Red China's Socialist Economics - Page A1
April 2, 1997
FEATURE STORY
Red China's Socialist Economics
By Howard Hobbs PhD Economics Editor
Threatens U.S. Trade MarketsWASHINGTON DESK - The People's Republic of China has in recent years boasted one of the fastest growing economies in the world. Its gross domestic product (GDP) increased 10.2 percent in 1995 and is projected to continue to grow at 10 percent during 1996.
The National Trade Data Bank reported this month that certain regions in China - especially those along the coast - are booming, and many people are becoming more prosperous. Rapid economic growth, bold reform measures and massive infrastructure plans point to enormous market potential in China.
Red Chinese leaders project spending of at least $100 billion per year on imports from now until the year 2000. As China gives priority to infrastructure development, business opportunities seem especially promising in the energy, telecommunications and transport sector. The central government is also providing incentives in order to direct more foreign activity to the inland areas and into high-technology sectors.
Two-way trade between the United States and China increased from $2.3 billion in 1979 to $57.3 billion in 1995. However, U.S. trade with China has been in deficit since 1983, reaching an historic high at nearly $34 billion in 1995, second only to the U.S.-Japan trade deficit.
Foreign direct investment continues to pour into China. According to Chinese statistics for 1995, contracted direct foreign investment, which measures the commitment of private foreign funds to Chinese projects and joint ventures, amounted to roughly US$91.3 billion, which represents a ten percent increase over 1994.
Actual, paid-in foreign direct investment increased by $37.5 billion, up 10 percent over 1994's US$33.8 billion. The United States, with total contracted investment for 1995 of US $3.08 billion (up 24% from 1994's US$2.49 billion), has pulled roughly even with Taiwan and Japan as China's second largest foreign investor, following Hong Kong/Macao.
By the end of 1995, over 258,000 foreign-invested enterprises had registered in China, an increase from 1994 of over 38,000, with a total contracted foreign investment of nearly US$395 billion and actual funds invested of US$135 billion. Finance for international business, while never sufficient to cover all of the nation's needs, is available as never before. As a result, the Chinese government has steadily withdrawn many of the early incentives for investment and is now becoming more restrictive about who invests and where.
The central government especially encourages foreign investment in the following seven priority sectors: (1) comprehensive and technological agricultural projects; (2) infrastructure and basic industries, such as highways, railways, harbors, airports, steel and non-ferrous metals; (3) so-called "pillar industries" including machinery, electronics, petrochemicals, automobiles and construction materials; (4) projects involving advanced technology, technical renovation and energy conservation; (5) projects supplying products meeting international market demands, upgrading the quality of Chinese products and increasing China's exports; (6) new technology and equipment to utilize natural resources; and (7) projects that utilize human and natural resources in the western and inland areas. Smaller investment projects under $30 million are easier and can often be done by local approval.
1996 was the first year for China to implement its Ninth Five-Year Plan (1996-2000) for National Economic and Social Development and the Long-Term Goals to the Year 2010 which were approved by the National People's Congress, China's legislative body, at its fourth session in March 1996.
The goals include continuing progress toward quadrupling the 1980 per-capita Gross National Products (GNP) by the year 2000, and subsequently doubling the 2000 GNP by the year 2010. (Note: China's GNP in 1980 was RMB 452 billion; China's inflation-adjusted GNP in 1995 was RMB 1913 billion, having achieved the targets set for the Ninth Five-Year Plan five years ahead of schedule). To make this ambitious blueprint a reality, China will have to maintain an average GNP increase of about eight per cent.
The key to achieving the above goals, according to the Chinese government, is to accomplish "two shifts": a shift of economic system from its centrally planned economy to a "socialist market economy"; and a more careful approach to investment, and resource allocation to achieve higher efficiency.
Although progress has been made in experiments on state-owned enterprise (SOE) reforms, the financial burden on the government is growing and the pace of reforms is slow. According to the reforms, certain unprofitable enterprises are now allowed to declare bankruptcy or to merge with others, thereby reducing the social burden borne by the government.
However, many SOE's are run rigidly and continue to operate in the red, representing a drag on the Chinese economy in general and financial reforms in particular. The SOE bad loan rate is now in excess of 20 percent and triangular debt is possibly as high as one trillion RMB.
China cannot permit unprofitable SOE's to suddenly go bankrupt. The SOE's provide salaries and social services for over 100 million workers and their families. Indeed, it has been argued that the state industrial sector provides a net plus to the economy, primarily because SOE's perform quasi-government functions, such as the provision of education, health, and other social services.
At the beginning of 1996, the Communist State Economic and Trade Commission selected 1,000 large SOE's for experiments in establishing a modern enterprise system. These "priority" SOE's will receive special government support and attention. Other SOE's will presumably be forced to become self-reliant or suffer the consequences.
China's political leadership -- characterized by group consensus rather than strong leadership by a single individual -- generally supports foreign trade and business investment in China, and agrees on the need for continued economic reforms and for political stability.
China's current "socialist market" economic structure continues to maintain roadblocks to foreign companies doing business in China. These include limitations on the right of foreign companies to directly access China's trading, wholesale, distribution and retail markets; foreign exchange controls that affect foreign companies' ability to repatriate profits; an underdeveloped commercial banking services; insufficient (but improving) enforcement of intellectual property laws; very limited access for foreign services; and an inadequate system for dispute resolution.
Other commonly heard complaints include high tariffs, sometimes inconsistent application of a 17 percent value-added tax on most imports, import quotas and licenses, unreasonable standards and quality control requirements, and continued lack of transparency in the trading system, lack of reliable legal framework, to ensure commercial rights.
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