Review and Prospect of Economic Reform

in China

Wang Cheng(Institute of Economics, Chinese Academy of Social Sciences)

I. Background and I. Background and Purposes of China’s Purposes of China’s Economic ReformEconomic Reform

Economic Stagnation and Poor Efficiency Economic Stagnation and Poor Efficiency ---Annual rate of GDP growth was 0.49% in 1900-

1950. Total rate of growth for the 50 years was 28%. Growth rate of per capita GDP in 50 years was -40%( average living standard declined).

------Annual rate of GDP was 6.2% in 1950-1978. But the annual rate of TFP was -0.35%( it showed technological and organizational retrogression for about 30 years).

(Compare: during reform---Annual growth rate of GDP was 9.5% with an annual rate of TFP 2.8% in 1978-2000).

(Continued)(Continued)

No Incentives to Pursue One’s InterestsNo Incentives to Pursue One’s Interests ---In urban area, workers got low and similar level ---In urban area, workers got low and similar level

of wages. Nearly all needs were met in kind of wages. Nearly all needs were met in kind through coupons and plan distribution system---through coupons and plan distribution system---food, clothes, daily necessities, traffic, housing. food, clothes, daily necessities, traffic, housing.

---In rural area, peasants had no land and capital. ---In rural area, peasants had no land and capital. They got pay in kind through collective work They got pay in kind through collective work and work-points system. Basic needs were met. and work-points system. Basic needs were met.

---Strict barriers against labor-flows between ---Strict barriers against labor-flows between urban&rural, provincial&local areas, industries, urban&rural, provincial&local areas, industries, sectors, social statuses. sectors, social statuses.

II. Start of China’s II. Start of China’s Reform---in Rural AreaReform---in Rural Area Innovation of the Villagers and

Recognition of the Government Later.---Heads of a village in Anhui Province made

secret contracts with peasants for family usage of land in exchange of paying part of their products in 1978.

---More and more villages copied the above mode and the rural life became better-off.

---Central government recognized the mode as a direction of rural reform at the end of 1981.

---In 1984, 99% of villages took the form.

(Continued)(Continued)

Growth EffectGrowth Effect---Annual agricultural growth rate:

8.2% in 1980-1985. (Compare: 2.3% in 1950-1978, 4.7% in 1986-1990.)

Equity EffectEquity Effect---Gap of per capita income between

urban and rural people decreased from 2.57fold in 1978 to 1.86fold in 1985.

III. Reform in Urban Area---III. Reform in Urban Area---SOEs Transformation(I)SOEs Transformation(I)

New Changes in SOEs and Their Surroundings after 1st Stage Reform

1. SOEs occupied less and less share of national employment and output, with 22% of business workers and 36% of AVIO(added-value of industry-output), but still with large capital ownership, 71% of investment and 70% of bank loans in 2003. (Other ownerships of enterprises appeared: limited-responsible, collective, TVE, cooperative, shareholding, foreign-funded, individual, and joint-ventured, etc.)

(Continued)2. Corporate governance has been

introduced into SOEs. Shareholding(or non-share) limited-liability corporations took shape. There were shareholders meeting, board of directors (incl. independent directors), board of supervisors and executive management. To focus on improvement of internal management. But difficulties appeared everywhere above(State share is too large to be one of the equal partners; governments at each level claim differ interests; how to merge old-3 into new-3).

(Continued)(Continued)3. Stock exchange markets have been built in

Shanghai(1990) and Shenzhen(1991)---most of the listed are reformed SOEs.

---Direct financing: with shares of 227b in stock-exchange and 416b outside exchange (as state and corporate shares), with total asset of ￥ 4246b and negotiable asset ￥ 1318b in 2003.

---Corporate development: with listed or public companies of 1287, and about 80m shareholders within China in 2003.

(Continued)

---Listed SOEs showed poor record(in P/NA) Listed-in 1994 95 96 later ------------------------------------------------- List-year(%) 14.5 19.2 22 1997(%) 4.9 12.5 12 ? 1998(% for all) 7.36 1999(% for all) 8.06 2000(% for all) 7.52 2001(% for all) 5.34 2002(% for all) 5.60

(Continued)

4.SOE Budget constraints from government and banks have been hardened.

---Commercial Bank Act issued in July 1995.---Heads of bank branches would be dismissed

or sentenced if they made bad loans(e.g. 66 heads were dismissed and one sentenced to 9 years for 6m bad loans in 1998).

---Five grades of loan-quality-control set up for banks in 1998.

---The government was not allowed to finance its deficit caused by supporting SOEs through issuing more currency since 1990s.

(Continued)

5. The Framework of Competitive Markets have been Restructured.

---Entries of more and more industries have been opened to other ownership’s competitors(vs. SOEs) from home and abroad.

---Small and medium-sized SOEs were largely reformed into private companies by MBO.

---large and huge-sized SOEs slowly retreated from competitive markets to entering public goods or non-competed production.

(Continued)6. New machines and equipments have

gradually replaced the old ones in SOEs (through various investments by listing, mergers&acquisitions, fiscal fund, joint-ventures, etc).

7. Growth rates of SOEs’ and all firms’ average wage levels declined and then recovered later.

---About 16% and 14% in 1979-1996. ---6.2% and 3.6% in 1997, -4.2 % and 0.2% in 1998. ---5.1% and 6.2% in 1999, 6.3% and 7.9% in 2000, and

9.8% and 11% in 2001.---14.4% and 14.3% in 2002;15.5% and 13.0% in 2003.

(Continued)8. Social security system has primarily establ

ished in urban areas.---Poverty reliefPoverty relief fund received annual contribution

of ￥ 3b and ￥ 2.3b from local and central government in 2001. The beneficiaries were 15.9m which covered 82.1% of the qualified up to June 2002.

---Basic elderly insuranceBasic elderly insurance included contributors of 108m and beneficiaries of 33.8m, with a fund of ￥ 242.6b and monthly average benefit of ￥ 556 per person in 2001. Employers contribute 20% and employees 6% over each employee wage.

(continued)---Basic health insuranceBasic health insurance had contributors and

beneficiaries of 54.7m in work and 18.2m retired, with annual income of ￥ 38.4b and spending ￥ 24.4b and a sum surplus of ￥ 25.3b in 2001. Employers contributed 6-7% and employees 2% over each wage unit.

---Unemployment insuranceUnemployment insurance included contributors of 103.6m and beneficiaries of 4.7m, with annual income ￥ 18.7b and expenditure ￥ 15.7b in 2001. Employers contribute 2.5% and employees 1% over each wage unit.

IV. Reform in Urban IV. Reform in Urban Area---SOEs Area---SOEs Transformation(II)Transformation(II) None or Little Changes in SOEs and Their

Surroundings after 1st Stage Reform 1. Property rights have not yet been clearly

defined(from SAMB to SAMC).2. Loss-making performance(The 40% of SOEs

made loss in 2002. The average profit ratio to net assets of all SOEs in competed sectors was only 0.5% in 2001. The government expenditure on loss-subsidy to SOEs were ￥ 50.7b in 1985, ￥ 57.9b in 1990, ￥ 65.9b in 1998, ￥ 27.9b in 2000, ￥ 30b in 2001, ￥ 26b in 2002, ￥ 23b in 2003).

(continued)

3. Banks making NPLs(non-performing loans) by 25% and bad debt(debtors being bankrupt or disappearing) by 6% of loans in 2000. The two ratios decreased to 18% and 5% in 2004.(4 AMCs setup for debt-to-equity swap—cover 1/6 of loss-making SOEs of more than 6000. The swap got repay 20%.)

(Continued)4. Governments keep decision-making

power on some SOEs businesses.(1) Changes in positions of managers

and employees(report scheme, inside laid-off, reemployment center, migrants).

(2) Investment and financial decisions.(3) Mergers and acquisitions.(4) Listing on stock exchange market.

V. Further Reform TasksV. Further Reform Tasks

Reform in Rural Area: 1. Agricultural taxation system2. Education-cost paying system3. Size and function of township

government4. Land utilization and transaction rules5. Assistance system to grain and cotton

production6. Rural finance system(small loans, co-

guarantors)

(Continued) Reforms of SAM System and SOEs.1. Better the system of SA monitor and

management.2. Standardize the SOEs ownership

changes and property distribution.3. Standardize the reformed share-holding

companies and their governance.4. Better regulation of SOEs in natural

monopoly industries and public utilities.5. Improve legal and policy conditions for

private firms to expand.

(Continued)

Reform in Finance Systems

1. Make banking firms into share-holdings.

2. Make insurance SOEs into share-holdings.

3. Legalize the status of policy bank system.

4. More marketization of monetary tools (e.g. interest-rates, exchange-rate, capital-flow, credit-securitization, etc.).

5. Complete systems of money market, capital market, and insurance market.

(Continued) Reforms in Fiscal System1. Strengthen transfer-payment mechanisms

(from central to local level, from provincial to county level).

2. Equalize the income taxation on domestic and overseas firms.

3. Better tax-rebate system for exporters.4. Gradually change VAT of firms from based

on input-cost to produced value.5. Establish taxations on environment and

resources usage.6. Open processes of public investment and

ratification to public-fund projects.

(Continued) Reform of Governmental Institution1. Clarify the governmental establishments,

their functions, division-of-labor in between, and their necessary scales.

2. Downsize greatly the governments at township and village level.

3. Make government independent of business, asset-running, NGO affairs.

4. Improve the rule-of-law by transparency, opening, hearing and public supervision.

ConclusionsConclusions The beginning of economic reform in

China faced vital economic difficulties, such as no progress in citizen’ s life for a long-time, and the poor efficiency brought people with extremely low pay, low consumption and highly exhausting labor, resources, and capital goods.

(Continued)

After the procedures of economic reform, the market mechanism with decentralized decision-making, decontrol to microeconomic activities and anti-deprivation of personal interest-pursuit proved to be of growth and equity effects under the socialism of China.

(Continued)

Although SOE reform was the hard-core in economic restructure, the national reform as a whole was an all-around and systematic project. All the related conditions and surroundings to SOE reform should not be neglected. (Relationships among economic, social, political and cultural reforms deserved close attention.)

(Continued) China is still facing tough tasks of

further reforms on the base of merely $1000 per capita GDP and imbalances in rural-urban income opportunities, coastal-inland developments, socio-economic happiness, economic-natural growth. The fragile characteristics of Chinese economy in the future will likely come from the above imbalances. So through reform and other efforts, China needs to strengthen both its physical and social infrastructures, and balance its development.

Thanks for attention!

Tel: 0086-10-68034177(O) 0086-10-88454664(H)Fax: 0086-10-68032473Email: wangcheng@cass.org.cn