Which Way for the Chinese Economy?
Wu, Renhong, The World and I
In the next decade, the Chinese economy is less likely to maintain high two-digit growth, even assuming a stable political situation.
China's economy achieved a remarkable two-digit growth (10 percent annually) from 1981 until 1997. But in the first half of 1998, economic growth slowed down and exports drastically dropped. Can China's boom continue in the next decade? And what is the trend of its currency?
In 1998, China's economy is facing great challenges. It is likely that economic readjustment will take two or three years unless the government pushes the GDP growth up to the targeted level of 8 percent.
These challenges are due to not only the external shocks from the Asian monetary crisis but also internal problems. The major challenges are: excessive capacity in industry, increasing unemployment, and lower export growth.
In the first half of 1998, China's GDP growth was 7 percent, 1.8 percentage points lower than the average growth rate of 1997. The other major macroeconomic indicators are as follows:
Industry grew at 7.9 percent, 3.2 points lower than in 1997. Industry is the leading indicator of China's economic growth, because it is the largest sector in the economy (49 percent of GDP).
Fixed investment increased 13 percent (in real terms), 4.7 percentage points higher than in 1997. Higher investment growth has been pushed by increases in government spending for infrastructure since the second quarter.
Consumer sales increased by 6.8 percent (in real terms), 3.4 percentage points lower than in 1997.
Consumer price index was - 0.3 percent, indicating deflation.
Unemployment increased to approximately 8 percent (about 16 million) in cities in the first quarter of 1998, which included about 5.7 million registered unemployed and 10 million laid-off workers. The increase in unemployment was brought about by further reforms of the state-owned enterprises and lower growth of GDP.
Exports grew by only 7.6 percent, 13 percentage points lower than in 1997. Imports grew 2.2 percent. The trade balance reached a $22.6 billion surplus. The significant drop in exports was mainly attributed to the recessions in China's major trade partners (Japan, Korea, and other Asian countries). Also, the intensified competition from the devaluations of other Asian currencies affected China's export growth.
The Chinese currency (Renminbi/yuan) remained stable. The exchange rate was 8.2798 Renminbi against one U.S. dollar in June, practically unchanged from January. The foreign reserves reached $140.5 billion in the end of June, slightly higher than that in the end of 1997 ($139.9 billion). This increase was attributed to the continued trade surplus and foreign capital inflow. Direct foreign investment in China reached $20.45 billion, a 1.3 percent drop compared with the same period last year.
The lower economic growth was mainly due to a drop in industrial growth, lower export growth, and decreasing consumer sales. The slowdown of industrial growth can be attributed to excess capacity. The utilization of production capacity in many industries was less than 50 percent in 1995.
Now the situation is worse. The overcapacity is not just a business cycle phenomenon. It has appeared since the end of the 1980s and was intensified by the overinvestments in 1992-94. The adjustment of the excess capacity is slow and will take several years, due to the nature of state-owned enterprises and underdeveloped labor and capital markets.
Lower consumer sales were mainly caused by negative expectations. The large number of layoffs not only directly affected the purchasing power of those involved but also greatly impacted general expectations of future job security and income, which has been reinforced by government announcements of the reform of state-owned enterprises and a 50 percent reduction of the government workforce. …