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The PRC's Industry Structure

Andrew Papadimos

This articles is from Chinese Business Center

Domestically, modernisation and economic growth has been the focus of the reformist policies introduced by Deng Xiaoping, and in attempting to achieve this, the leadership has implemented the Four Modernisations Programme that lays special emphasis on the fields of agriculture, industry, education, science and technology, and defence.

In the countryside, the 'responsibility system' has been implemented and basically represents a return to family farming. Under this system, families lease land for a period of up to thirty years, and must agree to supply the state an agreed quota of grain or industrial crops at a fixed low cost in return. The remaining surplus can either be sold to the state or on the free market. As a result, peasants have been increasing their agricultural output in response to these incentives.

Together with the responsibility system, there have also been a number of reforms relating to rural businesses - especially in the spheres of commerce and manufacturing. The increase in personal income bought about through the responsibility system has led to a burgeoning of small-scale enterprises that remain completely in private hands.

As shown in Graph 2, the PRC's economy is characterised by a large share of industry - standing at 61.2% of total GDP in 1990 - with a smaller share of 24.4% devoted to agriculture and a much smaller service sector constituting only 14.4% of GDP. Such a constitution of GDP is a reflection of the Soviet influence of a planned economy since the 1950s. The current dominance of the industrial sector in the PRC's GDP constitution has not always been the case however, and it has been largely through governmental intervention that this evolution has taken place.

Since the 1950s, the trend away from the agricultural sector toward industrialisation has been dramatic, and is a result of both policy changes and free market mechanisms. During the 1950s and 1960s, heavy industry received most attention and consequently grew twice as rapidly as agriculture. After the reforms of 1978, more attention to the agricultural sector as well as a move away from heavy industry toward light resulted in agricultural output almost doubling with only marginal increases for industry.

The role of free market forces has also been instrumental in altering China's sectoral make-up. After 1979, the forces of supply and demand meant that consumers could play a greater role in determining which crops would be planted. This had the effect of making more profitable the planting of such crops as fruit, vegetables and tea. As a consequence, however, traditional grain crops have suffered, as farmers prefer to plant the more profitable cash crops.

Increases in light industrial production and more profitable crops bought about by the loosening of market controls have not always been enough to satisfy consumer demand, which in turn has lead to inflation. Rather than increased demand being met with increased supply, the PRC's manufacturing sector and economic infrastructure are still too underdeveloped to supply a population of over one billion people with the commodities they want or need. Instead, a 'dual track' pricing system has arisen which has promoted arbitrage between official and free-market prices for the same commodities.

Inflation and the unavailability of consumer goods have made some commodities too expensive for ordinary Chinese workers, as well as resulting in a general decline in living conditions. Another factor arising from inflation in the PRC has been corruption among the higher echelons of the CCP. Managers of factories in regulated industries - usually high-level Party cadres - have been selling factory produce on the free market at grossly inflated prices. Inflation and corruption had become so embedded in the system by 1988, that the leadership was forced to take some drastic economic measures.

In response to the general economic malaise, Li Peng - Prime Minister of the PRC - adopted several austerity measures in the middle of 1988. The primary goal of these measures was to reduce economic growth and included such measures as limiting joint ventures, curtailing capital investment, tightening fiscal and monetary controls, reimposing centralised control on local construction projects and cuts in capital investment.

The PRC's current eighth Five Year Plan - 1991 to 1995 - reflects the goals of slowing the economy down to a manageable level after the excesses of the late 1980s. The growth rate of GNP is planned to average 6% per annum, and government investment will be drawn away from national construction programmes towards agriculture, transport and communications.

However, similar to the economic malaise in Australia where the government-induced economic slowdown evolved into recession, the PRC economy also showed similar signs of stagnation. Although eighteen months of austerity measures had lowered inflation to 2.1%, after eighteen months of rising unemployment, stagnation of industrial output and a breakdown of the financial system because of debt defaults, the PRC government was forced to loosen the economic screws in the middle of 1990.

Increased investment into capital construction programmes and Township and Village Enterprises (TVEs) was the PRC's solution to reviving its economy. However, by mid-1991 signs re-emerged that the PRC's economy was about to overheat once again. Rises in industrial production within TVEs of 32% for the first half of 1991, refusal to heed calls for curbs on investment capital construction in the provinces as well as the re-emergence of double-digit inflation. The rapid growth of early 1991 indicated that the PRC government is still going to have to struggle further with enforcing its economic policies.


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