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China

MongoliaOur quarterly Country Report on China and Mongoliaanalyses current trends. This annual country profile providesbackground political and economic information.

1998-99The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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ISSN 1352-089X

Comparative economic indicators, 1997

0 200 400 600 800 1,000

China

South Korea

Taiwan

Indonesia

Hong Kong

Thailand

Malaysia

Singapore

Philippines

Vietnam

Mongolia (a)

Gross domestic product$ bn

(a) Less than $1bn. Sources: EIU estimates; national sources.

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Singapore

Hong Kong

Taiwan

South Korea

Malaysia

Thailand

Philippines

Indonesia

China

Mongolia

Vietnam

Gross domestic product per head$

Sources: EIU estimates; national sources.

-2 0 2 4 6 8 10

China

Vietnam

Malaysia

Singapore

Taiwan

South Korea

Hong Kong

Philippines

Indonesia

Mongolia

Thailand

Gross domestic product% change, year on year


0 1 2 3 4 5 6 7 8 9 10

Mongolia

Indonesia

Hong Kong

Thailand

Philippines

South Korea

Vietnam

China

Malaysia

Singapore

Taiwan

Consumer prices% change, year on year


44.644.644.644.644.644.644.644.644.644.644.644.644.6

EIU Country Profile 1998-99 © The Economist Intelligence Unit Limited 1998

December 15th 1998 Contents

China

4 Basic data

5 Political background5 Historical background

11 Constitution and institutions13 Political forces16 International relations and defence

18 The economy18 Economic structure20 Economic policy29 Economic performance31 Regional trends

33 Resources33 Population35 Education36 Health36 Natural resources and the environment

37 Economic infrastructure37 Transport and communications38 Energy provision39 Financial services

41 Production41 Industry42 Mining and semi-processing43 Agriculture and forestry45 Construction

46 The external sector46 Merchandise trade49 Invisibles and the current account52 Foreign reserves and the exchange rate

54 Appendices54 Sources of information55 Reference tables55 Government finances55 Investment in assets by source and purpose56 Money supply and credit56 Gross domestic product and gross national product56 Gross domestic product by sector

1

© The Economist Intelligence Unit Limited 1998 EIU Country Profile 1998-99

57 Gross domestic product by expenditure57 Price indices57 Population58 Labour force58 Transport statistics58 National energy statistics59 Banking statistics: sources and uses of credit funds by state banks59 Industrial production60 Agricultural production60 Gross agricultural output value, by sector61 Total sown area, by crop61 Miscellaneous agricultural statistics62 Exports62 Imports63 Balance of payments, IMF estimates64 External debt65 Net official development assistance65 Position of China vis-à-vis BIS-reporting banks65 Foreign reserves65 Exchange rates

Mongolia

66 Basic data

67 Political background67 Historical background69 Constitution and institutions69 Political forces70 International relations and defence

70 The economy70 Economic structure71 Economic policy72 Economic performance73 Regional trends

74 Economic resources74 Population74 Education74 Health75 Natural resources

75 Economic infrastructure75 Transport and communications75 Energy provision76 Financial services

2


76 Production76 Industry76 Mining and semi-processing77 Agriculture and forestry77 Construction

78 The external sector78 Merchandise trade79 Invisibles and the current account79 Capital flows and foreign debt80 Foreign reserves and the exchange rate

81 Appendices81 Sources of information82 Reference tables82 Government finances82 Government revenue83 Government expenditure83 Money supply and credit83 Gross domestic product84 Gross domestic product by expenditure84 Gross domestic product by sector84 Consumer prices85 Population85 Labour force85 Output of selected industrial products86 Minerals production86 Livestock numbers86 Meat production87 Crop production87 Foreign trade87 Main trading partners88 Balance of payments, national estimates89 Balance of payments, IMF estimates90 External debt90 Net official development assistance91 Foreign reserves91 Exchange rates

3


China

Basic data

Land area 9,561,000 sq km

Population 1,236m (end-1997)

Main towns Population in million, end-1997 estimates

Chongqinga 30.4 Tianjin 9.0Shanghai 13.1 Shijiazhuang 8.6Beijing (Peking, capital) 12.2 Wuhan 7.2Chengdu 9.9 Qingdao 6.9Harbin 9.1 Guangzhou (Canton) 6.7

Climate Continental, with extremes of temperature; subtropical in the south-east

Weather in Shanghai(altitude 7 metres)

Hottest months, July and August, 23-32°C (average daily minimum and maxi-mum); coldest month, January, 1-8°C; driest month, December, 36 mm aver-age rainfall; wettest month, June, 180 mm average rainfall

Language Mainly Putonghua, based on northern Chinese (the Beijing dialect known asMandarin); local dialects and languages also used

Weights and measures The metric system is used alongside certain standard Chinese weights andmeasures, of which the most common are:

1 catty or jin=0.5 kg 2,000 catties=1 tonne (approximately)1 picul or dan=50 kg 20 piculs=1 tonne1 mu=0.0667 hectare 15 mu=1 shang=1 hectare

Currency 1 yuan/renminbi (y/Rmb)=10 jiao=100 fen. Average exchange rate in 1997:Rmb8.29:$1. Exchange rate on December 11th 1998: Rmb8.28:$1

Fiscal year January-December

Time Zone I (Urumqi) six hours ahead of GMT; zones II, III and IV (Chongqing,Lanzhou, Beijing, Shanghai, Harbin) eight hours ahead of GMT; nine hoursahead of GMT during Beijing summer time, mid-April to mid-October

Public holidays January 1st (New Year’s Day), Chinese New Year (three days), May 1st (LabourDay), October 1st and 2nd (National Day)

a Includes the surrounding counties.

4 China: Basic data


Political background

China has been ruled by the Chinese Communist Party (CCP) since 1949. Thehighest formal organ of power is the Politburo Standing Committee of sevenmembers, currently headed by the general secretary of the CCP, Jiang Zemin.Jiang is also state president, and chairman of the Central Military Commission(CMC). Other important institutions are the State Council, led by the premier,Zhu Rongji, and the National People’s Congress (NPC), a largely rubber-stampparliament. Since March 1998 the NPC has been chaired by Li Peng. Althoughrestrictions on intellectual freedom have been eased since the late 1970s, thecurrent leadership will not tolerate any organised opposition to CCP rule.

Historical background

5,000 years of history China is a civilisation of remarkable continuity, and many of the civilisation’sfeatures have endured since the country was first unified by the fearsomefounder of the Qin dynasty, the first recorded emperor of the whole country,Qin Shi Huang Di, in 221 BC. Traditional Chinese historians described sub-sequent history as following a “dynastic cycle”. Over a period, sometimeslasting several hundred years, a dynasty would expand, flourish, decline andfinally lose power, often in an insurrection sparked by a discontented peas-antry, or in a foreign invasion. Long periods of unity were interrupted severaltimes by long periods of disunity. The last imperial dynasty, the Qing, was“foreign”, composed of a Manchu nobility from the north-east, whose lan-guage and culture differed from that of the majority Han Chinese population.But like the Mongol Yuan dynasty (1276-1368) before them, the Qing becameassimilated. The heyday of the Qing was in the 18th century. In the 19thcentury, the Chinese political and economic system which was by then mori-bund was further weakened by long and debilitating internal revolts and by thedepredations of foreign powers seeking to carve out spheres of interest inChina. The imperial system finally collapsed in 1911.

The communists’ rise topower

The republic established in 1911 proved unable to preserve China’s territorialintegrity. Centrifugal pressures emerged, and by the early 1920s the country haddisintegrated into a patchwork of warring fiefdoms. The national governmentwas led by the Nationalist Party (the Kuomintang, or KMT), a bourgeois partyfounded by Sun Yat-sen and then led by Chiang Kai-shek, which was reorgan-ised in 1924 along Leninist lines. A united front, formed in 1924 with the infantCCP, ended in 1927 when the KMT turned against the CCP. This prompted theCCP, after a few failed attempts at urban insurrection, to become predominantlya rural, peasant-based party. It survived several encirclement attempts by theKMT in its remote rural fastnesses (strongholds) in southern China, and in1934-35 trekked across vast distances to a new base in Yan’an, in Shaanxiprovince in the north-west—the famous “Long March”. It was during this ardu-ous and dangerous journey that Mao Zedong established his position as thesupreme leader of the CCP, a position which he retained until his death in 1976.

A second, uneasy united front, imposed on Chiang by mutinous officers inDecember 1936, was formed when the CCP and the KMT combined to resist

China: Historical background 5


Japanese aggression. (Japan annexed Manchuria in 1931 and mounted a full-scale invasion of China proper in 1937.) The Japanese surrender in 1945,however, was followed by the eruption of full-scale civil war in China betweenthe CCP and KMT in 1946. Because the KMT was divided and corrupt and itstroops ill-disciplined, however, its support base was quickly eroded by rampantinflation and corruption. Thus, the US-backed KMT forces were routed withunexpected ease by armies of the not-so-well-equipped but better disciplinedCCP. In 1949 the KMT established a government-in-exile in the “unliberated”island province of Taiwan, and on October 1st Mao proclaimed the foundingof the People’s Republic of China (PRC), with Beijing as its capital.

Mao and internal partystruggles, 1949-76

The generation of senior communists who emerged from the Long Marchplayed the major role in national politics until the emergence of the current,“third” generation of leaders in the last years of Deng Xiaoping. The personal-ity of Mao, who towered over his colleagues and sought to gather absolutepower into his own hands, weakened—some would argue, fatally—the institu-tional basis of the party-state, because it precluded the establishment of asecure succession mechanism or consensus-building system. During the so-called Great Proletarian Cultural Revolution of 1966-69, Mao, seeing his owninfluence eroded after the disastrous “Great Leap Forward” of 1958 and theconsequent famine in 1959-60, turned to the “masses” to overthrow his rivalsin the party hierarchy, with the ideological pretext of pursuing his own mille-narian brand of egalitarian socialism against the forces of pragmatism and“revisionism”. The chaos of the Cultural Revolution left the army as the onlyviable political institution and Mao turned to the military to restore order inthe early 1970s. After the death in 1976 of both Mao and his widely respectedlieutenant, the premier, Zhou Enlai, senior military figures moved quickly toarrest the most prominent of Mao’s “leftist” colleagues, including his wife,Jiang Qing and the other members of the so-called Gang of Four.

The 1980s: economic butnot political change

Mao’s designated successor, Hua Guofeng, presided over a period of normalisa-tion, which was marked by the return to power of Deng, the most senior of thepurged pragmatists to survive the Cultural Revolution. In December 1978, at awatershed meeting of the party’s 11th Central Committee, Deng and his sup-porters achieved predominance over Hua and other “leftists”. In 1980 theCultural Revolution was reassessed as a national disaster and Mao himself wasdeemed to have been only 70% “good”.

Apart from the chairmanship of the CMC, Deng never took the most seniorofficial positions for himself. He sought to ensure the continuity of the reformsthat he instituted by ruling through a succession of younger men who sharedhis belief in the priority of economic advance over political purity. But suchwas the damage done during the later Mao years to the institutions of partyand state that Deng’s personal imprimatur was necessary to maintain the paceof reform and secure the all-important acquiescence of the army. Politicallegitimacy in China depends on personal prestige and not on the holding ofoffice, a state of affairs which Deng at first sought to alter and then made use ofto pursue the politically conservative agenda of the elder group among whomhe was paramount. Tensions between “reformers”, like Deng, and “conserv-atives” worried about the dilution of socialist orthodoxy brought about by

6 China: Historical background


greater economic liberalism have been a persistent feature of Chinese politics.Thus, Deng’s personal intervention was at times necessary to push forward thereform process. One reason for Deng’s prestige, especially with the army, is thathe was never seen as anything other than orthodox politically. This was illus-trated by the harsh crackdown on dissidence after the “democracy wall” move-ment of late 1978 and early 1979 had outlived its usefulness. Deng wascommitted to the maintenance of order, which to the Chinese leadership issynonymous with the continued monopoly on power of the CCP.

The Beijing massacre Market-oriented reforms, growth in the personal incomes of millions of city-dwellers, and a rapid expansion of foreign trade and links with developedcountries inevitably brought demands for political change, which found anincreasing echo among intellectuals, students and, most worrying for theparty, among urban workers. To the leaders of China such demands spelledinevitable chaos and were, as such, tantamount to sedition. Deng’s first twochosen party leaders were ditched for having leant too far in the direction ofpolitical reform. The first, Hu Yaobang, was ousted following student demon-strations in 1987. The second, Zhao Ziyang, was sacked in 1989, after large-scale street protests (triggered by the death of Hu) were ended only by themassacre of unarmed civilians in the approaches to Tiananmen Square inBeijing on June 4th 1989. As party leaders, Hu and Zhao had to take the blamefor the failure of communist indoctrination.

The 1990s: Marx and themarket

The 1989 massacre was followed by widespread condemnation from the Westbut a period of political repression in China and an obsession with the need for“stability”. However, the collapse of communism in the Soviet Union andelsewhere in eastern Europe led to a rethink. The main danger to the CCP’srule, it was argued, was not the pressure for democratisation that economicreform had brought, but rather the failure to achieve healthy and rapid eco-nomic growth. In 1992 Deng, then aged 88 and in theory fully retired, re-emerged in a famous tour of the rapidly growing areas of the south to launch anew campaign—his last—for faster and bolder economic reform. As in themid-1980s, the emphasis of political rhetoric was no longer on the importanceof Marxist orthodoxy but on the need to achieve rapid economic growth bywhatever means were most appropriate. Deng’s last appointed heir was Jiang, aformer mayor of Shanghai. By the time Deng died in February 1997, Jiang, whowas first elevated following the fall of Zhao, used his period as heir apparent toconsolidate his position among important constituencies. He moved graduallyto combine the important roles of party leader, state president and chairman ofthe CMC.

The collective leadership:Jiang Zemin’s technocracy

Jiang now heads a collective leadership, the contours of which were clarified attwo important meetings in late 1997 and early 1998. At the first, the 15thcongress of the CCP, a new Politburo and Politburo Standing Committee (PSC)were elected. At the annual meeting of the NPC in March 1998, delegates chosea new government.

Jiang’s immediate subordinates are the former prime minister, Li Peng, who isnow the chairman of the NPC and of its standing committee, and Zhu, whobecame premier at the meeting of the NPC in March 1998.



At the 15th congress the two vacancies created by the retirement of Qiao Shiand Admiral Liu Huaqing on the most important committee in the country,the PSC, were filled by two newcomers to the top echelon: Wei Jianxing (born1931), and Li Lanqing (born 1932). Wei, regarded as close to Qiao, has headedthe important Central Commission for Discipline Inspection since 1992 andtook over as temporary party secretary of Beijing in 1995, replacing the dis-graced Chen Xitong. Li Lanqing, a vice-premier with experience in inter-national affairs and education, took the seventh place on the PSC. He isregarded as a reformist but lacks a broad power base.

Also on the important PSC are Li Ruihuan, the chairman of the ChinesePeople’s Political Consultative Conference (CPPCC, a pseudo-democratic advi-sory body which incorporates the few non-communist political organisationsallowed), and the slightly younger Hu Jintao, a former governor of Tibet andnow president of the central party school, who specialises in doctrinal matters.Hu, who became state vice-president at the March NPC, is viewed as a possiblesuccessor to Jiang.

Over the last few years Jiang has managed to have his protégés and associatespromoted to senior positions in the People’s Armed Police (PAP) and the mili-tary. At the 1995 meeting of the NPC he was able to secure the promotion tothe rank of vice-premier of Wu Bangguo (formerly party secretary of Shanghai)and Jiang Chunyun (formerly party secretary of Shandong), and placed themin charge of overseeing industry and agriculture respectively. There was someopposition, especially to the promotion of Jiang Chunyun, and there havebeen mutterings about Jiang Zemin’s “Shanghai clique”.

The Politburo Standing Committee, PSC (new members in bold)

Jiang ZeminHu JintaoLi PengWei JianxingZhu RongjiLi LanqingLi Ruihuan

The Politburo (excluding PSC members)a

Ding Guan’gen (head of propaganda)

Tian Jiyun (vice-chair of the National People’s Congress)

Li Changchun (party secretary of Henan)

Li Tieying (minister of Commission for Restructuring theEconomy)

Wu Bangguo (vice-premier, responsible for SOEs)

Wu Guanzheng (party secretary of Shandong)

Chi Haotian (vice-chair of CMC and minister of defence)

Zhang Wannian (vice-chair of CMC)

Luo Gan (state councillor)

Jiang Chunyun (deputy chairman of NPC)

Jia Qinglin (party secretary of Beijing)

Qian Qichen (vice-premier, foreign minister)

Huang Ju (party secretary of Shanghai)

Wen Jiabao (secretary-general of Central Finance andEconomic Leading Group)

Xie Fei (party secretary of Guangdong)

a Listed by stroke order/number of surnames.



A collective leadership It has frequently been remarked that Jiang Zemin’s leadership is necessarilycollective, because he lacks the charisma and personal authority of the LongMarch generation of leaders. Because it is collective it is also consensus-drivenand therefore more dependent on the process of compromise than was the casewhen Deng acted as the ultimate, behind-the-scenes arbiter. That said, a soundconsensus appears to exist behind the current, cautious but steady approach ofJiang, which is technocratic in style. Jiang and his allies, notably the currentand former premiers, Zhu and Li Peng, appear to agree that the current socio-economic system is in need of reform rather than fundamental change andthat the political system can be made to function better by a vigorous attemptto purge corruption and by the introduction of a somewhat more open andresponsive style by government at all levels.

The State Council (new members in bold)

Premier: Zhu Rongji

Vice-premiers: Li Lanqing, Qian Qichen, Wu Bangguo,Wen Jiabao

State councillors: Chi Haotian, Luo Gan, Wu Yi, IsmailAmat, Wang Zhongyu

Secretary-general: Wang Zhongyu

Ministry of Foreign Affairs: Tang Jiaxun

Ministry of National Defence: Chi Haotian

State Development Planning Commission: Zeng Peiyan

State Economic and Trade Commission: Sheng Huaren

Ministry of Education: Chen Zhili

Ministry of Science and Technology: Zhu Lilan

Commission of Science, Technology and Industry forNational Defence: Liu Jibin

State Ethnic Affairs Commission: Li Dezhu

Ministry of Public Security: Jia Chunwang

Ministry of State Security: Xu Yongye

Ministry of Supervision: He Yong

Ministry of Civil Affairs: Doje Cering

Ministry of Justice: Gao Changli

Ministry of Finance: Xiang Huaicheng

Ministry of Personnel: Song Defu

Ministry of Labour and Social Security: Zhang Zuoji

Ministry of Land and Resources: Zhou Yongkang

Ministry of Construction: Yu Zhengsheng

Ministry of Railways: Fu Zhihuan

Ministry of Communications: Huang Zhendong

Ministry of Information Industry: Wu Jichuan

Ministry of Water Resources: Niu Maosheng

Ministry of Agriculture: Chen Yaobang

Ministry of Foreign Trade and EconomicCo-operation: Shi Guangsheng

Ministry of Culture: Sun Jiazheng

Ministry of Public Health: Zhang Wenkang

State Family Planning Commission: Zhang Weiqing

People’s Bank of China: Dai Xianglong

National audit office: Li Jinhua



To the extent that a collective leadership involves putting in place an institu-tional rather than a purely personal base for the exercise of collective authority,it must be seen as a step forward in the process of building the institutionsneeded to ensure stability. Even if the Chinese political system cannot survivethe reform process in the long run, there are signs that it is maturing. Jiang maybe China’s Brezhnev; China’s Gorbachev has yet to emerge.

Fighting corruption andlawlessness

A campaign against corruption in the party and lawlessness in society has beenpursued since 1995. Corruption is widely perceived to run wide and deepwithin the party, and the fact that only a few high-level officials (most notably,the above-mentioned former secretary of the Beijing municipal CommunistParty committee, Chen) have been exposed as corrupt tends to confirm thecynicism with which much of the population regards the party and even theconduct of politics. Attempts are now being made to reinvigorate the CCP andto strengthen its ideological basis by means of nationwide emulation cam-paigns which, in the late 1990s after nearly 20 years of economic reform, havea curiously anachronistic ring. Jiang is also determined to rebuild the partyfrom the grass roots and spends much time and energy pursuing this goal. Theprominent role played by the military during the flood-fighting in mid-1998allowed the regime to re-emphasise the links among party, people and army onwhich so much emphasis was placed during the Maoist era.

The “princelings” Another group of people whose activities have attracted a good deal of un-favourable comment are the elder generation’s children, known as “princel-ings” because of their privileged access to the economic opportunities offeredby the reform era. They have some reason to adopt a lower profile now thatDeng and most of the Long March generation have passed from the scene. Theannouncement that Chen, held under house arrest since 1995, was due to betried for corruption came just before the 15th CCP congress and was intendedto serve as a reminder of the seriousness of the anti-corruption drive. Thepolitical careers of princelings may be blighted by the desire of the Jiang-ledleadership to distance itself from charges of nepotism and to demonstrate thatit will treat this quasi-aristocracy without fear or favour. For example, notableby their absence in elections to the Central Committee were several prominentmembers of the families of elders, including Deng’s son and daughter. Howevertheir economic privileges are unlikely to be assailed.

The army In mid-1998 Jiang took his campaign to eradicate corruption a big step furtherby ordering the military to give up its business empire. Jiang was quoted at aspecial anti-smuggling meeting of the CMC as saying: “the army and armedpolice forces must earnestly carry out checks on all kinds of commercial com-panies set up by subsidiary units, and without exception from today must notengage in their operation”. During the reform era, the military has developedthousands of businesses, ranging from cellular-telephone networks and aero-space companies to karaoke lounges and massage parlours. But Chinese entre-preneurs have long complained that the military uses its influence to eradicatecompetitors and circumvent the law, for example, through smuggling.

If the call for renewed ideological purity rings hollow with most Chinese, thereis no doubt that they are concerned about crime and corruption, especially



when the privileged abuse their positions. Public executions and purges, espe-cially of minor party functionaries, can be expected to continue and even toincrease as the regime seeks ways to renew its mandate.

Constitution and institutions

The constitution is subjectto frequent changes

The constitution is essentially descriptive rather than normative and has beensubject to frequent revision. The latest version, which was promulgated in 1982and amended in 1988, describes China as a people’s socialist dictatorship ledby the working class, and based on an alliance of workers, peasants and intel-lectuals. Despite much talk, and some limited action on “political reform”during the 1980s, the basic political structure remains that of an authoritarianone-party state.

Important recent events

1989: The Beijing massacre in Tiananmen Square ofanti-government protesters takes place in June. DengXiaoping retires from his post as chairman of the CentralMilitary Commission (CMC) in November.

1992: Deng goes on his “southern tour” to launch a newcampaign for reform. The 14th Communist Party nationalcongress adopts platform of “socialist market economy”.

1993: The National People’s Congress re-elects Li Peng aspremier for five years in March; Jiang Zemin becomes headof state as well as party leader.

1994: The US president, Bill Clinton, decides to renew,unconditionally, China’s most favoured nation (MFN) tradingrights and no longer to link their annual renewal to the issueof human rights.

1995: The president of the Philippines, Fidel Ramos, accusesChina of stationing armed vessels in an area of the SpratlyIslands in the South China Sea in February. Parts of this areaare claimed by China, Taiwan, Vietnam, the Philippines,Malaysia and Brunei. China is outraged at the US decision toallow the president of Taiwan, Lee Teng-hui, to make aprivate visit to Cornell University, from which he has adoctorate. Relations with the US and with Taiwan comeunder severe strain. The publication of a Proposal forFormulating the ninth Five-Year Plan at the fifth plenarysession of the 14th Central Committee signals a renewedcommitment to gradual reform.

1996: China’s truculence in the run-up to the first everdemocratic elections in Taiwan in early 1996, which includes

the holding of military exercises using live ammunition,causes widespread anxiety about China’s intentions. Jiangcontinues to strengthen his hold on power by intensifying adrive against corruption and crime and appointing hissupporters to key positions in the military. South Africaannounces the intention to switch recognition from Taiwanto China to be implemented at the end of 1997.

1997: The death of Deng, aged 92, is announced. Hischosen successor, Jiang, steps smoothly into greaterprominence, a role confirmed as the year progresses by hisability to promote his allies. China resumes the exercise ofsovereignty in July over Hong Kong, which becomes aSpecial Administrative Region (SAR) of China. The 15thcongress of the Chinese Communist Party (CCP) furtherconsolidates the leadership around Jiang.

The two men considered to be least loyal to him—Qiao Shiand Liu Huaqing—are disqualified from membership of theCentral Committee (and hence from the Politburo StandingCommittee) on grounds of age. Many of the new appointeesare allies of Jiang and the new Central Committee has atechnocratic flavour in keeping with the Jiang-Li Peng axis.Jiang makes the first visit to the US since 1985 by a Chinesehead of state. The improvement in bilateral relations whichthe visit signals is consolidated by the release, on medicalparole, of the dissident Wei Jingsheng, who flies to the US inNovember.

1998: The new premier, Zhu Rongji, is confirmed in hisposition at the NPC meeting in March. The US president, BillClinton, goes to China in a reciprocal visit in June, andappears to give concessions over Taiwan.

China: Constitution and institutions 11


Provinces, SEZs andautonomous regions

China is divided into 22 provinces, five autonomous regions and four munici-palities. The provinces range from the most populous and crowded, Henan,with 94.3m people, to Qinghai, with just 5m. The most recent adjustment wasin March 1997, when the 30m-strong administrative area of Chongqing, a cityof 15m, plus surrounding districts and counties, were hived off from Sichuan,previously the most populous province. Previous changes included the separ-ation of Hainan Island from Guangdong province in 1988 to become a separateprovince, as well as a special economic zone (SEZ). Four other SEZs had beenestablished in 1980 on the southern seaboard. The SEZs enjoy considerablefinancial autonomy and offer a more liberal climate for foreign investors. Therole of the SEZs was somewhat undercut by the opening in 1984 of 14 more“coastal cities” offering similar incentives for foreign investment. The situationfor the SEZs worsened further in 1990 when a cut-throat competition for for-eign investment by localities all over China broke out, whether or not they hadbeen designated for the task by Beijing. Most have now created their owndevelopment zones, replete with a range of investment incentives.

The so-called autonomous regions have no more autonomy than provinces.The name, however, recognises the pre-revolutionary predominance of non-Han ethnic groups in Guangxi (Zhuang, an ethnic group in south-west China),Tibet, Xinjiang (Turkic, Uighur Muslims), Inner Mongolia (Mongols) andNingxia (Chinese, Hui Muslims). The four municipalities of Beijing, Shanghai,Tianjin and Chongqing are provincial-level entities.

Sub-provincialadministration

Below the provincial level, administration is further subdivided into prefec-tures, counties and townships, and, within cities, into districts. The “people’scommunes” established during the Great Leap Forward of 1958 as the country’sbasic administrative unit have been disbanded. In some places, however, thecommunes’ subdivisions—“production brigades” still function within the newframework of the contract responsibility systems. Production brigades com-prise several villages, and “production teams” of either part or all of a village.By the end of 1997 there were 110 rural prefectures, 222 prefecture-level cities,442 county-level cities and 2,135 counties. There were 668 cities, includingfour municipalities with the status of provinces, and 727 districts, the urbanadministrative subdivision.

The legislature In theory, the supreme organ of state power is the NPC. It is elected every fiveyears, passes laws and treaties, nominates the executive and approves the con-stitution. It has roughly 3,000 members, indirectly elected from lower-levelpeople’s congresses. It meets in plenary session for two to three weeks eachyear, usually in March-April. Between sessions many of its powers are vested ina standing committee of around 200 members which drafts laws and handlesNPC business when the parliament is not in session. In most Stalinist party-states, the legislature, like the rest of the state apparatus, is subordinate to theparty. The NPC is no exception and has been a rubber-stamp body, approvingdecisions made by the CCP. However, during Qiao’s term as chairman of theNPC and its standing committee from 1993 to 1997 it showed more muscle.Delegates took to questioning the premier more closely when he delivered theannual address to the full session and on occasion voted against appointees ofthe top leadership. Although the casting of protest votes is likely to continue,

12 China: Constitution and institutions


the new NPC chairman, Li Peng, will ensure parliament remains under tightCCP control. Under Deng, a measure of direct electoral democracy was intro-duced at the lower-level people’s congresses, at the township (or district) andcounty and village levels. There are triennial elections. In theory, any candi-date can stand if nominated by ten voters, and there have to be between 30%and 50% more candidates than seats. In practice, however, all candidates arerequired to support the leading role of the CCP. There has been talk aboutextending direct elections to higher levels, but no action has been taken yet.

The State Council The highest organ of state administration is the State Council, which is, ineffect, the cabinet. Its composition is decided by the NPC, acting on partyrecommendations. It is headed by a premier, whose term is, in theory, concur-rent with the five-year life of the NPC. The work of the State Council is presidedover by an executive board, usually with about 15 members, composed of thepremier, his deputies (there are currently four vice-premiers), state councillorsand a secretary-general. Below the State Council come the various ministriesand commissions, as well as a number of important state-owned industrialenterprises.

Political forces

The role of the ChineseCommunist Party

By 1997 the CCP had about 58m members and was the world’s largest politicalparty. Party membership is a benefit in material and professional life, and insome government bodies effectively a prerequisite of advancement.

The Central Committee The CCP’s structure parallels, and supervises, that of government and legis-lature. Its main decision-making body is a Central Committee consisting, as of1997, of 151 full members and 191 alternates. The Central Committee iselected at a five-yearly party congress, normally in the months preceding thefirst session of a new NPC. The most recent party congress, the 15th, was heldin September 1997. The next is not due until 2002. The Central Committeemeets in plenary session about twice a year. In the interim most of its power isvested in a Politburo which currently has 22 members.

The Standing Committee Uniquely, the CCP adds a further tier of centralised leadership, the PolitburoStanding Committee, of seven members, who are the most powerful people inthe country. Usually, the Politburo will include some people of purely partystanding and provincial- or municipal-level party secretaries. But it may alsoinclude the premier and his deputies, other important state councillors andrepresentatives of the military.

The 15th party congress The 15th quinquennial congress of the CCP, the first since the death of Deng,was held in September 1997. As well as performing the task of electing the newCentral Committee, the congress approved the policy line hammered out inmeetings held in the run-up to the congress and presented in a key-note speechby Jiang. The centrepiece of the congress was the decision to elevate Dengtheory to form part of the constitutional ideology of the CCP. This endows theleadership with the pragmatic ideology necessary to pursue reform, forexample of the ownership of industrial assets.

China: Political forces 13


Party and governmentfunctions are still

intertwined

In the late 1980s there was much talk of the “separation of functions” of partyand government. The party would concentrate on its proper role of providingideological leadership, while day-to-day economic and administrative manage-ment would be in the hands of the government. This separation has not takenplace, however, and at the national level it still seems irrelevant whether it isthe State Council or the CCP which makes administrative decisions, since thetop echelons of both bodies are staffed by almost the same people.

The secretariats andcommissions

The apparently clearcut line of pyramidal control within the CCP is compli-cated by its various secretariats and commissions. The central secretariat han-dles the day-to-day business of the party. The general secretary is the partyleader, following the abolition in 1980 of the post of chairman, and has thepower to convene Politburo meetings. The Central Commission for DisciplineInspection, with responsibility for the internal discipline of the party—andhence managing a strong network of informers and spies as well as personnelfiles—is a particularly powerful body.

The People’s LiberationArmy

One of Deng’s aims was to demilitarise politics. He did this by making use ofhis prestige as a legendary military commander in the revolutionary war andhis status from 1973, and again from 1977 to 1980, as the chief-of-staff of thePeople’s Liberation Army (PLA). Representation of the PLA in the top organs ofstate and party has steadily diminished. Until the 14th party congress in 1992only one Politburo member, the then defence minister, Qin Jiwei, was a “mili-tary man”, although the president, Yang Shangkun, also a Politburo member,had strong links with the army. The PLA’s share of the government budgetsimilarly declined from about 6% of GNP in the late 1970s to less than 3% inthe late 1980s. The army was reduced in size by about 25%, to 3m personnel.

However, following the bloody crackdown by the military on popular demon-strations in 1989 the army’s presence was more felt in the Politburo; there werereports that a number of generals attended its meetings, albeit in a non-votingcapacity. The increased politicisation of the military could also be seen in therole that the PLA played in the conduct of foreign policy particularly towardsTaiwan: it was widely believed that the large-scale intimidatory military exer-cises by China in the Taiwan Straits in 1995 and 1996 was due to Jiang andother leaders pandering to military demands for China to take a more hardlinestance towards Taiwan. The retirement of Liu Huaqing from the PSC in 1997and Jiang’s order to the military to give up its business empire seems to suggestthat the civilian leadership is once again trying to reduce the direct politicalpower of the PLA. The military is however unlikely to be fully pushed out ofpolitics: the PLA remains the ultimate guarantor of party rule.

The People’s Armed Police From 1989 Jiang has put a lot of effort into building up the People’s ArmedPolice (PAP). This has partly been aimed at easing dissatisfaction within thePLA about having to take up responsibility for civilian crowd control. Jiang,who initially had little authority within the military, also built up the PAP tostrengthen his own political power base.

The Central MilitaryCommission

Control over the army was vested in two parallel commissions, the StateCentral Military Commission and the party CMC. The bodies usually have

14 China: Political forces


identical membership, and the State Central Military Commission is rarelyreported as meeting, leaving no doubt as to the intended truth behind theoft-repeated maxim that “the party controls the gun”. The chairmanships ofthe two commissions were the last posts Deng held, until 1989-90, when hehanded both jobs to his designated successor, Jiang, a man with no previousmilitary experience.

Worker organisation isdiscouraged

The CCP has tried hard to maintain China’s monolithic power structure, leav-ing various identifiable interest groups in effect under-represented. Althoughthere are national organisations supposedly looking after the interests ofwomen, farmers and workers, all are tame bodies pliant to the will of the CCP.It is noteworthy, for example, that even before the CCP mobilised againststudent protesters in 1989 it had denounced as “counter-revolutionary” theindependent trade unions which had sprung up during the protests. The CCPremains extremely nervous of any sign of worker organisation, mindful of therole of Solidarity in the downfall of party rule in Poland.

The party has enforced social control and political discipline in large measurethrough the pervasive role of the “work unit”. State factories provide not just asalary but housing, education and political indoctrination. In the cities

Main political figures

Jiang Zemin: President, party general secretary and head ofthe military, Jiang rose to the top because he was thecandidate most acceptable to China’s senior political figuresfollowing the popular protests of 1989 and the militarycrackdown that ended them. Jiang is now attempting to fillthe role as political arbitrator and senior statesman in theleadership, rather than becoming involved in day-to-daypolicy implementation. This makes him less vulnerable topolicy failure than other front-line figures, such as thepremier, Zhu Rongji.

Li Peng: After stepping down as premier in March this year, LiPeng is now chairman of the National People’s Congress (NPC,the largely rubber-stamp parliament), and remains numbertwo in the political hierarchy. This is despite the unpopularitygenerated by his personal involvement in the bloodycrackdown on the peaceful Tiananmen Square demonstrationsin Beijing in 1989. He is likely to force the pace of legislationthrough the NPC to keep abreast of the reform programme,but uncertainty remains over the state of his health, and aheavy workload could force his premature departure.

Zhu Rongji: Zhu was elevated to third in the leadershipbehind Jiang and Li Peng at the September 1997 CCPNational Congress, and appointed to the top executive postat the March NPC in 1998, as widely predicted. He is,however, not universally politically popular, especially in theprovinces where an abrasive and no-nonsense manner has

earned him few friends. As China’s economic supremo, Zhuis vulnerable to any sharp downturn in the economy.

Hu Jintao: Hu has made rapid progress in the politicalhierarchy, and is now the youngest member of the PolitburoStanding Committee (PSC). Appointed vice-president inMarch, Hu is emerging as the heir-apparent to Jiang. His agemakes him especially acceptable to the younger generationof leading figures at home and overseas.

Li Ruihuan: The chairman of the Chinese People’s PoliticalConsultative Conference (CPPCC) and member of the PSC. LiRuihuan rose from humble origins under the protection ofkey veteran luminaries, including Deng Xiaoping, whoelevated him to the PSC along with Jiang in 1989. Li Ruihancan be counted on to keep the CPPCC to its historical role ofinsignificance.

Wei Jianxing: Head of the Central Discipline InspectionCommittee, Wei was made head of the Beijing municipalparty committee for a period following the ousting of thediscredited Chen Xitong. Wei was elevated to the PSC at the15th CCP National Congress in September last year.

Li Lanqing: Elevated to the PSC at the 15th CCP NationalCongress in September 1997, Li Lanqing has been one of thecountry’s vice-presidents since 1993. He features regularly inthe media expounding on economic and other issues.

China: Political forces 15


so-called neighbourhood committees, often composed of the retired, provideanother mechanism of control in areas such as family planning and crimeprevention. But these systems of social control are gradually breaking down.This is partly because of the government itself, which is pursuing structuralreform of the state-owned enterprises (SOEs). It is also because social mobility,and the aspirations which nearly 20 years of strong income growth havebrought with them, have made people less susceptible to constant surveillance.

International relations and defence

Four periods of foreignpolicy

Foreign relations since 1949 can be divided into four periods. From 1949 to1960 China was in alliance with the Soviet Union, although this relationshipwas already under severe strain in the late 1950s. There followed, in 1960-72, aperiod of isolation, during which China sought to identify itself as a naturalleader of the developing world in its resistance to “US imperialism”. From 1972China found itself in de facto alliance with the US against perceived Sovietexpansionism. That epoch came to a definitive end in 1989, when relationswith the Soviet Union were normalised and the Beijing massacre introducednew and severe strains into Sino-US relations.

Preparation as the nextsuperpower

Since then, and especially after the collapse of the Soviet Union, China hastried to sustain an independent stance, as the next superpower-in-waiting. Thecountry’s relations with the US are subject to continual strain over humanrights and trade issues. The demise of the Soviet Union has, if anything, madean always uneasy relationship more problematic. Developments in Taiwan area further irritant. Despite US warnings to Taiwan that an open call for inde-pendence would not get US support, the fact that the US Senate harbours areflexive loyalty and support for Taiwan and its fledgling democracy is wellknown on the island and resented on the mainland.

During 1997-98 some ground was laid for a more positive Sino-US relationshipwhen there was an exchange of visits by Jiang and the US president, BillClinton. However, much work remains to be done. Trade tensions between thetwo countries figure particularly prominently and China’s willingness to erectsome barriers to imports and foreign investment continues to irritate the US.

China’s relationship with Japan is marked by sensitivities about Japan’s imperialpast. There is also a feeling in China that Japanese investment is inadequate andthat Japanese companies are reluctant to transfer technology. Relations withEurope have been cordial by and large, although before 1997 ties with the UKsuffered from disagreements over Hong Kong. In the modernisation of China,the Beijing leadership has found eager help from the large community of over-seas Chinese in Hong Kong, Taiwan, South-east Asia and even further afield. Ithas tried to stay on good terms with both North and South Korea. Ties withRussia have become cordial in the 1990s and relations with countries in CentralAsia are strongly coloured by the fear that Muslim separatists, mainly fromXinjiang province, might find refuge and succour there.

Further afield, China’s new-found assertiveness in pursuit of its territorialclaims in the South China Sea, notably its stationing in early 1995 of military

16 China: International relations and defence


personnel on Mischief Reef—an atoll in the Spratly Islands claimed by thePhilippines—has caused consternation in the region. China’s reluctance toagree to multilateral negotiations on the Spratly Islands—which are claimed byseveral other South-east Asian countries—and its apparent belief that it canclaim to be an archipelagic state, despite having ratified the UN law of the sea,make its behaviour appear irrational. Observers have detected the undue influ-ence of the military in these areas. Although, as noted, the Chinese militarylacks the capacity to press claims so far from the mainland (as of 1998, forexample, it has no aircraft carrier), the fact that it undoubtedly intends toacquire such capacity is a matter of concern in the region.

During the development of the financial crises that have affected countries inAsia and elsewhere in 1997-98, China has tried to project itself as a good neigh-bour willing to deploy resources to preserve regional economic stability. To thatend, China contributed to the IMF-brokered rescue packages for Thailand.

Relations with Taiwan China’s behaviour towards Taiwan demonstrates its obduracy about what itconsiders to be an internal matter. The Chinese government sees Taiwan as aninalienable part of China and therefore insists that it is not answerable in worldforums for its conduct vis-à-vis Taiwan. The same is true, but more immediatelyso, of China’s attitude towards Hong Kong.

The private visit of the Taiwan president, Lee Teng-hui, to the US in mid-1995infuriated a Chinese leadership already seriously worried by Taiwan’s success-ful efforts to raise its international profile and thereby bolster its de facto inde-pendence. The process of negotiating trade, investment and communicationslinks across the Taiwan Strait ground to a virtual standstill. Relations reached anadir during the run-up to the first direct presidential election in Taiwan,which was held in March 1996. China indulged in military manoeuvres withthe apparent aim of influencing the outcome of the elections by intimidatingvoters in Taiwan to choose a less assertive president. Contacts between thesemi-official bodies charged with fostering relations across the straits resumedonly in late 1998.

WTO membership remainselusive

The problems which can often bedevil China’s foreign relationships are appar-ent in the protracted and so far unsuccessful negotiations towards admitting (orrather readmitting—China was a founder member of the General Agreement onTariffs and Trade, GATT) China to the World Trade Organisation (WTO).

From China’s perspective its failure to be readmitted to the WTO, in particularthe fact that it did not join in time to count as a founder member, is positiveproof of discrimination. Chinese leaders point to the very substantial liberalis-ation of the import tariff regime as evidence of China’s real intention to jointhe WTO. Such liberalisation measures include the reduction of the un-weighted average tariff rate from 43% in 1992 to 22-23% in 1996 and furthersince, as well as other measures that have liberalised the economy. Trade part-ners, chiefly the US backed by Japan and the EU, argue that reform particularlyof the services sector has not gone far enough and that the sheer size of theChinese economy gives China the potential to disrupt world trading patterns.Specific conditions should therefore be attached to China’s entry, binding it toimplement further measures. China argues that its underdeveloped economy

China: International relations and defence 17


entitles it to join the WTO as a developing country, exempt for the time beingfrom some of the measures demanded of WTO members.

This stand-off has left China feeling that it is being discriminated against, notfor fundamental economic reasons but by a US government which, despitehaving formally separated the issue of China’s human rights from the annualextension of most favoured nation (MFN) trading status, still seeks to wieldundue influence over China.

Military forces, 1997(’000; mid-year)

Regulara Conscriptb

Army 2,090 1,075

Navy 260 40

Air force 470 160

Total 2,820 1,275

a Including conscripts. b Estimates.

Source: International Institute for Strategic Studies, The Military Balance 1997/98.

The priorities of themilitary have changed

Since the founding of the PRC in 1949 China has been engaged in the war inKorea, on the north’s side, and in territorial disputes on its borders with Indiaand Vietnam. By the mid-1990s there were no obvious military threats. In 1994China and Russia agreed not to target each other with nuclear missiles. Thearmy is now engaged in an expensive programme of modernisation. Mostexperts calculate that it will take China several decades to close the technologygap even between its armed forces and those of Taiwan or Japan, much less theUS. China’s determination to acquire the potential to project its military powerfar beyond its borders nevertheless gives rise to worldwide concern, heightenedby secrecy about spending on military technology and a refusal, to date, to betied down by any bilateral or multilateral security arrangements.

The army is most likely to be called on to use its new technology in a conflictover disputed waters and islands in the South China Sea, in a new Koreanconflict or, conceivably, in the recovery of Taiwan. Under Deng the army lostabout 25% of its manpower, but the slimmed-down fighting force remains theworld’s largest standing army, with some 3m personnel.

The economy

Economic structure

“Leaving the land, but notthe countryside”

China is in the throes of an industrial revolution. Although, as in other indus-trial revolutions, there is and will continue to be movement from the country-side to the towns, an industrial revolution is also being encouraged in thecountryside. While the majority of the labour force is classified as rural (500mout of a labour force of 700m) , as many as 100m of these according to someestimates have moved to cities in search of higher pay. Millions more who livein the countryside are not employed on the land. An agricultural survey con-ducted in 1996 found that nearly one-quarter of the rural labour force was not

18 China: Economic structure


engaged in agriculture, having taken employment in rural industry or services.Including dependants, the true peasantry now numbers between 480m and530m. The “non-agricultural village population” includes about 135m em-ployed in township and village enterprises (TVEs).

Main economic indicators, 1997

Real GDP growth (% change, year on year) 8.8

Consumer price inflation (av; %) 2.8

Current-account balance ($ m) 29,718

External debt (year-end; $ bn) 151.3a

Exchange rate (av; Rmb:$) 8.290

Population (year-end; m) 1,236

a EIU estimate.

Sources: State Statistical Bureau, China Statistical Yearbook; IMF, International Financial Statistics; EIU, CountryData.

The process of industrialising the countryside is encouraged for many reasons:established urban centres are already lacking in infrastructure; and the existing,already stretched, social-control system could not withstand a larger rural-urban migration. Nevertheless, such a migration is inevitable in the long run;jobs cannot be produced in the rural areas in sufficient numbers to absorb thehuge surplus labour force and ensure continued rapid economic growth wellinto the next century.

The dominant role ofindustry

Economic growth has, for many years, been led on the supply side by increasesin industrial output. Even before Deng Xiaoping’s reforms, the Chinese eco-nomy was characterised by industry’s unusually large share in gross outputvalue. This was particularly striking because so much of the workforce re-mained deployed on the land. At first, in the early 1980s, the reforms repre-sented a shift of national resources towards agriculture, through a sharp rise inthe procurement price paid for agricultural crops and what amounted to theprivatisation of agriculture. However, by the late 1980s industry’s contributionwas again increasing year by year as parts of the countryside industrialised.Meanwhile, services have also been growing rapidly, as controls on the eco-nomy have been lowered and demand for personal services has grown.

The state now producesless than half of industrial

output

Industry itself had undergone a fundamental shift. Until 1978 output wasdominated by large state-owned enterprises (SOEs). Since then, much of theboom in manufacturing output has been produced by “collective” enterprises,under the aegis of local governments, TVEs or, increasingly, by private entre-preneurs or foreign investors either in wholly owned enterprises or in jointventures with Chinese interests. By the early 1990s the share of the official statesector in industrial output had shrunk to no more than half. Nevertheless, thestate sector tends to contain industries which are the most capital-intensiveand often the largest in scale, and financing them absorbs a large share ofnational resources, especially financial resources.

China: Economic structure 19



China India Russia Brazil Japan US

GDP ($ bn) 902 380 447 811 4,192 8,111

GDP per head ($) 733 398 3,054 5,075 33,213 30,263

GDP per head ($ at PPPa) 3,684 1,699 4,290 6,927 23,778 30,263

Consumer price inflation (av; %) 2.8 7.2 14.6 6.4 1.7 2.4

Current-account balance ($ bn) 29.7 –3.4 3.3 –33.8 94.4 –166.8 % of GDP 3.3 –0.9 0.7 –4.2 2.3 –2.1

Exports of goods fob ($ m) 182,670 35,159 88,927 52,990 409,240 680,280

Imports of goods fob ($ m) 136,448 45,660 71,304 61,354 307,630 877,290

Foreign trade (% of GDP)b 20.3 9.0 19.7 6.6 9.8 8.4

Debt-service ratio, paid (%) 10.1 23.5 8.8 54.0 0.0 0.0

a Purchasing power parity. b Exports of goods plus imports of goods divided by GDP.

Source: EIU, CountryData.

Various problems surrounding the comparison of output levels between coun-tries mean that the comparative GDP figures should be treated with somecaution. However, China is clearly a more open economy than its great neigh-bours, India and Russia, at least as measured by foreign trade’s share of GDP.Industry’s share of GDP is also higher than in India.

Inland regions have lostout

The coastal areas on China’s eastern seaboard have benefited from their accessi-bility, their links with overseas Chinese and their more developed infrastruc-ture. They have consistently shown far higher rates of growth than the westernprovinces. This trend is by no means new. Western China is in many places arid,mountainous or otherwise infertile. The main population centres have alwaysbeen the wheat-growing plains of northern China and the rice paddies of theYangtze Delta. The current, ninth, Five-Year Plan aims to address the wideninginequalities of wealth and income between the coast and the interior by concen-trating investment, both domestic and foreign, in the interior provinces.

Economic policy

Seeking means ofmacroeconomic control

Economic policy in the Deng era was dominated by attempts to stimulategrowth through the expansion of trade and the harnessing of market forces,without causing destabilisation by the wholesale destruction of the old system.The reform process, which started in the late 1970s, has essentially been acombination of breaking up the communal agricultural system and creatingnew forms of economic organisation. Therefore until the mid-1990s, little hadbeen done to threaten the vested interests of powerful constituencies. Mostimportant among these are the 100m workers and party cadres in the tradition-al SOEs, whose mounting financial losses are a source of macroeconomic insta-bility. In 1992 the government adopted Deng’s idea that China needed tomove from being a “socialist planned commodity economy” to being a “social-ist market economy”. However, the means to achieve this have never beenclearly spelled out. According to an important meeting of the CommunistParty’s Central Committee in November 1993, the “state sector” is to remainthe backbone of the economy.

20 China: Economic policy


However, the dynamism in the Chinese economy comes from the private,foreign-invested and “collective” sectors. Many parts of the economy haveslipped the leashes of central state control. The government’s dilemma is howto exercise macroeconomic control when, on the one hand, its fiscal andmonetary policy levers remain deficient and, on the other, its formal power torun the economy by administrative fiat has been eroded. The reform period hasled to the devolution of economic decision-making powers, including com-mand over resources, to provincial from central governments and even more tosubprovincial government entities. These latter seek to maximise the employ-ment and revenue-generating potential of enterprises under their control orinfluence. They often compete for resources and much of their economic be-haviour has undesirable consequences.

An issue that dominates policy is the balance between reform and unemploy-ment; the prospect of social unrest continues to preoccupy policymakers. Infla-tion was seen as a major factor in the mass unrest of 1989 but was brought undercontrol by the late 1990s by the use of more effective macroeconomic tools.Now the major dilemma is the difficulty of pressing ahead with the widespreadclosure or merger of thousands of value-subtracting SOEs without sparking un-rest. Fear of the social consequences of the unemployment that this process willentail has led to a sharp slowdown in the momentum of reform in 1998. Theresult is to delay what many see as the inevitable and to protract the tribulationsof the banks—especially the state banks—which are used as the channel forpolicy loans to SOEs and which are technically insolvent as a result.

At the end of 1995 the draft proposal for formulating the ninth Five-Year Plan(1996-2000) for national economic and social development and the long-termtarget for 2010 was presented to the Communist Party’s Central Committee. Asbefore, the aim is to move towards balanced growth, with a trickle-down effectfrom the rapidly advancing eastern seaboard into the interior. Greater attemptsare now being made to attract investment, from foreign as well as domesticsources, into the interior of the country. Overall GDP growth is targeted at8-9% per year over the ninth-plan period.

Food self-sufficiency has become an issue of main concern, and over the nextfive years there will be a reconcentration of effort on the neglected area of ruraldevelopment. The severe floods of mid-1998, which cost thousands of lives andan estimated Rmb80bn ($9.7bn) in direct losses, served as a reminder of thedamage done to the environment, and to the productive capacity of the land bydecades of poor management, excessive reclamation of land and deforestation.

Policies to attract foreigninvestment have proved

successful

China has been remarkably successful in attracting foreign investment. By theearly 1990s it was the largest recipient of foreign direct investment (FDI) in thedeveloping world. At first, a cordon sanitaire was erected around foreign invest-ments, with the establishment in 1980 of four special economic zones (SEZs) inthe south, offering tax and other incentives. Such privileges were later ex-tended across most of the country. By the 1990s, and especially after Deng’s“southern tour” in 1992, localities were competing with each other to offerforeign investors the most attractive terms. By the end of 1996 there were235,681 registered enterprises with foreign capital in China, with a totalpledged capital of $459.8bn, of which $303bn was to be provided by foreign

China: Economic policy 21


partners. Between 1979 and 1997 a total of $228bn of FDI was actually put inplace; of the total actually invested, about 80% was committed to coastal areasand provinces, with Guangdong province alone accounting for 23% of totalinvestment. Much the most important source of foreign funds was Hong Kong,with over half of total investment.

In more recent years the volume of investment from Hong Kong has includeda sizeable but unknown proportion of mainland Chinese money; in order toqualify for tax exemptions and to make it easier to take capital out of thecountry, a large number of Chinese investors have established Hong Kong shell

The industrial reforms: a brief chronology

1979-80: Law on joint ventures; price liberalisation starts inagriculture. Fiscal autonomy to local governments; specialeconomic zones (SEZs) created; private income taxintroduced.

1981: Individual enterprises encouraged in urban centres.

1982: Price liberalisation of industrial products starts; patentlaw and trademark law enacted.

1983: State-owned enterprises (SOEs) begin to be taxedinstead of turning over profits; bank lending to SOEs beginsto replace allocations from budget; collective enterprises areencouraged; People’s Bank of China (PBC) begins to assumesome of the functions of a central bank.

1984: Fourteen coastal cities are opened;director-responsibility system and “above-plan” pricing andproduction autonomy introduced; township and villageenterprises (TVEs) created.

1986: Labour-contract system replaces virtual lifetimeemployment for urban new recruits.

1988: SOE contract responsibility system begins; on thebasis of negotiated multi-year contracts, managers’ (andsometimes workers’) rights of control and obligations to thestate are defined; regulations on private enterprisespublished; enterprise and bankruptcy laws passed.

1989-90: Regulations on mergers, joint-stock companiesand commercialisation of banks. Copyright law enacted.

1991: Delegation of direct trade rights to (some) SOEs;beginning of pension and housing reform; encouragementof enterprise groups and corporatisation, whereby the state’sownership rights take the form of shares managed by stateasset administration bureaux and state asset investmentcompanies, and the firm has management autonomy.

1992: Deng Xiaoping’s southern tour; new operatingmechanism and granting of 14 autonomous rights to SOEsgive managers authority to “use and dispose of the propertyentrusted to them by the state for management andbusiness purposes”; phasing out of production targets andprice controls; patent law and trademark law revised.

1993: Principle of “socialist market economy” replaces“socialist commodity economy” (first agreed upon by the14th national party congress a year earlier); decision of thirdplenum on establishing modern enterprise system;promulgation of a competition law; new accountingstandards introduced.

1994: Foreign-exchange reform; fiscal and tax reform;implementation of company law; launch of“10,000-1,000-100-10" programme.

1995: New commercial banking law; PBC law; provisionalregulations guiding foreign investment; insurance law; moveto a five-day week; legislation to regulate the securities anddebt markets; draft of ninth Five-Year Plan; announcement oftariff reduction of 30% for 4,000 of 6,000 lines; 179non-tariff barriers (30% of total) to be replaced with tariffs.

1996: Programme of transforming 1,000 enterprises intofully autonomous corporations announced; smallerenterprises to be encouraged to merge; average unweightedtariff falls to less than 23%, with implementation ofreductions from April.

1997-98: Experimentation with different forms ofownership, including joint-stock shareholding, is declared tobe compatible with socialism; it becomes clear that theauthorities are willing, indeed eager, to countenance themerger, closure and/or privatisation of thousands of smallerSOE’s while ensuring retention by the state of its majoritystake in larger enterprises and its total control of the around500 very largest enterprises.



companies and posed as “foreign investors” (so-called round-tripping). Thesecond most important foreign investor is Taiwan, with about 8% of the totalin 1997, although because of the restrictions imposed by the Taiwan govern-ment most of that investment is also routed through Hong Kong. The share of”foreign" capital in China of overseas Chinese origin is high—higher still ifethnic-Chinese investors from the US, Canada, Thailand and Australia areincluded.

In 1991-97 the US was the fourth largest foreign investor, after Hong Kong(with 52.4% of the total), Taiwan (8.6%) and Japan (with 7.7%). These percent-ages, however, understate the importance of investment by industrialisedcountries, which tends to be in higher value-added sectors involving a degreeof badly needed technology transfer, rather than in the labour-intensive pro-cessing and assembly operations favoured by investors from Hong Kong andTaiwan, which have helped to fuel the boom in TVE output along the easternseaboard.

The government has announced its wish to make level the uneven playing-field between domestic and foreign investors. One reason for this is a feelingthat the economy has matured to the point where special incentives are nolonger needed to attract foreign funds, as overseas investors will seek entry toChina simply because of the potential of its vast market. There is also a pressingneed to augment the fiscal position by being able to tax all enterprises at thesame rate, and a desire to bring an end to “round-tripping”. Although thetiming of the change has not been made clear and exceptions will also begranted by the many authorities at lower levels with the power to approveinvestment projects, “national treatment” is already being offered to foreigncapital in Shenzhen. This will mean forfeiting tax privileges in exchange forbetter access to the domestic market. But the slowdown in the rate of con-tracted investment—contracted investment fell by 20% in 1996 and by 31% in1997—has prompted the government to rethink this policy, or at least itstiming. The removal of duty exemptions on capital goods imports for foreign-invested enterprises from April 1997 is said to have deterred new commitmentand has been reversed. At the same time, the sluggish state of domestic demandduring 1998 has prompted the government to take action to close off sectors—telecoms and retailing—that foreign companies are keen to penetrate.

Meanwhile, the government is going to have to offer incentives and sweetenersto lure foreign investment, especially for projects with long payback periods,into the interior of China, where infrastructure is poor. Incentives will continueto be a feature of the investment regime for some time. (For data on investmentin assets see Reference table 2.)

Currency reforms The Chinese currency, the renminbi, is still not fully convertible, although theauthorities have emphasised that convertibility is the ultimate goal. For mostof the 1980s they adopted what amounted to a policy of parallel exchangerates. An “official” rate covered the imports of some SOEs and currency conver-sions by foreign residents and tourists, who had their own legal tender, calledforeign-exchange certificates (FECs). Meanwhile, a growing share of foreigntrade was conducted at a lower rate closer to a true market price, available on anumber of “swap” markets. Usually, there would be a third parallel-market rate



as well, reflecting the demand for foreign exchange. At the end of 1993 theswap and official rates were merged and FECs abolished. A primitive interbankmarket was set up, although most traders still found themselves having to usethe swap markets.

On December 1st 1996 the Chinese government established the de facto con-vertibility of the currency on current account by announcing conformity withthe requirements of Article VIII of the IMF agreement. Convertibility on thecapital account, which has been the aim of the government, has almost cer-tainly been put off as a result of the global currency market volatility of 1997and 1998 (see Foreign reserves and the exchange rate).

Fiscal challenges One of the consistent inflationary pressures has been a large and growingcentral government budget deficit (see Reference table 1). In part, this has beenthe effect of the reforms themselves—the growing expense of subsidising bothurban consumer prices and loss-making SOEs—as well as an inadequate taxbase and failures in tax collection. There has also been a continuing debateabout the division of tax revenue between Beijing and provincial and lower-level governments. In 1994 a reform of the tax system was undertaken, de-signed both to redress what was seen as an imbalance in favour of provincialgovernments, and to clarify and simplify a system of bewildering complexity.From that year the central government pledged that it would cease to monetiseits deficit by borrowing from the People’s Bank of China (PBC, the centralbank). Revenue rose more sharply than expenditure in 1994-96, and the rise inexpenditure was held below that of revenue, reducing the growth of the deficit.But the true public-sector deficit is much higher than the 1% of GDP that the1995 figures imply and it has been rising . First, borrowing is taken as revenue.Second, many of the public sector’s financial obligations, for example, militaryexpenditure, are not fully recorded in the budget. In addition, there is thehigh—and rising—cost of policy lending to SOEs.

The World Bank argues that more accurate representation of government ac-tivities is provided by the concept of the consolidated government deficit. Thisconsists of the fiscal (ie budget) deficit plus the part of the PBC lending to thefinancial system that finances the government-directed expenditure of theSOEs. Calculated in this way, the consolidated government deficit is estimatedto amount to 5-6% of GDP. It has been kept high not just because of the needto make subsidised working-capital loans to “priority” enterprises but also bythe need to sustain the large amount of investment that is channelled throughloans to SOEs or used for rural or social-sector development. Much of thisspending, it should be noted, is undertaken at the local level. In the five years1988-92, for example, an average 42.9% of the total fixed investment by centraland local government was undertaken by central government, and 57.1% wasundertaken by local governments.



Summary of government finances, 1997(Rmb bn)

Total revenue 865.1 of which: taxes 823.4 industrial commercial tax 662.7 tariffs 31.9 agricultural tax 39.7 SOE income 72.1 collectives’ income 16.9

Total expenditure 923.3 Current expenditure 601.5 of which: administration 113.7 education, science & health 190.4 defence 81.2 economic services n/a social welfare & pensions 14.2 price subsidies 55.2 interest payments n/a Capital expenditure 321.8

Balance –58.2Source: State Statistical Bureau, China Statistical Yearbook.

Monetary policy The fiscal problems faced by the central government, exacerbated by the needto subsidise the state-owned industrial sector, have hampered the effectivereform of the financial sector. A persistent feature of the Chinese system re-mains the fusion of the fiscal and monetary roles of the state. The large con-solidated government deficit, which has been financed by the PBC, has meantthat monetary policy has been subordinated to fiscal imperatives. The PBC hasno effective independence and is subject to the State Council (or cabinet);60-80% of its lending is in the form of policy loans, which mainly comprisegovernment expenditure.

Traditionally, an annual credit plan has been the chief instrument of monetarypolicy. It was compiled annually in accordance with directives established bythe State Council for growth in the major macroeconomic variables and theputting together of sectional and local needs. It was implemented, after beingapproved by the State Council, by means of credit ceilings set for the mainbanks (ceilings for non-bank financial institutions are part of an indicativecredit plan). These ceilings covered different kinds of credit and are also disag-gregated by province, using estimated increases in bank deposits and the pre-vious year’s performance as guidelines. The quotas were allocated by the headoffice of the PBC to the head office of the relevant bank, leaving the PBCbranch network in a supervisory role. Funds could be transferred by the PBCwhen provincial branches of the banks had unused lending quotas, but notfunds (banks could also seek funds in the growing interbank market).

Decentralisation—especially as manifested in the strong investment demandof local governments—poor co-ordination and the emergence of informal andunofficial financial activity combined to render the annual credit plan ineffec-tive. The rapid pace of financial broadening and deepening and a poorregulatory system permitted the diversion of funds to unintended uses, and the



availability of alternative financial assets, formal and otherwise, rendered thesystem prone to disintermediation crises.

Interest rates do not reflect the market. The soft budget constraints of SOEshave made it impossible to use interest rates as an effective method of financialintermediation in the formal sector, and interest rates have been changedinfrequently and—until inflation came down to low single-digit rates in1997—were generally negative in real terms. Interest rates on deposits havebeen adjusted upwards several times to help combat disintermediation andinterest rates were reduced five times in 1996-98 to stimulate growth and to aidcash-starved SOEs. However, the state banks cannot afford to pay attractiveinterest rates to depositors when they cannot earn positive interest spreads ontheir own assets. They are obliged to act as channels for what would strictlyspeaking be another source of policy lending, accounting for the vast majorityof the lending of SOEs. To prevent disintermediation, the central bank hassince March 1994 been paying an inflation-rate subsidy on maturity on depos-its of three years and above. The rate is fixed monthly and has been set at zerowith the successful squeezing out of inflation in 1997. Treasury bonds havealso been paying positive real interest rates and are easily disposed of as a result.

Monetary policy is heavily constrained. To curb excessive growth of liquidityand investment demand, it has been official policy to restrain the lending of thestate banks as part of a 16-point programme to cool the economy. This beganwith the so-called austerity programme introduced in 1993. This drive has beenof limited effect. The SOEs’ need for cheap working capital has not diminishedand, indeed, in some cases has increased because of the chain of unpaid enter-prise debts that has built up. Banks have come under pressure at various times tostep up their lending to keep enterprises afloat. The state itself has continued toborrow from the central bank to finance policy lending. Thus, liquidity hascontinued to increase. Money-supply growth (M2) and the growth of total loansoutstanding have decelerated since the overheating of 1993, but remain ataround 20% year on year in nominal terms. In real terms growth in these areashas accelerated as inflation has fallen. (See Reference table 3 for data on moneysupply and credit.) Meanwhile, a very large unofficial financial sector hasemerged, where the rates of interest are truly those of the market, and thisundermines attempts to curb the growth of credit in the formal sector.

Reform of the financialsystem

Reform of the financial system is an important priority and various changeshave already been made. In 1998 the mandatory credit plan was abolished. Thegovernment has also begun to reorganise the branch network of the PBC alongregional rather than provincial lines. This change is aimed at reducing thesusceptibility of the network to pressure from local governments. Some effortshave also been made to recapitalise the state banks.

Financial reform is not expected to progress quickly. Further reforms representchallenges in reconciling competing interests and conflicting goals. Reform ofthe financial system would have consequences for the management of public-sector finances and for the funding of SOE activities. Although the governmenthas recognised that the financial system will have to change if monetary policyis to become a meaningful macroeconomic tool, it is not clear the government



is ready to make the change. In 1998 state banks were once again put underpressure to start lending to government-inspired infrastructure projects.

Price policy Price policy in China since 1978 has pursued two not always compatible goals:a gradual lifting of state controls over the prices of most products and themaintenance of price stability for urban consumers, especially in agriculturalstaples. This led to quite rapid rises in prices. In 1998 weak domestic demandwas met with a supply-side boost to output generated by looser monetarypolicy and this, combined with an influx of cheap imports, led to a period ofdeflation. The government responded by putting a floor under the prices ofsteel, cotton and automobiles. Some upward pressure on prices also resultedfrom the floods of mid-1998.

The reintroduction of price regulation in 1998 followed a process of pricereform—the removal of the distortions caused by administered prices—whichstarted in the early 1980s. The proportion of prices set by the government inthe retail sector had fallen from 97% in 1978 to 10% in 1992; those for agricul-tural and sideline products from 94.4% to 15%; and in production materialsfrom 99.7% to 20%.

After 1992, however, economic overheating exacerbated inflation and the paceof price reform slowed. In the 16-point programme announced in July 1993price reform was frozen, the price of coal used in power generation and ofwashed coal having been deregulated in January of that year. During the firsthalf of 1993 prices for crude oil and steel products were liberalised, the graincoupon system was abolished and grain prices were liberalised. In 1994 foodprices, under the influence of shortfalls and higher costs for farmers, rosesharply. The surge in prices at mid-year led the government to reintroducesubsidies, price controls and even rationing in some cities. There was a 24.1%rise in the national consumer price index in 1994; food prices rose by 31.8%. Arise in the grain procurement price in 1996 and 1997 was not fully passed onto consumers, and local governments have, since 1994, been responsible forpolicing price rises in their jurisdictions.

Within the picture of an overall freeing of prices, however, the prices of certainimportant commodities—for example grain, coal, oil and rail freight—remainsubject to some regulation, generally only over the proportion of output that isstill covered by the planning mechanism. In these cases there is both an officialand a free-market price. In the case of grain this is partly because the historicallegacy of keeping the price paid by urban consumers low has meant carefulcontrol of the procurement price and a high degree of government subsidy.Procurement by the state still accounts for a significant part of the harvest,which is bought at contracted prices. In the case of important raw materialsprices, continued price control has reflected a general scarcity, which hasmeant that the government has traditionally not only set prices but also over-seen allocation, favouring important SOEs.

Import prices continued to be influenced by a tariff regime which keeps theprices of some imports artificially high to protect domestic producers; theseinclude potassium fertiliser, polystyrene and selected high-technologyconsumer products. Within agriculture, export prices for some agricultural



commodities, notably maize and rice, are kept artificially low to benefit dom-estic consumers. By the early 1990s the domestic price of wheat (both plannedand free market) was close to import parity. The authorities have been able inthe case of certain commodities for which China is a price-maker on theinternational market (such as tungsten) to use taxes and licences to help toraise the export price relative to the domestic price and thereby to maximisethe foreign exchange gained. If China becomes a member of the WTO suchpolicies will be more problematic.

Trade policy Despite progressive measures to liberalise, simplify and streamline China’strade regime, it remains complex and comparatively highly regulated, withtariff and non-tariff barriers a prominent feature. A Foreign Trade Law waspromulgated in 1994, but couched in very broad terms. During 1995 a numberof enabling regulations designed to foster the aim of joining the World TradeOrganisation (WTO) were announced, including cuts in tariffs. With the excep-tion, in general, of foreign-invested enterprises, trade continues to be con-ducted within the framework of the planning mechanism under thesupervision of the Ministry of Foreign Trade and Economic Co-operation(MOFTEC), previously the Ministry of Foreign Economic Relations and Trade(MOFERT). Trade is carried out through the mediation of foreign trade corpor-ations (FTCs), national and provincial, which work to contracted goals.

The main feature of the reforms has been the scaling down of the plan. Themandatory plan for exports has been eliminated, although the state retainscontrol through canalisation and licensing of a few goods which are still classi-fied by category. Although the plan has remained more important for imports,because of a perceived need to protect domestic industry and conserve foreignexchange, the number of goods subject to categorisation had fallen to 20 in1992. Meanwhile, the number of FTCs has grown rapidly.

Use of trade barriers as apolicy tool

Like other developing countries, China uses tariffs and taxes and non-tariffbarriers on imports—and, to a lesser extent, on exports—as a policy tool. Non-tariff barriers include controls, canalisation, the trade plan, and the export andimport licensing system. Tariffs are not an important source of governmentrevenue, and a desire to join the WTO means that China is following a policyof progressive relaxation of trade barriers and lifting of tariffs.

In the early 1990s China’s average tariffs were among the world’s highest: theweighted average most favoured nation (MFN) tariffs were 30.6% in 1991-93.Under the reductions that were announced at the 1995 meeting of the Asia-Pacific Economic Co-operation (APEC) forum the trade-weighted average tarifffell from 28.1% to 19.8%, and it is set to fall to 16.6% under the latest offer tothe WTO. The variability of the tariff regime is also being reduced, althougheffective rates of protection in manufacturing are high and variable, and effec-tive protection will remain high in heavy industries.

Non-tariff barriers, meanwhile, are fairly extensive. Import licensing, forexample, covers more than 18% of imports, while state trading monopolies,due to be ended in 1999, cover 11%. Under its WTO offer China has agreed toeliminate most non-tariff barriers other than state trading, which will bephased out slowly. But the flood of cheap imports in 1998 led to the erection



of more non-tariff barriers as China sought to protect domestic industry andthe trade regime has consequently become less compatible with WTO norms.

The overall impact of the tariff and non-tariff barriers regime on the economyis to raise the price of final consumer goods relative to intermediates andthereby to afford a high degree of protection to domestic producers of con-sumer goods. This helps to reinforce distortions in the industrial sector. Theimpact of membership of the WTO will therefore be favourable to Chineseindustry.

Internal trade was discouraged by the autarkic policies encouraged in the pre-reform era. This led to a widely dispersed industrial development structure inwhich each province sought to produce as wide a range of goods as possible.Internal trade has now been stimulated by reforms and the greater economicspecialisation that has accompanied liberalisation. But some local govern-ments seek—illegally—to erect internal trade barriers, both to collect taxes oncross-provincial trade and to protect local producers.

Economic reform itself has also tended to reduce internal trade in some goods.The comparatively developed eastern seaboard, which is the springboard ofexport-oriented manufacturing, is becoming more closely linked to regionaltrading partners than to the interior of China. This is exemplified by the lowdomestic value added in many assembly operations. For example, in 1991imports for processing represented 77% of the value of processed exports. Thecurrent tariff structure exacerbates this because it allows relatively high-costproduction of intermediate inputs to continue for the domestic market, en-couraging exporters to favour imported intermediates. Exemptions on importduty for export processing had been so important that the value of exportsassociated with concessional imports had reached 64% of the value of manu-factured exports in 1993.

Economic performance

Statistics should betreated with some caution

China’s striking—and, in recent years, spectacular—rates of real economicgrowth have been led, on the supply side, by huge increases in industrialproduction and, on the demand side, by a combination of rapid growth inpersonal consumption and consistently high rates of fixed investment. (SeeReference table 4 for gross domestic product and gross national product.) Thisinvestment has been made possible by very high domestic savings rates whichhave been placed largely with the formal banking sector and used to keepstate-owned industry afloat. However, the statistics should be treated withsome caution. The Chinese media themselves have carried official complaintsabout the inaccuracy of the data that make up the national growth figures. Inparticular, local officials and executives have been accused of inflating prod-uction figures in order to curry favour with their superiors. It is also unclearwhether the value figures produced as evidence of “real” growth have beendeflated in a rational or consistent way to take account of inflation.

China: Economic performance 29


Gross domestic product(at constant prices; % change, year on year)

Annual average1997 1993-97

Private consumption 4.8 7.3

Government consumption 5.0 8.0

Gross fixed investment 9.0 15.5

Exports of goods & services 18.8 14.6

Imports of goods & services 3.6 10.9

GDP 8.8 11.0 Agriculture 3.5 4.3 Industry 11.1 15.1 of which: manufacturing 11.0 14.1 Services 8.2 8.7Sources: State Statistical Bureau, China Statistical Yearbook; EIU estimates.

Investment-led growth inthe 1990s

Nevertheless, there is no doubting the vibrancy of economic activity in China.The boom of the early 1990s was fuelled by huge increases in investment,much of it destined for property development and manufacturing industry.(For the national accounts by expenditure and output, see Reference tables 5and 6.) The boom in this sense differed from the two earlier peaks in China’seconomic cycle since the reforms were launched in 1978. They were led on thedemand side by increases in consumption after the austerity of the CulturalRevolution and by rapid rises in rural disposable income.

Hence, as it became clear in mid-1993 that the economy was in danger ofseriously overheating, the rate of investment growth became a prime target ofgovernment concern. The problem was exacerbated by the diverse sources offunds available to the localities. Senior officials in Guangdong, for example,noted that central-government austerity had little effect on them, since theyraised about one-third of their funds from their local tax base, one-third fromthe local banking system and one-third from abroad.

Rapid growth is now seenas sustainable

In the 1990s the government wanted to break out of a “boom-bust” cycle—periods of rapid growth accompanied by rising inflationary pressures and fol-lowed by sharp slowdowns in periods of retrenchment. There was much debateabout achieving a sustainable rate of annual economic growth. The EighthFive-Year Plan, produced in 1991, and a Ten-Year Development Strategy pro-duced in the same year estimated this growth rate at around 6%. Any faster, itwas argued, and the shortcomings of infrastructure development and of basicindustries, such as agriculture and energy, would lead to intolerable infla-tionary and social tensions. However, this strategy was abandoned in 1992 byDeng. Double-digit growth came to be seen as sustainable, desirable and evenessential in order to create the opportunities China’s massive population wascoming to expect. Once again, however, when overheating became a seriousproblem in 1993-95 the authorities decided that sustainable growth would bein single digits, this time at 8-9%.

Inflation has beensuppressed—

Rapid growth (until 1996-97) led to high rates of price inflation (see Referencetable 7), although the overall retail-price index has tended to understate the

30 China: Economic performance


extent of inflation in urban areas, where it is most felt among civil servants andothers on fixed salaries. In 1994 overall national retail-price inflation wasnearly 22% per year, a rate seen only briefly in 1988, when it provoked panicbuying and hoarding. Austerity measures, mainly administrative, aimed atcooling down the economy were applied in mid-1993 but have been substan-tially relaxed since 1996, when interest rates and reserve requirements wereadjusted to give relief to SOEs and banks. In 1994 some economists argued thatliving standards had kept pace with inflation. Others argued that this was trueonly in some areas, and that, in the countryside in particular, the benefits ofthe boom had been more or less totally eroded. In 1996 inflation was helddown to single digits and it fell even further in 1997. In 1998 there was actuallya period of deflation.

—and growth has slowed Since mid-1993, a concerted effort has been made to slow the pace of growth,especially of investment, by means of a tight credit policy, supplemented bythe imposition of price controls on food in the cities and towns. This, and anincreased reluctance by banks to fund the working capital and investment ofstate-owned enterprises unable to meet their debts, helped to slow the rate ofGDP growth to 9.7% in 1996 and further to 8.8% in 1997, after an annualaverage of 12.1% in the five years 1991-96. The slowdown has been led, indemand terms, by a sharp fall in the rate of investment and, in supply terms,by a drop in the rate of growth of industry. Growth is expected to be not farbelow the target rate of 8% in 1998 as a result of strenuous efforts to hold it up,but there are renewed doubts about the sustainability of rapid growth withoutradical reform of the SOE and financial sectors. In the short term, slowing orhalting the process of rationalisation of the SOEs and the banks will boostgrowth by keeping employment levels up and supporting industrial outputgrowth, even if SOEs are producing for the stockpile. In the long run thediversion of scarce resources to such ends will constrain the growth of totalfactor productivity.

Inflation(% change, year on year)


Overall retail prices 0.8 11.1

Overall consumer prices 2.8 13.2

Urban consumer prices 3.1 13.7

Rural consumer prices 2.5 12.8

Farm products purchasing prices –4.5 13.6

Industrial products producer prices 1.1 10.0Source: State Statistical Bureau, China Statistical Yearbook.

Regional trends

Reforms have exacerbatedregional disparities

Under Mao Zedong, regional policy was always torn between the conflictingideals of egalitarianism and local self-sufficiency, which are in conflict becauseof the poverty, inaccessibility and inhospitable terrain of most of the interiorcoastal regions compared with the more fertile coastal deltas and plains. Thecontradiction has been exacerbated by the reforms. The coastal areas have been

China: Regional trends 31


far more able to achieve rapid growth. Guangdong province and the Pearl RiverDelta, in particular, bordering Hong Kong, has been able to tap that territory’swealth of capital, technology and entrepreneurial skill.

Further north, the Yangtze Delta is the focus of an effort to create a foreigninvestment-led boom like that in the Pearl River Delta. Shanghai would be-come the “dragon’s head”, or the Hong Kong of central China. Shandong andManchuria are also well placed to capitalise on growing links with Japan andSouth Korea. Taiwan’s growing investments in China have tended to be con-centrated in Guangdong and in Fujian, just across the Taiwan Strait.

Gross domestic product by region, 1997

Population GDP GDP/head GDP/head(m) (Rmb trn) (Rmb) ($)

Beijing 12.4 181.1 14,604.8 1,759.6

Tianjin 9.5 124.9 13,147.4 1,584.0

Hebei 65.2 395.4 6,064.4 730.7

Shanxi 31.4 148.0 4,713.4 567.9

Inner Mongolia 23.3 109.4 4,695.3 565.7

Liaoning 41.4 349.0 8,430.0 1,015.7

Jilin 26.3 144.7 5,501.9 662.9

Heilongjiang 37.5 270.8 7,221.3 870.0

Shanghai 14.6 336.0 23,013.7 2,772.7

Jiangsu 71.5 668.0 9,342.7 1,125.6

Zhejiang 44.3 463.8 10,469.5 1,261.4

Anhui 61.3 267.0 4,355.6 524.8

Fujian 32.8 300.0 9,146.3 1,102.0

Jiangxi 41.5 171.5 4,132.5 497.9

Shandong 87.8 665.0 7,574.0 912.5

Henan 92.4 407.9 4,414.5 531.9

Hubei 58.7 345.0 5,877.3 708.1

Hunan 64.6 299.3 4,633.1 558.2

Guangdong 70.5 731.5 10,375.9 1,250.1

Guangxi 46.3 201.5 4,352.1 524.3

Hainan 7.4 41.0 5,540.5 667.5

Chongqing 30.4 135.0 4,440.8 535.0

Sichuan 84.3 332.0 3,938.3 474.5

Guizhou 36.1 79.3 2,196.7 264.7

Yunnan 40.9 164.4 4,019.6 484.3

Tibet 2.5 7.7 3,080.0 371.1

Shaanxi 35.7 132.6 3,714.3 447.5

Gansu 24.9 78.1 3,136.5 377.9

Qinghai 5.0 20.2 4,040.0 486.7

Ningxia 5.3 21.0 3,962.3 477.4

Xinjiang 17.2 105.0 6,104.7 735.5

All Chinaa 1,236.3 7,477 6,047.9 728.7

a Includes military personnel.

Source: State Statistical Bureau, China Statistical Yearbook.

32 China: Regional trends


However, the interior provinces have been left behind. The hope that develop-ment in the coastal areas would “trickle down” to the inland regions has notbeen entirely misplaced. In particular, tens of millions of migrant workers sendremittances back home. But some official Chinese commentators have claimedthat, in fact, capital is being drained out of the poorer regions to invest in thecoastal boom towns. In 1997 a serious effort to draw investment, both dom-estic and foreign, into central and western China, got under way.

The central governmentstill shoulders a

considerable fiscal burden

The 1994 tax reforms represented an attempt by the central government tosecure some of the benefits of increased growth by redistributing tax receipts.The system of revenue collection and sharing between centre and provincesbegan to be streamlined. For the first time, the finance minister’s budgetspeech included a breakdown of the division of revenue and expenditure be-tween Beijing and the provinces.

The figures show that the central government made a net transfer to theprovinces in 1994 of Rmb150.6bn ($17.5bn at the 1994 exchange rate ofRmb8.619:$1), rising to Rmb225.1bn in 1997. It also shouldered the entirebudget deficit. Since it is not known what arrangements were previously ap-plied, it is impossible to judge how the centre’s relative position has changed.However, the figures demonstrate that the cost to the centre of subsidising thepoorer provinces, which are largely in the interior, far outweighs the transfersfrom locally collected tax revenue in the surplus provinces of the coastal sea-board. At the time, it was reported that the intention was to increase thecentre’s share of total tax revenue from around 30% to around 60% over aperiod of years. Meanwhile above budget local level spending has tended tofuel a rising budget deficit on national definitions (see Economic policy).

Resources

Population

China’s huge population is both its greatest resource and its greatest challenge.At the end of 1997 the population was estimated at 1.24bn and was growing ata rate of around 13m per year in 1992-96. In 1980 a harsh one-child familypolicy was introduced, with the aim of limiting the population to 1.2bn by2000. So unpopular was the policy in the countryside that it was relaxed inmany areas to allow families whose first child was a girl a second chance.Chinese press reports now speak of a probable population of between 1.3bnand 1.32bn in 2000 (see Reference table 8 for historical population data).

The 1986-97 “baby boom” Population-control experts have praised China as a role model, as birth rateshave fallen, although in the last decade that process seems to have ended asbirth rates have reached a natural low. In part, lower population growth ratesare attributable to a demographic trough, although foreign as well as Chinesedemographers credit the family-planning drive with having “averted” as manyas 200m births in the 1980s. But the whole 1986-97 period is regarded as a“baby-boom period”, a legacy of an earlier baby bulge in the last years of the

China: Population 33


rule of Mao Zedong, who believed in national strength through numbers. It isestimated that between 11m and 13m women per year reached child-bearingage during this period.

The crude birth rate fell from 37 per 1,000 population in 1952 to 16.98 per1,000 in 1997. The death rate fell from 17 per 1,000 in the early years of thePeople’s Republic to 6.56 per 1,000 in 1997. It is this lag between the sharpdecrease in the mortality rate achieved under communist rule (although withan interruption in the famine years of the early 1960s, when tens of millionsdied of starvation) and the slower drop in the fertility rate that leaves Chinawith its enormous population problem today.

One consequent problem is that the population is ageing. The proportion ofthe elderly in the total population (defined as males aged 60 and over, andfemales aged 55 and over) increased from 9.3% in 1982 to 10.3% in 1990. Oneof the reasons families in the countryside found the one-child policy so harshwas because of the traditional obligation of sons to care for their parents in oldage. The labour force (the economically active population) was estimated at705m at the end of 1997, and has grown at a rate of around 1.3% a year inrecent years. Throughout the 1990s the labour force is expected to grow byabout 7m per year, presenting a formidable challenge to policymakers.

But there are, in effect, tens of millions of additional new workers in thecountryside. Because large numbers of farm workers are underemployed formuch of the year, industrial growth also raises the expectations of potentialmigrants, who do not figure in the unemployment statistics. It is the pressureof the steady increase in the size of the workforce that, more than any othersingle factor, has dictated the strategy of pursuing high economic growthdespite the attendant social and political risks. (For data on the labour force seeReference table 9.)

Population indicators(m unless otherwise indicated; census results)

1982 1990

Population 1,004 1,131

Crude birth rate (per 1,000 population; %) 20.91 17.70

Natural growth rate (per 1,000 population; %) 14.55 11.21

Average size of household 4.54 4.06

Han 937 1,039

Minority population 67 91

Sex ratio (male/female; %) 105.5 106.0

Urban population 206.3 296.1 % of total 20.6 26.2

Population aged 0-14 337.3 313.0

Population of working age 550.9 679.0

Men over 60 & women over 55 93.0 116.8Source: State Statistical Bureau, China Statistical Yearbook.

Ethnic minoritiesare growing faster

than the Han

At the time of the 1990 census China’s population was still dominated by ethnicHan Chinese, who made up 91.9% of the total. Ethnic minorities, which includethe Zhuang, Turkic groups, Tibetans, Mongols and several dozen others, had

34 China: Population


been growing much faster than the Han population, with a 35.8% increase onfigures in the last census (in 1982), compared with 10.9% for the Han.

Some minorities have been granted exemptions from the one-child familypolicy. Tibetan and Mongol nomads, for example, are usually “allowed” threechildren and often disregard restrictions anyway. In 1991 the official pressbegan to hint at tougher birth-control rules for the minorities, a politicallyrisky move, especially in Tibet and in Uighur areas of Xinjiang, where anti-HanChinese sentiment runs high and large families are a cultural norm.

Education

Although, to judge by the 1990 census, China had made considerable strides inreducing the number of illiterate people between 1980 and 1990—from 284mto 205m—the provision of basic education remains a problem. Many ruralschools are inadequately funded, relying on charges to the local families whosend their children there, and there is widespread truancy and absenteeism,despite a notional nine years of compulsory education. An even bigger problemis the very small percentage of people in higher education. In 1993 only 4% ofthe people in the relevant age group were enrolled in tertiary education, ac-cording to World Bank data.

Education is improving,but remains a problem

China suffers—and will continue to suffer in the future—from an acute short-age of skilled personnel. In part, this is the legacy of the Cultural Revolution,when education was seriously disrupted. It is also due to years of underfundingof the educational system. Under Deng, the prejudice against intellectual activ-ity encouraged by Mao was reversed. Examination-based entrance systems werereintroduced for universities and have become highly competitive. More than100,000 students have attended courses abroad, in particular in the US but tensof thousands have never returned. In secondary education, the trend in recentyears has been towards the development of vocational schools to prepare stu-dents directly for their role in the workplace. In universities, however, the oldsystem of “job assignments” for graduates is breaking down, with universityleavers more often competing in the marketplace for work. Funding of educ-ation, especially in rural areas, remains a problem and there is an increasingincidence of children, especially girls, dropping out of primary schools.

Education(% of population over 6 years unless otherwise indicated; census results)

1982 1990

Educated to university level 0.7 1.6

Educated to senior middle level 7.5 9.0

Educated to junior middle level 20.0 26.5

Educated to primary level 39.9 42.3

Illiterate & semi-illiterate persons 31.9 20.6

Illiterate & semi-illiterate persons (m) 283.7 204.9Source: State Statistical Bureau, China Statistical Yearbook.

China: Education 35


Health

Healthcare is increasinglycommercialised

The increase in life expectancy since 1949 has been marked, and is partly as aresult of greatly improved healthcare systems. By 1975 insurance coverage andthe rural Co-operative Medical System (CMS) operated by the communesreached nearly 90% of the population. Basic healthcare facilities were availableto nearly everybody, free of charge or at a nominal cost. There was, however, abig gap between the facilities available in the big cities and those on offer inpoorer rural areas. Now that the communes have disappeared the CMS hasvirtually broken down in many rural areas, leaving the rural population to fendfor itself. Only about 10% of the rural population is now covered by commu-nity-financed healthcare.

The urban population has been better insulated against the market forcessweeping though the healthcare system. Half the urban population is coveredby health-insurance systems and in many state enterprises healthcare is stillone of the facilities offered to the workforce. In practice, however, medical careis being increasingly commercialised. According to national figures, in 1997there were 1.61 doctors per 1,000 people, up from 0.85 in 1970. There were 2.3hospital beds per 1,000 people in 1995, up from 1.33 in 1970 and only 0.15 in1949.

Natural resources and the environment

The land area of China, at 9,561,000 sq km, is slightly larger than that of theUS and occupies similar latitudes. It is notable for the small proportion of landcultivated (15.9% in 1995), and the large share of this which is irrigated (25%),reflecting centuries of intensive land use. An estimated 154m ha were sown tocrops in 1997, the area under crops having tended to fall since 1985. Irrigationefforts in arid western areas are failing to keep pace with the loss of arable landto building in the more fertile areas.

There are three main farming zones:

• south of the Yangtze, where there is abundant rainfall, two crops of rice andone of spring wheat, as well as jute, sugarcane and other subtropical crops;

• between the Yangtze and Yellow rivers, where a two-crop system of wheatand rice is used; and

• in the north, where the climate is cold and dry, and there is a one-cropwheat system.

Shortages of someimportant materials loom

China is also well endowed with most minerals and metals. Sizeable reserves offerrous and ferro-alloy minerals support a major iron and steel industry. Chinais a world leader in the production of some 17 minerals, including phosphate,tungsten, molybdenum and titanium.

However, the rate of exploitation of some mineral resources is such that ashortfall looms. According to a report issued in October 1997 by the Ministryof Geology and Mineral Resources, demand for iron ore will reach 350m tonnesin 2000, against maximum domestic output of 230m-250m tonnes. Copper

36 China: Health


demand is expected to reach 1.3m-1.5m tonnes by the same date, by whichtime production will not be more 500,000-600,000 tonnes. China already hasa minerals trade deficit of $10bn a year, and is the world’s second largestconsumer and third largest importer of minerals.

Attempts will be made to boost domestic output by attracting foreign invest-ment and technology to exploit the 1,100-plus locations where solid mineraldeposits have been found in the last five years, most of them in comparativelyinaccessible western China.

As with oil, China plans to seek minerals abroad. Several companies are to becreated to lead exploration efforts abroad, and co-operation with countries inAfrica, Latin America and Asia will be expanded.

Economic infrastructure

Transport and communications

Railways China’s inadequate transport system constitutes a serious obstacle to futureeconomic growth, with virtually every facet of it already run to capacity. Thebackbone of the system remains the railway, which in 1997 carried 34.3% ofcargo (by tonne-km) and 35.4% of passengers (by passenger-km). Coal trans-port still clogs the railway system and the network is congested and overloadedfor both cargo and passengers, especially around the annual Chinese New Yearholiday, after which tens of millions of migrant workers flock to the railwaystations. New railways recently constructed include a 2,381-km north-southlink bisecting the existing coastal route (via Shanghai) and the inland route,the Beijing to Kowloon (Hong Kong) line that crosses the Yangtze at Macheng,Hubei, and is expected to bring prosperity to the central inland provincesthough which it runs. It was built in only three years and opened in 1997.

Roads The road network has also failed to keep pace with a rapid increase in thenumber of automobiles on the roads. By the end of 1997 China had 5.8mpassenger vehicles. The length of the highway network increased to 1,226m kmin 1997, compared with 1,057m km in 1992. (See Reference table 10 for trans-port statistics.)

Ports Similar problems affect ports, of which Shanghai remains the most important,accounting in 1995 for 20.7% of sea cargo handled. A new port is to be devel-oped south of Shanghai, and in 1994 a new container port was opened atShenzhen, the Special Economic Zone (SEZ) neighbouring Hong Kong.

Civil aviation Civil aviation is undergoing a boom, expanding at a rate of 13.7% per year interms of passenger-km in 1992-97. In 1988 the national flag carrier, CAAC,ceased to operate as an airline and became a regulatory authority. There arenow about 30 Chinese airlines, including the international company, AirChina. The industry has been beset by safety problems, and the government isencouraging airlines to merge and improve co-operation.

China: Transport and communications 37


Telecommunications There has been a parallel boom in telecommunications, although having aterrestrial telephone at home remains a privilege, enjoyed in 1997 by only oneperson in every four. But the number of subscribers to pagers and to mobiletelephones is growing rapidly. In 1994 China launched its first commercialsatellite, APSTAR 1, owned by a consortium of Chinese state enterprises andThai, Hong Kong and Singapore interests. Since 1984 China has launchedsatellites for foreign operators.

Energy provision

China is rich in energy resources, but they are not being developed fast enoughto keep pace with demand. China is the world’s largest producer of coal, whichis still the most important source of primary energy, providing about 70% oftotal output. (For national data on coal, oil and gas production see Referencetable 11.) Much of the coal is of poor quality, and it is a major contributor toair pollution. About 80% of coal deposits are in the north and west, far fromthe regions where demand is booming and also far from adequate supplies ofwater for coal-washing at the pithead.

Efforts to develop the oilindustry

Onshore oil production, which provided much of the foreign exchange thatfuelled the trade growth of the early 1980s, has risen only slowly in recentyears. China is now a net importer of crude oil. Efforts since the early 1980s todevelop a big offshore industry have yet to make an impact. Hopes now centreon supposedly vast oil reserves in the Tarim Basin in the far west. Developingthem, and then the necessary system for transporting oil to the coast, remainsa distant goal.

Energy balance, 1997(m tonnes of oil equivalent)

Oil Gas Coal Electricity Other Total

Primary supplyProduction 160 20 698 53a 206 1,137Imports 59 0 1 0a 0 60Exports –25 –3 –17 –2a 0 –47Stock change –8 0 0 0 0 –8Total 186 17 682 51a 206 1,142

17b 1,108

Processing & transformationInput to refining –155 0 0 0 0 –155Input to transformation –15 –1 –226 –51a 0 –293Refining/transformation output 155 3 0 99b 0 257Energy industry fuel/loss –16 –4 –41 –22b 0 –83

Final consumptionTransport fuels 55 0 5 1b 0 61Industrial fuels 28 8 297 51b 0 384Residential etc 37 3 99 25b 206 370Non-energy uses 35 4 14 0 0 53Total 155 15 415 77b 206 868

a Expressed as input equivalents on an assumed generating efficiency of 33%. b Output basis.

Source: Energy Data Associates.

38 China: Energy provision


Natural gas has been discovered in the south, off Hainan Island, and in Sichuanprovince, but has not as yet made a big contribution to energy supplies.

There is a wealth of hydro resources, and there are a number of grandioseschemes to develop more, including the massive Three Gorges project atSandouping in Hubei province, on which work started in earnest in 1997. Inaddition, there are now two functioning nuclear power plants, and plans tobuild several more. In many areas in recent years energy shortages have been amajor bottleneck to industrial growth. In mid-1994, for example, even thecapital, Beijing, had to introduce electricity rationing, after a hot spell led to asurge in the use of air conditioners.

Financial services

Major restructuring of thebanking system is under

way

In the context of China’s own savings-investment gap and of the problemsaffecting financial institutions across Asia, structural problems in the bankingsystem are the focus of much attention. The government has in the past fre-quently appeared to have lost its ability to control credit expansion. Within thestate banking system there has been widespread disregard for loan ceilings setby the People’s Bank of China (PBC, the central bank), as well as a proliferationof illegal or “grey” markets for raising capital. Concern about the viability ofthe Chinese banking sector was heightened in mid-1998 following the closureof the Guangdong International Trust & Investment Corporation (GITIC),when it could not pay foreign debts of some $2bn. A further problem is that anunknown but not inconsiderable proportion of this debt has not been regis-tered with the State Administration for Foreign Exchange (SAFE) and will neverbe recovered. China has approximately 240 International Trust & IvestmentCorporations (ITICs). GITIC was the third such slosure in the last 18 months.The overseas liabilities of the Itics are estimated at around $10bn, but thou-sands of SOEs and government departments have Itic deposit accounts.

In 1993 the beginnings of a thorough overhaul of the banking system wereinitiated. The aim was to transform the PBC, which still retained vestiges of themonopoly bank of a state socialist regime, into something closer to a monetaryauthority which controls the market but is no longer a front-line participant.Accompanying the attempt to transform the PBC into a kind of Chinese Fed-eral Reserve Bank, and making its operations much more transparent, will be arestructuring of the rest of the state-owned banking system. There are four“specialised” and eight “comprehensive” banks. They will eventually operatein a genuine commercial environment, while their policy lending (loans madeunder government instruction to “key” projects, unprofitable state-ownedenterprises and government itself) is hived off to new, purpose-formed institu-tions. At present such lending usually falls to the specialised banks (Agricul-tural, Industrial and Commercial, Construction, and Bank of China, whichdeals in foreign exchange). Now there is a new State Development Bank, areorganised Agricultural Bank, and an export credit institution.

The separation of functions will not of itself reduce the budgetary burden on thestate banks. Moreover, as noted, the state-owned banking system is beset bynon-performing loans to loss-making state enterprises. It is therefore easier to set

China: Financial services 39


up new financial institutions, sometimes with foreign capital, than to transformthe operations of the state banks. Nevertheless, the introduction of positive ratesof interest on deposits and some loans during 1995-96 is a step in the rightdirection, as is the widening of spreads which took place as a result of theinterest rate reductions of 1996-98. The restructuring of the PBC’s provincialbranch network has also begun.

Bond sales help establishsecurities markets

The development of secondary capital markets was in part necessitated by thegovernment’s consistent budget deficits. It was perceived that funding thedeficits by printing money was a prime cause of the inflationary surge whichbegan in 1993 and would have been worse were it not for the increasingdemand for cash and increasing willingness to save displayed by the popul-ation in the mid-1990s.

It had been difficult to raise money through selling Treasury bonds, except bythe coercive deduction of bond payments from state workers’ pay packets, apractice which was much resented. The paper was seen as illiquid. Thus, from1990 the government started issuing bonds underwritten by financial institu-tions. By the mid-1990s issues of more than Rmb100bn ($12.1bn) could bedisposed of, apparently without undue difficulty.

The stockmarkets arebeing closely regulated

The securities exchanges where Treasury bonds were sold formed the basis forChina’s first two stock exchanges, which opened in 1990, in Shanghai andShenzhen. About 800 large SOEs have listed some stock on the markets and arenow known as joint-shareholding companies, although the state still holds amajority stake in them. The markets, while shallow, have been extremelyvolatile and measures were introduced in mid-1997 to try to dampen themarket by forbidding banks from speculating or from lending for that purpose.

There have been attempts to improve regulation in the financial sector. Super-vision of the insurance and securities markets, previously the responsibility ofthe PBC, is to be undertaken by separate bodies. The China Securities Regula-tory Commission has authority over stock trading, and the recently establishedChina Insurance Regulatory Commission will manage the country’s insurancecompanies. A draft securities law, aiming to harmonise the practices of the twostock exchanges and provide a more transparent regulatory framework, hasbeen drawn up, and is expected to be published shortly.

There are two categories of shares. “A” shares, denominated in renminbi, areopen only to Chinese investors. By the end of 1997 some 322 companies werelisted on the two exchanges and there were also 56 “B” shares, also denomi-nated in renminbi, but traded in US and Hong Kong dollars by foreigners. Bythe end of November 1998 a total of 47 China-incorporated enterprises werelisted on the Hong Kong Stock Exchange. Several other Chinese stocks arelisted in New York and one in London. Demand for Chinese equity and alsodebt has been severely hit by the Asian financial crisis and its aftermath.

(For banking statistics, see Reference table 12.)

40 China: Financial services


Production

Industry

Despite the reservations noted earlier (see Economic performance), there is nodoubting that industrial output has increased at huge rates in China in recentyears. Industrial output growth averaged 12.6% per year in real terms through-out the 1980s. For most of that period, it was led by the township and villageenterprises (TVEs). In effect, local agricultural surpluses were invested in manu-facturing, often in small, low-technology and labour-intensive processes. Inthe 1990s, and especially since 1992, the sector called “private and other”,which includes the fast-growing foreign-invested enterprises (FIEs), has beenmaking a noticeable impact on production figures.

Although, in absolute terms, the contribution of private entities and FIEs re-mains small, the proportion is growing rapidly. In 1997 FIEs contributed 7.3%of national gross output; FIEs with funds from Hong Kong, Macau and Taiwancontributed a further 5.4%. “Private” ones contributed 17.9% in 1997, up froma combined share for the foreign-funded and private categories of 4.4% in1990. State-owned industry, meanwhile, saw its share of total output fall from54.6% in 1990 to 25.5% in 1997, while the proportion contributed by collec-tively-owned enterprises grew from 35.6% to 38%.

The industrial sector(Rmb bn unless otherwise indicated)

% of % change,1994 1995 1996 1997 total year on year

Gross output, current prices 7,017.6 9,189.4 9,959.5 11,373.3 100.0 14.2 State enterprises 2,620.1 3,122.0 2,836.1 2,902.7 25.5 2.3 Collectives 2,647.2 3,362.3 3,923.2 4,334.7 38.1 10.5 of which: township enterprises 810.2 1,193.2 1,173.0 n/a 810.2 1,193.2 village enterprises 965.8 1,184.7 1,590.0 1,794.0 15.8 12.8 co-operative enterprises 261.1 213.4 338.7 466.9 4.1 37.9 Private enterprises 708.2 1,182.1 1,542.0 2,037.6 17.9 32.1 Others 1,042.1 1,523.1 1,658.2 2,098.2 18.4 –22.4Source: State Statistical Bureau, China Statistical Yearbook.

Industrial enterprises by ownership

1995 1996 1997 ’000 % of total ’000 % of total ’000 % of total

Total 7,341.50 100.0 7,986.5 100.0 7,922.9 100.0 State-owned 118.0 1.6 113.8 1.4 98.6 1.2 Collectives 1,475.00 20.1 1,591.8 19.9 1,772.3 22.4 of which: township-owned 228.8 3.1 202.3 2.5 n/a n/a village-owned 689.9 9.4 678.4 8.5 631.4 8.0 co-operative enterprises 371.6 5.1 518.6 6.5 782.5 9.9 Privately owned 5,688.2 77.5 6,210.7 77.8 5,974.7 75.4 Other 60.3 0.8 70.2 0.9 77.3 1.0Source: State Statistical Bureau, China Statistical Yearbook.

China: Industry 41


Nevertheless, there were still 98,600 state-owned enterprises (SOEs) in 1997,compared with 104,700 in 1991. In 1997 the number of individually ownedenterprises reached 6m, down from 8m in 1994. The majority of these werebased in rural areas and the fall in their number owed much to the difficultoperating conditions.

Problems ofoverproduction persist

In terms of the structure of industrial output, the trend has been for a gradualshift away from the traditional dominance of heavy industrial products pro-duced by the state-owned sector towards light industry. The acute shortage ofconsumer goods at the end of the 1970s created enormous pent-up demand forboth domestic and imported goods. There has, however, been a continualproblem of overproduction in some sectors, notably of a number of basicconsumer durables such as refrigerators and washing machines. Demand forthese was high in the mid-1980s. Thereafter, a more sophisticated consumermarket preferred to pay for imported products, which were seen as being ofhigher quality. Stockpiles built up and they were a major factor in the mount-ing “triangular debt” between banks, enterprises and their suppliers whichpre-occupied policymakers in 1991 and again in 1994-98.

In trying to control overproduction, the government also faced a dilemma. TheSOEs are quickest to respond to austerity measures such as credit controls, butthey are also the weakest sector of the industrial economy and most vulnerableto bankruptcy. A bankruptcy law introduced in 1988 has rarely been enforced,because of the social consequences of unemployment in the cities. Time andagain since then senior government leaders have suggested that bankruptcy wasan issue that they were about to tackle. The latest attempt came in 1998 whenthe government of the new premier, Zhu Rongji, outlined a programme of rapidreform of the SOEs. However, faced with a rapid slowdown in the rate of eco-nomic growth, the government soon began to back down on its promises.

The state sector appears to cry out for a dose of the “reform” meted out to muchof the rest of the economy. Many SOEs, possibly at least half, are loss-makingand subsidising them is a major component of the public-sector deficit. Thefinancial system that has to be maintained to protect them is a serious obstacleto the development of other parts of the economy and to some of Beijing’s mostcherished international objectives, namely smooth trade relations with itsmajor partners and admission to the World Trade Organisation (WTO). How-ever, each time the issue has risen to the top of the agenda China’s leaders haveshied away from it. There are many powerful vested interests fighting for theprotection of state-owned industries. More fundamentally, the social and polit-ical consequences of large-scale bankruptcies make market discipline hard toenforce. In the 1990s efforts have been made to develop a social-security systemwhich would leave more political room for manoeuvre. (Production statistics forlight and heavy industrial products are given in Reference table 13.)

Mining and semi-processing

China’s mining industry has been plagued by a skewed pricing system and bysafety problems. Coal mines, in particular, have a reputation as deathtraps.Industry ownership is mixed. State-run mines are responsible for nearly 60% of

42 China: Mining and semi-processing


China’s annual output but are, in many cases, as unsafe as the thousands ofprivately run mines. The low price of coal has discouraged investment in safetyprecautions and in exploitation of some deposits.

Foreign involvement ingold production will be

allowed

Similar problems have dogged the gold industry. In late 1995—before thengold production figures were a state secret—Beijing claimed that China’s goldoutput ranked sixth in the world and revealed that total output that year hadbeen 105 tonnes, up by 16% on 1994, which implies output of 90.5 tonnes in1994. Production rose sharply from 117 tonnes in 1996 to 166.3 tonnes in1997; output is expected to reach 170 tonnes in 1998 and is planned to remainat that level in 1999.

Plans are in place to allow a floating gold price to stimulate production. Gold isofficially a state monopoly, but the gap between the state purchasing price andthe parallel-market price has led to widespread illegal mining. In 1994 Chinaannounced that it would in future allow foreign participation in gold mining.A gold-mining joint venture, involving a Canadian company, Asia MineralsCorporation, and the Shandong Zhaoyuan Gold Industry Group Company hasbeen formed. There is enormous potential consumer demand. In 1992 and1993 China imported more than 200 tonnes of gold per year, almost 10% ofworld production. But gold consumption per head is only around 0.2 g, com-pared with around 6-7 g per head in other ethnic-Chinese societies such asHong Kong and Taiwan. Total deposits are estimated at 4,500 tonnes.

In recent years China has also emerged as an important producer and exporterof rare metals crucial to high-technology industries such as aerospace andelectronics. These metals include vanadium, titanium, germanium, galliumand polycrystalline silicon. It is also thought to hold the world’s largest reservesof rare earths at the Bayan Obi mine in Inner Mongolia.

Agriculture and forestry

Hailed as a spectacular success when they were initiated, Deng Xiaoping’s agri-cultural reforms faced criticism a decade later that they had been a “one-shotdeal”. The big production rises that followed the reforms were only partly attrib-utable to the introduction of material incentives. The old commune system,which awarded farmers work-points, had explicitly related output to reward.

The reforms did lead to big one-off gains from the rationalisation of crops thatresulted from giving individual farmers a measure of freedom over how to usetheir land. However, individual land plots are in many areas very small, andtitle to them still belongs to the state. There is a serious problem of under-investment in the land, and hence of degradation. There is also a legacy ofmany decades of abuse of the natural environment, which now threatensagricultural production. The government has tried to encourage a degree ofrecollectivisation, now known as scale-farming, in order to counter these prob-lems and encourage mechanisation.

Farmers suffer from pricedistortions

An equally important problem since the mid-1980s has been the decliningterms of agricultural trade. Despite regular procurement price increases, and a

China: Agriculture and forestry 43


campaign against the illegal extortion of levies and fees by local officials, thereis still concern about the exploitation of farmers and the concomitant risk ofrural unrest. Besides “fees” charged for entertaining visiting inspection teamsor for investment in industrial enterprises, many farmers are still being chargedexorbitant prices for inputs such as fertiliser, seeds and pesticide. Discontent inthe countryside has been heightened by periodic cash shortages among localgovernments, which have resorted to paying farmers for their contracted grainwith white slips, or IOUs. Farmers also face the possibility of arbitrary eviction,if their land is diverted to other uses. One of the reasons why the governmentis encouraging so-called grassroots democracy, as in the election of villageleaders, is to give local communities an increased sense of ownership of theirown fate, and responsibility for locally made decisions.

As a result of such pressures the government has had difficulty in persuadingfarmers to continue to grow grain. It had to emphasise that its “contracts” withhouseholds were mandatory. In 1995-96 it appeared that problems in grainproduction were continuing. The total area under cultivation was reported tohave shrunk by 0.9% in 1995; the area planted to grain shrunk by 0.4% and thatto rice, wheat and corn by a “comparatively big margin”. Total output was downin 1994, at 445.1m tonnes. Strenuous efforts to improve matters brought anincrease to 466.6m tonnes in 1995 and, further, to a record 504.5m tonnes in1996 and a bumper 494m tonnes in 1997. The aim is to produce 500m tonnesper year regularly by 2000. (For data on agriculture see Reference tables 14-17.)

Deforestation is nowrecognised as a serious

problem

The reforms also appear to have exacerbated the effects of the almost annualclimatic disasters to which Chinese agriculture is subject. In 1994 serious flood-ing in the south was accompanied by a prolonged drought in the north andwest. This experience was bad but by no means exceptional. Flood-preventionmeasures have been neglected in many areas because of the collapse of the oldcollective systems that were responsible for them. Irrigation techniques innorthern China have had the effect of lowering the water table, to such anextent that it is often said the capital will have to be moved from Beijing. Thesituation is now widely accepted as being acute. The floods that occurred in theYangtze river basin in southern China and those of the Sung and Nen rivers innorthern China in mid-1998 were acknowledged to have been exacerbated byenvironmental degradation. Floods are a perennial problem in China and 1998was a very bad year; figures released in mid-October 1998 stated that naturaldisasters of various kinds had “covered” (inundated) 44.2m ha and “affected”17.3m ha—a vast swathe of China; there had been 4,610 deaths and directlosses were estimated at Rmb80bn ($9.7bn), of which Rmb72.5bn were sus-tained in flood-affected areas.

Deforestation has also been a factor in the flooding. With the emphasis, in MaoZedong’s words, on “taking grain as the key link”, many forests disappeared inthe 1960s. According to one estimate, as much as one-seventh of China’sland—an area five times the size of the UK—has suffered soil erosion, destroy-ing farmland, silting up rivers and reservoirs, and thus contributing to seriousflooding. Tree-planting is now being actively encouraged. The area under foresthas expanded, but China still remains a timber-starved country and it is theworld’s second largest importer of logs. The problem has been made worse in

44 China: Agriculture and forestry


recent years by the construction boom among newly prosperous farmers in thecountryside, as well as by mass theft, forest fires and pests. The Chinese mediahave warned that in just a few years China may run out of trees to fell, andhave focused on the economic consequences of this, notably unemploymentfor millions of timber workers. But there is mounting concern, too, about theecological consequences.

Construction

Chinese official statistics make a distinction between “productive” and “non-productive” investment. The central government’s consistent difficulty in re-cent years has been to allocate enough funds to “productive” investment,especially in much-needed infrastructural projects, while restraining invest-ment in residential construction, hotels, town halls and, increasingly, pureproperty speculation.

Land-use plans have beenenhanced

As one of the main measures designed to cool the economy in mid-1993,regulations about “basic construction” were tightened. This foreshadowed anannouncement that the country’s overall land-use plan would be enhanced.Any type of land used in construction projects, including land used for devel-opment zones, would be listed from then on in the state’s annual land-useplans. Hitherto, the plans had covered only land used by the state, majorcollective projects and that used for rural housing. Hence, far more arable landwas being developed for housing or industry than the state intended. In 1992the state had set aside 266,600 ha of land for construction, but more than400,000 ha were actually used. However, in July 1994 it was found that invest-ment in property development or speculation was up by 95.8% compared withJuly 1993, while investment in capital projects had risen by 76.8%. There were5,447 new projects in “fixed assets” sectors, a 20% increase on the year-earlierperiod. Much foreign investment, mainly from Hong Kong, was now also goinginto property speculation. In Fuzhou, for example, such investment accountedfor 45% of all foreign investment.

The result has been a property bubble along the southern coast, with large areasof arable land left fallow for development which may never happen. Therelaxation of credit that took place in 1996 prompted fears of a renewed boutof property speculation, and there is now the prospect of serious overcapacityin major cities. As of mid-1998 the property market was seriously depressed:office prices in Shanghai fell by 50% between 1997 and 1998. The residentialproperty market, which the government is seeking to stimulate by the con-struction of affordable housing for sale to urban workers who have in the pastrelied on employers to house them, is suffering from poor demand in the faceof prices that are too high.

China: Construction 45


The external sector

Merchandise trade

Export growth has beenrapid—

In most years since 1978, although not in 1996-98, the growth of exports hasoutpaced world export growth. Furthermore, every year, apart from 1983 and1984, the importance of manufactures has increased as a proportion of mer-chandise exports. China has more than doubled its share of total world exportsin that time. Since the late 1980s a rising share of exports and imports has beenaccounted for by re-exports from processing facilities with foreign invest-ment—foreign invested enterprises (FIEs); FIEs’ share of exports has risen above40% and their share of imports has now exceeded 50%.

In 1994 export growth was boosted by the effective devaluation of the ren-minbi at the beginning of the year. In 1995 exports were being overstatedbecause of changes to the value-added tax (VAT) rebate system that were intro-duced at mid-year and again in January 1996. This led to implausible rises inrecorded exports in dollar terms, especially in the first half of the year. For 1995as a whole the dollar value of exports was reported by customs figures as havingrisen by 23%, to $148.8bn. This distorted the base for comparison during 1996,when dollar exports rose by only 1.5%. In 1997, despite difficult trading condi-tions in Asia and stiff competition from exporters whose currencies slid heavilyagainst the US dollar, dollar exports were once again rising in the 20% range,as inventories built up during 1996 were put on the market. But the pace ofexport growth slowed quite sharply in the face of loss of competitiveness andpoor demand in Asian markets in 1998.

China’s competitive advantage as an exporter lies in its massive and cheaplabour force. Too often this has been wasted by low productivity and poor-quality work. However, this now appears to have been successfully overcomein some of the thousands of enterprises in Guangdong producing for exportunder the watchful eye of expatriate quality controllers.

—and China will moveupmarket

There seems, on the face of it, no reason why China should not follow HongKong, Taiwan and South Korea in moving upmarket and conquering newmarkets, especially in electronics, on the basis of the assembly-type arrange-ments it has used so successfully for light manufactures such as garments andclothes. In 1997 textiles (including garments) accounted for 23.6% of Chineseexports. Pharmaceuticals have already shown impressive growth, because ofthe popularity of traditional Chinese medicines among overseas Chinese andthe wider availability of chemicals for Western medicines.

Imports are dominated bymanufactures—

Imports are dominated by manufactures. Their share of the total reached 80%in 1997, compared with 20% for primary products. However, the manufacturesbill includes a high proportion of intermediates, notably chemicals and relatedproducts (13.6% of total imports in 1997), but also raw materials, iron andsteel, and textiles yarn.

46 China: Merchandise trade


—but non-staple food andpetroleum imports will

increase

This pattern is unlikely to undergo a radical change in the next five years,although food imports may well rise in years of bad harvest, even if the overallgoal of increased grain production is met. The emphasis on the grain harvest isalso likely to lead to greater imports of non-staple foods. Crude oil imports arelikely to rise sharply, as domestic production fails to keep pace with demand, and,in particular, as new refining and petrochemicals capacity comes on stream. (Fordata on foreign trade by commodity, see Reference tables 18 and 19.)

Merchandise trade($ bn)

1995 1996 1997

Exports (fob) 148.8 151.1 182.7 Primary goods 21.5 21.9 23.9 of which: food & live animals 10.0 10.2 11.0 raw materials 4.4 4.0 4.1 mineral fuels 5.3 5.9 7.0 Manufactured goods 127.3 129.1 158.8 Chemicals 9.1 8.9 10.2 Light industriala 32.2 28.5 34.4 Machinery & transport equipment 31.4 35.3 43.7 Miscellaneous 54.5 56.4 70.4

Imports (cif) 132.1 138.8 142.4 Primary goods 24.4 25.4 28.6 of which: food & live animals 6.1 5.7 4.3 raw materials 10.2 10.7 12.1 mineral fuels 5.1 6.9 10.3 Manufactured goods 107.7 113.4 113.7 Chemicals 17.3 18.1 19.3 Light industriala 28.8 31.4 32.2 Machinery & transport equipment 52.6 54.8 52.7 Miscellaneousb 8.3 9.1 9.4

Trade balance 16.7 12.3 40.3 Primary goods –2.9 –3.5 –4.7 Food & live animals 3.8 4.5 6.7 Raw materials –5.8 –6.7 –8.0 Mineral fuels 0.2 –1.0 –3.3 Manufactured goods 19.6 15.7 45.1 Chemicals –8.2 –9.2 –9.1 Light industriala 3.5 –2.9 2.2 Machinery & transport equipment –21.2 –19.5 –9.0 Miscellaneous 46.3 47.9 61.9

a Light and textiles industrial products, rubber products, minerals and iron products. b Includingproducts not classified elsewhere.

Source: General Administration of Customs of the People’s Republic of China, China’s Customs Statistics.

Trade relations with theUS remain fraught

Continued rapid growth in exports, however, relies on a hospitable inter-national environment and on continued reform of China’s foreign-trade sys-tem. The biggest question-mark over future export growth was removed in1994 when the US president, Bill Clinton, renewed China’s most favourednation (MFN) trading status unconditionally, without making further annualrenewals conditional, as they had been in the past, on China’s human-rightspolicies. However, trade relations with the US remain fraught. The root of theproblem is China’s massive and growing bilateral trade surplus.

China: Merchandise trade 47


In the short term, further export growth will be constrained by tougher en-forcement of quota restrictions on imports of textiles and some other goodsinto both the US and European markets. The US, in particular, has foundlarge-scale Chinese “cheating” on quotas through transshipment and rela-belling in countries such as Honduras. In the long term, China’s relations withthe US may benefit from the phasing out of the Multi-Fibre Arrangement(MFA) under the Uruguay Round of the GATT, although China may face lim-ited sanctions for its failure to protect intellectual property rights. The rel-ationship is crucial. The US probably takes as much as one-third of Chineseexports, a proportion disguised in Chinese figures by the large volume which istransshipped in Hong Kong, much of which appears in the US figures as beingof Chinese origin. Of crucial importance in the smoothing of trade relations isa successful outcome to the protracted negotiations on the terms of China’sentry to the World Trade Organisation (WTO).

Administrative controlson imports will bedifficult to replace

Imports remain much more tightly controlled by administrative fiat and quotathan do exports and there have been moves to raise such barriers in the face ofan influx of smuggled imports and a loss of competitiveness in 1997-98. Theintention is gradually to replace administrative controls on imports by a tariff-based system, in which the exchange rate would also perform a significantregulatory function; it is a reform the government is nervous about pursuing. Itfears that a lifting of absolute import quotas would be followed by a flood ofimports, as in 1985-86. There is also a worry about the difficulty of collectingtariffs and the possibility of a new avenue of corruption for the officials in-volved. Given the degree of domestic protection through quotas at the mo-ment, tariffs would have to be set at unrealistically high levels to achieve thesame effect. There is also a great deal of opposition and passive resistance tomarket-opening measures from bodies with entrenched interests, such as pow-erful ministries in Beijing, and in domestic industries which could suffer fromdifficulties under free competition.

The trade surplus issomewhat surprising

Having been in deficit in the late 1980s, the merchandise trade account swunginto surplus in 1990 and, apart from 1993, when there was a rapid rise indomestic demand, has remained in surplus. This surplus is partly the result ofthe demand management of 1989-90 and after 1993, which slashed the importbill, and partly the result of the surge in export-oriented manufacturing, oftenbased on foreign investment, that has occurred since 1992 along the easternseaboard. The trade surplus has also been swollen by overreporting of exportvalues in order to benefit from rebates on VAT. Although the incentive to dothis was reduced with the reduction of the rebate rates in 1995 and again inJanuary 1996, overreporting probably increased with the raising of rebates oncertain commodities during 1998. Meanwhile, after the announcement thattariff concessions on capital-goods imports of foreign-invested enterpriseswould be reduced from April 1996, a surge in such imports took place in thefirst few months of 1996, further confusing the trade data. The requirements ofChina’s development are such that the volume of import growth is likely to befaster than that of exports over the next ten years, during which time the tradesurplus will disappear.

48 China: Merchandise trade


Trading partners, 1997Exports fob Imports cif Trade

% change % of % change % of balance$ bn year on year total $ bn year on year total ($ bn)

Hong Kong 43.8 33.0 24.0 7.0 –10.6 4.9 36.8

Taiwan 3.4 21.2 1.9 16.4 1.6 11.5 –13.0

Singapore 4.3 15.2 2.4 4.5 23.9 3.2 –0.2

Indonesia 1.8 28.9 1.0 2.7 17.2 1.9 –0.9

Malaysia 1.9 40.1 1.0 2.5 11.2 1.8 –0.6

South Korea 9.1 21.5 5.0 14.9 19.6 10.5 –5.8

Japan 31.8 3.0 17.4 29.0 –0.6 20.4 2.8

ASEAN 12.0 24.0 6.6 12.3 15.2 8.6 –0.3

APEC 137.0 20.3 75.0 104.8 2.8 73.6 32.2

EU 23.8 20.1 13.0 19.2 –3.4 13.5 4.6 of which: UK 3.8 19.1 2.1 2.0 5.1 1.4 1.8 Germany 6.5 11.0 3.6 6.2 –15.6 4.4 0.3 France 2.3 22.1 1.3 3.2 44.7 2.2 –0.9 Italy 2.2 21.8 1.2 2.4 –24.5 1.7 –0.2 Netherlands 4.4 24.5 2.4 1.1 16.7 0.8 3.3

Russia 2.0 20.0 1.1 4.1 –20.6 2.9 –2.1

Canada 1.9 17.8 1.0 2.0 –21.9 1.4 –0.1

US 32.7 22.5 17.9 16.3 0.8 11.4 16.4

Australia 2.0 22.8 1.1 3.2 –5.4 2.2 –1.2

Latin America 4.6 47.7 2.5 3.8 4.4 2.7 0.8

Africa 3.2 24.9 1.8 2.4 68.2 1.7 0.8

Total incl others 182.7 20.9 100.0 142.4 2.5 100.0 40.3Source: Economic Information & Agency, Hong Kong, China’s Customs Statistics.

Invisibles and the current account

The current account, 1997($ bn)

Merchandise trade balance (fob-fob) 46.2

Net services balance –5.7

Net income balance –15.9

Net transfers 5.1

Current-account balance 29.7Source: IMF, International Financial Statistics.

In 1995 the current-account surplus fell from $6.9bn in 1994 to only $1.6bn; itrose back up to $7.2bn in 1996 and reached $29.7bn in 1997, thanks to anothersurge in export revenue. The surplus on the travel account is insufficient to pulloverall services into surplus. In 1995 the income-account deficit soared asoutward payments of interest rose, and profits and dividends outflows wererecorded for the first time ever. This casts doubt upon the previous data for the1990s and may lead to retroactive adjustments, perhaps reducing some of thelarge errors and omissions that appear on the capital account. (For balance-of-payments data see Reference table 20.)

China: Invisibles and the current account 49


Tourism and shippingdominate invisibles

The two major items on the services account are tourism and shipping. Chinahas been running a sizeable surplus of about $1.5bn per year on the travelaccount, and the continued boom in foreign trade and investment will con-tinue to bring in large numbers of foreign travellers, of whom the majority areoverseas Chinese. The shipping account, however, has tended to be in deficit.

China also has some invisible income from tens of thousands of constructionworkers, mainly in the Middle East but increasingly in recent years in theRussian Far East. Overall, the healthy rise in foreign-exchange reserves in 1994-98 will tend to boost invisibles income, but the invisibles account will continuein deficit.

Capital flows and foreigndebt

China’s total foreign debt rose to $128.8bn in 1996, according to World Bankfigures, requiring debt service of $15.8bn, with a debt-service ratio of 8.7%.China has few, and usually only temporary, difficulties in raising funds on theinternational capital markets and can be expected to remain a major borrowerin the future. Nor will debt service be a serious constraint in the longer term.But in the short term the effects of the Asian crisis and the doubts which ratingsagencies and banks now have about the creditworthiness of all but the mostsovereign of Chinese borrowers will act as a disincentive to the raising of newforeign debt. (For data on external debt, see Reference table 21; for data on aid,see Reference table 22; for information on assets and liabilities, see Referencetable 23.)

The capital accountdepends on direct

investment growth

The pledges of large inflows of foreign capital witnessed in recent years, how-ever, have begun to slow. Actual inflows, meanwhile, are still rising, reflectingprevious large commitments. Much of the foreign investment so far has beendrawn by China’s comparatively cheap labour force and other low productioncosts. There are signs that rising costs are already deterring some investors fromthe prosperous southern provinces such as Guangdong. In less advanced prov-inces labour costs are lower, but the bureaucratic and infrastructural hurdlesmay be much greater. Despite China’s commitment to the introduction of alevel playing field for domestic and foreign investment regimes, it seems cer-tain that incentives will continue to be needed to attract foreign funds to theinterior of the country for projects where payback periods will be long. Inaddition, China faces increasing competition from other countries for invest-ment directed at manufacturing for the US market. Membership of the WTO iscrucial to protect China’s competitiveness as an investment location for exportinto developed markets.

However, direct investment is being drawn by the prospect of China’s ownmarket and this will remain a powerful lure to multinationals. Some 200 of theworld’s top 500 companies are already present in China and more will surelyfollow. Most joint ventures are still required to export at least 80% of theiroutput, but an increasing number are now concentrating on the desirableprospect of a genuine opening of the Chinese domestic market. AlthoughChina remains a very poor country in terms of GDP per head, even on apurchasing power parity (PPP) basis, the pockets of comparative prosperity inthe east are large enough in themselves to constitute a sizeable market.

50 China: Invisibles and the current account


One new feature of foreign investment in the late 1990s is the growing impor-tance of the services sector. Foreign retailers, fast-food chains and other serviceindustries began to see a real market developing. Although this is limited, byand large, to the more prosperous south and south-eastern regions, it stillrepresents a new “middle class” numbering some tens of millions, with rapidlyrising purchasing power. The main shopping streets of cities such as Shanghaiand Guangzhou are coming to be occupied by shops owned or franchised bysome of the world’s leading fashion and other brand names. Moreover, theseare now beginning to spread inland.

Utilisation of direct foreign investment($ m)

Year Cumulative

1979-83 1,802 1,802

1984 1,258 3,060

1985 1,661 4,721

1986 1,874 6,595

1987 2,314 8,909

1988 3,194 12,103

1989 3,392 15,495

1990 3,487 18,982

1991 4,366 23,348

1992 11,007 34,355

1993 27,515 61,870

1994 33,767 95,637

1995 37,521 133,158

1996 41,726 174,884

1997 45,257 220,141Source: State Statistics Bureau, China Statistical Yearbook.

“Round-tripping” The capital-account and foreign-investment figures are confused by the com-mon practice of “round-tripping”. Billions of dollars of Chinese money haveleft the country, mostly to be parked in Hong Kong, where mainland enter-prises are big investors in the local stock and property markets. A fair propor-tion of that money is then reinvested in China, ostensibly as foreigninvestment. The tax incentives available to foreigners are gradually being whit-tled away in favour of the notion of a level playing field for domestic andforeign investors. However, the attraction of keeping money offshore is suchthat the practice is unlikely to disappear. Some estimates put the amount ofsuch “hot money” leaving China each year as high as $10bn-20bn. It thus hasa big impact on the capital account and helps explain some of the large figureswhich move about China’s national accounts, often identified merely as“errors and omissions”. The amount of FDI is also exaggerated by the practiceof disguising foreign debt as foreign investment. The State Administration forForeign Exchange (SAFE), with which all foreign debt is supposed to be regis-tered, has signalled that it will take a hard line on honouring unofficial foreignborrowing by Chinese enterprises that cannot meet their obligations.

China: Invisibles and the current account 51


Foreign direct investment inflows, by selected provincea

($ m)

1993 1994 1995 1996 1997

Guangdong 7,555.8 9,463.4 10,260.1 11,754.1 12,634.9

Jiangsu 2,843.7 3,763.2 5,190.8 5,210.1 5,435.1

Shanghai 3,160.3 2,473.1 2,892.6 3,940.9 4,225.4

Fujian 2,874.4 3,713.2 4,043.9 4,084.5 4,197.1

Shandong 1,874.1 2,552.4 2,689.0 2,633.5 2,775.6

Tianjin 613.7 1,015 1,520.9 2,152.7 2,511.3

Liaoning 1,279.1 1,440.1 1,424.6 1,737.8 2,366.3

Beijing 666.9 1,371.6 1,080.0 1,552.9 1,592.9

National total 27,770.9 33,945.8 37,805.7 42,135.2 52,387.3

a Foreign direct investment and other foreign investments.

Source: State Statistics Bureau, China Statistical Yearbook, various years.

Foreign reserves and the exchange rate

China’s officially posted foreign-exchange reserves stood at $22bn at the end of1993, less than half the $46bn recorded in September 1992. Most of the fall wasattributable to a technical change. In 1993 China ceased to include the foreign-exchange holdings of the Bank of China, the foreign-trade bank, in its calcula-tions of the size of its reserves. These are now limited to the holdings of thePeople’s Bank of China (PBC, the central bank) itself. The reform is in line withthe attempts to turn the PBC into a real central bank, and also to enhance theautonomy of state-owned enterprises (SOEs; the Bank of China’s “reserves”included its foreign-currency liabilities to SOEs). Foreign-exchange reservesrose healthily in 1994 as export growth picked up from the disappointingslowdown in 1993. By end-1994 reserves (excluding gold) stood at $52.9bn,and they continued to rise during 1995, reaching $75.4bn by the end of theyear and soaring to $107bn by the end of 1996. During 1997 they continued tomount, reaching $142.8bn by the end of the year. (For data on foreign reserves,see Reference table 24.) They then remained at just over this level for most of1998 before rising further to reach $143.7bn at the end of October as a result ofthe imposition of controls on outflows of foreign currency.

The renminbi fell from Rmb8:SDR1 at the end of 1993 to Rmb12.3:SDR1 at theend of 1994. During 1995 the Chinese currency was stable against the SDR butappreciated in annual average terms against a weak US dollar. It then held firmagainst a strong dollar in 1996-97. The renminbi was devalued by 50% againstthe dollar in January 1994, but the inflation differential has turned the modestappreciation against the dollar that took place in 1995 and its stability in 1996into a significant appreciation in real terms. This has been helpful in restrain-ing domestic inflation but has damaged export competitiveness. Strong inflowsof foreign exchange in the form of FDI and a continuing trade surplus havehelped to put upwards pressure on the currency. In mid-December 1998 theexchange rate was Rmb8.28:$1.

The heavy falls in the exchange rate of many Asian currencies against the USdollar since mid-1997 and the accompanying squeeze on domestic demand in

52 China: Foreign reserves and the exchange rate


the troubled economies of South-east Asia, Korea and Japan have put renewedpressure on China’s competitive position and there has been some lobbying fordevaluation of the renminbi. However, the Chinese authorities resisted this,stating in November 1998 that there would be no devaluation in 1999. Whatthis means is a commitment to avoid devaluation until the Asian crisis is over.The corollary is postponement of full convertibility of the currency. Indeed,measures introduced to underscore the commitment to currency stability andto stem the illegal outflow of foreign exchange have made access to foreigncurrency more difficult to obtain.

China: Foreign reserves and the exchange rate 53


Appendices

Sources of information

National statistical sources BBC, Summary of World Broadcasts (daily and weekly), London

Beijing Review Press, Beijing Review (weekly), China Daily, Beijing

Economic Information and Consultancy Co, China’s Customs Statistics(quarterly), Hong Kong

Economic Information and Consultancy Co, China Economic News (weekly),Hong Kong

Far Eastern Economic Review, China Trade Report (monthly), Hong Kong

Japan External Trade Organisation, China Newsletter (bi-monthly), Tokyo

State Statistical Bureau, China Statistical Yearbook (annual), Beijing

State Statistical Bureau, Monthly Bulletin of Statistics, Beijing

State Statistical Bureau, press releases published by Xinhua

US-China Business Council, The China Business Review (bi-monthly),Washington, DC

US Department of Commerce, Doing Business with China, Washington DC

International sources Bank for International Settlements, International Banking and Financial Market

Developments (quarterly)

Energy Data Associates, 1 Regent Street, London SW1Y 4NR

IMF, International Financial Statistics (monthly)

Organisation for Economic Co-operation and Development, GeographicalDistribution of Financial Flows to Aid Recipients (annual)

UN, Monthly Bulletin of Statistics

UN, World Investment Report (annual)

World Bank, Global Development Finance (annual)

World Bank, World Development Report (annual)

Select bibliography Geremie Barme and John Minford (eds), Seeds of Fire, Hong Kong, 1986

Jung Chang, Wild Swans, London, 1992

John Gittings, China Changes Face, London, 1989

Perry Link, Evening Chats in Beijing, New York, 1992

Harrison E Salisbury, The New Emperors, London, 1993

Vaclav Smil, China’s Environmental Crisis, New York, 1993

54 China: Sources of information


Jonathan D Spence, The Search for Modern China, London, 1990

Michael D Swaine, The Military and Political Succession in China, Rand, 1993

Ezra E Vogel, One Step Ahead in China, Cambridge, Massachusetts, 1989

Georgina Wilde, China to 2010: The pace of reform, Economist IntelligenceUnit, Research Report, No. M228, 1998

Reference tables

Reference table 1

Government finances(Rmb bn)

1993 1994 1995 1996 1997

Revenuea 434.9 521.8 624.2 740.8 865.1 of which: tax 425.5 512.7 603.8 691.0 823.4 net subsidies to enterprisesb –36.2 –36.6 –32.8 –33.7 –36.8 other revenue 45.5 45.7 53.2 83.6 78.6

Expenditure 464.2 579.3 682.4 793.8 923.3 of which: capital construction 59.2 64.0 78.9 90.7 102.0 defence 42.6 55.1 63.7 72.0 81.3 culture, health & education 95.8 127.8 146.7 170.4 190.3 administration 53.6 72.9 87.3 104.1 113.7 price subsidies 29.9 31.4 36.5 45.4 55.2

Debt servicea 33.6 49.9 88.7 131.2 191.8

Balance –29.3 –57.5 –58.2 –53.0 –58.2

a It is Chinese practice to include borrowing and the principal element of debt service in thebudget. The measured deficits would be higher without these. b The net of direct income fromenterprises and subsidies to cover their losses.


Reference table 2

Investment in assets by source and purpose(Rmb bn)

1993 1994 1995 1996 1997

By source of fundsa

State budget 48.4 53.0 62.1 62.6 69.7Domestic loans 307.2 399.8 419.9 457.4 478.3Foreign investment 95.4 176.9 229.6 274.7 268.4Self-generated fundsb 856.2 1,153.1 1,340.9 1,541.2 1,709.6

By purposeConstruction 820.1 1,078.7 1,317.3 1,510.9 1,561.4Equipment 331.6 432.8 426.2 492.6 604.5Other 155.5 192.8 258.3 287.8 328.2

Total investment 1,307.2 1,704.2 2,001.9 2,291.4 2,494.1

a Figures grouped by sources of funds do not sum to total for 1994-97. b Including others.


China: Reference tables 55


Reference table 3

Money supply and credit(Rmb bn unless otherwise indicated; end-period)

1993 1994 1995 1996 1997

Currency in circulation 577.7 728.4 788.2 879.8 1,017.5

Demand deposits 969.3 1,239.0 1,520.2 1,876.5 2,381.0

Money (M1) incl others 1,676.1 2,154.0 2,559.7 3,066.3 3,834.3

M1 growth (%) 43.1 28.5 18.8 19.8 25.0

Quasi-money 1,797.9 2,538.0 3,514.7 4,543.3 5,352.4

Money (M2) 3,474.0 4,692.0 6,074.4 7,609.6 9,186.7

M2 growth (%) 42.8 35.1 29.5 25.3 20.7

Domestic credit 3,481.1 4,310.4 5,333.4 6,641.1 7,950.3

Domestic credit growth (%) 42.1 23.8 23.7 24.5 19.7 Claims on central government (net) 118.4 133.3 166.7 218.0 243.8 Claims on other domestic transactors 3,362.7 4,177.1 5,166.7 6,423.0 7,706.4

Net foreign assets of monetary authorities 222.3 506.5 637.0 921.4 1,366.1Sources: IMF, International Financial Statistics.

Reference table 4

Gross domestic product and gross national product(Rmb bn; at current prices)

1993 1994 1995 1996 1997

Gross domestic product 3,463.4 4,675.9 5,847.8 6,788.5 7,477.2

Gross national product 3,456.1 4,667.0 5,749.5 6,685.1 7,345.3Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 5

Gross domestic product by sector(Rmb bn; current prices)

1993 1994 1995 1996 1997

Primary 688.2 945.7 1,199.3 1,384.4 1,396.9

Secondary 1,642.9 2,237.2 2,853.8 3,361.3 3,677.0 Industry 1,414.4 1,936.0 2,471.8 2,908.3 3,175.2 Construction 228.5 301.3 382.0 453.0 501.8

Tertiary 1,132.4 1,493.0 1,794.7 2,042.8 2,403.3 of which: transport, post & telecommunications 212.3 268.6 305.5 349.4 452.6 domestic trade 309.1 405.0 493.2 556.0 628.2

Total 3,463.5 4,675.9 5,847.8 6,788.5 7,477.2Source: State Statistical Bureau, China Statistical Yearbook.

56 China: Reference tables


Reference table 6

Gross domestic product by expenditure(Rmb bn; current prices)

1993 1994 1995 1996 1997

Private consumption 1,568.2 2,123.0 2,783.9 3,318.8 3,611.8

Public consumption 450.0 598.6 669.1 785.2 865.0

Fixed investment 1,298.0 1,685.6 2,030.1 2,333.6 2,569.8

Change in stocks 201.8 240.4 357.7 353.1 286.6

Net exports –68.0 63.4 99.9 145.9 274.5

GDPa 3,450.1 4,711.1 5,940.5 6,936.6 7,607.7

a Includes statistical discrepancy, therefore differs from the figure for GDP by sector.


Reference table 7

Price indices(1978=100 unless otherwise indicated)

1993 1994 1995 1996 1997

Overall retail pricesa 254.9 310.2 356.1 377.8 380.8 % change, year on year 13.2 21.7 14.8 6.1 0.8

Overall consumer pricesb 208.4 258.6 302.8 327.9 337.1 % change, year on year 14.7 24.1 17.1 8.3 2.8

Urban consumer prices 294.2 367.8 429.6 467.4 481.9 % change, year on year 16.1 25.0 16.8 8.8 3.1

Rural consumer pricesb 201 248 291.4 314.4 322.3 % change, year on year 13.7 23.4 17.5 7.9 2.5

Farm products purchasing prices 314.7 440.3 527.9 550.1 525.3 % change, year on year 13.4 39.9 19.9 4.2 –4.5

Rural retail prices of industrial products 204.3 239.4 274.6 291.6 294.8 % change, year on year 11.8 17.2 14.7 6.2 1.1

a Includes prices of consumer goods and agricultural producer goods sold to farmers. b 1985=100, includes consumer goods and servicesconsidered necessities of daily life.

Sources: State Statistical Bureau, China Statistical Yearbook; IMF, International Financial Statistics.

Reference table 8

Population(m; year-end)

1993 1994 1995 1996 1997

Urban 333.5 343.0 351.7 359.5 369.9

Rural 851.7 855.5 859.5 864.4 866.4

Total 1,185.2 1,198.5 1,211.2 1,223.9 1,236.3 Male 604.7 612.5 618.1 622.0 631.3 Female 580.5 586.0 593.1 601.9 605.0Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 9

Labour force(m; year-end)

1993 1994 1995 1996 1997

Urban state-owned units 109.2 112.1 112.6 112.4 110.4 of which: manufacturing 34.4 33.2 33.3 32.2 30.1 government agencies & people’s organisations 10.1 10.1 10.2 10.9 10.4

Collectives in towns 33.9 32.9 31.5 30.2 28.8 of which: manufacturing 16.0 15.1 14.2 13.5 12.4 trade & food services 7.4 7.2 6.9 6.7 6.4

Urban private enterprises 1.9 3.3 4.8 6.2 7.5

Self-employed in towns 9.3 12.3 15.6 17.1 19.2

Rural employed 487.8 487.9 488.5 490.4 493.9 of which: township & village enterprises (TVEs) 123.5 120.2 128.6 135.1 91.6

Total incl others 663.7 672.0 679.5 688.5 696.0 Primary industries 374.3 364.9 354.7 347.7 347.3 Secondary industries 148.7 152.5 156.3 161.8 165.0 Tertiary industries 140.7 154.6 168.5 179.0 183.8

Economically active population 670.3 678.8 687.4 696.7 705.8Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 10

Transport statistics1993 1994 1995 1996 1997

RailwaysLength of track (’000 km) 53.8 54.0 54.6 56.7 57.6Passengers carried (bn person-km) 348.3 363.6 354.6 332.5 354.8Freight traffic (bn tonne-km) 1,195.5 1,245.8 1,287.0 1,297.0 1,310.0

RoadsHighways (’000 km) 1,083.5 1,117.8 1,157.0 1,185.8 1,226.4Passengers carried (bn person-km) 370.1 422.0 460.3 490.9 554.1Freight traffic (bn tonne-km) 407.1 448.6 469.5 501.1 527.2Passenger vehicles (buses and cars) (’000) 2,859.8 3,497.4 4,179.0 4,880.2 5,805.6Freight trucks (’000) 5,010.0 5,603.3 5,854.3 5,750.3 6,012.3

WaterWaterway freight traffic (bn tonne-km) 1,386.1 1,568.7 1,755.2 1,786.3 1,923.5 of which: ocean shipping 913.4 n/a n/a n/a n/aSource: State Statistical Bureau, China Statistical Yearbook.

Reference table 11

National energy statistics

1993 1994 1995 1996 1997

Coal (m tonnes) 1,150 1,240 1,361 1,397 1,373

Crude oil (m tonnes) 145 146 150 157 161

Natural gas (bn cu metres) 16.8 17.6 17.9 20.1 22.7Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 12

Banking statistics: sources and uses of credit funds by state banks(Rmb bn unless otherwise indicated; year-end balances)

1994 1995 1996 1997

Deposits 4,050.3 5,388.2 6,859.6 8,239.0

Bonds 21.4 180.1 260.4 3.0

Currency in circulation 728.9 788.5 880.2 1,017.8

Others 155.3 65.4 –96.8 241.0

Total fund sources 4,955.8 6,422.2 7,903.4 9,500.8 Loan uses 3,997.6 5,054.4 6,115.7 7,491.4 To industrial production enterprises 994.8 1177.5 1,421.3 1,652.6 To commercial enterprises 1,051.0 1,283.7 1,533.3 1,835.7 To construction enterprises 61.7 79.9 97.4 159.1 To individual proprietors 15.6 19.6 28.0 38.7 To urban collectives 200.2 251.5 282.2 503.6 To agriculture 114.4 154.5 191.9 331.5 Other loans 1,559.9 2087.7 2561.6 2,970.2 Government debts 123.7 113.2 113.2 158.2 Foreign exchange 448.2 677.5 957.9 1346.7 Others 386.4 577.2 716.7 504.5Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 13

Industrial production(m units unless otherwise indicated)

1993 1994 1995 1996 1997

Light industrial productsBicycles 41.5 43.6 44.7 33.6 30.0Sewing machines 8.4 8.6 9.7 6.8 7.0Television sets 30.3 32.8 35.0 35.4 36.4Wristwatches 192.9 477.8 481.9 479.8 295.0Cloth (bn metres) 20.3 21.1 26.0 20.9 24.9Refrigerators 6.0 7.7 9.2 9.8 10.4Washing machines 9.0 10.9 9.5 10.7 12.5

Heavy industrial productsCement (m tonnes) 367.9 421.2 475.6 491.2 511.7Steel products (m tonnes) 77.2 84.3 89.8 93.4 99.8Crude steel (m tonnes) 89.6 92.6 95.4 101.2 108.9Plastics (m tonnes) 3.6 4.0 5.2 5.8 6.9Machine-tools (’000 units) 262.0 206.5 203.4 177.4 186.5Pig iron (m tonnes) 87.4 97.4 105.3 107.2 115.1Locomotives (units) 922.0 992.0 974.0 1,050.0 1,069.0Motor vehicles (’000 units) 1,298.5 1,366.9 1,452.7 1,475.2 1,582.5Tractors (’000 units) 37.7 46.7 63.3 83.7 82.4Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 14

Agricultural production(m tonnes unless otherwise indicated)

1993 1994 1995 1996 1997

Grain 456.5 445.1 466.6 504.5 494.2

Cotton 3.7 4.3 4.8 4.2 4.6

Oil-bearing cropsa 18.0 19.9 22.5 22.1 21.6

Sugarcane 64.2 60.9 65.4 66.9 78.9

Sugarbeet 12.0 12.5 14.0 16.7 15.0

Tea 0.6 0.6 0.6 0.6 0.6

Aquatic products 18.2 21.4 25.2 32.9 36.1

Meatb 38.4 45.0 52.6 45.6 51.5

Pigs (m head) 393.0 414.6 441.7 362.8 389.0

Sheep & goats (m head) 217.3 240.5 276.9 237.3 255.6

Cattle & other large animals (m head) 139.9 149.2 158.6 133.6 140.6

a Excluding soybeans. b Pork, beef and mutton.


Reference table 15

Gross agricultural output value, by sector(% of total; current prices)

1993 1994 1995 1996 1997

Crop cultivation 54.6 53.8 54.3 53.7 56.4

Forestry 4.5 3.9 3.5 3.3 3.3

Animal husbandry 27.4 29.7 29.7 30.2 31.0

Fishery 8.0 8.2 8.4 8.6 9.2

Other 5.5 4.5 4.1 4.2 0.1Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 16

Total sown area, by crop(% of total)

1993 1994 1995 1996 1997

Grain crops 74.8 73.9 73.4 73.9 73.3 of which: rice 20.5 20.4 20.5 20.6 20.6 wheat 20.5 19.5 19.3 17.5 19.5 maize 14.0 14.3 15.2 16.1 15.4 tubers 6.2 6.3 6.4 6.4 6.3 soybeans 8.4 8.6 7.5 6.9 7.2

Industrial crops 14.5 n/a n/a n/a n/a of which: cotton 3.4 3.7 3.6 3.1 2.9 oil-bearing crops 7.5 8.1 8.7 8.2 8.0 of which: rapeseed 3.6 3.9 4.6 3.1 4.2 peanuts 2.3 2.5 2.5 2.3 2.4 sugar 1.1 1.2 1.2 1.2 1.2 tobacco 1.4 1.0 1.0 1.2 1.5

Vegetables & melons 5.5 6.0 6.3 6.9 7.3Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 17

Miscellaneous agricultural statistics

1993 1994 1995 1996 1997

Grain yields (kg/ha) 4,557.0 4,500.0 4,659.0 4,894.0 4,823.0

Cotton yields (kg/ha) 750.0 785.0 879.0 890.0 1,025.0

Irrigated area (m ha) 487.3 487.6 492.8 503.8 512.4

Chemical fertiliser applied (m tonnes) 31.5 33.2 35.9 38.3 39.8

Chemical fertiliser produced (m tonnes) 19.6 22.7 25.5 28.1 28.2

Afforested area (m ha) 12.9 12.9 12.9 12.9 13.4

Grain imports (m tonnes) 7.5 9.2 20.8 12.2 4.2Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 18

Exports($ m; fob)

1993 1994 1995 1996 1997

Primary goods 16,666 19,708 21,487 21,925 23,930 Food & live animals etc 8,399 10,015 9,954 10,232 11,054 Beverages & tobacco 901 1,002 1,369 1,342 1,049 Non-edible raw materials 3,052 4,127 4,375 4,046 4,193 Mineral fuels, lubricants etc 4,109 4,069 5,335 5,929 6,987 Animal & vegetable oils, fats, waxes 205 495 454 376 647

Manufactured goods 75,078 101,298 127,283 129,141 158,767 Chemicals & related products 4,623 6,236 9,094 8,879 10,225 Light industrial products, rubber, minerals, iron etc 16,392 23,218 32,243 28,511 34,406 Machinery & transport equipment 15,282 21,895 31,391 35,313 43,702 Miscellaneous products 38,781 49,937 54,548 56,426 70,430 Products not classified elsewhere 0 12 7 12 4

Total 91,744 121,006 148,770 151,066 182,697Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 19

Imports($ m; cif)

1993 1994 1995 1996 1997

Primary goods 14,210 16,486 24,411 25,440 28,620 Food & live animals etc 2,206 3,137 6,131 5,672 4,304 Beverages & tobacco 245 68 394 497 320 Non-edible raw materials 5,438 7,437 10,158 10,697 12,006 Mineral fuels, lubricants etc 5,819 4,035 5,127 6,877 10,306 Animal & vegetable oils, fats, waxes 502 1,809 2,601 1,697 1,684

Manufactured goods 89,749 99,128 107,667 113,398 113,741 Chemicals & related products 9,704 12,130 17,300 18,106 19,297 Light industrial products, rubber, minerals, iron etc 28,527 28,084 28,772 31,391 32,224 Machinery & transport equipment 45,023 51,467 52,638 54,771 52,759 Miscellaneous products 6,495 6,768 8,264 8,484 8,552 Products not classified elsewhere 0 679 693 646 909

Total 103,959 115,614 132,078 138,838 142,361Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 20

Balance of payments, IMF estimates($ m)

1992 1993 1994 1995 1996

Exports: goods fob 69,568 75,659 102,561 128,110 151,077

Imports: goods fob –64,385 –86,313 –95,271 –110,060 –131,542

Trade balance 5,183 –10,654 7,290 18,050 19,535

Exports of services 9,189 11,146 16,503 19,130 20,601

Imports of services –9,414 –12,014 –16,201 –25,223 –22,585

Income credit 5,655 4,437 5,854 5,191 7,318

Income debit –5,367 –5,696 –6,873 –16,965 –19,755

Transfers credit 1,206 1,290 1,269 1,827 2,368

Transfers debit –51 –118 –934 –392 –239

Current-account balance 6,401 –11,609 6,908 1,618 7,243

Direct investment abroad –4,000 –4,400 –2,000 –2,000 –2,114

Direct investment in China 11,156 27,515 33,787 35,849 40,180

Portfolio investment assets –450 –597 –380 79 –628

Portfolio investment liabilities 393 3,646 3,923 710 2,372

Other investment assets –3,267 –2,114 –1,189 –87 –1,126

Other investment liabilities –4,082 –576 –1,496 4,122 1,282

Financial balance –250 23,474 32,645 38,673 39,966

Capital account nie credit 0 0 0 0 0

Capital account nie debit 0 0 0 0 0

Capital-account nie balance 0 0 0 0 0

Net errors & omissions –8,211 –10,096 –9,100 –17,822 –15,504

Overall balance –2,060 1,769 30,453 22,469 31,705

Financing (– indicates inflow)Movement of reserves 2,060 –1,769 –30,453 –22,469 –31,705Use of IMF credit & loans 0 0 0 0 0Source: IMF, International Financial Statistics.



Reference table 21

External debt($ m unless otherwise indicated; debt stocks as at year-end)

1992 1993 1994 1995 1996

Private non-guaranteed 200 556 583 1,090 1,150

Public medium- & long-term 58,463 70,076 82,391 94,675 102,260 Official creditors 19,105 24,339 28,973 36,982 39,433 Multilateral 8,614 10,690 13,588 16,302 17,695 Bilateral 10,491 13,650 15,385 20,680 21,737 Private creditors 39,358 45,737 53,418 57,693 62,828 of which: banks 17,913 20,678 21,475 23,869 24,437 bonds 5,449 7,715 11,087 10,684 11,106

Total medium & long-term 58,663 70,632 82,974 95,764 103,410

Short-term debt 13,765 15,296 17,483 22,325 25,407 of which: interest arrears on long-term debt 0 0 0 0 0

Use of IMF credit 0 0 0 0 0

Total external debt 72,428 85,928 100,457 118,090 128,817

Total debt service 8,618 10,168 11,135 15,066 15,756 Principal 5,213 6,729 6,343 9,070 10,260 Interest 3,405 3,439 4,792 5,996 5,496 of which: short-term debt 697 809 948 1,340 812

Ratios (%)Total external debt/GNP 16.3 19.9 18.6 17.2 16.0Debt-service ratioa 10.2 11.1 8.9 9.9 8.7Short-term debt/total external debt 19.0 17.8 17.4 18.9 19.7Concessional long-term debt/ total long-term debt 19.5 19.0 19.2 18.8 18.1Variable interest long-term debt/ total long-term debt 29.5 29.2 28 29.6 29.6

Note. Long-term debt is defined as having original maturity of more than one year.a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.



Reference table 22

Net official development assistancea

($ m)

1992 1993 1994 1995 1996

Bilateral OECD 2,077.3 2,239.8 2,393.9 2,531.2 1,670.9 of which: Japan 1,050.8 1,350.7 1,479.4 1,380.2 861.7 Germanyb 192.8 247.8 300.0 684.1 461.1 France 153.4 102.6 97.7 91.2 97.2 Austria 23.0 10.1 32.4 66.2 4.9

Arab countries 11.6 1.5 24.4 35.6 18.4

Multilateral 966.2 1,030.0 820.0 967.5 928.3 of which: IDA 789.9 865.1 671.0 798.2 790.7 UNDP 44.9 44.8 38.4 38.3 28.7 EU 31.3 19.5 14.1 32.7 34.8

Total 3,055.1 3,271.2 3,238.4 3,534.3 2,617.6Source: OECD Development Assistance Committee, Geographical Distribution of Financial Flows to Developing Countries.

Reference table 23

Position of China vis-à-vis BIS-reporting banks($ m; end-period)

1993 1994 1995 1996 1997

Assets 48,592 56,464 67,061 79,750 90,075

Liabilities 49,163 59,952 57,428 66,544 66,419Source: Bank for International Settlements, International Banking and Financial Market Developments.

Reference table 24

Foreign reserves($ m unless otherwise indicated; end-period)

1993 1994 1995 1996 1997

Foreign exchange 21,199 51,620 73,579 105,029 139,890

SDRs 484 539 582 614 602

Reserve position in the IMF 704 755 1,216 1,396 2,270

Total reserves excl gold 22,387 52,914 75,377 107,039 142,762

Golda 612 646 660 637 601

Gold (m fine troy oz) 12.7 12.7 12.7 12.7 12.7

a National valuation.

Source: IMF, International Financial Statistics.

Reference table 25

Exchange rates(Rmb per unit of currency; annual averages)

1993 1994 1995 1996 1997

US dollar 5.762 8.619 8.351 8.314 8.29

Hong Kong dollar 0.744 1.115 1.08 1.075 1.071

Japanese yen (’000) 52.02 84.37 89.23 76.35 68.6

D-mark 3.488 5.319 5.827a 5.525a 4.792a

a Cross-rate.




Mongolia

Basic data

Land area 1,566,500 sq km

Population 2.37m (January 1998 estimate)

Main towns Population

Ulaanbaatar (capital) 632,900 (January 1998)Darkhan 91,400 (January 1997)Erdenet 68,000 (January 1997)

Climate Continental with extremes of temperature

Weather in Ulaanbaatar(altitude 1,350 metres)

Rainy season, June-August; mean winter temperature, –20°C; mean summertemperature, 15°C but with wide daily fluctuations

Language Mongolian

Measures Metric system

Currency Togrog. Average free market rate 1997: Tg813.16:$1. Exchange rate on Decem-ber 14th, 1998: Tg893.56:$1

Fiscal year January-December

Time 8 hours ahead of GMT

Public holidays January 1st (New Year’s Day); Mongolian Lunar New Year (variable—two daysin January or February); June 1st (Women and Children Day); July 11th-13th(Naadam); November 26th (Constitution Day); December 31st (New Year’sEve)

66 Mongolia: Basic data


Political background

In 1990 the existing Soviet-backed political system in Mongolia began to col-lapse. Since then, a more democratic system has been evolving, although pro-gress from a one-party state has not always been easy. During 1998 Mongoliawas officially without a government for much of the year, following the resign-ation of the government of the prime minister, Tsakhiagiin Elbegdorj.Mr Elbegdorj lost a vote of no confidence in the State Great Khural (the nationalassembly) in July 1998 after his government decided to undertake a contro-versial bank merger. It took until December for the majority grouping in theparliament, the Democratic Coalition, and the president, Natsagiin Bagabandi,to agree on a replacement. The State Great Khural finally approved the nomina-tion of the mayor of Ulaanbaatar, Janlavlyn Narantsatsralt, on December 9th.

Historical background

Soviet backing pushed theMongolian People’s Party

into power—

Mongolia gained independence from China in 1911. In 1921 the MongolianPeople’s Party (MPP), with backing from the Soviet Union, assumed power, andruled as the only permitted political party until the early 1990s (the MPPbecame the Mongolian People’s Revolutionary Party (MPRP) in 1924). TheMPRP kept a close relationship with the Soviet Union during this period andSoviet aid contributed substantially to the transformation of Mongolia’s socialand economic life (although it also involved costs: the mass purges that were afeature of Soviet political life in the 1930s also occurred in Mongolia, leading tothe deaths of around 100,000 people).

—the rule of which lasteduntil the early 1990s

In 1989 popular demands for reform intensified. In March 1990 the People’s GreatKhural amended the constitution, removing references to the MPRP as the “guid-ing force” in Mongolia. A new electoral law was also approved, and nationalelections were brought forward by one year, being held in July 1990. The MPRPwon more than 80% of the seats, although representatives from four other partiesand several independents were also elected. The new People’s Great Khural electedPunsalmaagiin Ochirbat, a member of the MPRP, as the country’s first president.

The opposition partiesmake gains—

A new constitution was adopted in June 1992 replacing the People’s Great Khuralwith a unicameral 76-seat State Great Khural. At the election for the new body inJune 1992, the MPRP took 70 seats. The MPRP government subsequently clashedwith the president, Mr Ochirbat, when he blocked legislation he regarded as uncon-stitutional. As a result, Mr Ochirbat lost the backing of the ruling party, and becamethe opposition’s candidate in Mongolia’s first direct presidential election in June1993, which he won with 57.8% of the vote. The opposition’s success was repeatedin the general election of June 1996 when the Democratic Coalition, which con-sisted of the Mongolian National Democratic Party (MNDP) and the MongolianSocial Democratic Party (MSDP), took 50 of the 76 seats in the parliament. A leaderof the MNDP, Mendsaikhany Enkhsaikhan, became prime minister.

—but have recently runinto difficulties—

Since then, the democratic parties have run into problems. Mr Ochirbat lostthe presidential election to the MPRP candidate, Mr Bagabandi in 1997. In

Mongolia: Historical background 67


April 1998 Mr Enkhsaikhan was replaced as prime minister by the leader of theMNDP, Mr Elbegdorj. This change was made possible by an amendment to thegovernment law, allowing members of parliament (MPs) to serve as ministers.However, after Mr Elbegdorj’s government tried to force through a controversialbank merger, the opposition boycotted parliament. When the MPRP MPs re-turned, they were joined by some government MPs in passing a vote of no-confi-dence against the government. On July 24th 1998 Mr Elbegdorj was forced toresign.

—and there is a sense ofpolitical crisis

It took several months for the Democratic Coalition to nominate a new primeminister acceptable to President Bagabandi, even though, under Mongolian law,a replacement government must be in place after 30 days. During the interven-ing period, the constitutional court ruled that the change to the governmentlaw allowing MPs also to serve in the cabinet was illegal. In October Mongoliawas further unsettled by the murder of the prominent democratic politician,

Important recent events

1990: The one-party rule of the Mongolian People’s Revolutionary Party (MPRP)ends. Demonstrations, led by the Mongolian Democratic Union, which had beenformed a year earlier, produced the resignation of the Politburo and CentralCommittee. Six parties contest a national election in July. A senior figure in theprevious regime, Punsalmaagiin Ochirbat, was elected Mongolia’s first presidentby the People’s Great Khural (the national assembly).

1992: In June a new constitution was adopted, which replaced the People’sGreat Khural with a unicameral 76-seat State Great Khural. In the subsequentelection, the MPRP took 70 seats. A former Politburo member, Puntsagiin Jasrai,was appointed prime minister.

1993: Mr Ochirbat retains the presidency in Mongolia’s first direct presidentialelection in June, although having clashed with the parliamentary MPRP duringthe previous year, he was elected as the candidate of the opposition.

1996: The Democratic Coalition, consisting of the Mongolian National DemocraticParty (MNDP) and the Mongolian Social Democratic Party (MSDP), took 50 of the76 seats in the parliament in the June general election. An economist and leader ofthe MNDP, Mendsaikhany Enkhsaikhan, became prime minister.

1997: The MPRP’s presidential candidate, Natsagiin Bagabandi, defeated MrOchirbat in the May presidential election. This left an empty seat in parliament,which was won by the leader of the MPRP, Nambaryn Enkhbayar, in a by-electionin October.

1998: In February parliament amended the government law to allow serving MPsto hold positions concurrently in the cabinet. Following this change,Mr Enkhsaikhan was replaced as prime minister by the leader of the MNDP,Tsakhiagiin Elbegdorj, in April. However, Mr Elbegdorj’s government was forcedto resign on July 24th after a controversial bank merger, and subsequent boycottby the opposition of parliament. It was not until December 9th that a new primeminister, the mayor of Ulaanbaatar, Janlavyn Narantsatsralt, took office.

68 Mongolia: Historical background


Sanjaasurengiin Zorig. Although the motive behind Mr Zorig’s killing wasunclear, his death only added to the sense of the crisis. Finally, the mayor ofUlaanbaatar, Mr Narantsatsralt, became prime minister on December 9th.

Constitution and institutions

The 1992 constitutiongives the elected president

an important role

Under the constitution of February 1992 the state is headed by a directlyelected president. The president is in charge of the National Security Counciland the armed forces. The legislature is the State Great Khural, a unicameralbody of 76 members, elected for a four-year term. The president has the powerto veto legislation but can be overruled by a two-thirds majority in the StateGreat Khural. The judiciary is independent of both the legislature and thepresident. A separate Constitutional Court rules on questions of the legality oflegislation and the activities of members of the government.

Political forces

Three parties dominatepolitics—

The Mongolian People’s Revolutionary Party (MPRP), founded in 1920 as theMongolian People’s Party, was the only political party in Mongolia until the1990s. Initially communist, the MPRP now regards itself as a social democraticparty. In 1990 the formation of other parties was legalised, and there are nowaround 15. The most important are the Mongolian National Democratic Party(MNDP) and the Mongolian Social Democratic Party (MSDP). Together the

Main political figures

Natsagiin Bagabandi: chairman of the State Great Khural(national assembly) in 1992-96 and current president. MrBagabandi was the Mongolian People’s Revolutionary Party(MPRP) candidate in the presidential election in May 1997.However, there have been signs that the president has anagenda all of his own, and one that is different from that ofthe parliamentary MPRP. During the political crisis of 1998Mr Bagabandi blocked the nominees for prime ministerproposed by the Democratic Coalition. Instead, he putforward his own candidates, leading to the charge that hewas seeking a greater executive role in government.

Janlavyn Narantsatsralt: prime minister. Member of theMNDP, and mayor of Ulaanbaatar, Mr Narantsatsralt becameprime minister on December 9th 1998, filling the politicalvacuum created by the resignation of Mr Elbegdorj’sgovernment over four months earlier. Mr Narantsatsraltgraduated from the Moscow Land Management Institute in1981, and had been mayor of Mongolia’s capital sinceNovember 1996.

Nambaryn Enkhbayar: formerly an official of the WritersUnion and minister of culture in 1992-96. He was appointedhead of the MPRP after the party lost the 1996 election and

became and MP as a result of a by-election in October 1997.Since then he has been a fierce opponent of the DemocraticUnion and its reform programme. He and his fellow MPRPMPs have since mounted frequent boycotts, staying away foreight weeks prior to the fall of the Elbegdorj government.

Tsakhiagiin Elbegdorj: prime minister between April andJuly 1998, and leader of the Mongolian National DemocraticParty (MNDP). Mr Elbegdorj became prime minister afterparliament changed the government law to allow servingMPs to also serve as members of the cabinet. Mr Elbegdorjwas forced to resign after his government lost a vote of noconfidence in parliament over a controversial bank merger.

Radnaasumberliin Gonchigdorj: a leader of theMongolian Social Democratic Party (MSDP) and presentspeaker of parliament. A founder member of the SocialDemocratic Union, Mr Gonchigdorj stood successfully inMongolia’s first multi-party elections in 1990. Hesubsequently became chairman of the Little Khural, aninterim parliament of full-time MPs. He has served in allparliaments since then and became the leader of the MSDPin 1994. He has been tipped as a likely candidate for thepresidency in 2001.

Mongolia: Constitution and institutions 69


MNDP and the MSDP form the Democratic Coalition. Other parties include theMongolian United Traditional Party, which emphasises nationalist ideas andMongolian traditions. The significance of single-issue parties such as the GreenParty and the Religious Party has diminished since 1990.

—and mass political andunion movements

In addition to formal parties there are also pressure groups, such as theMongolian Democratic Union, which spearheaded demands for reform in1989-90. A law on non-government organisations (NGOs), in force since 1997,has improved the status of lobby groups. There are legal restrictions on theinvolvement of monasteries and other religious groups in national politics butrespect for Buddhism no longer incurs exclusion from public life.

International relations and defence

Traditional relations areshifting

Until the early 1990s Mongolia relied heavily and almost exclusively on theSoviet Union and other countries of Comecon (Council for Mutual EconomicAssistance, the communist states’ economic bloc). The end of the cold war andconsequent withdrawal of Soviet troops from the Sino-Mongolian border haveallowed the development of a new foreign policy based on pragmatic economicconsiderations rather than ideology. Mongolia has sought to balance its rel-ations with China and the Soviet Union. It has also built up relations withcountries such as Japan, Germany and the US, all of which are generous donorsof aid. Membership of Asia-Pacific organisations is also an objective. Mongoliajoined the Association of South-east Asian Nations’ Forum (ARF) in 1998 and isseeking membership of the Asia-Pacific Economic Co-operation forum (APEC).

The economy

Economic structure

Main economic indicators, 1997

Real GDP growth (% change, year on year) 3.3

Consumer-price inflation (av; %) 44.6

Current-account balance ($ m) –59.5

Exchange rate (end-period; Tg:$) 813.2

Population (end-period; m) 2.4Sources: Asian Development Bank, Economic and Resource Centre website; IMF, International Financial Statistics; Europa, The Europa

World Yearbook 1998.

Agricultural production isbecoming more important

once again

Comecon aid focused on the industrial sector. This had some success, andindustrial production caught up with and then overtook agricultural output inthe 1970s. By 1990 industry (excluding construction) accounted for 35.6% ofGDP compared with 28.9% in 1980. Since then, following the fall of the Sovietempire, the decollectivisation of livestock, price reforms and some liberalisation,agriculture has once again become the dominant sector in Mongolia. In 1997,agriculture accounted for 34.6% of GDP, whilst industry accounted for 20.4%.

70 Mongolia: International relations and defence



Mongolia China Kazakhstan Malaysia Russia Thailand

GDP ($ m) 933 901,954 22,546 97,884 447,084 153,917

GDP per head ($) 393.7 733.2 1,361.5 4,517.0 3,053.5 2,539.9

Consumer prices (av; % change) 44.6 2.8 17.4 2.7 14.6 5.6

Exports of goods fob ($ m) 463 182,670 6,769 77,753 88,927 56,668

Imports of goods fob ($ m) 544 136,448 7,154 73,812 71,304 55,105

Current-account balance (% of GDP) –6.4 3.3 –4.2 –4.9 0.7 –1.9

a EIU estimates.

Sources: Asian Development Bank, Economic and Resource Centre website; EIU CountryData.

Economic policy

Central planningdominated until the

1990s—

Until the early 1990s Mongolia’s economy was managed using a central plan-ning model similar to that of the Soviet Union. Aid from both the Soviet Unionand China during the 1950s hastened modernisation, promoting the expan-sion of industry, infrastructure and urbanisation. Collectivisation was com-pleted in 1959 and in the 1970s mining developed through joint ventures withthe Soviet Union, Czechoslovakia and Bulgaria.

—but is now beingreplaced by a market

system

In an attempt to improve the functioning of the economy some tinkering withMongolia’s system of central planning occurred in the late 1980s. The demo-cratic revolution of 1990 brought about calls for more substantial change andsince then Mongolia has been moving towards a market economy. There hasbeen some privatisation, currency reforms and the removal of controls onprices and wages. The government has received support from the World Bank,the IMF and the Asian Development Bank (ADB).

Recent economic developments

1991: All citizens were given vouchers to the value of Tg10,000 ($1,050) toexchange for shares in both small businesses and larger enterprises. State farmsand collectives began to be dismantled, and livestock and other assets distributedto herdsmen and farmers.

1992: The Mongolian stock exchange opened.

By 1995: All trade, catering and services had been privatised; 95% of livestockwas in private ownership; some housing was privatised.

1996: Secondary trading began on the stock exchange.

1997: A four-year programme to privatise 60% of remaining state assetscommenced (88 companies in all). Assets to be offered included coal mines,Erdenet, the Gobi Cashmere Co and the state airline, MIAT. The governmentbegan to dispose of its housing stock.

Mongolia: Economic policy 71


The government balanceremains firmly in deficit

During the 1980s government expenditure regularly exceeded income, withthe difference being financed through loans from the Soviet Union. Since thenthere has been some improvement. However, the budget remains in the red: onaverage, the budget deficit was equivalent to 5.5% of GDP in 1993-97, com-pared with 17.6% in 1986-90. This was partly because of revenue reforms (seebox, Major tax reforms). There were signs in 1998 that the deficit was worsen-ing once more. (See Reference tables 1-3 for details of government revenue andexpenditure.)

The state bank has triedto reduce money-supply

growth

In the early years of the reform period growth in money supply was rapid: in1993, broad money supply (M2) grew by 228% year on year. The Mongol Bank(central bank) has had some success in taming this rapid growth, partlythrough the imposition of credit controls. M2 grew by 17.2% in 1996. Al-though money supply growth picked up once again in 1997, M2 grew by just4.4% year on year in October 1998 (see Reference table 4 for data on the moneysupply and credit.)

Economic performance

The economy suffered asevere setback in the early

1990s—

According to Asian Development Bank (ADB) figures GDP grew at an averageannual rate of 6.2% during the 1980s. The collapse of Comecon (the Councilfor Mutual Economic Assistance) in 1990-91 had a severe affect on Mongolia’seconomy. Mongolia’s trade had been dependent on Comecon, which groupedMongolia with most of the countries of eastern Europe and the Soviet Union.Thus, the collapse ended the investments and subsidised deliveries of rawmaterials from which Mongolia had benefited, and left the country withoutthe means of acquiring many products and services crucial to its economy.GDP consequently declined sharply (see Reference tables 5-7 for GDP data onMongolia).

Major tax reforms

1991: Customs duties introduced and a personal and company income-tax lawimplemented.

1993: A new tax law came into force. This provided for 17 state levies, includingincome tax, sales tax, profit tax, various forms of licensing fees and sevenlocal-government taxes.

1997: Introduction of new income-tax rates, a simplified and progressivebusiness tax. On July 1st, a value-added tax was introduced at 10%, but wasquickly raised to 13% in an attempt to close the government’s widening budgetdeficit. Most customs tariffs abolished.

72 Mongolia: Economic performance


Gross domestic product(% real change)


GDP 3.3 2.2

Regional comparisonsChina 8.8 11.0Russia 0.4 –6.1Kazakhstan 2.0 –8.4Sources: Asian Development Bank, Economic and Resource Centre website; EIU CountryData.

—but has since begun torecover

GDP has risen in real terms every year since 1994, at an average annual rate of3.6%. Liberalisation has boosted small-scale agricultural output, and industryhas begun to recover from the dislocation of the early 1990s. Aid-assistedinfrastructure projects have produced stronger growth in transport andcommunications in recent years. In 1997 the government inaugurated a newprivatisation programme, which may attract much-needed foreign investment.

Inflation(% change, year on year)


Consumer prices 44.6 87.8

Regional comparisonsChina 2.8 13.2Russia 14.6 188.5Kazakhstan 17.4 320.9Sources: IMF, International Financial Statistics; EIU, CountryData.

The rate of inflation hasfallen

Inflation sky-rocketed in the early 1990s, reaching an annual rate of 268% in1993. This was a result of the progressive easing of price controls and the rapidfall in the value of the togrog. Price increases have since slowed, and the rate ofinflation was 44.6% in 1997. By September 1998 the year-on-year inflation ratehad fallen to just 5.7%. (See Reference table 8 for historical inflation data.)

Regional trends

The Selenge-Tuul basin, in the Khangai-Khentii mountain complex, is the mostpopulous and productive region and has received the bulk of investment.Elsewhere, geographic and climatic conditions, distance and poor communi-cations with the capital have severely limited economic prospects. However,recent investments in regional energy, transport, telecommunications, miningand oil exploration as well as cross border trade are beginning to have someimpact in the countryside.

Mongolia: Regional trends 73


Economic resources

Population

Mongolia’s population doubled between 1960 and 1990. Since then growth hasaveraged 1.5% a year. Despite this, population density remains at around 1.5 persq km, one of the lowest in the world. In 1997 around 40% of the populationwas less than 16 years old. Approximately 52% of the population lives in urbanareas, with around 34% in the three largest centres of Ulaanbaatar, Darkhan andErdenet. (See Reference tables 9-10 for historical population and labour data.)

Khalkh Mongols make up 85% of the population. The Kazakhs are the largestminority group. Unemployment is high. Official figures showed that 62,200were unemployed at the end of 1997; other estimates suggest it is higher still.

Population and health indicators, 1996(per 1,000 population unless otherwise indicated)

Total population (m) 2.4a

Population growth rate (%) 2.7b

Life expectancy (years) 64.8c

Crude birth rate 22.2

Crude death rate 7.5

Infant mortality (per 1,000 live births) 40

Maternal mortality (per 100,000 live births) 65d

a January 1998. b 1970-95. c 1995. d 1990.

Sources: State Statistical Office, Mongolian Economy and Society in 1996; United Nations Development Programme, Human Develop-

ment Report 1998.

Education

Under communism education was free and literacy rates were high. Since 1993spending on education has fallen in relative terms. For example, in 1992 educ-ation accounted for 26.5% of government spending, but this had fallen to just16% by 1997. Although a new education law, enacted in 1995, provides forcontinuing free education in state schools up to secondary level, vocationaland tertiary education is only partly state-funded. It is hoped that a restructur-ing programme currently being implemented with a $15.5m loan from theAsian Development Bank (ADB) will improve the schools’ situation.

Health

External humanitarian aid as well as the government’s Poverty AlleviationProgramme have ensured that the basic indicators of health have improved overthe last few years. By 1996 the infant mortality rate (per 1,000 live births) hadfallen to 40, compared with 64.4 in 1990, and the overall death rate had fallenfrom 8.5 to 7.5. However, government health spending as a proportion of GDPfell from 5.9% of GDP to 3.8% between 1991 and 1997. Health standards are nothelped by the high poverty levels. Officially, 19.2% of the population lives in

74 Mongolia: Population


poverty; other estimates suggest that the figure could be as high as 36%. Basichealth problems, low birth rates and respiratory diseases remain prevalent.

Natural resources

Mongolia’s 1.6m sq km land area includes mountain, forest, steppe and semi-desert regions. The country is mineral rich, with significant oil reserves anddeposits of other ores. However, most of the country is designated pasture land,where camels, horses, cattle, sheep and goats are reared. The severe continentalclimate restricts other agricultural activities. Water is scarce and the growingseason is no more than 100 days long. Land quality is also limited by desertifi-cation, which affects 30% of pasture, and overgrazing, especially by goats.

Economic infrastructure

Transport and communications

The most crucial transportation link is the 1,815-km Trans-Siberian railwaybetween Ulaanbaatar and Moscow. This line is linked to other places in thecountry, such as Erdenet. However, the absence of a more substantial railnetwork, and a poor road network, of which only 1,471 km was paved in 1996,limit intra-country communication. The improvement of the transport infra-structure has been a government priority since 1993. Efforts have been made torepair existing links between Ulaanbaatar, Erdenet and Darkhan. Externalfunds have also helped in the construction of new roads.

During the 1990s telecommunications links have been improved. It is nowpossible to make direct international calls to and from many parts of thecountry. Fax machines are increasingly available and in 1996 Mongolia’s firstlink with the Internet was established. The media are largely government-owned, although they will be liberalised in January 1999 when a new medialaw comes into force.

Energy provision

Coal-fired power stationsundergo refurbishment

The Central Electricity System (CES), powered by five coal-fired power stationsand linked to the Russian grid, supplies Mongolia’s main industrial region withelectricity and heat. The stations are inefficient and power supplies areunreliable. Hydroelectric stations and renewable energy systems are beginningto replace some of the small provincial diesel stations. Communities withoutelectricity still use wood or dried dung as fuel.

Mongolia: Natural resources 75


Energy balance, 1997(m tonnes oil equivalent)

Oil Gas Coal Electricity Other Total

Primary production 0.0 0.0 1.9 0.0 0.1 2.0Imports 0.4 0.0 0.1 0.1a 0.0 0.6Exports 0.0 0.0 0.0 0.0 0.0 0.0

Primary supply 0.4 0.0 2.0 0.1a 0.1 2.6

Losses & transfers –0.1 0.0 –0.7 –0.1 0.0 –0.9

Net transformationb 0.0 0.0 0.0 0.2b 0.0 0.2

Final consumption 0.3 0.0 1.3 0.2b 0.1 1.9

a Expressed as input equivalents, on an assumed generating efficiency of 33%. b Output basis.

Source: Energy Data Associates.

Financial services

Since 1990 Mongolia’s monolithic banking system has been progressively re-formed. In 1991 commercial functions were separated from Mongol Bank (thecentral bank), and two commercial banks were created. A new banking lawcame into force in 1996, and the central bank has tried to increase control overthe sector, for example by increasing minimum reserve requirements. In 1998controls were further tightened when amendments to the banking law werepassed. With support from the World Bank and IMF, the authorities are alsoattempting to restructure the banking sector. However, recent events suggestthat such reform will not be easy. In 1998 the merger of the state-ownedRenovation Bank and the private Golomt Bank brought down the government(see Political background) and was later reversed.

Production

Industry

Until the 1990s most industries were state-owned and the pattern of industrialdevelopment was based on trade relations with the Soviet Union and theCouncil for Mutual Economic Assistance (Comecon). The collapse of Comeconinflicted much damage on Mongolian industry in 1991-93.

Since then, Mongolia’s industrial sector has begun to grow again in real terms.The Soviet-inspired system of industrial development has been progressivelyreformed, starting in 1991 with the breaking up of large industrial enterprises.Further reforms followed, culminating in the privatisation programme of 1997-2000 (see Reference table 11 for output data of selected industrial products).

Mining and semi-processing

The minerals sector is active, and the government has been keen to develop theindustry further. A new mining law was passed in June 1997 to simplify theprocedure for mining exploration and to reduce licence fees. The country has

76 Mongolia: Financial services


an estimated 100bn tonnes of coal reserves and 17 productive—although ap-parently largely loss-making—mines. The Erdenet Company, owned byMongolian and Russian interests, produces copper concentrates and molybde-num. Together with related processing concerns, Erdenet generates a majorityof Mongolia’s export earnings. Other mining joint ventures include six fluor-spar mines and a uranium mine. Gold production has risen dramatically since1993. Mongolia also has an estimated 5bn barrels in oil reserves. (Referencetable 12 has figures on Mongolia’s production of minerals.)

Agriculture and forestry

The agricultural sector has been progressively liberalised since the early 1990s.Privatisation of the negdels (herding collectives) began in September 1991.Animals were leased to herdsmen, who were allowed to retain produce inexcess of state requirements. By the latter part of 1992 most government pro-curement had ceased (the exception was meat, which continued to be ra-tioned). During this period, many herdsmen reverted to a subsistenceeconomy, discouraged from selling livestock products by low domestic prices.As a result there was a slump in many agricultural product-processing indus-tries. (For data on livestock numbers, see Reference table 13; meat productionfigures are given in Reference table 14.)

The arable sector has also been liberalised. The 55 state farms built with assis-tance from the Comecon were sold off in 1991 to create over 300 small farms.Arable production then fell because farmers were without access to funds, andlacked the necessary management skills to operate the new enterprises. Thearea of land under cultivation and yields per hectare consequently fell: accord-ing to the UN, the wheat yield fell from 1,301 kg per ha in 1989 to 737 kg in1995. There has since been some improvement in yields, but arable farmingremains very vulnerable to the weather. (See Reference table 15 for crop prod-uction data.)

Construction

Much construction was carried out by Soviet and Mongolian teams during the1970s and 1980s. In the 1990s the Soviet builders departed and the Mongolianteams were split up into smaller construction companies. However, the short-age of funds and building materials resulted in unfinished buildings (whichwere rapidly stripped) and high rates of unemployment. The commencementof projects financed with foreign aid—almost half of building work in 1996—isnow helping to regenerate the construction industry. About 50% of the work iscarried out by Mongolian companies.

Mongolia: Agriculture and forestry 77


The external sector

Merchandise trade

Foreign trade, 1997($ m; customs basis)

Merchandise exports fob 418.0

Merchandise imports cif –443.4

Trade balance –25.4Source: Asian Development Bank, Economic and Resource Centre website.

Mongolia hastraditionally recorded

trade deficits—

According to figures from the Asian Development Bank, Mongolia recorded atrade deficit throughout the 1980s. The deficit lessened with the collapse ofComecon in 1990-91 and a surplus was recorded in 1993-95. However, theimprovement was largely due to a collapse in imports rather than an improve-ment in exports. Since 1996 the trade balance has deteriorated once more. Inthe first nine months of 1998 alone a deficit of $119.2m was recorded, com-pared with a deficit of $5.8m in the same period of 1997. (See Reference table16 for historical data on Mongolia’s foreign trade.)

—partly because of thenarrow export base

The renewed trade deficit has been partly the result of poor export perform-ance. Mongolia is heavily dependent on commodity exports: in the first ninemonths of 1998, mineral exports accounted for just over half of the country’stotal export earnings. This makes the economy vulnerable to shifts in worldcommodity prices. In the first nine months of 1998, the total value of copperexports fell by 38.5%, from $143.8m in January-September 1997 to $88.4m.This was entirely the result of weak world copper prices, as the total volume ofcopper exported increased by 7.9%. In addition, Mongolia also exports agricul-tural commodity goods, such as cashmere—Mongolia accounts for 30% ofworld cashmere production—and textiles. Machinery and electrical equipmentaccounted for 22% of imports in 1996, while mineral products accounted foranother 20%.

There has beensome change in the

direction of trade

In 1997 Russia, previously Mongolia’s dominant market, purchased only 9.5%of Mongolian exports. China has become an increasingly important trade part-ner since 1990, buying 21.7% of Mongolia’s exports in 1997, and supplying14.3% of its imports. Switzerland became Mongolia’s largest export market in1997, buying 31.5% of total exports. Other important trading partners in the1990s include Japan, South Korea and the EU. (See Reference table 17 for dataon main trading partners.)

Main trading partners, 1997

Exports fob to: % Imports cif from: %

Switzerland 31.5 Russia 36.2

China 21.7 China 14.3

South Korea 10.5 Japan 7.6

Russian Federation 9.5 US 6.6

Japan 8.8 South Korea 4.5Source: Asian Development Bank, Economic and Resource Centre website.

78 Mongolia: Merchandise trade


Invisibles and the current account

The current account was chronically in deficit during the 1980s, owing topersistent imbalances in Mongolia’s trade with the Comecon countries. Thechanges of the early 1990s, which helped to reduce the trade deficit (balance-of-payments basis) helped push the current account into surplus in 1993.However, the deterioration in the trade balance after 1996, and the fall inofficial transfers, caused the current account to move into the red once again.(For ADB balance-of-payments figures see Reference table 18; for IMF data,which differ from the ADB figures, see Reference table 19.)

Current account, 1997($ m)

Exports: goods fob 462.6

Imports: goods cif –543.5

Trade balance –80.9

Services balance –24.6

Net unrequited transfers 46.0

Current-account balance –59.5Source: Asian Development Bank, Economic and Resource Centre website.

Capital flows and foreign debt

Mongolia has benefitedfrom significant aid

inflows

In the first two years following the collapse of Comecon, emergency aid pre-dominated. This has since been replaced by more project aid for infrastructurerenovation and development, and short- and medium-term development. In1991-96 approximately $1.2bn of aid was pledged through donor conferencescalled by the UN Development Programme (UNDP), the government of Japanand the World Bank. At the sixth meeting of the Mongolian Donor Group,held on October 7th 1997, participants pledged $256m in aid for Mongolia in

Trade regulations changes

1992: Customs duty levied on both imports and exports at a standard rate of 15%.

1994: Duty on 33 items of staple foods and manufacturing inputs reduced from10% to zero. A 100% import duty imposed on luxury items such as alcohol, andthe export of a small number of commodities—including rare species and gold—banned.

January 1997: Mongolia joins the World Trade Organisation (WTO).

May 1997: Import duty abolished on all but a few items such as alcohol,tobacco, oil products and motor vehicles.

July 1998: Seasonal 15% import duty reimposed on all flour and vegetableimports through Sukhbaatar, Altanbulag and Zamyn Uud.

Mongolia: Invisibles and the current account 79


1998. (See Reference table 20 for a breakdown of external debt; Reference table21 for net official development assistance.)

Foreign reserves and the exchange rate

Total reserves (excluding gold) rose from $16.4m at the end of 1992, to $175mat the end of 1997. Reserves fell in 1998 to $95m in July as the governmentintervened in the foreign-exchange markets to support the togrog, and themerchandise trade deficit widened. (See Reference table 22 for data on foreignreserves.)

Mongolia’s currency, the togrog, was pegged to the transferable rouble from1973 to 1990, at different rates for commercial and non-commercial transac-tions. In 1990 the government pegged the currency to the dollar at a rate ofTg5.63:$1. Since then it has been devalued several times. In June 1991 thecommercial and non-commercial rates were unified at Tg40:$1. In May 1993the currency was allowed to float, and since then it has fallen steadily, reachingTg893:$1 by December 14th 1998 according to central bank figures. (See Refer-ence table 23.)

80 Mongolia: Foreign reserves and the exchange rate


Appendices

Sources of information

National statistical sources State Statistical Office of Mongolia, National Economy of the MPR for 70 Years:Anniversary Statistical Yearbook, Ulaanbaatar, 1991

State Statistical Office of Mongolia, Mongolian Economy and Society in 1996,Ulaanbaatar, 1997

International sources Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries

Asian Development Bank, Economic & Development Resource Centre(website)

Energy Data Associates, 1 Regent Street, London SWlY 4NR

IMF, International Financial Statistics, monthly

World Bank, Global Development Finance (annual)

World Bank, World Development Report (annual)

Select bibliography Asian Development Bank, Mongolia: A Centrally Planned Economy in Transition,Oxford University Press, New York, 1992

Ole Bruun and Ole Odgaard, Mongolia in Transition: Old Patterns, NewChallenges, Curzon, Richmond, Surrey, 1996

Keith Griffin, Poverty and the Transition to a Market Economy in Mongolia,Macmillan, London, 1995

Mongol Messenger (weekly), Montsame, Ulaanbaatar

United Nations Development Programme, Human Development Report Mongolia1997, UNDP, Ulaanbaatar, 1997

World Bank, Mongolia, Toward a Market Economy, Washington DC, 1992

Mongolia: Sources of information 81


Reference tables

Reference table 1

Government finances(Tg m)

1993 1994 1995 1996 1997

Current revenue 51,816 82,194 135,684 152,805 197,338 Tax 49,810 67,596 105,510 128,158 165,454 Non-tax 2,006 14,598 30,174 24,647 31,884

Capital receipts 0 672 3,855 2,020 10,202

Total revenue 51,816 82,866 139,538 154,825 207,539

Current expenditure 41,553 74,676 101,508 128,154 203,452

Capital expenditure 8,270 10,551 26,659 26,007 28,148

Net lending 11,839 16,099 21,183 20,032 44,045

Total expenditure 61,662 101,326 149,350 174,193 275,645

Budget balance –9,846 –18,460 –9,812 –19,368 –68,106 % of GDP –5.9 –6.5 –2.3 –3.3 –9.2Sources: Asian Development Bank, Economic and Development Resource Centre website; EIU calculations.

Reference table 2

Government revenue(Tg m)

1993 1994 1995 1996 1997

Total revenue (excl foreign grants) 51,816 82,866 139,538 154,825 207,539 Tax revenue 49,810 67,596 105,510 128,158 165,454 Income tax & capital gains tax 28,440 32,041 48,537 49,745 n/a Social-security contributions – 6,419 15,765 22,687 n/a Taxes on property 6 42 54 45 n/a Domestic taxes on goods & services 14,140 19,529 28,107 36,257 n/a Taxes on international trade & transactions 6,579 7,541 9,572 13,905 n/a Other taxes 645 2,025 3,475 5,519 n/a Non-tax revenue 2,006 14,598 30,174 24,647 31,884 Capital revenue 0 672 3,855 2,020 10,202

Grants 3,027 3,265 5,085 4,329 6,111Sources: State Statistical Office, Mongolian Economy and Society in 1996; Asian Development Bank, Economic and Development Resource Centre website.

82 Mongolia: Reference tables


Reference table 3

Government expenditure(Tg m)

1993 1994 1995 1996 1997

Total expenditure 61,662 101,326 149,350 174,193 275,645 General public services 3,615 8,393 12,814 17,413 23,970 Defence 6,425 11,250 16,626 22,537 16,055 Education 9,596 16,439 23,525 29,911 44,078 Health 6,330 11,610 15,959 19,959 27,904 Social security & welfare 5,718 13,459 23,378 30,548 45,938 Housing & community amenities 3,371 5,337 7,456 8,215 2,760 Economic services 12,332 26,777 27,152 16,896 20,748 Agriculture 1,539 2,183 4,156 2,822 5,221 Industry 1,139 9,829 2,719 0 0 Electricity, gas & water 3,348 7,522 12,397 7,271 8,417 Transport & communications 1,276 4,576 4,278 4,002 4,497 Other economic services 5,029 2,667 3,604 2,800 2,614 Others 14,276 8,062 22,439 28,716 94,191Source: Asian Development Bank, Economic and Development Resource Centre website.

Reference table 4

Money supply and credit(Tg m unless otherwise indicated; end-period)

1993 1994 1995 1996 1997

Demand deposits 9,756 14,104 17,045 20,702 26,341

Money (M1) 18,547 33,050 42,637 60,838 76,109

M1 growth (%) 142.7 78.2 29.0 42.7 25.1

Quasi-money 24,216 43,906 59,408 58,757 93,977

Money (M2) 42,763 76,956 102,045 119,595 170,086

M2 growth (%) 227.6 80.0 32.6 17.2 42.2

Domestic credit 31,535 56,446 41,730 93,206 69,315Source: IMF, International Financial Statistics.

Reference table 5

Gross domestic product(market prices)

1993 1994 1995 1996 1997

Tg m At current prices 166,219 283,263 429,207 586,529 737,039At constant (1993) prices 166,219 170,042 180,775 185,048 191,112Real change (%) –3.0 2.3 6.3 2.4 3.3

Per head (Tg)At current prices 74,830 127,258 187,108 251,740 311,177At constant (1993) prices 74,830 76,393 78,807 79,423 80,687Real change (%) –4.9 2.1 3.2 0.8 1.6Source: Asian Development Bank, Economic and Development Resource Centre website.

Mongolia: Reference tables 83


Reference table 6

Gross domestic product by expenditure(Tg m; current market prices)

1993 1994 1995 1996 1997

Private consumption 101,380 155,046 270,605 373,466 478,061

Government consumption 44,152 96,165 64,924 96,407 116,432

Gross fixed capital formation 42,700 62,215 123,500 135,251 169,430

Change in stocks 3,500 7,962 –10,200 12,281 0

Net exports of goods & services –8,516 –15,884 8,544 –11,617 6,753

Statistical discrepancy –16,996 –22,241 –28,165 –19,260 –33,637

GDP 166,219 283,263 429,207 586,529 737,039Source: Asian Development Bank, Economic and Development Resource Centre website.

Reference table 7

Gross domestic product by sector(Tg m; constant 1993 prices; % change year on year in brackets)

1993 1994 1995 1996 1997

Agriculture 58,335 59,911 62,454 68,714 70,500 (–2.7) (2.7) (4.2) (10.0) (2.6)

Industry 54,032 55,186 63,243 63,529 65,000 (–7.8) (2.1) (14.6) (0.5) (2.3)

Mining, manufacturing & electricity, gas & water 51,308 52,175 59,914 60,032 61,712

(–6.4) (1.7) (14.8) (0.2) (2.8) Construction 2,725 3,011 3,329 3,497 3,288

(–16.2) (10.5) (10.6) (5.0) –(6.0)

Trade 26,537 26,533 26,564 27,220 28,527 (5.3) (0.0) (0.1) (2.5) (4.8)

Transport & communications 7,714 7,539 7,449 8,084 8,533 (–4.7) (–2.3) (–1.2) (8.5) (5.6)

Finance, public administration & others 19,601 20,874 21,065 17,501 18,551 (–2.2) (6.5) (0.9) (–16.9) (6.0)

GDP 166,219 170,042 180,775 185,048 191,112 (–3.0) (2.3) (6.3) (2.4) (3.3)

Source: Asian Development Bank, Economic and Development Resource Centre website.

Reference table 8

Consumer prices

1993 1994 1995 1996 1997

Consumer prices (Jan 1991=100) 1,339.8 2,513.2 4,033.3 5,882.3 8,505.5 % change, year on year 268.4 87.6 60.5 45.8 44.6Source: IMF, International Financial Statistics.



Reference table 9

Population(’000 unless otherwise indicated)

1993 1994 1995 1996 1997

Urbana 1,251.3 1,229.2 1,222.2 1,222.8 1,226.3

Rurala 963.7 1,020.8 1,057.8 1,114.7 1,127.0

Total (m) Annual averageb 2.22 2.23 2.29 2.33 2.37b

Year-end 2.25 2.28 2.32 2.35 2.39

a January. b EIU estimate, based on official year-end figures.

Sources: State Statistical Office, Mongolian Economy and Society in 1996; Europa, The Europa World Yearbook 1998; EIU estimates.

Reference table 10

Labour force(‘000)

1993 1994 1995 1996 1997

Labour force 1,080.9 1,089.3 1,103.1 1,124.3 1,162.3

Economically active populationEmployed 772.8 786.5 794.7 791.8 772.4 Agriculture 302.2 336.6 354.3 358.1 373.0 Industry 124.1 100.9 108.1 104.7 98.9 Others 346.5 349.0 332.3 329.0 300.5Unemployed 71.9 74.9 45.1 55.4 63.7Source: Asian Development Bank, Economic and Development Resource Centre website.

Reference table 11

Output of selected industrial products

1992 1993 1994 1995 1996

Meat excl canned meat (’000 tonnes) 25.1 17.3 11.3 11.3 8.5

Sausage (tonnes) 3,360.0 1,245.3 1,065.3 639.2 674.0

Flour (’000 tonnes) 181.9 175.5 127.0 158.7 92.3

Bakery goods (’000 tonnes) 60.9 46.0 33.9 36.8 30.0

Milk & milk products (m litres) 27.7 13.0 4.9 1.8 1.7

Alcohol (’000 litres) 6,769.6 5,250.8 3,626.0 3,663.2 3,583.6

Carpets (’000 sq metres) 1,037.0 1,000.1 681.5 595.7 666.3

Cashmere (tonnes) 97.6 121.5 232.1 420.8 517.0

Camel-wool blankets (’000 metres) 90.6 48.7 24.1 19.4 31.4

Scoured wool (’000 tonnes) 7.1 3.5 2.1 1.2 0.8

Leather boots (’000 pairs) 2,244.7 1,030.8 406.6 245.5 86.6

Porcelain goods (’000 pieces) 3,337.2 1,789.2 1,582.4 688.5 150.6

Cement (’000 tonnes) 132.5 82.3 85.8 108.8 106.0

Doors & windows (’000 sq metres) 15.8 9.6 8.1 7.4 3.4

Electricity (m kwh) 2,928.6 2,131.7 2,122.7 2,052.8 2,046.7Source: State Statistical Office, Mongolian Economy and Society in 1996.



Reference table 12

Minerals production(’000 tonnes unless otherwise indicated)

1992 1993 1994 1995 1996

Coal 6,247.3 5,608.5 5,012.4 4,871.2 5,110.6

Copper 300.2 334.3 343.3 346.4 351.5

Molybdenium 3.5 4.4 4.4 3.9 4.7

Gold (kg) 624.5 n/a 1,789.5 4,504.0 5,242.1

Fluorspar 622.1 536.8 383.2 526.9 565.1Sources: State Statistical Office, Mongolian Economy and Society in 1996.

Reference table 13

Livestock numbers(’000 head)

1993 1994 1995 1996 1997

Camels 415.2 367.7 366.1 367.5 357.9

Horses 2,200.2 219.3 2,408.9 2,648.4 2,770.5

Cattle 2,819.0 2,730.5 3,005.2 3,317.0 3,476.3

Sheep 14,657.0 13,779.2 13,786.6 13,718.6 13,560.6

Goats 5,602.5 6,107.0 7,241.3 8,520.7 9,134.8

Pigs 48.6 28.7 23.4 23.5 23.5

Chickens 179.0 74.0 99.0 58.0 58.0

Beehives (’000) 4.3 4.0 3.7 3.5 3.5Source: Food and Agriculture Organisation, Statistics Database website.

Reference table 14

Meat production(tonnes)

1993 1994 1995 1996 1997

Beef & veal 64,500 64,400 71,300 88,700 88,700

Mutton & lamb 96,600 95,900 93,500 90,900 90,900

Goat meat 16,000 16,000 18,000 28,000 28,000

Pigmeat 700 700 600 300 300

Chicken meat 105 28 27 25 25

Horsemeat 33,000 30,000 25,000 22,000 22,000

Camel meat 11,000 9,000 6,000 5,000 5,000

Total 221,905 216,028 214,427 234,925 234,925Source: Food and Agriculture Organisation, Statistics Database website.



Reference table 15

Crop production(’000 tonnes)

1993 1994 1995 1996 1997

Cereals 474.0 328.0 260.9 219.1 219.1Wheat 450.2 321.9 256.7 215.3 215.3Barley 22.3 6.1 4.2 3.8 3.8

Maize for forage & silage 12.0 10.0 8.0 6.0 6.0

Grasses for forage & silage 112.0 29.1 18.7 18.8 18.0

Roots & tubers of which: potatoes 60.1 54.0 52.0 46.0 46.0 pulses 1.5 1.0 1.0 1.0 1.0 fresh vegetables 27.7 22.8 27.3 23.8 23.8Source: Food and Agriculture Organisation, Statistics Database website.

Reference table 16

Foreign trade($ m)

1993 1994 1995 1996 1997

Merchandise exports fob 382.6 356.1 473.3 424.3 418.0

Merchandise imports cif –379.0 –258.4 –415.3 –450.9 –443.4

Trade balance 3.6 97.7 58.0 –26.6 –25.4Source: Asian Development Bank, Economic and Development Resource Centre website.

Reference table 17

Main trading partners($ m)

1993 1994 1995 1996 1997

Exports fob to:Switzerland 10.4 22.4 76.9 103.1 131.5China 120.2 73.2 77.8 81.0 90.8South Korea 1.3 19.1 26.1 34.0 43.9Russian Federation 201.4 103.8 68.9 87.5 39.9Japan 17.1 45 46.7 35.0 36.9UK 1.2 5.1 18.7 19.3 23.3US 4.3 12.4 25.8 17.8 21.8Italy 10.5 8.7 11.4 10.7 11.3Germany 3.0 2.4 7.6 4.7 6.3

Imports cif from:Russia 221.6 148.8 208 154.9 160.5China 65.9 23.9 44.5 66.0 63.3Japan 20.8 16.7 45.3 77.8 33.5US 17.2 11.4 14.5 11.0 29.2South Korea 4.3 14.9 21.5 18.0 19.8Germany 6.7 10.0 18.5 21.5 18.5Singapore 3.7 3.6 7.4 13.4 16.5Czech Republic 0.6 3.3 9.9 8.0 6.9Switzerland 2.3 3.5 6.1 5.1 1.4Source: Asian Development Bank, Economic and Development Resource Centre website.



Reference table 18

Balance of payments, national estimates($ m)

1993 1994 1995 1996 1997

Exports: goods fob 365.8 367.0 485.6 423.4 462.6

Imports: goods cif –374.5 –370.5 –488.9 –510.8 –543.5

Trade balance –8.7 –3.5 –3.3 –87.4 –80.9

Services: credit 26.8 43.0 47.1 66.5 67.4

Services: debit –57.9 –76.8 –93.1 –87.2 –92.0

Services balance –31.1 –33.8 –46.0 –20.7 –24.6

Private transfers –0.1 –3.0 –2.8 6.2 4.0

Official transfers 71.0 77.6 79.1 63.6 42.0

Net unrequited transfers 70.9 74.6 76.3 69.8 46.0

Current account balance 31.1 37.3 27.0 –38.3 –59.5

Direct investment 7.7 7.0 9.8 15.9 19.1

Other long-term capital 32.5 7.9 50.9 46.8 98.3

Other short-term capital –49.8 –51.0 –41.7 –42.4 –40.8

Net errors & omissions 5.2 –10.6 –18.7 –1.2 0.0

Overall balance 26.7 –9.4 27.3 –19.2 17.1Source: Asian Development Bank, Economic and Development Resource Centre website.



Reference table 19

Balance of payments, IMF estimates($ m)

1991 1992 1993 1994 1995

Goods: exports fob 346.5 355.8 365.8 367.0 451.0

Goods: imports fob –447.6 –384.9 –344.5 –333.3 –425.7

Trade balance –101.1 –29.1 21.3 33.7 25.3

Services: credit 26.5 34.8 26.0 45.4 57.3

Services: debit –66.3 –69.7 –66.9 –91.2 –95.4

Income: credit 0.0 0.2 0.8 3.2 3.0

Income: debit –4.9 –27.1 –21.0 –22.5 –28.4

Current transfers: credit 41.6 38.7 66.7 77.8 77.1

Current transfers: debit 0.0 –3.5 4.2 0.0 0.0

Current-account balance –104.2 –55.7 31.1 46.4 38.9

Direct investment abroad 0.0 0.0 0.0 0.0 0.0

Direct investment in Mongolia 0.0 2.0 7.7 6.9 9.8

Portfolio investment assets 0.0 0.0 0.0 0.0 0.0

Portfolio investment liabilities 0.0 0.0 0.0 0.0 0.0

Other investment assets 0.0 –64 –35.4 –51.0 –49.2

Other investment liabilities 10.8 18 15.9 5.1 22.5

Financial balance 10.8 –44 –11.8 –39.0 –16.9

Capital account nie credit 0.0 0.0 0.0 0.0 0.0

Capital account nie debit 0.0 0.0 0.0 0.0 0.0

Capital-account nie balance 0.0 0.0 0.0 0.0 0.0

Errors & omissions –36.4 17.4 –4.8 –1.0 10.1

Overall balance –129.8 –82.3 14.5 6.4 32.1

Memorandum itemsTotal change in reserve assets (– indicates inflow) 129.8 82.3 –14.5 –6.4 –32.1Financing (– indicates inflow) movement of reserves 51.2 72.3 –23.5 –27.4 –22.6Use of IMF credit & loans 15.3 3.5 13.1 21.1 –9.5Exceptional financing 63.3 6.5 –4.1 n/a n/aSource: IMF, International Financial Statistics.



Reference table 20

External debt($ m unless otherwise indicated; debt stocks at year-end)

1992 1993 1994 1995 1996

Public medium & long-term 272.2 328.3 386.5 451.7 474.0 Official creditors 163.0 225.0 297.3 373.7 421.5 Multilateral 56.4 71.5 113.1 169.9 204.3 Bilateral 106.6 153.5 184.2 203.9 217.2 Private creditors 109.2 103.3 89.2 78 52.5 of which: banks 19.7 19.6 19.6 14.6 10.3 bonds 0.0 0.0 0.0 0.0 0.0

Use of IMF credit 18.9 31.6 55.3 47 43.6

Short-term debt 59.2 13.7 5.5 13.7 6.8 of which: interest arrears on long-term debt 1.7 1.6 2.5 2.5 2.5

Total external debt 350.2 373.6 447.2 512.4 524.4

Total debt service paid 67.6 19.9 38.7 46.7 47.8 Principal 56.1 10.3 29.2 37.2 39.6 Interest 11.5 9.6 9.5 9.6 8.2 of which: short-term debt 0.7 2.3 0.5 0.4 0.2

Ratios (%)Total external debt/GNP n/a 71.6 67.8 54.3 55Debt-service ratio, paida 17.3 5.1 9.3 9.1 9.7Short-term debt/total external debt 16.9 3.7 1.2 2.7 1.3Concessional long-term debt/ total long-term debt 42.9 52.6 58.3 67.4 75.9

Note. Long-term debt is defined as having original maturity of more than one year.a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Reference table 21

Net official development assistance($ m)

1992 1993 1994 1995 1996

Bilateral 67.5 81.9 108.1 126.9 136.2 of which: Japan 43.7 57.5 71.1 99.9 103.8 Germany 17.5 10.9 11.0 11.8 11.8

Multilateral 55.4 44.1 76.0 80.9 66.4 of which: ADB 22.0 16.0 26.7 55.8 34.8 IDA 28.0 3.4 17.4 8.4 11.0 IMF 0.0 13.0 21.2 0.0 8.1

Total 122.9 126.0 184.1 207.8 202.6Source: OECD Development Assistance Committee, Geographical Distribution of Financial Flows to Aid Recipients.



Reference table 22

Foreign reserves($ m unless otherwise indicated; end-period)

1993 1994 1995 1996 1997

Foreign exchange 59.70 78.49 114.50 107.00 175.00

SDRs 0.03 2.89 2.52 0.43 0.70

Reserve position in the IMF 0.01 0.01 0.01 0.01 0.01

Total reserves excl gold 59.74 81.39 117.03 107.44 175.71

Gold (national valuation) 5.31 11.00 34.50 53.60 24.60

Total reserves incl gold 65.05 92.39 151.53 161.04 200.31

Memorandum itemGold (m fine troy oz) 0.02 0.03 0.10 0.15 0.08Source: IMF, International Financial Statistics.

Reference table 23

Exchange rates(Tg:$)

1993 1994 1995 1996 1997

End-period 396.51 414.09 473.62 693.51 813.16

Period average n/a 412.72 448.61 548.40 789.99Source: IMF, International Financial Statistics.

Editors: Ken Davies; Paul CaveyAll queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023



China Mongolia - International University of JapanThe Economist Intelligence Unit The Economist...

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