institutions with greater magnitude was conducted successively from the State Council to local governments. This round of reform was the largest in scale since the founding of the People’s Republic of China with the strongest magnitude and covered the widest fields. The reform emphasized the change of governmental functions by clearly distinguishing the roles of the government and of the enterprises; the numbers of institutions together with the staff working for them were to be reshuffled and trimmed to the extent that they were compact but highly efficient with consistent powers and responsibilities. The comprehensive economic departments and the law enforcing and monitoring departments were to be given the priority of being reinforced; the specialized economic departments were to be cut down in number by means of mergers. The State Administration of Domestic Trade, the State Administration of Coal Industry, the State Administration of Machinery Industry, the State Administration of Metallurgy, the State Administration of Petrol and Chemical Industries, the State Administration of Light Industry, the State Administration of Textile Industry, the State Administration of Building Material Industry and the State Administration of Non-Ferrous Industry were cancelled. After the institutional reforms, the number of existing component departments of the State Council was reduced to 29 from the former 40, and the number of staff members working for ministries, commissions, offices and administrations under the State Council was reduced to 16, 500 from the original 33,000. Organizations within the departments were cut by one quarter. Propelled by the institutional reforms in the State Council, local governments at various levels conducted corresponding trimmings, further defining the responsibilities and authorities. The average number of institutions on the provincial level was reduced to 40 from the previous 55, an average reduction of about 20 percent, and the number of personnel was reduced by an average of 47 percent, or a total of 74,000 persons. After this institutional reform of the government, the number of government staff accounted for 4.56 percent of the total employment in 2001, while previously the percentage was 5.16 percent. The government staff accounted for 13.9 percent of the total urban employment in 2001, compared to 17.86 percent in 1992.
   4.The government has greatly reduced its intervention as far as the prices are concerned. The government’s administration over prices is simply regarded as a means for macro control, aimed at maintaining stable market prices and regulating the distribution of revenues. In 2001, the government issued the Price-Setting Catalogue of the State Development Planning Commission and the relevant departments of the State Council, according to which, prices of most commodities and services that were previously fixed by the Central Government are now set free. The types (categories) of commodities and services the prices of which were fixed by the price administrative authority and other relevant authorities of the State Council was reduce to 13 from the 141 in the 1992 Price-Setting Catalogue.
   The government retains the price setting or price control power only for very few important commodities and labor services. The Price law stipulates that when necessary the government may exercise government guided prices and government fixed prices for the following five types of commodities and services: (1) prices of very few commodities of important significance to national economic development and people’s livelihood; (2) prices of a few commodities the resources of which are limited; (3) prices of commodities under natural monopoly; (4) prices of important public utilities; (5) prices of important public welfare services.
   5. Government’s Production Administration
   The government does not intervene in production operations. The production operations of all market entities of the whole society are determined by the enterprises and by the market. The principal function of the government is to prevent and abolish monopolization and regional blockade, to fight against unfair competition and to create a fair environment for production and business operation. Apart from exercising mandatory planning on a few important products, the government leaves the rest to market regulation and to directive planning. In industrial production, only five products are subject to mandatory planning, namely, timber, gold, cigarettes, salt and natural gas. Among these five products, mandatory planning is limited to some stages or some types of by-products of timber, natural gas and gold. While in agricultural production, mandatory planning is completely abolished, and the main farm produces are under directive planning or subject to market orientation.
   The approach used by the government in directly controlling the state owned enterprises has been changed a great deal, as a result of remarkable progresses made in distinguishing the roles of the government and the enterprises. Concurrently with the reforms of the government institutions, armed forces, military police, the judiciary system, the Communist Youth League, the Women’s Union and various government departments underwent reforms in which their relations with the associated enterprises were separated. Some of the enterprises that have severed relations with the patronizing government institutions entered into a group of 500 large enterprises under the direct control of the State Economic and Trade Commission, others were taken over by the localities. The government departments cancelled their relations with the economic entities or enterprises that were previously run by them or belonged to them, and no longer ran these enterprises. In order to enhance the supervising function as an owner, the government designated the board of supervisors to key state-owned enterprises and financial institutions, and authorized asset managing institutions and large enterprises to run state-owned assets, in order to safeguard and enhance the value of state-owned assets. To some key enterprises, the government exercised the system of designating monitors, and intensified the work of the board of supervisors of state-owned enterprises. In most areas, the government exercised the system of designated accountants to some state-owned enterprises, thus intensifying financial supervision of state-owned enterprises by the government. The government proposed the principle of “advancing in some areas and retreating from others”, and “be active only in a selected number of areas” to implement strategic adjustments to the state-owned economy.
   The government relaxed the control over some monopolized industries. Fighting against monopolization will benefit the nurturing and growing of the market. The process of China’s economic reform is in essence a process of breaking the monopoly in various aspects to be replaced by the optimal allocation of resources by the market step by step. In recent years, China’s access restrictions on monopolized industries such as telecommunications, aviation, railway and electrical power have been relaxed to some extent. The reform of the telecom industry was the most successful. “Telecom industry” here is used in the narrow sense, referring to the telecommunications network and network services. Network services cannot be independent of the telecommunications network, so the telecommunications network is highly monopolized. Before 1994, in China’s telecommunications market, especially the part of basic businesses of it, there was only one enterprise due to the government’s severe access restrictions, namely China Telecom under the Ministry of Post and Telecommunications, which was under monopolized management all over the country. In 1998 the restructuring of the telecom industry was initiated. To date, a new pattern of the telecom industry has taken shape consisting of a number of companies including China Telecom, China Mobile, China Unicom, CHINAVSAT, Jitong Communications, and China Railcom.
   6. Government’s Maintenance of the Market Order
   By formulating policies and perfecting rules and regulations, the government can maintain the market order, striving for creating a favorable market environment for fair competition of the market entities. The basis for a successful market economy system lies in the bonding relations between the market entities enjoying equal rights. This type of relationship is maintained by a well-developed law system in combination with an effective mechanism to enforce it. The Chinese government has made significant progress in establishing and developing the market rules.
   In maintaining the market order, the promulgation and implementation of the Economic Contract law, the Technical Contract law, the Foreign Economic Contract Law, the Arbitration Law, the Trademark Law, the Product Quality Law, the Accounting Law, the Audit Law, the Law of Counter-Unfair Competition and the Price Law made specific stipulations in relation to the rules for enterprises’ market access, equal participation of market competition and transaction; the promulgation and implementation of the Consumer Protection Law, the Trade Union Law, the Regulations on the Settlement of Enterprise Labor Disputes and the Labor Law etc. are for safeguarding the lawful rights and interests of the consumers and laborers.
   In improving and enhancing the macroeconomic control by the State, the formulation of the Budget Law defined the budget control powers between the Central Government and the localities; a series of taxation related laws and regulations were issued and amended, such as the Law of Individual Income, the Income Tax Law for Enterprises, the Provisional Regulations on the Enterprise Income Tax, the Provisional Regulations on the Value Added Tax, the Provisional Regulations on the Consumption Tax, the Provisional Regulations on the Business Tax, the Provisional Regulations Concerning the Stamp Duty, the Provisional Regulations on the Resource Tax, the Provisional Regulations on the Land Value Added Tax and the Procedures for Administering the Levying and Collection of Tax etc., establishing a preliminary framework for China’s taxation system. The formulation of the Law of People’s Bank of China, the Law of Commercial Banks and the Insurance Law established and perfected the macroeconomic control system of the central bank and intensified the supervision and control of the financial industry. The formulation of the Law of Agriculture, the Land Administration Law, the Law of Waters, the Forestry Law, the Mineral Resources Law, the Law of Coals, the Law of the Highway, the Civil Aviation Act, the Railway Law, the Electric Power Law, the Postal Law, the Construction Law, the Tobacco Monopoly Law, the Fisheries Law and the Environmental Protection Law etc. ensured that the government will formulate industrial policies in compliance with the laws and promoted the healthy development of China’s infrastructure industry.

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