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China's Economy

 

China's economy held the line on growth in 1999, mainly with government assistance, as the economy continues to suffer from the effects of massive, and accelerating, restructuring. The coming year could see some improvement, though the economy is likely to remain under stress as the restructuring intensifies over the next three to five years.

Large-scale job loss and gluts of consumer goods are still dampening demand, but deflation has begun to flatten out. Recovery in the rest of Asia helped keep exports strong, though foreign investment dipped (see Trade and Foreign Direct Investment).

China's preparations to enter the World Trade Organization (WTO) will accelerate the pace of the toughest reforms yet in agriculture, the state-owned sector, and banking, among others. Economic performance depends in large part on how well China implements these reforms and on non-state sector growth. Foreign firms are also likely to see these reforms as crucial, as WTO implementation is deeply entwined with these issues.

OVERALL ECONOMIC PERFORMANCE IN 1999

GDP China's GDP grew slightly more than 7 percent in 1999, thanks only to the government's ongoing stimulus program. With other Asian countries recovering, China's probable WTO accession this year, and a new drive to boost the private sector, however, both the Chinese government and outside analysts predict slightly stronger growth-around 7.5 percent-in 2000.

Investment Investment in fixed assets rose 7.8 percent in 1999, and is expected to increase by another 7.8 percent in 2000. Much of the investment came from the government's stimulus plan.

Prices Consumer and retail prices fell throughout 1999. Overcapacity in many industries was chiefly responsible for the 27-month deflation, but slack demand caused by consumer worry about job security and education and health costs also played a role. Many economists believe that the worst is past, and that deflation will wane in 2000.

Monetary policy China's impressive money-supply growth rates continued in 1999. Deflation-fighting efforts included the issuance of more than *200 billion ($24.16 billion) in new currency last year; the institution in November of a tax on individual savings deposits; and another round of interest rate cuts. The government also increased its reliance on open-market operations in 1999, after suspending operations through mid-1998. This could be the year Beijing further relaxes its control over loan interest rates.

Financial reforms China stepped up the pace of financial reform in 1999 and this pace is likely to continue in 2000. A few of the more high-profile moves included: establishing asset-management companies to relieve the four state banks of their bad loans; slightly loosening restrictions on foreign participation in commercial banking; granting domestic insurance firms the ability to invest in closed-end securities funds; and expanding the number of listed investment funds.

The government's budget woes Government revenue, while rising of late, is still falling far short of the budget's requirements. Though the State Administration of Taxation reported that total revenue was up 13.4 percent in 1999, tax evasion remains a serious problem. The government has already issued billions of RMB in Treasury bonds both to help recapitalize the ailing banks and to stimulate the suffering economy, and more such outlays will be necessary before either recovers.

Foreign currency and the value of the RMB China's foreign-currency reserves reached $154.68 billion at the end of 1999, up 6.7 percent. Most analysts expect that the RMB's value will remain relatively stable this year.

Agriculture Falling agricultural prices, due to bumper harvests, were responsible for the small rise in rural incomes of only 4 percent in 1999. This was less than half of the average urban income, which rose more than 9 percent. Rural poverty is likely to be exacerbated when China joins the WTO-an additional 9.6 million farm workers are expected to lose their jobs as a result of China opening its agricultural markets.

SOE reform With many of the smaller and more inefficient SOEs already closed, the government now has to tackle the behemoths, the country's largest employers. The number of laid-off SOE workers is expected to hit 12 million this year.

The non-state sector China has made several moves to encourage the non-state sector in recent months. As China prepares to enter the WTO, private firms may gain more opportunities to participate in the capital markets. Parts of the service sector may also be deregulated.

Employment In 1999, urban registered unemployment was 3.1 percent. Official unemployment figures do not include the rural population, the floating population, or the millions who are technically unemployed, but still on SOE payrolls. Independent analysts estimate that when these populations are included, China's unemployment rate reaches double digits.

SCENARIOS FOR 2000

WTO preparations aside, the PRC economy is facing several years of high unemployment, stubborn overcapacity, industrial and agricultural restructuring, and slower growth than that of the early 1990s. The prospect of WTO membership gives the country's leaders an added impetus to implement reforms. Implementation will be difficult, and will almost certainly meet resistance, especially at the local level. Nevertheless, reform will progress, if slowly, and China will continue on its path to full integration with the world economy.

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