lesson from 30 years of chinese reform

8/6/2019 Lesson From 30 Years of Chinese Reform

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Content

IntroductionHistoryTwo Phases of the ReformEffect on State Budget

Effect on Poverty reductionEffect on Wealth Disparity.Conclusion


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The Chinese economic reform refers to the programof economic reforms called " Socialism with Chinesecharacteristics " in the People's Republic of China(PRC) that were started in 1978 by pragmatists withinthe Communist Party of China (CPC) led by DengXiaoping and are ongoing as of the early 21st century.

The goal of Chinese economic reform was to generatesufficient surplus value to finance the modernization of the mainland Chinese economy.Neither the socialist command economy , favored by

CPC conservatives, nor the Maoist attempt at a GreatLeap Forward from socialism to communism inChina's agriculture (with the commune system) hadgenerated sufficient surplus value for these purposes.

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The initial challenge of economic reform was tosolve the problems of motivating workers and

farmers to produce a larger surplus and toeliminate economic imbalances that werecommon in command economies.Economic reforms started since 1978 have

helped lift millions of people out of poverty,bringing the poverty rate down from 53% of thepopulation in the Mao era to 12% in 1981.

His economic reforms are still being followed bythe CPC today and by 2001 the poverty ratebecame only 6% of the population


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History

The first reforms in the late 1970s and early 1980sconsisted of opening trade with the outside world,instituting the household responsibility system inagriculture, by which farmers could sell their surplus

crops on the open market, and the establishment ofTown and Village Enterprises (TVEs).The process of economic reform began in earnest in1979, after Chinese leaders concluded that the Soviet-

style system that had been in place since the 1950swas making little progress in improving the standard ofliving of the Chinese people and also was failing toclose the economic gap between China and the

industrialized nations .


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The reforms of the late 1980s and early 1990sfocused on creating a pricing system and

decreasing the role of the state in resourceallocations .The reforms of the late 1990s focused onclosing unprofitable enterprises and dealingwith insolvency in the banking system.A fter the start of the 21st century, increasedfocus has been placed on narrowing the gapbetween rich and poor in China.The standard of living of most Chinese hasimproved markedly since 1978.


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Two Phases of The ReformThe first part of Chinese economic reform involvedimplementing the household responsibility system inagriculture , by which farmers were able to retainsurplus over individual plots of land rather thanfarming for the collective.Establishment of TVE's, which were industries ownedby townships and villages.A n open door policy was introduced which the began

to allow international trade and foreign directinvestment .These initiatives immediately increased the standardof living for most of the Chinese population andgenerated support for later, more difficult, reforms.


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The second phase of reform occurred in the1980s and was aimed at creating market

institutions and converting the economy from anadministratively driven command economy to aprice driven market economy.Dual-track pricing system , in which some

goods and services were allocated at statecontrolled prices, while others were allocated atmarket prices.

Goods allocated at market prices wereincreased, until by the early-1990s theyincluded almost all products


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Constraints on foreign trade were relaxed.Joint ventures with foreign firms were officially

encouraged as sources of modern technologyand scarce foreign exchange .With rising incomes, greater incentives, and

rapid growth in the service and light industrialsectors, the People's Republic of China beganto exhibit some of the traits of a consumer society .Thus, the Chinese economy in the late 1980swas very much a mixed system . It could not beaccurately described as either a centrally

planned economy or a market economy .


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PHASE (1990-2000)


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During a Chinese New Year visit to southernChina in early 1992, China's paramount leader at the time Deng Xiaoping made a series of political pronouncements designed to give newimpetus to and reinvigorate the process of

economic reform.The 14th National Communist Party Congressbacked up Deng's renewed push for marketreforms, stating that China's key task in the1990s was to create a " socialist marketeconomy ".


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During 1993, output and prices wereaccelerating, investment outside the state

budget was soaring, and economic expansionwas fueled by the introduction of more than2,000 special economic zones (SEZs) and theinflux of foreign capital that the SEZs facilitated.The growth rate was thus tempered, and the

inflation rate dropped from over 17% in 1995 to8% in early 1996.


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In 1996, the Chinese economy continued to grow at arapid pace, at about 9.5%, accompanied by lowinflation.

The economy slowed for the next 3 years, influencedin part by the Asian Financial Crisis , with officialgrowth of 8.9% in 1997, 7.8% in 1998 and 7.1% for 1999.

From 1995 to 1999, inflation dropped sharply,reflecting tighter monetary policies and stronger measures to control food prices.The year 2000 showed a modest reversal of this trend.

Gross domestic product in 2000 grew officially at 8.0%that year, and had quadrupled since 1978. In 1999,with its 1.25 billion people but a GDP of just $3,800per capita (PPP), China became the second largesteconomy in the world after the US.


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Phase (2000present)

The Fifth Plenum in October 2005 approved the 11thFive-Year Economic Program (20062010) aimed atbuilding a " harmonious society " through morebalanced wealth distribution and improved education ,

medical care , and social security .On March 2006, the National People's Congressapproved the 11th Five-Year Program .The plan called for a relatively conservative 45%increase in GDP and a 20% reduction in energyintensity (energy consumption per unit of GDP) by2010.


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China's economy grew at an average rate of 10% per year during the period 19902004, thehighest growth rate in the world.China's GDP grew 10.0% in 2003, 10.1%, in2004, and even faster 10.4% in 2005 despiteattempts by the government to cool the

economy.China's total trade in 2006 surpassed $1.76trillion, making China the world's third-largesttrading nation after the U.S. and Germany.Such high growth is necessary if China is togenerate the 15 million jobs needed annuallyroughly the size of Ecuador or Cambodia toemploy new entrants into the job market


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On January 14, 2009 as confirmed by the World Bankthe NBS published the revised figures for 2007financial year in which growth happened at 13 percent

instead of 11.9 percent (provisional figures).China's gross domestic product stood at US$ 3.4

trillion while Germany's GDP was USD $3.3 trillion for 2007.

This made China the world's third largest economy bygross domestic product .Based on these figures, in 2007 China recorded itsfastest growth since 1994 when the GDP grew by

13.1 percent.China may have already overtaken Germany evenearlier as China's informal economy (including theGrey market and underground economy ) is larger than

Germany's.


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. Louis Kuijs, a senior economist at World Bank ChinaOffice in Beijing, said that China's economy may evenbe (as of January 2009) as much as 15 percent larger

than Germany's. According to Merrill Lynch China economist Ting Lu,China is projected to overtake Japan in "three to four years".

China launched its Economic Stimulus Plan tospecifically deal with the Global financial crisis of 20082009 .It has primarily focused on increasing affordable

housing, easing credit restrictions for mortgage andSMEs, lower taxes such as those on real estate salesand commodities, pumping more public investmentinto infrastructure development, such as the railnetwork, roads and ports.


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Major natural disasters of 2008, such as the

2008 Chinese winter storms , the 2008 Sichuanearthquake , and the 2008 South China floodsmildly affected national economic growth butdid do major damage to local and regionaleconomies and infrastructure.Growth rates for Sichuan dropped to 4.6% inthe 2nd quarter but recovered to 9.5% annualgrowth for the whole of 2008


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FINAN CIAL AND BANKING SYSTEM

Most of China's financial institutions are state owned & governed and 98% of banking assets are stateowned. The chief instruments of F inancial and F iscal control are the People's Bank of China (PBC)and the Ministry of F inance, both under the authority of the State Council.

The People's Bank of China replaced the Central Bank of China in 1950 and gradually took over private banks.

It fulfills many of the functions of other central and commercial banks.

It issues the currency, controls circulation, and plays an important role in disbursing budgetaryexpenditures.

A dditionally, it administers the accounts, payments, and receipts of government organizations andother bodies, which enables it to exert thorough supervision over their financial and generalperformances in consideration to the government's economic plans. The PBC is also responsible for international trade and other overseas transactions. Remittances by overseas Chinese are managed bythe Bank of China (BOC), which has a number of branch offices in several countries.

Other financial institutions that are crucial, include the China D evelopment Bank (C D B), which fundseconomic development and directs foreign investment; the A gricultural Bank of China ( A BC), whichprovides for the agricultural sector; the China Construction Bank (CCB), which is responsible for capitalizing a portion of overall investment and for providing capital funds for certain industrial andconstruction enterprises; and the Industrial and Commercial Bank of China ( ICBC), which conductsordinary commercial transactions and acts as a saving bank for the public.


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ECO N OMICAL RE F ORMS

China's economic reforms greatly increased the economic role of thebanking system. In theory any enterprises or individuals can go to thebanks to obtain loans outside the state plan, in practice 75% of statebank loans go to State Owned Enterprises.

(SOEs) Even though nearly all investment capital was previouslyprovided on a grant basis according to the state plan, policy has sincethe start of the reform shifted to a loan basis through the various state-directed financial institutions. Increasing amounts of funds are madeavailable through the banks for economic and commercial purposes.F oreign sources of capital have also increased. China has receivedloans from the World Bank and several United N ations programs, aswell as from countries (particularly Japan ) and, to a lesser extent,commercial banks. Hong K ong has been a major conduit of thisinvestment, as well as a source itself.With two stock exchanges (Shanghai Stock Exchange and ShenzhenExchange),Mainland China's stock market had a market value of $1 trillion byJanuary 2007, which became the third largest stock market in A sia,after Japan and Hong K ong. It is estimated to be the world's thirdlargest by 2016.


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CURRE N CY SYSTEM

Beginning January 1, 1994, the People's Bank of China quotes the midpoint rateagainst the US dollar based on the previous day's prevailing rate in the interbank

foreign exchange market.The rate of exchange (Chinese Yuan per US$1) on July 31, 2008 was RMB 6.846, in

mid-2007 was RMB 7.45, while in early 2006 was RMB 8.07:US $1 = 8.2793 Yuan(January 2000), 8.2783 (1999), 8.2790 (1998), 8.2898 (1997), 8.3142 (1996), 8.3514(1995).There is a complex relationship between China's balance of trade, inflation, measured

by the consumer price index and the value of its currency.Despite allowing the value of the Yuan to "float", China's central bank has decisive

ability to control its value with relationship to other currencies. Inflation in 2007,reflecting sharply rising prices for meat and fuel, is probably related to the worldwiderise in commodities used as animal feed or as fuel. Thus rapid rises in the value of the

Yuan permitted in December, 2007 are possibly related to efforts to mitigate inflationby permitting the renminbi to be worth more.


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Conti.A bout 45 percent of China's labor force is engaged in agriculture.There are over 300 million Chinese farm workers mostly laboringon small pieces of land relative to U.S. farms.Virtually all arable land is used for food crops. China is the world'slargest producer of rice and is among the principal sources of

wheat, corn (maize), tobacco, soybeans, peanuts (groundnuts),cotton, potatoes, sorghum, peanuts, tea, millet, barley, oilseed,pork, and fish.Major non-food crops, including cotton, other fibers, and oilseeds,furnish China with a small proportion of its foreign trade revenue.A gricultural exports, such as vegetables and fruits, fish andshellfish, grain and grain products, and meat and meat products,are exported to Hong K ong. Yields are high because of intensivecultivation, for example, China's cropland area is only 75% of theU.S. total, but China still produces about 30% more crops andlivestock than the United States. China hopes to further increaseagricultural production through improved plant stocks, fertilizers,and technology.


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CONTINUED..

Among the various industrial branches themachine-building and metallurgical industrieshave received the highest priority.These two areas alone now account for about

2030 percent of the total gross value of industrial output.Overall industrial output has grown at anaverage rate of more than 10 percent per year,

having surpassed all other sectors in economicgrowth and degree of modernization.The predominant focus of development in thechemical industry is to expand the output of chemical fertilizers, plastics, and synthetic fibers.


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CONTINUED.

The growth of this industry has placed Chinaamong the world's leading producers of

nitrogenous fertilizers.In the consumer goods sector the main emphasisis on textiles and clothing, which also form animportant part of China's exports.

Textile manufacturing, a rapidly growing proportionof which consists of synthetics, account for about10 percent of the gross industrial output.


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STEEL INDUSTRY

China is the largest producer of steel in the worldand the steel industry has been rapidly increasingits steel production.Iron ore production kept pace with steel productionin the early 1990s but was soon outpaced byimported iron ore and other metals in the early2000s.

Steel production, an estimated 140 million tons in2000, was increased to 419 million tons in 2006.Much of the country's steel output comes from alarge number of small-scale producing centers,

one of the largest being Anshan in Liaoning.


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AUTOMOTIVE INDUSTRY

By 2006 China had become the worlds third largestautomotive vehicle manufacturer (after US and Japan) andthe second largest consumer (only after US).

Automobile manufacturing has soared during the reformperiod.In 1975 only 139,800 automobiles were produced annually,

but by 1985 production had reached 443,377, then jumped tonearly 1.1 million by 1992 and increased fairly evenly eachyear up until 2001, when it reached 2.3 million.In 2002 production rose to nearly 3.25 million and then

jumped to 4.44 million in 2003, 5.07 million in 2004, 5.71million in 2005 and 7.22 million in 2006.In 2007, 9 million automobiles are produced and the countrycould become the number-one automaker in the world by2020.


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CONTINUED..

After respectable annual increases in the mid- andlate 1990s, passenger car sales soared in theearly 2000s.In 2006, a total of 7.22 million automobiles havebeen sold, including 5.18 million units of passenger cars and 2.04 million units of commercial vehicles.China began to plan major moves into theautomobile and components export businessstarting in 2005.

A new Honda factory in Guangzhou was built in2004 solely for the export market and wasexpected to ship 30,000 passenger vehicles toEurope in 2005.


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CONTINUED..

By 2004, 12 major foreign automotivemanufacturers had joint-venture plants in China.They produced a wide range of automobiles,

minivans, sport utility vehicles, buses, and trucks.In 2003 China exported US$4.7 billion worth of vehicles and components.The vehicle export was 78,000 units in 2004,173,000 units in 2005, and 340,000 units in 2006.The vehicle and component export is targeted toreach US$70 billion by 2010

lesson from 30 years of chinese reform

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