Country Profile 2005

China

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KAZAKHSTAN Manzhouli Hailar YYichunichun Jiamusi Qiqihar HEILHEILONGJIANGONGJIANG Jixi MONGOLIA Harbin Yining INNER MONGOLIA ChangcChangchunhun Jilin KYRGYZ REP. Urumqi YYanjianji XINJIANG Xilinhot TongliaoTongliao JILIN Asku TAJI KKorlaorla ChifChifengeng ShenyangShenyang FFushunushun KI KKashgarashgar NORTH ST LIAONINGLIAONING A Hohhot ZhangjiakZhangjiakouou AnAnshanshan KOREA N Dandong Sea of Japan BaotBaotouou AN. BEIJINBEIJINGG TTangshanan GH DatDatongong F Tianjin Dalian A HEBEI N YYinchuaninchuan SHANXI TA Yantai SOUTH

S TTaiyuanaiyuan ShiShijiazhuangjiazhuang Y

I NINNINGXIAGXIA e Zibo Yellow Sea KOREA JAPAN l

K l Jinan Golmud o A Xining YYanananan w SHANDONSHANDONGG Qingdao P R Lanzhou . QINGHAI Lianyungang GANSU LLuoyanguoyang Zhengzhou TTianshuiianshui Xian HENHENANAN JIANJIANGSUGS XIZANG SHAANXI Huainan (TIBET) CCHINAHINA NNanjinganjing WWuxiuxi XiangfXiangfanan XinyXinyangang WWuhuuhu Shanghai MianyMianyangang HUBEI ANHUI Main railway SICHUANSICHUAN Yangtze R. East China Chengdu WWanxiananxian WWuhanuhan Hangzhou Ningbo N Lhasa L Sea Main road a JiangJianglingling EP n c Leshan A a Chongqing ZHEJIANZHEJIANGG L n International boundary g Changde NanchangNanchang R Wenzhou . ( HUNHUNANAN Province boundary BHUTBHUTANAN M Changsha e k o NanpingNanpi International airport n JIANJIANGXIGXI g GUIZHOU HengyHengyangang INDIA R DukDukouou FUJIAN Fuzhou ) GuiyGuiyangang Capital . Liupanshui Ganzhou BBANGLADESHANGLADESH Dali Major town Kunming Shaoguan Xiamen Liuzhou TAIWAN Other town YUNNYUNNANAN GUANGDONGGUANGDONG GUANGXIGUANGXI Guangzhou January 2005 NNanninganning YYulinulin Hong Kong MYANMAR Macau PACIFIC 0 km 250 500 750 1,000 (BURMA) VIETNAM Zhanjiang OCEAN 0 miles 250 500 Bay of Bengal LAOS Gulf of Haikou South China Tonking HAINAN Sea ' The Economist Intelligence Unit Limited 2005 Comparative economic indicators, 2004

Gross domestic product Gross domestic product per head US$ bn US$ ’000

China 1,586.0 Singapore

South Korea Hong Kong

Taiwan Taiwan

Indonesia South Korea

Thailand Malaysia

Hong Kong Thailand

Malaysia China

Singapore Indonesia

Philippines Philippines

Vietnam Vietnam

0 100 200 300 400 500 600 700 0 5 10 15 20 25 Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product Consumer prices % change, year on year % change, year on year

China Vietnam

Singapore Indonesia

Malaysia Philippines

Hong Kong China

Vietnam South Korea

Philippines Thailand

Taiwan Singapore

Thailand Taiwan

South Korea Malaysia

Indonesia Hong Kong

0246810 -1012345678 Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

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Contents

China

3 Basic data

4 Politics 4 Political background 6 Recent political developments 9 Constitution, institutions and administration 11 Political forces 16 International relations and defence

22 Resources and infrastructure 22 Population 24 Education 26 Health 26 Natural resources and the environment 28 Transport, communications and the Internet 30 Energy provision

31 The economy 31 Economic structure 32 Economic policy 39 Economic performance 42 Regional trends

43 Economic sectors 43 Agriculture 46 Mining and semi-processing 47 Manufacturing 48 Construction 49 Financial services 52 Other services

52 The external sector 52 Tra d e i n go od s 55 Invisibles and the current account 56 Capital flows and foreign debt 57 Foreign reserves and the exchange rate

58 Regional overview 58 Membership of organisations

60 Appendices 60 Sources of information 61 Reference tables 61 Population 61 Labour force 62 Transport statistics 62 National energy statistics

63 Government finances 63 Investment in assets by source and purpose 64 Money supply and credit 64 Gross domestic product 65 Gross domestic product by expenditure 65 Gross domestic product by sector 65 Price indices 66 Agricultural production 66 Gross agricultural output value by sector 67 Tota l s ow n a rea , by c rop 67 Miscellaneous agricultural statistics 68 Industrial production 68 Sources and uses of credit funds by state banks 69 Exports 69 Imports 70 Balance of payments, IMF series 71 External debt 71 Official development assistance 71 Position of China vis-à-vis BIS-reporting banks 72 Foreign reserves 72 Exchange rates

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China

Basic data

Land area 9,561,000 sq km

Population 1.3bn (end-2004)

Main towns Population (m) of main cities (end-2000, urban districts only) Shanghai 9.86 Shenyang 4.33 Beijing (Peking, capital) 7.61 Chengdu 3.46 Chongqing 6.61 Nanjing 3.10 Tianjin 5.33 Changchun 2.88 Wuhan 4.41 Xi’an 2.86 Guangzhou 4.36 Dalian 2.75 Harbin 4.35

Climate Continental, with extremes of temperature; subtropical in the south-east

Weather in Shanghai (altitude Hottest months, July and August, 23-33°C (average daily minimum and 4 metres) maximum); coldest month, January, -1 to 9°C; driest month, September, less than 5 mm average rainfall; wettest month, June, 160-165 mm average rainfall

Language Mainly putonghua, or Standard Chinese, based on northern Chinese (the Beijing dialect known as Mandarin); local dialects and languages are also used

Measures The metric system is used alongside certain standard Chinese weights and measures, of which the most common are: 1 catty or jin=0.5 kg 2,000 catties=1 tonne 1 picul or dan=50 kg 20 piculs=1 tonne 1 mu=0.0667 ha 15 mu=1 shang=1 ha

Currency Renminbi (Rmb), or yuan. 1 yuan=10 jiao=100 fen. Average exchange rate in 2004: Rmb8.3:US$1. Exchange rate on January 7th 2005: Rmb8.3:US$1

Fiscal year January-December

Time Eight hours ahead of GMT

Public holidays in 2005 General holidays: January 1st-3rd (New Year); February 9th-11th (Chinese New Year or Spring Festival); May 1st-3rd (Labour Day); October 1st-3rd (National Day). Holidays for particular groups: March 8th (International Women’s Day); May 4th (Youth Day); June 1st (Children’s Day); August 1st (Army Day).

Politics

The People’s Republic of China (PRC) was founded in 1949, and the Chinese Communist Party (CCP) has been in power ever since. Free-market economic reforms since 1978 have transformed the structure of the economy and raised living standards, but politically China remains a Marxist-style party-state. National leaders are not elected but emerge from the CCP’s political- bureaucratic structure. The current fourth-generation leadership, headed by Hu Jintao, began to take on the most senior positions in the leadership at the CCP’s 16th five-yearly national congress in 2002. The formal transition of power continued at the annual meeting of the National People’s Congress (NPC, China’s largely rubber-stamp legislature) in March 2003, when Wen Jiabao replaced the former premier, Zhu Rongji, and the head of the NPC, Li Peng, retired in favour of Wu Bangguo. The formal handover of power was concluded in September 2004, when Mr Hu replaced the former president, Jiang Zemin, as chairman of the Central Military Commission (the party organisation that tops the military bureaucracy). However, the new leadership is still building up informal networks of supporters within the bureaucracy, and the party faction around Mr Jiang remains influential.

Political background

The relevance of China’s past First politically united in 221 BC, China quickly became the most powerful state in East Asia, and from the Han dynasty period (206 BC to AD 220) through to the early modern period China was one of the most advanced countries in the world in terms of technology. A consciousness of the length of China’s history and the formerly pre-eminent position of Chinese culture directly informs political opinions and Chinese attitudes to international relations today. Economic reform is intended to restore China to its “rightful” position in the world.

The collapse of the Chinese In the early years of the 19th century China was confronted with the challenge Empire posed by expansionist European powers. Defeat at the hands of Great Britain in the first opium war of 1839-42 led to the cession of Hong Kong island. This was followed by further “unequal treaties” that saw the creation of a string of treaty ports and concessions along the coast held by foreign powers. These ran their own courts and collected China’s maritime customs revenue, on which were secured indemnities incurred by China as a penalty for defeat in warfare. The gradual fall of China under the sway of a handful of foreign powers came to be seen as a period of “national humiliation”. The Chinese Empire finally collapsed in 1911, but the successor Republic of China (ROC) government, led by the Kuomintang (KMT, Nationalists), proved unable to preserve the country’s territorial integrity, and China quickly disintegrated into a patchwork of semi- autonomous and sometimes warring fiefdoms.

The founding of the People’s A KMT government led by Chiang Kai-shek unified much of urban China in Republic 1927 but failed to gain complete control over the country, much of which fell into the hands of the CCP. In 1931 Japan conquered Manchuria in the north-

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east, and in 1937 Japan launched a full-scale invasion of China. The KMT government was thus occupied with fighting the Japanese as well as struggling to prevent territorial gains by the CCP. When Japan surrendered in 1945, civil war broke out. Chiang’s forces were routed with unexpected ease by the better- disciplined CCP army, forcing him to flee with the ROC government in 1949 to the island province of Taiwan (which had been under Japanese control from 1895 to 1945). On October 1st of that year the CCP leader, Mao Zedong, proclaimed the founding of the People’s Republic of China, with Beijing as its capital.

Fro m fam i n e to re fo rm The next 30 years were characterised by social and economic upheavals as landlords were punished in a drive to collectivise agriculture, dissidents were repressed and the population was subjected to a series of political campaigns. In the Great Leap Forward of 1958 the government attempted to turn China into an industrial economy overnight. The policy failed in spectacular fashion, resulting in the world’s worst ever man-made famine, in which an estimated 30m people died. In a further bout of hysteria, during the Cultural Revolution of 1966-69, Mao attempted to rouse the student “red guards” against “capitalist roaders” within the party bureaucracy. Mao’s wife, Jiang Qing, was a leading member of the leftist “gang of four” that was prominent in the years before his death in September 1976. Pragmatists within the ruling party, led by Deng Xiaoping, who had survived being purged during the Cultural Revolution, re-emerged in the wake of Mao’s death and, taking control of the government, embarked on a course of economic reform. Developments in the 1980s!market-oriented reforms, growth in the personal incomes of millions of city-dwellers, a rapid expansion of foreign trade and closer links with developed countries!brought demands for political change as well as for greater cultural openness. However, this second- generation leadership, although prepared to reform the economy, was ultimately not willing to countenance the party’s own fall from power. The party’s general secretary, Hu Yaobang, hitherto Deng’s heir-apparent, was dismissed after his policies were blamed for student demonstrations in 1986.

The Beijing massacre in 1989 The death of Mr Hu in 1989 led to more demonstrations, but this time on a much larger scale, at times involving more than 1m people. The ruling elite initially appeared unsure how to respond to these massive protests, but on May 24th Mr Hu’s successor, Zhao Ziyang, was removed from power, and on the night of June 3rd-4th the military moved to retake Tiananmen Square, at the political heart of China, which had formed the focus for the protests, killing several hundred unarmed civilians along the way. The massacre was followed by widespread arrests and executions, leadership changes!a low-profile mayor of Shanghai, Jiang Zemin, was promoted as Deng’s latest designated heir!and a period of economic and political retrenchment.

Economic reforms continue Deng’s swing to conservatism did not last long. His desire for continued economic reform was if anything strengthened by the collapse of communism in the Soviet Union and eastern Europe later in 1989!Deng concluded from this that, although political reform was dangerous, so was the failure to achieve

sustained and rapid economic growth. In 1992 he conducted a tour of the rapidly growing areas of the south, calling for faster and bolder economic reform. Deng’s calls gained prominence, and China’s economy started on a new boom phase. The southern tour proved to be Deng’s last major contribution to policymaking in China. He died in February 1997.

Recent political developments

A technocratic leadership Since the early 1990s China has been ruled by “technocrats”, with careers under Mr Jiang dominated less by political struggle than by the study of engineering and the natural sciences. Mr Jiang was successful in establishing himself as the most senior leader in his generation, but he never enjoyed the deep-seated authority commanded by Deng, let alone Mao. Under Mr Jiang the leadership was necessarily much more collective than had been the case in the past. Decisions were the outcome of debate and compromise between Mr Jiang and other senior leaders, most importantly Li Peng, who was premier and then chairman of the NPC, and Zhu Rongji, who succeeded Mr Li as premier in March 1998.

The fourth-generation Mr Jiang retired as CCP general secretary at the party’s 16th five-yearly National leadership Congress in November 2002, and as state president at the annual meeting of the full NPC in March 2003. He was replaced in both positions by the head of the fourth-generation leadership, Hu Jintao. At the same events Mr Li and Mr Zhu also retired, being succeeded as head of the NPC and premier by Wu Bangguo and Wen Jiabao respectively. The leadership handover extended much further than just to these most senior figures. Of the seven members of the outgoing politburo standing committee (PSC), the highest policymaking body in China, only Mr Hu remained in the new nine-man body that was formed in November 2002. Of the 356 officials selected at the congress to serve on the party’s central committee (CC), around 180 were newly appointed (the politburo is made up of members of the CC). Similarly far-reaching changes were made to the government bureaucracy in March 2003. These changes in themselves did not mark the end of Mr Jiang’s influence. At the November 2002 congress Mr Jiang managed to have his own political philosophy written into the party constitution alongside Marxism-Leninism, Mao Zedong Thought and Deng Xiaoping Theory. Mr Jiang’s unwieldy contribution, the Theory of the Three Represents, states that the party represents the foremost productive forces, the most advanced culture and the fundamental interests of the people. Moreover, the former president initially kept his position as chairman of the Central Military Commission (CMC, the party organisation that tops the military bureaucracy), and retained the loyalty of his power base throughout China’s political-bureaucratic system, including at least of five of the nine members of the new PSC.

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Mr Hu consolidates his Relations between Mr Hu and Mr Jiang were reported to be poor!the new position general secretary was hand-picked for the top jobs not by his immediate predecessor but rather by Deng Xiaoping!but Mr Hu is generally considered to have made unexpectedly rapid progress in consolidating his position as China’s “core” leader. Help in this task came from an unexpected source: the spread in the early months of 2003 of a highly contagious disease, Severe Acute Respiratory Syndrome (SARS). The government initially tried to cover up the outbreak, but was undermined when information about the spread of SARS emerged anyway. Officials then came clean, ministers were sacked to take the blame for the cover-up, and tackling the disease became the government’s top priority. The government’s success in bringing the disease under control!the World Health Organisation (WHO) declared China SARS-free on June 24th!was not the only factor that has bolstered the positions of Mr Hu and Mr Wen. China’s success in October 2003 in becoming only the third country in the world to undertake a manned space mission boosted the popularity of the whole regime. Mr Hu and Mr Wen have also worked hard to cultivate “men of the people” images. They have both visited rural and run-down urban areas, are reported to have called on the media to focus less on the activities of leading officials and instead run stories with more direct relevance to the lives of ordinary people, and have exhorted party officials to identify more closely with ordinary people. Mr Hu has also broached the subject of political reform, issuing a vague call for an expansion of “socialist democracy”.

A limited New Deal is The emphasis on social justice and good-quality public administration under promised Mr Hu and Mr Wen has been described as China’s New Deal. But the government has also been at pains to emphasise that the one-party state is not about to be dismantled. Socialist democracy is being interpreted as allowing local-level People’s Congresses, elected along Communist lines, to supervise government work. In a sign of the limits of the current more open approach to governance, open debate on constitutional reform and discussion of the 1989 Beijing massacre were curtailed in late 2003 and early 2004. The Chinese government has taken a notably hard line on democratic aspirations in Hong Kong!in April 2004 the standing committee of the NPC issued an interpretation of the Basic Law, Hong Kong’s mini-constitution, ruling out any constitutional changes that would increase the role of Hong Kong residents in electing the territory’s legislature and chief executive. Relations with Taiwan also became more tense in the run-up to and in the aftermath of the March 2004 presidential election on the island. Mr Hu has taken the opportunity to install his supporters in key positions in provincial bureaucracies, but the party faction around Mr Jiang remains influential, particularly on key issues such as international affairs and the handling of Taiwan and Hong Kong. However, in a sign that Mr Hu is managing to build support for his leadership, Mr Jiang resigned his last position as chairman of the party’s CMC in September 2004, being replaced by Mr Hu.

Important recent events

2000 In March the candidate of the officially pro-independence Democratic Progressive Party, Chen Shui-bian, is elected as president in Taiwan. The US Congress (legislature) votes to grant permanent normal trade relations (PNTR) status to China. Never- theless, relations with the US remain difficult, and shared concerns about the US National Missile Defence system plans bring China and Russia closer together. 2001 At the March meeting of the National People’s Congress (NPC, the legislature), the tenth five-year plan is unveiled, with an emphasis on continuing economic reform, and with membership of the World Trade Organisation (WTO) a key aim. At its second attempt, China wins the right to stage the Olympic Games, which will be held in 2008 in the capital, Beijing. The new US administration under the presidency of George W Bush takes a more assertive stance towards China, and Sino-US relations appear to be upset when a US spy plane and a Chinese military jet collide just outside China’s national air space in April. Remaining obstacles to China’s accession to the WTO are overcome in the immediate aftermath of the September 11th terrorist attacks on the US, which prompt China to join the US-led coalition against terrorism. China officially accedes to the WTO on December 11th. 2002 In May the vice-president, Hu Jintao, visits the US, where he becomes the first senior Chinese official to visit the Pentagon, the centre of US defence operations. In November Mr Hu becomes general secretary of the Chinese Communist Party (CCP) at the party’s 16th congress. Jiang Zemin’s theory of the Three Represents!which holds that the CCP represents the foremost productive forces, the most advanced culture and the fundamental interest of the people!is officially adopted as party ideology. This is designed to legitimise the party’s turn towards capitalism and to allow private entrepreneurs to join the party. 2003 In March Mr Hu becomes state president, and Wen Jiabao is made premier. The two men soon face their first real test, when a new disease, Severe Acute Respiratory Syndrome (SARS), begins to spread rapidly. The leadership’s initial attempts to cover up the outbreak fail. The health minister, Zhang Wenkang, and the mayor of Beijing, Meng Xuenong, are made scapegoats for this approach and are sacked. Fighting the disease then becomes a priority, and rapid progress is made, with China being declared SARS-free on June 24th. During the remainder of the year Mr Hu consolidates his position, issuing a call for “socialist democracy” and basking in the nationalist glow generated by the successful October launch of China’s first manned space mission. Trade tensions with the US build, but overall relations between China and the US are characterised by a closeness not evident for several years. 2004 During the first half of the year the government ratchets up efforts to cool the rapidly growing economy, arousing surprisingly vocal opposition from some local-level leaders. Even so, Mr Hu and Mr Wen cement their authority yet further, and manage to ease Mr Jiang out of his last formal party position as chairman of the Central

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Military Commission (the body that controls China’s armed forces) in September. Relations with Taiwan remain tense following the March re-election of Mr Chen. The central government appears to be successful in facing down demands for wide- ranging political change in Hong Kong. Constitution, institutions and administration

Two constitutions China has not one but two constitutions: the state constitution, and that of the ruling CCP. Amendments to the state constitution tend to follow changes to the party’s constitution. The latter was revised in November 2002 to state that “the Communist Party of China is the vanguard both of the Chinese working class and of the Chinese people and the Chinese nation”, and to include Mr Jiang’s theory of the Three Represents as part of the party’s official ideology, alongside Marxism-Leninism, Mao Zedong Thought and Deng Xiaoping Theory. These changes were aimed at widening the party’s appeal, and in particular upgrading the status of the private sector. In March 2004 the NPC amended the state constitution to incorporate the theory of the Three Represents. Other amendments guaranteed the inviolability of “lawful private property” as well as respect for human rights.

The NPC In theory, the supreme organ of state power is the National People’s Congress (NPC). NPC representatives are replaced every five years. The body passes laws and treaties, nominates the executive and approves the constitution. It has around 3,000 members, indirectly elected by lower-level people’s congresses. It meets in plenary session for two to three weeks each year, usually in March- April. Between sessions, many of its powers are vested in a standing committee. As in other party-state systems, the legislature is subordinate to the party. But in recent years the NPC has been encouraged to take more seriously its duty of holding the government to account. Between plenary sessions, the NPC’s standing committee and its specialist groups have taken a more active role in questioning government proposals and developing legislation. At the plenums themselves, deputies have expressed their displeasure with leading officials: at the 1999 NPC, about 25% of delegates either abstained or voted against the reports presented by the heads of the People’s Supreme Court. The NPC’s standing committee also plays a constitutional role as interpreter of Hong Kong’s Basic Law, or mini-constitution.

The CPPCC The Chinese People’s Political Consultative Conference (CPPCC) is a powerless forum that supposedly provides for policy consultation between the ruling party and other social and political organisations. Represented on the body are eight nominal “democratic parties” that support the leading role of the CCP, as well as women’s organisations, religious bodies and representatives of Hong Kong, Macau, Taiwan and Overseas Chinese.

The State Council The highest organ of state administration is the State Council, which is, in effect, the cabinet. Its composition is determined by the NPC, acting on party recommendations. It is led by the premier, who has a term concurrent with the five-year life of the NPC. The work of the State Council is presided over by an executive board, usually with about 15 members, composed of the premier, his

deputies, state councillors and a secretary-general. Below the State Council are the various ministries and commissions, as well as a number of important state-owned enterprises (SOEs). The government bureaucracy is subject to periodic restructuring. In 1998 the number of central government ministries was cut from 40 to 29, and one-half of the 8m civil servants employed in the central government were laid off. In 2003 the Ministry of Foreign Trade and Economic Co-operation was merged with some functions of the State Economic and Trade Commission and the State Development and Planning Commission to form a new Ministry of Commerce. At the same time a new State Asset Management Commission and China Banking Regulatory Commission were formed.

The provinces For administrative purposes China is divided into 22 provinces, five autonomous regions and four municipalities. The provinces range from the most populous and crowded, Henan, with an estimated 96.7m people in 2003, to Qinghai, with 5.3m. The most recent adjustment to boundaries took place in March 1997, when the administrative area of Chongqing, with a total population of 31m, comprising a city of around 6.6m together with surrounding districts and counties, was separated from Sichuan, formerly the most populous province. (The other three municipalities are Beijing, Shanghai and Tianjin.) The so-called autonomous regions are so in name only. The term, however, recognises the pre-revolutionary predominance of non-Han ethnic groups in Guangxi (the Zhuang ethnic group), Tibet, Xinjiang (the Uighurs, Turkic- speaking Muslims), Inner Mongolia (the Mongols) and Ningxia (the Hui, Chinese-speaking Muslims). China also has two Special Administrative Regions (SARs), Hong Kong and Macau. These are autonomous from the rest of China, having separate governments, legal systems and quasi-constitutions (Basic Laws). The central government is, however, responsible for the foreign affairs and defence of Hong Kong and Macau.

Local governments Below the provincial level, in 2003 there were 51 rural prefectures, 282 prefecture-level cities, 374 county-level cities and 1,642 other counties. There were 660 cities (including the four municipalities) and 845 urban districts. As urbanisation proceeds, the tendency is for the number of administrative divisions classified as urban to rise. Counties are subdivided into townships and villages. A measure of direct electoral democracy is in place at the village level, where triennial elections are now held for around 3.2m village leaders. More recently, officials have started to experiment with grass-roots direct elections in urban areas, and, on a more limited scale, polls for township chiefs. By giving people an institutionalised way of expressing their dissatisfaction with officialdom, the government hopes that it can prevent the population from resorting to less orthodox!and more destabilising!methods, such as street protests. However, these polls remain peripheral to the main system of government in China; elected village officials are also officially subordinate to village CCP secretaries, almost all of whom are still appointed officials. This is something that officials in the CCP, anxious to maintain their own power, are in no rush to change.

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The State Council

Leaders Premier: Wen Jiabao Vice-premiers: Huang Ju, Zeng Peiyan, Hui Liangyu, Wu Yi State Councillors: Zhou Yongkang, Cao Gangchuan, Tang Jiaxuan, Hua Jianmin, Chen Zhili Ministries and Commissions under the State Council, with ministers Ministry of Foreign Affairs: Li Zhaoxing Ministry of National Defence: Cao Gangchuan State Development and Reform Commission: Ma Kai Ministry of Education: Zhou Ji Ministry of Science and Technology: Xu Guanhua State Commission of Science, Technology and Industry for National Defence: Zhang Yunchuan State Ethnic Affairs Commission: Li Dek Su Ministry of Public Security: Zhou Yongkang Ministry of State Security: Xu Yongyue Ministry of Supervision: Li Zhilun Ministry of Civil Affairs: Li Xueju Ministry of Justice: Zhang Fusen Ministry of Finance: Jin Renqing Ministry of Personnel: Zhang Bolin Ministry of Labour and Social Security: Zheng Silin Ministry of Land and Resources: Sun Wensheng Ministry of Construction: Wang Guangtao Ministry of Railways: Liu Zhijun Ministry of Communications: Zhang Chunxian Ministry of Information Industry: Wang Xudong Ministry of Water Resources: Wang Shucheng Ministry of Agriculture: Du Qinglin Ministry of Commerce: Bo Xilai Ministry of Culture: Sun Jiazheng Ministry of Health: Wu Yi State Population and Family Planning Commission: Zhang Weiqing People’s Bank of China: Zhou Xiaochuan National Audit Office: Li Jinhua Political forces

The CCP In June 2002 the CCP had 66.4m members, 5.2% of the total population, making it the largest political party in the world. Only 11.6m (17.5%) were women; 4.1m (6.2%) were from ethnic minorities. The membership is relatively old (77.7% of members are aged over 35), but 75% of the 11.9m new members recruited in 1997-2002 were under the age of 35, and 78.6% of the new members had received education at high-school level or above. By contrast, only 52.5% of the general membership have received a high-school education. The party claims that women accounted for 25.4% of new recruits in 1997-2002. Joining the party

traditionally offered the promise of both material and professional benefits, and is still important for ambitious government officials. For the rest of the population, however, the attractions of party membership are fading as the CCP loses the dominance in everyday life that it previously enjoyed. The CCP’s structure parallels and supervises that of the government and the legislature. Its main decision-making body is the central committee. Currently having 198 full members and 158 alternate members, the central committee meets in plenary session about twice a year. In the interim most of its power is vested in the politburo, which has 24 members at present. Above the politburo stands the politburo standing committee (PSC), the most powerful political institution in China, which currently has nine members. Membership of the central committee, the politburo and the PSC are decided upon at the CCP’s national congress, which is held every five years, normally in the months preceding the first session of a new NPC. The most recent CCP National Congress, the 16th, was held in November 2002.

Party secretariats and The apparently clear-cut line of pyramidal control within the CCP is commissions complicated by its various secretariats and commissions, as well as issue-based leading committees. The general secretary is the party leader (following the abolition in 1980 of the post of chairman), and has the power to convene politburo meetings. The central secretariat handles the day-to-day business of the party. The Central Commission for Discipline Inspection, which has responsibility for the internal discipline of the party!and hence manages a strong network of informers, spies and personnel files!is a particularly powerful body. Apart from the PSC, the work of the government is co-ordinated through leading groups, which bring together senior officials to formulate policy on particular issues, such as foreign affairs and Taiwan.

Corruption among officials Immediately after the government had embarked on a programme of economic reform in 1978, the legitimacy of the CCP rose as the standard of living of ordinary people improved rapidly. Since then, the popularity of the party has faltered. Endemic official corruption has been a major cause of the party’s popularity woes. In recent years the resultant discontent has been exacerbated by economic changes that have led incomes in rural areas to stagnate, and by government attempts to reform SOEs that have resulted in large numbers of lay-offs. In an example of this disgruntlement, in March 2002 thousands of former state workers took to the streets of two cities in China’s north-east, complaining about the non-payment of welfare, income and severance benefits and the enrichment of party officials. These were perhaps the largest worker- initiated protests in the history of the PRC. (Although involving some workers, the momentum for the huge 1989 protests had been provided by students.) Such social discontent clearly represents a serious challenge to CCP power. Officials have been working to rationalise pension, unemployment and medical care systems, but the task is both hugely complex and expensive, and so far they have made little more than a start. The government has also been trying to stamp out graft. Orders to officials to refrain from many kinds of economic activity are frequently reiterated. People who fail to meet standards of integrity are, in theory, excluded both from CCP membership and from

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employment as officials!the party claims that 124,000 members were expelled in 1997-2002. More senior officials are being convicted of graft, and are being subjected to seemingly ever more serious punishments: in September 2000 the vice-chairman of the NPC, Cheng Kejie, was executed after being found guilty of corruption. (Although not all executions are corruption-related, according to Amnesty International, a UK-based human rights watchdog, at least 726 people were executed in China in 2003, a figure that is likely to be a gross underestimate of the real figure.) In late December 2004 five members of the NPC were expelled from the legislature for corruption. Given the problems in the state-owned sectors of the economy, lay-offs are likely to continue. Graft will also persist because it is essentially the result of a half-reformed economic system and a ruling party that is above the law!causes that the willingness of the authorities to arrest, prosecute and sometimes shoot corrupt officials does nothing to address. Popular discontent is therefore unlikely to disappear soon.

The PLA The army was reduced in size in the 1980s, but following the bloody crackdown by the military on popular demonstrations in 1989 the armed forces gained a greater political role. In the immediate aftermath of the massacre there were reports that a number of generals had attended meetings of the politburo, albeit in a non-voting capacity. The influence of the People’s Liberation Army (PLA, China’s military) was still being felt several years later. China’s large intimidatory military exercises in the Taiwan Strait in 1995 and 1996 appeared to reflect the need of Mr Jiang and other leaders to pander to the hawkish views of the military. An order issued by Mr Jiang in July 1998 for the military to give up its business empire suggested that the civilian leadership was trying to reduce the direct political power of the PLA. The military is, however, unlikely to be pushed out of politics completely; its profile and clout were raised by heightened tension with Taiwan in 1999-2000. Ultimately the PLA’s political power is guaranteed by its role as the protector of party rule in China. Control over the army is vested in two parallel commissions, the State Central Military Commission (CMC) and the Party Central Military Commission. The bodies usually have identical memberships, and meetings of the State Central Military Commission are rarely reported, leaving no doubt as to where the real power lies. The chairmanships of the two commissions were the last official leadership positions that Deng Xiaoping occupied. He held the posts until 1989-90, when he handed both jobs to Mr Jiang, who resigned from the party position in September 2004. The CCP general secretary, Hu Jintao, is currently chairman of the party CMC; Mr Jiang will remain chairman of the state CMC until spring 2005.

The ruling party’s monopoly The CCP has tried hard to maintain China’s monolithic power structure, on political power leaving various identifiable interest groups in effect underrepresented. Although there are national organisations supposedly looking after the interests of women, farmers and workers, all are tame bodies that are pliant to the will of the CCP. Even before the CCP mobilised against student protesters in 1989, it had denounced as “counter-revolutionary” the independent trade unions that had sprung up during the protests. The CCP remains nervous of any sign of

organisation among workers, mindful of the role of the trade union-based Solidarity movement in the downfall of Communist Party rule in Poland. The party traditionally enforced social control and political discipline in large measure through the pervasive role of the “work unit”. State-owned factories provided not just a salary but also housing, education and political indoctrination. The so-called neighbourhood committees, often composed of retired workers, provided another mechanism of control in the cities, in such areas as family planning and crime prevention. These systems of social control are, however, gradually breaking down. This is partly the unintended result of government policy, as the government pursues structural reform of the SOEs. It is also because greater social mobility and the aspirations stimulated by 20 years of strong income growth have made people less susceptible to constant surveillance. Organised dissent or questioning of the CCP’s right to rule is not tolerated. Any form of organisation that can mobilise large numbers of people is regarded as threatening. This remains true even 50 years after the founding of the PRC. For example, after 10,000 of its adherents protested in Beijing in 1999, a spiritual group, Falun Gong, was outlawed as an “evil cult”, and has since been subjected to a fierce campaign of repression. Political leaders accept that vocal resistance to the process of reform by SOE workers who have lost jobs is inevitable, but any attempt to organise such protests is treated harshly. The globalisation of information through the Internet is also seen as a potential threat, and access to Internet sites is censored, as are the national media. Separatist aspirations in Tibet, or among the Muslim Uighur population centred in Xinjiang in the west, are also suppressed. The rise of radical Islamist movements in central Asia, which might lend support to Uighur separatists, is a serious concern, and this is one of the factors behind China’s support for the US-led “war on terror”.

Decentralisation of power Although the CCP reacts strongly to the growth of regional independence movements, local governments have at times in the past 50 years gained some degree of autonomy. Given China’s topography!the PRC is almost as big as the US, and some provinces have populations as large as those of significant countries!this is perhaps not surprising. The attitude of the central authorities in Beijing has also been important. During the 1960s and 1970s attempts by Mao to “unleash the masses” led to decentralisation, but the chaos that ensued inevitably meant that these phases were followed by periods of recentralisation. Since then there has been a more consistent trend towards decentralisation, as resource mobilisation powers and spending responsibilities have been devolved to local governments. Local governments have also increasingly become entrepreneurs and major stakeholders in local enterprises, seeking to maximise employment and revenue-raising opportunities in the areas under their jurisdiction, regardless of the policy instructions of the central government. The central government is far from powerless: it can still exercise considerable influence through its ability to appoint and remove leading local officials, and provincial governors are frequently reshuffled to prevent the

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emergence of a localist challenge. Moreover, the centre can usually win com- pliance, albeit sometimes reluctant and slow, with its main policies. However, some observers argue that devolution is irreversible and that, given the size and diversity of the country, the government will eventually have to be reorganised along federal lines. Main political figures

Hu Jintao General secretary of the Chinese Communist Party (CCP), state president and chairman of the Central Military Commission (CMC, the party organisation that tops the military bureaucracy). Mr Hu was party secretary in impoverished Guizhou province (1985-88), and then in Tibet (1988-92) at a time of repression in that province. He was promoted to the politburo standing committee (PSC) in 1992, and was reportedly identified by the then paramount leader, Deng Xiaoping, as the “core” figure of the fourth-generation leadership. In the same year Mr Hu was appointed as head of the Central Party School in the capital, Beijing, from where he will have been able to develop his support base and extend a network of loyalists across China. Little known at home or overseas, Mr Hu began to acquire a more public profile in the two years before becoming party leader in November 2002. Since taking on the top jobs, he seems to have settled comfortably into his new responsibilities. However, he still has some way to go in building the informal power base that is necessary to support his formal positions. Jiang Zemin The former president, Mr Jiang was Mr Hu’s predecessor as core leader. Mr Jiang was promoted from his position as CCP secretary in Shanghai to take on the most senior national leadership positions in the aftermath of the turmoil of 1989. Initially viewed as a transitory figure, he managed to build a solid power base across China’s bureaucracy. Mr Jiang, who is not believed to be close to Mr Hu, remains an influential figure. His network of support did not vanish with his retirement in 2002-04, and he maintains close relations with his protégés on the PSC. Wu Bangguo PSC member since November 2002, vice-premier on the State Council since 1995 and chairman (head) of the National People’s Congress (the legislature) since March 2003. Number two in the official party hierarchy since his elevation to the PSC, Mr Wu has held portfolios relating to industry, the economy, defence and labour. The time that he has spent in national office is, however, relatively short: he moved to Beijing only in the mid-1990s, before which time he had spent his whole career working in Shanghai. He is considered a member of the Shanghai clique, owing loyalty to Mr Jiang. Wen Jiabao A PSC member since November 2002 and the premier (head of the State Council) since March 2003. Mr Wen rose from lowly posts in geology and through the ranks of the bureaucracy to become the third most senior member of the CCP after Hu Jintao and Wu Bangguo in November 2002. He served under Hu Yaobang and Zhao Ziyang, even accompanying Mr Zhao on a tearful visit to protesters in Tiananmen Square in 1989, but survived the downfalls of both men. Mr Wen’s expertise lies in

the rural economy and finance. He has formed a close working partnership with Mr Hu, and owes no particular loyalty to Mr Jiang. Jia Qinglin A PSC member since November 2002 and head of the Chinese People’s Political Consultative Conference (CPPCC, a powerless forum that supposedly provides for policy consultation between the ruling party and other social and political organisations) since March 2003. Mr Jia rose through the party ranks in Fujian in the 1980s and 1990s, eventually becoming governor of the province. He was promoted to the city government in Beijing in 1996, and, despite the emergence of a major smuggling scandal in Fujian, joined the CCP’s politburo in 1997. Mr Jia undoubtedly owes his political survival and elevation to Mr Jiang; the two have long been close friends. Zeng Qinghong A PSC member since November 2002 and vice-president since March 2003. Mr Zeng’s career is based on two relationships. He is the son of an early revolutionary, Zeng Shan, and thus is the only “princeling” in the top leadership. He is also a close associate of Mr Jiang. The two men worked together in Shanghai, and their relationship continued in Beijing, where Mr Zeng became a speech-writer and political hatchet-man for Mr Jiang. Mr Jiang had long wanted to ensure Mr Zeng’s promotion, but their close political relationship meant that such a move attracted opposition from other leaders. Mr Zeng is now an important figure. He is not only a member of the PSC, but is also state vice-president, head of the Central Party School and responsible for co-ordinating mainland policy towards Hong Kong. Huang Ju A PSC member since November 2002 and vice-premier on the State Council since March 2003. Mr Huang, a long-time party secretary of Shanghai, was eclipsed by the city’s more popular mayor, Xu Kuangdi, until Mr Xu was abruptly transferred to a humble position in academia in Beijing late in 2001. Mr Huang is thought to rank sixth in the new CCP hierarchy and, like Mr Wu and Mr Zeng, is close to Mr Jiang. International relations and defence

China’s falling out with the Soviet Union in 1960 initially led to a period of isolation, but from 1972 China found itself in de facto alliance with the US against perceived Soviet expansionism. That epoch ended in 1989, when relations with the Soviet Union were normalised and the Beijing massacre undermined ties with the US. After a quiet time in the early 1990s spent trying to rebuild international relations, China’s government has become increasingly confident in projecting itself as a regional, and even global, power.

China’s relationship with Currently, the relationship with the US is China’s most important!and most the US difficult. This is not just because of unexpected upsets, which in recent years have included NATO’s 1999 bombing of China’s embassy in Belgrade, Yugoslavia, and the collision of a US spy plane with a Chinese military jet in April 2001. More fundamentally, the US has conflicting interests in China. The prospect of a huge emerging market excites US business. However, many US politicians are horrified by China’s human rights record; and, although China

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cannot claim to be a rival to the US, it is an emerging power that threatens to disturb US interests in East Asia. These differing interests have caused US policy towards China to fluctuate. Typically, US presidents have taken power promis- ing to take a more assertive line towards China, only to adopt a more conciliatory stance once firmly established in the Oval Office. Upon taking office the current US president, George W Bush, did indeed adopt a harder line towards China. But since then ties with China have warmed, with the then US secretary of state, Colin Powell, describing them in September 2003 as the best they have been since the early 1970s.

The Taiwan issue One of the main long-standing and tangible irritants to Sino-US relations has been the issue of Taiwan. Ever since Chiang Kai-shek and the Republic of China (ROC) government fled there at the end of the Chinese civil war in 1949, Taiwan has been a de facto independent state (the government in Taiwan still proclaims its official name to be the Republic of China). However, it does not have de jure independence: the ROC government is recognised by just 26 countries worldwide, does not have a seat in the UN General Assembly and is a member of few international organisations. The PRC government claims sovereignty over the island and the right to retake it by force. The US government has played an important role in protecting Taiwan from the PRC’s territorial ambitions. Shortly after the end of the civil war the presence in the Taiwan Strait of the US 7th fleet deterred mainland aggression, and throughout the 1960s and 1970s US military and intelligence personnel were stationed on the island. The US has remained Taiwan’s main defender ever since: under the 1979 Taiwan Relations Act, the US is legally required to provide Taiwan with the material with which to defend itself against a Chinese attack. Under a policy of “strategic ambiguity”, the US traditionally avoided spelling out the extent of its support for Taiwan in the event of conflict, but both Mr Bush and the current US deputy secretary of defence, Paul Wolfowitz, have gone on record as saying that the US would do “whatever it takes” to defend Taiwan; the current administration has also approved the largest weapons sale to Taiwan since 1992. Still, Mr Bush’s support for Taiwan has clear limits. He has, for example, stuck to the position of his predecessors that there is just “One China”. In December 2003, apparently rattled by attempts by Taiwan’s president, Chen Shui-bian, to stir up pro-independence sentiment on the island, Mr Bush went further, saying that the US opposed “any unilateral decision, by either China or Taiwan, to change the status quo”.

Relations with Japan China’s relationship with Japan, traditionally difficult, became even more tense in 2004. The underlying tension is centred on the atrocities committed by the Japanese army during its invasion of China in the 1930s. The government in Beijing claims that Japan has never atoned properly for these acts. This is probably true, and the visits made by the current Japanese prime minister, Junichiro Koizumi, to Japan’s most famous war shine (where war criminals are memorialised among the dead) have seemed to many people in China to illustrate his country’s equivocal attitude towards its wartime past. Even so, China works hard to keep the tensions alive, as they provide a useful tool with which to seek foreign policy concessions from Japan. Despite the political

tension, economic links between the two countries have developed rapidly in recent years. Japan is now China’s largest supplier of imports and its third- largest export market.

Relations with Russia Relations between China and Russia have, curiously, improved as their governments have moved away from communism. Starting in 1989, when the president of the Soviet Union, Mikhail Gorbachev, visited Beijing, relations between China and Russia have become noticeably warmer. Unlike the relationship with, say, Japan, China’s ties with Russia are not based on economic considerations. In 2003 trade between the two countries amounted to a mere 1.8% of China’s total trade. Sino-Russian relations are instead more political in nature. For one thing, the two countries often react in similar ways to US foreign policy decisions!for example, both governments have opposed US plans to build a missile defence system. The united Sino-Russian opposition to US policy appears to have weakened slightly since the September 11th 2001 attacks on the US, but the repercussions of that incident have yet to undermine the military aspect of ties between Russia and China. In recent years Russia has been a major supplier of arms and oil to China.

North and South Korea North Korea is one of China’s traditional allies!PLA soldiers fought alongside North Korean forces in the Korean war of the early 1950s. There are, however, some signs that China has become impatient with its intractable neighbour, and in 2003 the Chinese government abandoned its long-standing non- interventionist stance to become an active participant in international efforts to try to ease tension on the Korean peninsula. This more proactive stance is part of China’s efforts to build better relations with the US, but is also a product of China’s improving ties with South Korea. Although differing on the issue of communism, China and South Korea have in common their historical experience of brutal Japanese occupation. Since the establishment of diplomatic relations in 1992, political and particularly economic ties have developed quickly, and trade with South Korea accounted for 7.4% of China’s total in 2003.

India and ASEAN Relations with other countries in Asia have at times been tense. India, the world’s second most populous nation, has long viewed China with suspicion: the two countries fought a border war in 1962, and China has enjoyed a strong relationship with India’s main enemy, Pakistan. Many member countries of the Association of South-East Asian Nations (ASEAN) have been worried by China’s regional aspirations. China attacked Vietnam in 1979, and in the 1990s asserted more aggressively its claims to sovereignty over the Spratly Islands in the South China Sea, territories that are also claimed by Brunei, Malaysia, the Philippines, Taiwan and Vietnam. Since the late 1990s, however, China has made determined attempts to improve relations with its nearest neighbours. Closer trade and investment ties have formed the basis of better relations with India, and diplomatic exchanges between the two countries have become more frequent. In November 2002 China agreed to establish a free-trade area with the ASEAN countries from 2010, and an agreement has also been reached that requires all parties to avoid any action that would lead to an escalation of tensions in the South China Sea.

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The military is modernised China’s government has in recent years been making great efforts to modernise its military, the People’s Liberation Army (PLA). Under Deng Xiaoping, the army lost about 25% of its manpower (although China still has the world’s largest standing army). The PLA has also been trying to update and modernise its weaponry, for example by buying military technology from Russia. Official defence spending has almost doubled in the past five years, but Western analysts believe that the scale of military expenditure in China is much larger than that officially budgeted!a report released in July 2002 by the US military put annual military spending in China at US$65bn, far above the US$20bn admitted by the Chinese government. The military is most likely to be called on to use its new technology in a conflict over disputed waters and islands in the South China Sea, in a new Korean conflict or, conceivably, in the recovery or blockade of Taiwan.

Comparative military forces, 2004/05 China Japan Russia Taiwan US Army Personnel 1,600,000 148,200 360,000 200,000 502,000 Main battle tanks 7,580 980 22,800 926 7,620 Navy Personnel 255,000 44,400 155,000 45,000 376,750 Frigates 42 9 10 21 30 Submarines 69 16 51 4 72 Air force Personnel 400,000 45,600 184,600 45,000 379,500 Combat aircraft 1,900 280 1,736 479 3,513

Source: International Institute for Strategic Studies, The Military Balance, 2003/2004.

Security risk in China

I. Armed conflict China’s foreign policy is aimed at providing a peaceful international environment within which it can develop its economy. The capability of its armed forces is defensive rather than offensive, although the People’s Liberation Army (PLA, China’s military) is working towards establishing the capacity to allow it to retake Taiwan by force if necessary. China’s posturing towards Taiwan currently takes the form of regular military exercises designed to intimidate the island’s leaders, discourage them from making a formal declaration of independence and instead persuade them to “rejoin the motherland”. China has formally stated that a declaration of independence would be a casus belli, as would the introduction or indigenous development by Taiwan of nuclear weapons, or the arrival of foreign troops on the island. In the current environment a declaration of independence by Taiwan’s leaders is unlikely, as it would be unpopular domestically: the vast majority of local people, although not desiring immediate unification, favour the maintenance of the status quo. Foreign troops would not be posted on the island unless a crisis had already developed in the Taiwan Strait. Taiwan probably has the capacity to develop nuclear weapons, but it is unlikely to do so. Although the three conditions stated as grounds for war are unlikely to be met, conflict is still possible. China’s leaders have in recent years stressed a fourth ground

for attack, namely an “indefinite” refusal by the island’s government to enter into reunification negotiations. Presumably the definition of “indefinite” is in the hands of the mainland government. Nevertheless, a full-scale invasion is unlikely, at least in the next five years, and probably not even in the longer term. This is because it is doubtful that China could yet successfully take Taiwan by force. Taiwan itself has a strong military, and China’s offensive capability is still limited. Even though the balance of forces across the Taiwan Strait is clearly shifting in China’s favour, the mainland might not emerge victorious in a battle for Taiwan: such an attack could, after all, provoke US intervention. Given these considerations, more likely than a full-scale battle would be an exchange of missiles. China has been building up its missile forces in Fujian, the coastal mainland province that faces Taiwan. Through such an attack China would inflict great damage on Taiwan, and would perhaps do so quickly enough to avoid US military intervention. But even this strategy would be far from cost-free for China. Taiwan long ago abandoned its own threat to invade the mainland, and has absolutely no interest in attacking China. It has, however, stated that it could react to a missile attack on its cities with retaliation in kind against the port areas of Shanghai and Hong Kong. Furthermore, any mainland attack on Taiwan deemed to have been unprovoked would almost certainly lead to the imposition of economic sanctions on China by Western governments. The other major military threat for China comes from the continuing stand-off between North and South Korea. China fought with North Korea in the Korean War, but the strength of historical ties between the two countries has been undermined by economic reform. China would be highly unlikely to intervene in a war, especially if the conflict were to be triggered by North Korea itself. A large-scale North Korean attack on the South would be swiftly followed by the US-led destruction of the North Korean regime under Kim Jong-il and its military forces!an outcome that could only be slowed, not prevented, by the intervention of China’s own forces. Given that such a conflict would also be likely to trigger huge and unwanted flows of refugees into China, officials in the Chinese capital, Beijing, can be relied upon to do their utmost to achieve a peaceful, diplomatic resolution of the dispute on the Korean peninsula. II. Civil unrest Social unrest is on the rise in China as state-owned enterprises (SOEs) shed labour, rural incomes stagnate and corruption remains rife. In an example of this disgruntlement, tens of thousands of unemployed workers took to the streets in the north-eastern city of Liaoyang in March 2002 to protest about the non-payment of welfare benefits. In the same month in Daqing, another city in the north-east, thousands of laid-off oil workers demonstrated against low severance benefits. These protests are thought to have been the biggest in China since the huge nationwide demonstrations of 1989, and were perhaps the largest worker-initiated protests in the history of the People’s Republic of China (PRC). According to government statistics, between 1998 and end-2004 around 30m people were laid off from SOEs. These are huge numbers, but the problem is not the scale of redundancies per se. More pertinent is the fact that struggling SOEs, and consequently lay-offs, tend to be concentrated together in areas where there are few alternative employment opportunities!notably the north-east. Furthermore, because China still lacks a functioning social security system, the affected workers are often

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denied adequate welfare payments. The government has been rushing to put in place an alternative benefit system, but is clearly struggling both to provide the necessary resources and to establish a distribution mechanism that is not built around individual work units. As a result, worker unrest is likely to trouble China’s leadership for some years to come. Protests in rural areas have also become increasingly common in recent years. Farmers suffer from the arbitrary imposition of ad hoc fees and charges by corrupt local officials. The levying of such fees imposes a particularly heavy burden on farmers because rural income growth has fallen sharply in recent years. The government tends to react to such protests by addressing some of the complaints raised and arresting those identified as the “ringleaders”. It comes down with a particularly heavy hand on any local protest that threatens to develop into a national movement!officials are quick to act against trade unions organised without the consent of the Chinese Communist Party (CCP). Foreign nationals who witness protest demonstrations are unlikely to be harmed, as it is domestic officialdom, not foreigners, who are the focus of animosity. Identifiably foreign people who take photographs or videos of such events may, however, find themselves the subject of attention from the local public security bureau (the Chinese police), especially if it is suspected that they might be gathering evidence of official misbehaviour. The worst punishment is likely to be confiscation of the film or videotape and expulsion from the country. Nationalism is on the rise in China. This partly reflects the growing sense in China that the country is becoming more important as a regional!some hope global! power. However, it is also a reflection of government policy, as officials stoke up nationalist feeling to deflect attention from the country’s economic woes. Thus, in the aftermath of the 1999 NATO bombing of the Chinese embassy in Belgrade, Yugoslavia, the government laid on transport to ferry demonstrators to the embassies of the US and other countries. Even so, officials seem wary of the potential for nationalist sentiment to develop to the extent that it destabilises China’s external relations and perhaps even the CCP regime itself. The government thus called a halt to the 1999 protests just a few days after they had begun. In March 2000 officials refused a request from students appealing to be allowed to demonstrate against the election in Taiwan of a new president, Chen Shui-bian. (Mr Chen’s Democratic Progressive Party has historically called for the establishment of an independent Taiwan.) The government has so far managed to exert control over nationalist anger, but there is the danger that it will not be able to do so as successfully in the future. In any case, at times of heightened international tension it is advisable for foreigners to stay away from public places, or at least to avoid being identified (correctly or otherwise) as members of the nationality that happens to be the current object of vilification. III. Crime As in other one-party states that have opted for far-reaching economic reform, the rapid rate of change experienced in China over the last 20 years has been accompanied by a rise in petty crime and gangsterism. The government has reacted to the increase in general crime in China with a series of “strike hard” campaigns. However, although these have resulted in a large number of executions!according to a UK-based human rights watchdog, Amnesty International, at least 726 people were executed in 2003!they have not prevented the general level of crime from rising,

albeit from what would be seen in international terms as a low base. This is not surprising. The rise in general crime reflects both a weakening of the control previously exercised by the CCP authorities, and the real increase in economic hardship faced by particular groups in society. Chinese officials particularly detest the loss of face abroad caused by crimes against foreigners, so these always incur extremely harsh punishment. Although it is advisable to take the same precautions with personal property in Shanghai as would be appropriate in London or New York, and to avoid situations (such as black-market currency transactions or buying pirated DVDs in dark back streets) that give the advantage to the criminal, serious crime against foreigners (such as murder or rape) is rare. China is one of the safest countries in the world for foreign females. Opium is grown in China’s south-west, particularly in the province of Yunnan, and then shipped worldwide. At the same time Chinese cities, like those in other countries, have a growing problem of narcotics dependency. The persistence of the trade in illegal substances owes much both to official corruption and to a revival of organised crime, in the form of the triads (ethnic-Chinese criminal gangs). There have been some successes in the war against the triads, for example the suppression of triad street killings in Macau after China regained sovereignty over the territory in December 1999, but organised crime has not been eradicated, either in mainland China or in Hong Kong or Macau. Resources and infrastructure

Population

A huge population China’s huge population is both its greatest resource and its greatest challenge. The population grew at an estimated average rate of 1% a year between 1991 and 2002, and at the end of 2004 was officially estimated at 1.3bn (the 1.3-billionth Chinese was officially held to have been born on January 6th 2005). This may prove to be an underestimate, because under-reporting of births has become common since a harsh one-child-family policy was introduced in 1980. So unpopular was the policy in the countryside that local officials have relaxed its application in many areas to allow families whose first child is a girl a second chance at producing a boy. Nevertheless, the crude birth rate fell from 37 per 1,000 head of population in 1952 to 12.4 per 1,000 in 2003. The death rate fell from 17 per 1,000 head of population in the early years of the People’s Republic of China (PRC) to 6.4 per 1,000 in 2003. China’s population is expected to continue growing until the middle of the 21st century, by which time the government hopes that it will have stabilised at 1.6bn.

The population is ageing Largely owing to the one-child policy, the proportion of the population aged 65 years and over in China is growing rapidly. According to the World Bank, the proportion of China’s population aged 65 and over will rise from just 9% in 1990 to 22% by 2030. This is a slower rate of growth than in Japan, where the proportion of the population aged 65 and over rose from 10% to 20% in just 24 years. In Germany, the same age shift took 56 years and in Sweden 85 years. Still, by 2030 more than one-quarter of the world’s population of pensionable age will live in China. In the late 1990s each retired person in China was

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supported by ten workers. By 2020 this ratio will have fallen to 1:6, and by 2050 to 1:3. Between 1990 and 2000 the number of people in China aged between 15 and 64 years increased by more than 131m, from 756.6m to 888m. According to the OECD, a further 70m people will enter the workforce in the coming decade. Proportionately, the urban workforce is rising even more quickly, as thousands leave the countryside, where unemployment and underemployment prevail, to find employment in the cities. It is the pressure of the steady increase in the size of the workforce, more than any other single factor, that has dictated the government’s strategy of pursuing high economic growth despite the attendant social and political risks.

Population indicators (m unless otherwise indicated; census results) 1990 2000 Population 1,133.7 1,265.8 Crude birth rate (per 1,000 population; %) 21.1 14.4 Natural growth rate (per 1,000 population; %) 14.4 7.6 Average size of household 3.96 3.44 Han Chinese population 1,042.5 1,159.4 Ethnic-minority population 91.2 106.4 Sex ratio (male/female) 106.6 106.7 Urban population 299.7 458.4 % of total population 26.4 36.2 Population aged 0-14 (% of total) 27.7 22.9 Population aged 15-64 (% of total) 66.7 70.2 Population aged 65 & over (% of total) 5.6 7.0

Source: National Bureau of Statistics, China Statistical Yearbook 2003.

Ethnic minorities At the time of the 2000 census Han Chinese made up 91.6% of China’s total population. Ethnic minorities, which include the Zhuang, the Uighurs and other Turkic groups, the Tibetans, the Mongols and several dozen others, are growing much faster than the Han population, which is reflected in a 16.7% increase in minority numbers compared with the 1990 census, as against an 11.2% rise in Han numbers. Some minorities have been granted exemptions from the one- child family policy. Tibetan and Mongol nomads, for example, are usually “allowed” to have three children and often disregard restrictions anyway.

Income equality China has seen a rapid growth in income inequality in the reform period. This is true not only in terms of the increased inequality within urban China, but is also seen in the gap between urban and rural China and between the eastern seaboard and the less prosperous western and central provinces. By 2000 income inequality, as measured by the Gini coefficient, had risen to 0.458 (where 0 represents an equal distribution of wealth and 1 represents extreme inequality), up from 0.424 in 1996. In international terms, this would put China’s income inequality ahead of that of the US!estimated at 0.408 in 1997! but behind countries such as Russia, where according to the World Bank the Gini coefficient was 0.487 in 1998. Sun Liping, a sociologist at China’s prestigious Qinghua University in the capital, Beijing, estimated in late 2004 that China’s Gini coefficient has risen to 0.48.

Inequality within and between urban areas is partly related to the diverging fortunes of different types of enterprise. Standards of living in towns and cities dominated by state-owned enterprises (SOEs) were relatively high in the pre- reform period. They have begun to slip since then as SOEs have struggled to cope with the structural changes!not least the sharp rise in competition! unleashed by the process of economic reform and opening. Workers in foreign- invested enterprises, meanwhile, have been able to command incomes well above the national average: the average wage of fully employed staff and workers in the capital, Beijing, in 2003 was Rmb25,312 (US$3,060), but the average in Beijing’s foreign-funded units was Rmb44,653. Admittedly, in the early days of the reform period the financial gain from employment in an SOE was not reflected fully in the wage because state-sector workers enjoyed welfare benefits and job tenure that were rarely found in the private sector. In recent years, however, even this has begun to change as the government has sought to break the state sector’s “iron rice bowl”!30m people, for instance, were laid off from SOEs between 1998 and 2004. The gap between urban and rural China has also been growing in recent years. In 2003 income per head had risen to Rmb8,472 in urban areas and Rmb2,622 in rural areas, compared with Rmb4,283 and Rmb1,578 respectively in 1995. Urban income per head is therefore now 3.2 times that in the countryside, up from 2.7 times rural income in 1995. The opening up of China to foreign investment and trade has naturally favoured provinces with good transport links to the outside world!Guangdong, Shanghai, Jiangsu!at the expense of the huge Chinese hinterland. The reform period also saw the abandonment of the “Third Front” development policies of the 1960s and 1970s, which stressed the development of industries in central provinces for strategic reasons.

The government attempts to Regional disparities and rural discontent and are now major political issues in tackle inequality China. In an attempt to promote the development of China’s inland regions, in 1997 the municipality of Chongqing was hived off from Sichuan province, and this has been followed by a more generalised attempt to accelerate economic growth in the west. Government leaders now also announce initiatives to relieve rural poverty with increasing frequency. However, resolving the inequality that has built up will be a difficult task. Foreign investors have been reluctant to respond to government exhortations to invest in western China, given the region’s poorer transport links to eastern ports. It is unclear how the problem of rural poverty can be decisively dealt with until urban China can create sufficient labour opportunities to absorb tens of millions of migrant workers from the countryside.

Education

Literacy rates are high but Since the formation of the People’s Republic of China (PRC) in 1949, great uneven strides have been made in basic-level education. By 2003 the number of illiterate and semi-literate people had fallen to 110m, 11% of the total population over 15 years of age (it should be borne in mind, though, that Chinese government figures relate to “functional literacy”; a more stringent definition of literacy, as used by the UN Development Programme, would give a literacy rate

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of a still impressive 80%). Official figures show that 98.7% (107.6m) of school-age children were enrolled in school in 2003. Around 97.9% of primary school students go on to junior high school, of whom a further 60.2% enter senior high school. Student-teacher ratios in 2003 were 20.5:1 in the case of primary schools and 18.9:1 for secondary schools. However, the overall figures mask some weaknesses, particularly in basic-level education. The proportion of illiterate and semi-literate people was lowest in Jilin province, at 3.9% in 2003, but was as high as 54.9% in Tibet and above 10% in 14 other provinces. Many rural schools are inadequately funded, relying on charges paid by local families, and there is widespread truancy and absenteeism, despite the requirement of a notional nine years of compulsory education (six years at primary-school level and three years in junior middle school).

Higher education expands There were 1,552 universities and institutions of higher education in 2003, up rapidly from 1,396 in 2002, with a total student enrolment of 11.1m (3.7m of whom were studying engineering and 1.8m of whom were studying management). In 1990 only 2.1m students had been enrolled in 1,075 institutions of higher education. The rapid rise in enrolments has been accompanied by a sharp rise in the student-teacher ratio. This stood at 15.3:1 in 2003, compared with 4.2:1 in 1978 at the beginning of the reform period. University entrance is generally on a meritocratic basis and highly competitive!a national university entrance examination ranks all students. Students with poor scores often end up studying unexpected subjects in remote institutions. China had 651,260 students enrolled as postgraduates in 2003 (up from 500,980 in 2002), when 111,091 postgraduate degrees were awarded, as well as 117,307 students studying abroad (down from 125,179 in 2002, but nevertheless a large jump from the 38,989 studying abroad in 2000), typically on postgraduate programmes in the US and other developed countries. Students studying abroad often choose to find work overseas, but a range of incentives are in place to entice them back. A total of 20,152 such students returned to China in 2003. In 2003 around 78,000 foreign students from 175 countries and territories began courses of higher education in China. Language and medicine are the leading subjects studied by foreign students. According to the official People’s Daily newspaper, around 60,000 of the new foreign student enrolments were from other Asian countries (including 35,000 from South Korea and 16,000 from Japan), with the US providing 7,000 students and Europe 6,000.

Education is beset by funding The education system is beset with funding difficulties. In March 2004 the shortages education minister, Zhou Ji, said that education spending as a share of GDP had risen from 2.5% in 1998 to 3.4% in 2002, and would rise to 4% by 2007. However, the state has had to call on the private sector to help expand educational provision. Private middle schools were first authorised in 1992, and since the early 1990s higher-education institutions have charged tuition fees, which are often as high as Rmb5,000 a year, equivalent to more than one-half of average urban disposable income. Interest-free loans are available to students from poorer households.

Health

Healthcare varies greatly The increase in life expectancy since 1949 has partly been the result of greatly between urban and rural areas improved healthcare systems. By 1975 insurance coverage and the rural Co-operative Medical System (CMS) operated by the communes reached nearly 90% of the population. Basic healthcare facilities were available to nearly everybody, either free of charge or at a nominal cost. There was, however, a large difference between the facilities available in the big cities and those on offer in poorer rural areas. This discrepancy has since widened: now that the communes have disappeared, the CMS has broken down in many rural areas, leaving the rural population to fend for itself. Only about 10% of the rural population is covered by community-financed healthcare, but there are plans to introduce a national scheme once more. The urban population has been better insulated against the market forces sweeping through the healthcare system. Even so, only one-half of the urban population is covered by health insurance systems, which are being extended as SOEs downsize. (SOEs were the main pillar in China’s previous system of work-unit-based healthcare provision.) In practice, medical care is being increasingly commercialised. China had 62,968 hospitals in 2003, with a total of 3.16m beds. In addition there were over 200,000 clinics and a number of other medical institutions. The number of doctors per 1,000 head of population was 1.48 in 2003; the fall in the ratio from 1.69 in 2001 was explained by a change in definitions of medical personnel. Official figures show that in 2002 expenditure on health was Rmb568bn (US$69bn), of which Rmb332bn (58%) was accounted for by private individuals’ expenditure on health services.

Pressing healthcare issues: China faces some particularly pressing healthcare issues. One is AIDS. The AIDS and smoking government admitted in 2003 that China had 80,000 cases of AIDS and a further 840,000 HIV carriers, but the figures could be higher owing to the use of contaminated blood in the mid-1990s. The UN believes that China could have more than 10m sufferers from HIV/AIDS by 2010. Drug abuse and prostitution have also contributed to the problem. Awareness of the dangers posed by smoking is also much lower in China than in developed countries. More than 300 million people smoke in China!there is particular concern about the rise in the number of women smokers!and experts believe that as many as 50m Chinese alive today face premature death as a result.

Natural resources and the environment

Arable land China’s land area is 9.56m sq km. It is notable for the small proportion of land cultivated (13.5% in 2003) and the large share of cultivated land that is irrigated (42% in 2001). The amount of cultivated land has fallen in recent years. According to a World Bank report released in 2001, the amount of cropland per 1,000 people fell by 7% between 1987 and 1997 to 109 ha, just 42% of the world average. At the same time irrigation efforts in arid western and northern areas have failed to keep pace with the loss of arable land to construction in the more fertile areas.

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There are three main farming zones: • south of the Yangtze River, where there is abundant rainfall, and two crops a year of rice and one of spring wheat are grown, as well as jute, sugarcane and other subtropical crops; • between the Yangtze and Yellow rivers, where a two-crop system of wheat and rice is used; and • in the north, where the climate is cold and dry, and there is a one-crop wheat system.

Mineral reserves Sizeable reserves of ferrous and ferro-alloy minerals support a major iron and steel industry. China is a world leader in the production of some minerals, including phosphate, tungsten, molybdenum and titanium. China is also rich in coal and hydroelectric energy resources, and is the world’s largest producer of coal (although much of it is of poor quality).

Environmental action moves Large-scale burning of coal, together with central planning and the rapid rate of up the political agenda economic growth achieved in recent years, have all taken their toll on China’s environment. Air pollution and the loss of water and land resources are serious problems. In 1999 only 33% of 338 cities for which data were available met China’s own residential ambient air quality criteria. Water shortages, particularly in the north of the country, are becoming ever more severe. This is partly related to surging demand!according to the World Bank, between 1980 and 1993 urban water consumption increased by 350% and industrial water consumption doubled. Government attempts to discourage wasteful use of water in agriculture may be having some effect, however, as in 2003 total water consumption fell by 1.5% to 541bn cu metres. Water consumption for household use rose by 5% year on year and that for industrial use rose by 1.1%, but the amount of water used in agriculture fell by 3.5% year on year. China has also been suffering from deforestation, leading to flooding. World Bank data show that the forested area in China contracted by an average of 1.2% a year between 1990 and 2000. The floods that occurred in the Yangtze basin in southern China and those of the Song and Nen rivers in northern China in mid-1998 were agreed to have been exacerbated by environmental degradation. The need to take action to preserve China’s natural resources has been moving up the political agenda. The State Environmental Protection Administration (SEPA) has been made a ministerial-level body, and a ministry for land and natural resources has been established, combining the former geology and natural resources ministry with other bodies responsible for land use and surveying. In 1996 the concept of sustainable development was enshrined in the government’s Agenda 21 policy document. According to the targets laid out, investment in environmental projects will rise to 1.7% of GDP by 2010, from just 0.7% in 1996. Such spending is welcome, but is unlikely to lead to a rapid improvement in China’s environment: at a local level, short-term economic considerations will continue to prevail over the need for sustainable development.

Transport, communications and the Internet

Railways China’s transport system is inadequate, especially in rural and western areas of the country, but large sums of money are being spent on upgrading it. The backbone of the system remains the railways, which carry over one-third of cargo and passengers. Coal transport still clogs up the railway system, and the network is congested and overloaded for both cargo and passengers, especially during China’s annual public holidays. (In addition to the Chinese New Year holiday, Chinese workers now enjoy long holidays around Labour Day on May 1st and National Day on October 1st.) Recent railway projects include the laying of a second track along the Beijing-Kowloon (Hong Kong) line, the single track of which was originally completed in 1996. A Rmb6bn railway line to far-flung Kashgar in southern Xinjiang was completed in 2001, and a railway line linking Tibet to the national network is also being constructed at a cost of US$3.3bn! construction is expected to be completed in 2007. Work began in 2004 on a railway between Yichang in Hubei province and Wanzhou in Chongqing municipality that will require 183 bridges and 114 tunnels, at a cost of Rmb17bn. During the tenth five-year plan period (2001-05) Rmb350bn will be spent to lay 6,000 km of new lines, as well as 3,000 km of double tracks where single tracks already exist, bringing China’s total railway network to 75,000 km by 2005. The government also plans to begin building a network of high-speed railways, an intention that is already attracting the attention of foreign companies.

The highway network Just a dozen years ago China had no highway system linking its provinces; now it has a network of 29,745 km of expressways, with the total length of highways rising from 1.4m km in 2000 to 1.8m km in 2003. Under the tenth five-year plan, a further 200,000 km of roads will be built, connecting 93% of villages across the country. However, despite these improvements, the road network is likely to remain inadequate in relation to the demands for transport in China.

Port facilities Port facilities have improved rapidly in recent years. China’s 14,500-km coastline hosts 200 seaports, which handled 2bn tonnes of goods in 2003, up from just 483m tonnes in 1990. Most ports!including some of the largest, such as Shanghai!are relatively shallow, and this prevents modern container ships from using many of them. However, this is changing. Shanghai is developing a new offshore deepwater port at Yangshan at an estimated cost of Rmb100bn. The first five berths are expected to be completed by end-2005 and will boost the port’s capacity by 2m TEUs a year. The full project will take 20 years to complete, and according to government plans should see Yangshan overtake Hong Kong to emerge as the world’s largest container port. China’s best existing deepwater port is at Ningbo, near Shanghai, in Zhejiang province. Other major ports include those at Dalian in the north-east, Tianjin, Xiamen in the south- eastern province of Fujian, and Guangzhou and Shenzhen, near Hong Kong.

Civil aviation Over the past ten years considerable effort has been made to improve the quality of China’s aviation infrastructure. Dozens of new airports and airport renovations have been completed, including showcase projects in Beijing and Shanghai. These changes have helped to support strong growth in civil

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aviation. Passenger numbers expanded by 7.7% a year in 1995-2002, and cargo tonnage rose even more strongly, by 10.4% a year. About 87.6m passengers travelled by air in 2003, a rise of 1.9% compared with 2002. The overall increase in passenger numbers was constrained by the regional outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003 as the number of passengers on international flights fell to 6.8m, from 8.4m in 2002; the number of domestic flyers rose from 77.6m to 80.8m. Cargo tonnage rose by 8.4% in 2003 to 2.2m tonnes. The government has been working to restructure the airline industry, which has suffered from overcapacity and fierce competition, and it looks likely that four groups will survive. A holding company has been formed to group together China’s Beijing-based flag carrier, Air China, with China South-west (based in Yunnan), Zhejiang Airlines and the China National Aviation Company, which through a subsidiary owns 40% of Hong Kong’s second passenger airline, Dragonair, and a majority share in Air Macau. A second group has been formed around Shanghai-based China Eastern, which has merged with Yunnan Airlines and China North-west. The third has been formed around Guangzhou-based China Southern, which owns Xiamen Airlines, China Northern and Xinjiang Air. The government had planned to allow the three groups to dominate China’s airline industry. But it now seems probable that a fourth, Hainan Airlines, will survive the consolidation process.

Telecommunications China’s telecommunications sector is booming!from fixed-line to Internet services. China now boasts more cable television subscribers (around 100m) and mobile phones customers (270m at end-2003) than the US. It had more than 262.7m fixed-line users at end-2003. In addition, the Internet is gaining in popularity, with 79.5m users at end-2003. Mobile and fixed-line penetration rates, with around 20 subscribers per 100 people, are nevertheless still low, so that the potential for further growth remains large. The government estimates that the number of fixed-line and mobile phone users will exceed 600m in 2005. Internet protocol (IP) telephony is displacing conventional international and long-distance trunk traffic, and third-generation (3G) mobile systems are to be rolled out. Optical-fibre cable links in the home may allow every urban household to have broadband multimedia access as early as 2010.

The media At end-2003 a total of 2,119 newspapers were being published in China, with total annual circulation of 38.3bn copies. There were 9,074 magazines, 317 television stations and 277 radio stations. The media sector remains mono- polised by the state, and the government continues to keep a close eye on what is published, but on issues considered less sensitive, such as finance, coverage has become increasingly lively. The most influential newspaper in China is the daily organ of the Chinese Communist Party (CCP), the People’s Daily, which has a daily circulation of around 3m. Other party newspapers include the Economic Daily (1.5m circulation in 1998); the daily organ of the People’s Liberation Army (China’s military), the Liberation Army Daily (800,000); and the English-language China Daily (at least 150,000), published by the CCP’s propaganda department. These are complemented by municipal newspapers such as Xinmin Evening News (1.75m), published by the Shanghai municipal government; Yangche ng Evening

News (1.73m), the Guangzhou-based evening newspaper now popular across China; and the Guangzhou Daily (1.6m), published by the Guangzhou municipal government. Other publications include the 21st Century Business Herald, the Economic Observer, and a business and finance magazine, Caijing. Chinese Central Television (CCTV) is the national television network, controlled by the CCP propaganda department. It is estimated that 500m viewers regularly tune in to the 7 pm news broadcast. There are also local television stations. In 2001 a US-based company, AOL-Time Warner, and the Australian News Corporation were both authorised to broadcast cable television in the Guangdong area; both companies agreed to accept state restrictions on content. Radio is a lively medium in China, with “talk radio” shows providing a forum for frank discussion of social and other problems. The state-owned Xinhua News Agency has branches throughout China and in many overseas countries, and provides party newspapers with a substantial proportion of their content. Xinhua also produces several restricted publications for top party leaders that are delivered by hand and contain classified content. One such organ, Neibu Cankao (Internal Reference), is available to officials from the ministerial level upwards. In late 2004 the State Press and Publications Administration announced that foreign newspapers could now be printed in China. It was at pains to stress that foreign newspapers may still not circulate within China and that every single printed copy of a foreign newspaper had to be exported.

Energy provision

Electricity Electricity consumption per head is only about one-third of the world average, and barely one-tenth of the average in the developed world. Around 60m rural residents have no access to electricity, and China still has intermittent problems with electricity shortages. These faded in the late 1990s when a slowdown of economic growth led to a contraction of energy consumption. Electricity consumption started growing again in 2000, however, with the rate of expansion picking up sharply in the following three years. As a result, by 2003 individual regions within China were once again struggling with electricity shortages. In 2004 the shortage affected key industrial regions such as Shanghai and the Yangtze River Delta, where firms facing planned power cuts were forced to contemplate night work. However, new power capacity due to come on line in the next couple of years, coupled with a slower pace of investment growth, is expected to lead to a significant reduction in power shortages by 2006. Coal provided 74.2% of energy produced in 2003, with 15.2% provided by crude oil. However, the government is trying to shift the balance of energy production away from fossil fuels towards other resources, particularly natural gas (which accounted for 2.9% of energy production in 2003). The next most important source of production is hydropower, which accounted for 7.7% of energy production in 2003. Hydropower generation will be boosted as the 26 turbines in the Three Gorges Dam project, which have a total capacity of 700 mw, come on stream over the next six years. Once fully operational in 2009, the dam’s

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output will reach 84.7 twh of power annually, making it by far the biggest single generating facility in the world. About 32% of the dam’s output will go to Shanghai, 16% to Guangdong and the rest to parts of central China, although supplies to each of these regions will vary at different times of the year in line with demand. Nuclear power accounted for 1.5% of electricity production in 2002. China currently has nine operational nuclear power generators, with a combined capacity of 7 gw in July 2004. This will rise to 9.1 gw by end-2005, when the Tianwan plant that is being built with Russian assistance in Jiangsu province will be commissioned. The government hopes to quadruple China’s nuclear power production capacity to 32-40 gw by 2020 by building a further 27 plants. Three more nuclear power plants are currently under construction, and in 2003 officials approved the building of four more, two in Zhejiang and two in Guangdong, each of which is to have a capacity of 1 gw. Construction of the plants is expected to begin later in 2005, and they will begin power generation in 2010. Although the new projects are to be opened to foreign co-operation, industry experts quoted in local media have said that the government will turn to domestic companies for major contributions to the projects. The state-owned State Power Corporation (SPC) has long dominated China’s electricity market, accounting in 2002 for around 50% of power-generation assets and 90% of electricity supplied. In early 2002, however, the government announced that it wanted to restructure the company to introduce more competition into the industry. At the end of the year the SPC was duly broken up into 11 firms: two grid operators, five electricity-generation companies!none of which has a market share of more than 20%!and four other companies. A new regulator, the State Electricity Regulatory Commission, was also formed.

The economy

Economic structure

Main economic indicators, 2003 Real GDP growth (% change, year on year) 9.3 Consumer price inflation (av; %) 1.2 Current-account balance (US$ bn) 45.9 Exchange rate (av; Rmb:US$) 8.28 Population (year-end; bn) 1.3

Sources: National Bureau of Statistics, China Statistical Yearbook; IMF, International Financial Statistics; Economist Intelligence Unit, CountryData.

Industry has a dominant role Even before the programme of economic reform and opening began in the late 1970s, the Chinese economy was characterised by the unusually large share of industrial production in gross output value: in 1979 industry accounted for almost 50% of officially measured GDP. This was particularly striking because so much of the workforce remained on the land. Reforms in the early 1980s initially increased the relative share of the agricultural sector. Driven by a sharp rise in the procurement price paid for crops and what amounted to the semi- privatisation of agriculture, the share of agricultural output in GDP rose from

30% in 1980 to 33% three years later. Since then, however, the share of agriculture has fallen fairly steadily, and by 2003 it accounted for only 14.6% of GDP. During the 1980s, as agriculture’s share in GDP fell, that of the growing services sector rose: the share of the tertiary sector in total output increased from around 21% of GDP in 1979 to over 30% ten years later. The relative share of the services sector has since remained steady, and the continued shrinkage in the relative contribution of agriculture has been reflected in a larger share for the secondary sector (including both industry and construction), which in 2003 accounted for 52.3% of GDP.

The increasing role of private The structure of China’s secondary industry changed fundamentally during the and collective enterprises 1980s. Until 1978 output was dominated by large state-owned enterprises (SOEs). Since then much of the boom in manufacturing output has been produced by “collective” enterprises under the aegis of local governments! particularly the township and village enterprises!or, increasingly, by private entrepreneurs or foreign investors, either in wholly owned enterprises or in joint ventures with Chinese interests. By 2003 the share of state-owned and state-holding enterprises in gross industrial output value had shrunk to 37.5%. However, state-owned companies, controlled by central government economic ministries, taken in isolation represented only 13% of industrial output. State- holding enterprises may control large numbers of state firms, and are not 100% state-owned.

Comparative economic indicators, 2004 Hong South China Kong Taiwan Korea Japan GDP (US$ bn) 1,588 159 316 664 4,669 GDP per head (US$) 1,120 22,730 13,940 13,760 36,660 GDP per head (US$ at PPP) 5,770 29,990 26,480 21,570 29,240 Consumer price inflation (av; %) 4.3 -0.4 1.8 3.6 -0.1 Current-account balance (US$ bn) 35.3 9.8 20.3 25.0 176 Current-account balance (% of GDP) 2.2 6.2 6.4 3.8 3.8 Exports of goods fob (US$ bn) 585.2 270.3 172.1 251.7 529.0 Imports of goods fob (US$ bn) 550.0 281.7 155.3 214.9 390.0

Source: Economist Intelligence Unit estimates, CountryData.

Economic policy

Economic reforms have been During the past 20 years China’s economy has been transformed from one in piecemeal which the industrial sector was largely centrally planned to one in which the allocation of resources is increasingly determined by the free operation of market forces. Economic reforms have not been carried out according to a comprehensive blueprint, but rather have been piecemeal and ad hoc, best summarised by the Chinese phrase “crossing the river by feeling for the stones”. The process began with the gradual phasing out of communes in the agricultural sector and their replacement by the semi-private household responsibility system, a change that gave individual families the right to keep! and then sell at market!any produce above a set level procured by the government. The government also established four Special Economic Zones, whose authorities were given the power to offer tax incentives to attract foreign

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direct investment (FDI). Over time, reforms have affected all sectors and have become progressively more far-reaching: some SOEs have been privatised and others have listed minority stakes on stockmarkets in China and abroad, private-sector companies have been allowed to be formed, price controls have been lifted, credit quotas in the banking sector have been abolished!the list of changes is long.

The state sector remains large Yet, although the invisible hand of the market has gained a greater role, China’s economy cannot yet be described as “free”. Of the 196,222 industrial enterprises with annual sales income of more than Rmb5m (US$600,000) registered in 2003, 34,280 were officially part- or fully owned by the state!these are the state-owned and state-holding enterprises. The government also probably had a stake in many, if not all, of the 22,478 companies defined as “collective” and the 9,283 firms categorised as “co-operative”, as well as stakes in thousands of non- industrial enterprises (altogether, China had around 150,000 SOEs in late 2003, controlling an official Rmb19.7trn, or US$2.4trn, in assets). China’s banking sector is still overwhelmingly state-owned. The government continues to publish five-year plans, although these are now more advisory than prescriptive. Officially, the government is aiming to create a “socialist market economy” rather than a capitalist one, with “socialist” best being understood as indicating that the Chinese Communist Party authorities themselves will continue to exercise close influence and control over important elements of the economy.

The restructuring of loss- Having said this, the authorities appear to agree with the conclusion of a making SOEs prominent US academic, Nicholas Lardy, that China’s economic revolution is “unfinished”. Officials realise that further reforms, namely the rationalisation of the inefficient state-owned sectors of the economy, are needed. The performance of China’s SOEs deteriorated steadily during the 1990s. According to Mr Lardy, profits of state-owned industrial firms fell from almost 7% of GDP in 1987 to just 2% in 1994. At the same time the proportion of SOEs losing money rose, and in 1996 losses made by the SOE sector exceeded profits for the first time. This deterioration dragged down the health of China’s state-owned banking sector, because the overwhelming majority of bank funds continue to be lent to state-linked firms (although they probably overstate the extent of the discrimination, official figures show that individuals and private companies account for under 1% of total credit outstanding in China). The ratio of non- performing loans (NPLs) in the financial system was officially 17.8% at the end of 2003, but is estimated by many independent observers to be much higher.

The government tries to Since 1998 the government has been aggressively pursuing a three-pronged increase the efficiency of SOEs strategy to deal with these issues. Under the guiding principle of “grasping the big and letting go of the small”, officials have been trying to raise the efficiency of SOEs by closing some and merging others, reducing government ownership by selling shares on domestic and international stockmarkets, and allowing state-owned firms to shed redundant labour. As for the banking sector, officials have been attempting to ensure that banks in China operate on a more commercial basis, for example by restructuring the central bank, the People’s Bank of China (PBC), to reduce damaging political interference by regional

governments. Measures have also been taken to strengthen the banks’ balance sheets. In 1998 the “Big Four” state banks received a capital injection of US$32bn. (China’s banking system is dominated by four state-owned institutions: the Bank of China, or BOC, the China Construction Bank, or CCB, the Industrial and Commercial Bank of China, and the Agricultural Bank of China.) Their balance sheets were further boosted in 1998-99 when government-established asset-management companies (AMCs) took Rmb1.4trn in bad loans off the banks’ books. In early 2004 the government announced a further recapitalisation, transferring ownership of US$45bn of foreign assets to the CCB and the BOC.

The social security system is To complement SOE reforms, the government has been trying to introduce a being reformed new social security system. This is an urgent task. SOEs have not just provided employment for large numbers of workers; these workers and their families have also been heavily dependent on the social benefits provided by SOEs, such as housing, healthcare, education and pension payments. Thus, at the same time as streamlining SOEs, the government has been working to establish a social security system that is not based on individual work units. In recent years employers and employees have, for instance, been required to contribute 3% of wages to an unemployment insurance fund. Since the late 1990s officials have been trying to introduce a new pension system, in which firms and workers contribute to a communal pension fund, but also make payments into individual pension accounts.

The SOE sector returns to These efforts have met with some success. Restructuring of SOEs has been real: profit in 2000 according to officials, SOEs laid off more than 30m workers between 1998 and end-2004. In 2001 officials claimed that the difficulties in the large SOEs had been “basically solved”, releasing figures showing that the 53,489 state-owned and state-holding companies in the industrial sector had produced a profit of Rmb240.8bn (US$29bn) in 2000, up by more than 140% year on year. Progress has also been made with banking sector reforms. The Big Four banks appear to have cut NPL ratios!the transfer of bad loans to the AMCs is estimated to have reduced the main banks’ NPL ratios by 10 percentage points!and diversified away from commercial lending into the market for consumer banking services.

Underlying problems remain Despite the government’s figures, many observers, particularly foreign ones, unresolved remain sceptical that the problems in the SOE sector have been reversed. Almost 50% of the profits of the entire state sector in 2000 were generated by just a handful of SOEs in the oil and gas sector, and although the profits of these few firms were up by nearly 300% year on year, this sharp rise was largely owing to higher world oil prices. SOE profit growth slipped thereafter, but surged again in 2003, again probably in large part because of another increase in world oil prices. Strong prices for oil, steel and other commodities supported profits at large SOEs in 2004, and 474 key SOEs reported a total profit of Rmb581.3bn in January-October that year, up by 48.3% year on year. That underlying problems remain unresolved should not be surprising. China’s economy has been hit by three shocks since 1997!the Asian downturn of 1998, the 2001 slowdown in the US and the mid-2003 crisis surrounding the regional

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outbreak of Severe Acute Respiratory Syndrome (SARS)!that lowered the rate of domestic GDP growth and consequently of employment creation. This made the central government even more wary than it was already of pursuing a “big bang” approach to SOE reform (in mid-1998 central government officials, worried that the principle of “letting go of the small” had been embraced too enthusiastically by local authorities, issued a directive slowing the process). SOEs have also historically been an important source of political power in China. A whole range of actors have unsurprisingly been reluctant to see their power bases dissolved. Furthermore, the new social security net still has many holes in it: the communal part of the new pension system, for example, is in deficit. Local authorities have reacted by raiding funds saved in individual accounts, meaning that these instruments now exist only in a notional sense. But with a functioning social security system still not in place, overnight restructuring of SOEs would clearly be dangerous for the government; even the limited streamlining that has already occurred has contributed to social unrest. Recent reforms: a brief chronology

2000-01 Progress is made in restructuring state-owned enterprises (SOEs). It is reported that the sector made total profits of Rmb241bn (US$29bn) in 2000, up by more than 140% year on year. Of the 6,599 large and medium-sized SOEs that were running at a loss in 1997, 70% have moved into profit, been restructured or merged by end-2000. At the beginning of 2001 the average tariff on imports is further reduced, to 15.3%. In December 2001 China at last joins the World Trade Organisation (WTO). 2002 China begins the process of adapting its institutional and legal system to comply with WTO-related undertakings The resultant cut in tariffs on imported cars contributes to a sharp rise in domestic automotive sales. A new division of corporate taxation revenue between the central government and the provinces is introduced in the 2002 budget. The 16th five-yearly Chinese Communist Party congress in November gives its ideological blessing to the private sector, and leaders outline some concrete steps to promote the development of the non-state sector, such as interest-rate reform. 2003 At the March meeting of the National People’s Congress (NPC), officials announce the creation of a new State Asset Management Commission. The head of the new body, Li Rongrong, makes it clear that his job is to oversee a general slimming-down of the state sector. Also in March, the government also establishes a State Banking Regulatory Commission, designed to improve the quality of bank supervision. During the year the China Banking Regulatory Commission, headed by a respected banker, Liu Mingkang, announces a speeding up of banking sector reform. In 2003 as a whole the government pays more attention to the rural economy, and launches a drive to revitalise the north-east. 2004 In March the NPC revises the Chinese constitution to afford greater legal protection to private property rights. The government unveils a series of policies, including

greater fiscal transfers to local governments to allow them to reduce the tax burden on peasants, to boost the rural economy as part of an attempt to promote more sustainable and equitable growth. The government attempts to address the overheating of some sectors of the economy by controls on lending to the steel, automotive and real-estate sectors. A new drive to reform the banking sector is launched in preparation for an eventual listing of the “Big Four” banks on overseas stockmarkets. Interest rates are raised in late October, and new rules give banks greater leeway to price loans according to risk. Entry to the WTO reinforces Nevertheless, the need to prepare industry for further liberalisation consequent reform on membership of the World Trade Organisation (WTO) and the need to improve the health of the banking sector has pushed the government to continue to promote SOE reform. As China’s economy strengthened in 2002-03, the central government returned to the issue of restructuring, triggering a new wave of sell-offs by local authorities. Officials appear to realise that postponing reform would only store up problems for the future. Procrastination would be particularly dangerous for China because, under its 2001 WTO accession agreement, the government pledged to open up the country’s economy to more foreign competition and to reduce subsidies to SOEs. In theory, if the government did not first act to improve the financial health of the SOEs and the state-owned banks, the implementation of these and other related WTO changes would lead to their collapse. The WTO agreement therefore added urgency to the issue of structural reforms. This was no accident: China’s former premier, Zhu Rongji, appears to have viewed the WTO agreement as a tool with which to push through painful domestic reforms that might otherwise stall.

Reform will now follow a The threat to domestic companies is in reality not so great. Even since entry to structured programme the WTO the government has been able to find ways of protecting local companies from the full force of foreign competition, for example through the imposition of high capital requirements for foreign banks wishing to establish branches. Even so, the significance of WTO entry should not be understated. The implementation of WTO-related reforms will lead to far-reaching changes in the domestic economy. Following entry to the WTO, the nature of economic reform in China has also changed. Previously reforms in China had been carried out on an ad hoc, experimental basis, but the government is now committed to implementing a comprehensive programme of reform according to a set timetable. Moreover, the government will be under unprecedented pressure to ensure that the reforms are implemented. If China’s trade partners are dissatisfied with the progress of reform, they can appeal to the trade body’s dispute resolution mechanism, which has the power to impose penalties on countries that fail to honour WTO-related commitments. WTO entry is expected to bring short-term benefits for China in addition to the longer-term boost to GDP growth that would be the result of a successful restructuring of the domestic economy. In general, China’s exports now have easier and more secure access to overseas markets; the export-oriented garment industry will be a particular beneficiary, with implementation of the final stage of the WTO’s Agreement on Clothing and Textiles on January 1st 2005 supposed to result in the complete removal of quotas that have long restricted world trade in apparel. (Apparel exports may still not reach their full potential,

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however, as the WTO agreement also gives trading partners the right to impose temporary restrictions on clothing imports from China, a provision that the US took advantage of in 2003.) In addition, WTO membership has prompted an increase in foreign investment, which rose from US$38.4bn in 2000 to US$44.2bn in 2001, and to an all-time high of US$49.3bn in 2002. FDI inflows fell back to US$47.1bn in 2003, possibly owing to the regional outbreak of SARS, but are likely to have notched up a fresh record in 2004.

FDI rebounds Membership of the WTO has therefore helped to reverse the fall in FDI that occurred in 1999. This decline had worried the government. FDI has played an important part in driving China’s economic transformation in the past 20 years, accounting for a high of 17.3% of all investment in China in 1994. During the 1980s and 1990s FDI was attracted to China by generous tax incentives provided by the government, and by a seemingly infinite supply of cheap labour. The attraction of these benefits seemed to be fading by the late 1990s as investors realised that chaotic rules and poor infrastructure made it hard to turn a profit in China. Entry into the WTO, which should result in the creation of a more rule-based system as well as opening up to FDI previously restricted areas of the economy, seems to have revived foreign investors’ interest in China.

Government finances are The reform-period deterioration in the government’s finances has been gradually strengthened reversed in recent years. Government revenue as a proportion of GDP has risen steadily since 1996, reaching 18.5% in 2003. A change negotiated with local governments lifted the central government’s share of revenue to 55% in 1994, and on January 1st 2002 a further revenue-sharing change was implemented, requiring local and provincial governments to share taxes generated from SOEs under their control with the centre. In recent years the government has also been trying to raise total government revenue by improving enforcement, for example by cracking down on smuggling and by transforming ad hoc fees and charges into proper taxes. Government expenditure as a proportion of GDP rose from 12.8% in 1995 to 21% in 2003. Officials initially loosened fiscal policy to support GDP growth during the Asian financial crisis of 1997-98, issuing special bonds to support extra spending. At first the government used the extra funds to boost general investment spending: capital spending rose from under 18% of total government expenditure in 1997 to 25.3% in 1999. Since then the economy has begun to strengthen, but this has resulted in a shift in, rather than a termination of, the government’s proactive fiscal policy. The government sold Rmb140bn in special bonds in 2003 and issued a further Rmb110bn in 2004, with the funds generated being increasingly used to fund greater social welfare spending, rather than increased capital expenditure. The government is expected to issue only Rmb80bn in special bonds in 2005. Government spending is in reality almost certainly higher than official statistics suggest, as they do not seem to include much off-budget expenditure in areas such as defence. They also do not reflect the real cost to the government of its continued support for ailing SOEs. Direct fiscal subsidies for SOEs have been replaced by soft loans issued by the state-owned banking system, but even though this indirect financial support for SOEs may not show up immediately

in the government’s annual fiscal deficit, it will eventually affect the state’s finances. It is because banks have lent so heavily to loss-making SOEs that they are now burdened with such high NPL ratios. Given the extent of these financial difficulties, it is only with injections of further public funds that the banking sector will ever be fully restored to health. It is not just contingent liabilities in the banking sector that threaten the government’s finances. The government also faces a large implicit pension debt (IPD). Before the introduction of the 1997 pension reforms all public-sector workers in China enjoyed a defined-benefit pension scheme. These pensions were not pre-funded, being financed on a pay-as-you-go basis. However, with the proportion of old people in China rising quickly and the profitability of SOEs being so weak, it is becoming increasingly difficult for individual workers and firms to cover the costs of this pension scheme. A large proportion of the IPD!estimated by the World Bank to amount to 70-80% of GDP!will instead have to be financed by the government. This might not prove as frightening as it looks!countries such as Argentina and Poland have faced IPD/GDP ratios of 100-200%. Nevertheless, the existence of the IPD does make China’s public finances less robust than is indicated by official figures for government debt.

Government revenue and expenditure (Rmb bn) 2003 preliminary 2004 budget Total revenue 2,194 2,380 Tax revenue 2,000 2,169 Taxes on incomes & profits 476 519 Taxes on goods & services 1,298 1,401 Other taxes 226 249 Non-tax revenue 194 211 Total expenditure 2,527 2,730 Current expenditure 2,035 2,267 Administration & defence 655 714 Culture, education, public health, science & broadcasting 471 520 Pensions & social welfare relief 266 295 Subsidies 84 96 Interest 96 76 Capital expenditure 452 433 Unrecorded expenditures 39 31 Overall balance -333 -351 Financing 333 351 Domestic (net, residual) 328 346 Foreign (net) 5 5 % of GDP Revenue 18.8 18.4 Expenditure 21.6 21.1 Overall balance -2.8 -2.7

Source: IMF, Article IV Consultation Staff Report 2004.

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Monetary instruments During much of the reform period monetary policy has remained a fairly blunt remain blunt instrument of economic management. The government has not controlled the monetary side of the economy through the manipulation of interest rates, but rather through administrative management of credit growth in the state-owned banking system. This has begun to change in recent years as government interference in the banking system, although not disappearing, has at least lessened. On October 29th 2004 the People’s Bank of China (PBC, the central bank) raised interest rates for the first time in nine years, but did so by only a small margin. The increase in interest rates, just 27 basis points for loans with one-year maturity, was small for an economy where lending is generally driven less by price than by relationships between governments, banks and large companies. However, the rise was accompanied by the removal of the upper limit within which lending rates can exceed the central rate!a change that in theory makes it easier for loans to be priced according to risk, and thus tackles one of the factors that have made banks reluctant to lend to small and medium-sized enterprises. When setting interest rates the PBC must weigh up the conflicting interests of the indebted banking sector on one hand and ailing SOEs on the other. Lending rates remain low as the PBC has sought to boost economic growth in general and alleviate some of the woes of the SOEs in particular; the low level of deposit rates in turn reflects an attempt by the PBC to bolster margins earned by the banking sector and induce the wider population to spend rather than save.

Economic performance

Growth has been rapid but Since China’s move away from central planning began in 1978, the economy volatile has grown by almost 10% a year. Although there is debate about the accuracy of these statistics, anyone who has visited the country regularly over the past few years can testify to the fact that the economy of China in general, and of the provinces on the eastern seaboard in particular, has been developing rapidly. What is equally clear is that the speed of economic growth has not been steady, the country having experienced three distinct economic cycles between 1978 and the late 1990s, with a fourth upturn setting in in mid-2003. The first peak occurred in 1984-85, with GDP expanding by 15.2% in the first year and consumer prices rising by 8.8% in the second. GDP growth then slowed, before picking up in the late 1980s, when inflation also surged: prices increased by an average of 18.4% a year in 1988-89. After the period of political and economic austerity that followed the turmoil of 1989, another boom occurred, with GDP expanding by almost 14% a year in 1992-93 and prices surging by 24% in 1994.

Investment led growth in Although similar in numerical terms, these cycles have had different underlying the 1990s characteristics. The booms of the 1980s were led by unsurprising increases in consumption. Following a 30-year period in which consumption had been discouraged, at the outset of reform there was huge pent-up demand. The introduction of the household responsibility system in the late 1970s led to a surge in rural incomes, which more than doubled between 1978 and 1983. The boom of the early 1990s, by contrast, was driven by huge increases in investment, much of it in property development and manufacturing industry!

fixed investment expanded by almost 25% annually in both 1992 and 1993. The nature of the endings of the booms was also different. Although the downturn of 1989-1990 was sharp!GDP expanded by just 4.1% in 1989 and 3.8% in 1990!it was brief, like the slowdown that followed the boom of the early 1980s, and was cyclical rather than structural. The downturn after the early 1990s boom was more prolonged: GDP growth slowed every year between 1992 and 1999.

Gross domestic product (% real change) Annual average 2003 1999-2003 Private consumption 6.0 7.1 Government consumption 6.0 9.3 Gross fixed investment 20.0 13.0 Exports of goods & services 23.6 21.7 Imports of goods & services 29.3 22.9 GDP 9.3 8.0

Source: Economist Intelligence Unit CountryData.

The pattern was repeated in Since the mid-1990s officials have been keen to avoid a repeat of the damaging 2002-03 boom-bust cycles that had characterised the reform period up to that point. However, by the late 1990s the government was becoming concerned that the underlying momentum of the economy had slowed too far, and from 1998 it started to support GDP growth through a programme of heavy public-sector spending (as well as possible statistical manipulation). By the end of 2002 the economy seemed to have gained some self-generated growth momentum once again, boosted by strong overseas demand for Chinese-made goods and even more robust domestic investment growth. GDP grew by 9.3% in 2003, but in reality the economy’s performance was even stronger. Growth in the year as a whole was dragged down by the temporary disruption caused by the outbreak of SARS in the second quarter. Moreover, although many economists believed that official statistics in the late 1990s exaggerated the strength of the economy, the consensus is that the 2003 data understated GDP growth. Even taking SARS into account, some independent observers suggest that China’s economy grew by as much as 10% in 2003.

The government attempts to By early 2004 it was becoming clear that what had initially looked like a cool an overheating economy successful recovery from the SARS crisis threatened to become an economic bubble, as investment spending soared in sectors such as steel, car manufacturing and real estate. The pace of China’s investment was so rapid that commodities such as steel and nickel were in increasingly short supply, driving up global prices. The government therefore sought from the middle of the year to curb overinvestment in certain sectors of the economy, while encouraging investment in power generation and in the more backward western provinces. A gradual slowdown in credit growth was achieved in late 2004, largely through administrative measures, although it remained too early to determine whether government attempts to manage a slowdown of the economy while avoiding a hard landing would be successful.

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Inflation (% change, year on year) Annual average 2003 1999-2003 Retail prices -0.1 -1.3 Overall consumer prices 1.2 0.0 Urban consumer prices 0.9 0.0 Rural consumer prices 1.6 0.1 Agricultural means of production 1.4 -0.8 Ex-factory industrial products 2.3 -0.2

Source: National Bureau of Statistics, China Statistical Yearbook.

China’s statistics

The accuracy of China’s official data has been questioned China’s GDP figures are suspect. In recent years headline GDP growth statistics have sometimes been released at, or even before, the end of the period that they are supposed to describe; the growth rate never differs markedly from the target announced by the government earlier in the year; and the numbers have only recently begun to be subject to later revisions. Moreover, as revealed in a thorough critique by a professor at the University of Pittsburgh, Thomas Rawski, in 1997-2001 these data were also hugely inconsistent with a number of other statistical series released by the government, such as growth in energy consumption, urban employment growth and consumer price inflation. Professor Rawski blamed these inconsistencies on political manipulation, and suggested that in 2000, for example, the economy grew by just 2-3%. He admitted, however, that these were “little more than guesses about China’s recent GDP performance” that were “not firmly grounded in empirical data”. In defence of China’s statistics, other data, such as the rapid growth of imports in recent years, suggested that the overall economy had been growing quite strongly. It is also thought that China’s statistical mechanisms, initially established to assess the growth of a centrally planned system, routinely fail to record accurately the size of the private sector, which is the most dynamic part of the economy. The Chinese government has been aware of these criticisms and has attempted to refute them. In 2002 a deputy director of the National Bureau of Statistics (NBS), Qiu Xiaohua, noted that his colleagues no longer relied on figures reported by local-level units, instead using the sample surveys that form the basis of statistical calculation systems in other countries. This is certainly an improvement!local officials often over-report growth data in the hope of impressing superiors. In an attempt to improve further the credibility of its statistics, in mid-April 2002 the government officially signed up to the IMF’s General Data Dissemination System (which aims to provide a standard for national economic data), and the NBS said in December 2002 that it would begin publishing GDP data calculated in line with international practices within three to five years. Since then, concern over the accuracy of China’s statistics has not disappeared. The nature of this concern has, however, begun to shift, and observers now worry not that China’s official statistics overstate growth but that they understate it. Thus, although government data showed that GDP grew by 9.3% in 2003, some independent observers suggest that in reality growth may have exceeded 10%.

Similarly, year-on-year GDP growth data for the second quarter of 2004 had been expected to be in double digits owing to the low base of comparison with the second quarter of 2003, when output was hit by the outbreak of Severe Acute Respiratory Syndrome (SARS). Eyebrows were accordingly raised when the NBS revised up GDP figures for the second quarter of 2003, thus allowing the year-on- year growth rate for the second quarter of 2004 to fall to 9.6%, from 9.8% in the first quarter, in line with government attempts to cool the economy. Regional trends

Reforms exacerbate regional In the reform period economic growth has been much more rapid in the disparities coastal areas. During the 1980s and early 1990s some of the most rapid rates of growth were recorded in the southern province of Guangdong in general and in the Pearl River Delta in particular, boosted by an influx of capital, technology and entrepreneurial skill from neighbouring Hong Kong. Since the early 1990s Guangdong and also Fujian, the province directly to the north of Guangdong, have benefited from investment from Taiwan: most private-sector analysts estimate that Taiwan companies have invested more than US$100bn in China since 1990. Shandong province and the north-east have profited from geographical proximity to the rich economies of Japan and South Korea. More recently much official attention has been focused on promoting the growth of the Yangtze Delta, with Shanghai as the “dragon’s head”.

The interior provinces are left In this rush the interior, and especially the western provinces, have been left behind behind. The hope that development in the coastal areas would “trickle down” to the inland regions has been more than just a dream. Tens of millions of migrant workers have been able to find work in the richer provinces in the east, remitting income back home. However, some official Chinese commentators have claimed that capital is being drained out of the poorer regions to invest in the coastal boom towns. In 1997 a serious effort to draw investment, both domestic and foreign, into central and western China, got under way, with some success. Addressing regional inequality is a priority of the tenth five-year plan (2001-05). It will, however, be a slow process, hampered by inadequacies of human resources and physical infrastructure.

Regional disparities, 2003 Population a GDP FDIb Foreign trade (m) % of total (Rmb bn) % of total (US$ m) (US$ m) North Beijing 14.5 1.1 366.3 3.1 2,191 68,500 Tianjin 10.1 0.8 244.8 2.1 1,535 29,342 Hebei 67.7 5.2 709.9 6.1 964 8,978 Shanxi 33.1 2.6 245.7 2.1 214 3,090 Inner Mongolia 23.8 1.8 215.0 1.8 89 2,829 North-east Liaoning 42.1 3.3 600.3 5.1 2,824 26,509 Jilin 27.0 2.1 252.3 2.2 191 6,148 Heilongjiang 38.2 3.0 443.0 3.8 322 5,329

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Regional disparities, 2003 Population a GDP FDIb Foreign trade (m) % of total (Rmb bn) % of total (US$ m) (US$ m) East Shanghai 17.1 1.3 625.1 5.3 5,468 112,340 Jiangsu 74.1 5.7 1,246.1 10.6 10,564 113,617 Zhejiang 46.8 3.6 939.5 8.0 4,981 61,411 Anhui 64.1 5.0 397.2 3.4 367 5,948 Fujian 34.9 2.7 523.2 4.5 2,599 35,326 Jiangxi 42.5 3.3 283.0 2.4 1,612 2,528 Shandong 91.3 7.1 1,243.6 10.6 6,016 44,637 South-east Henan 96.7 7.5 704.9 6.0 539 4,712 Hubei 60.0 4.6 540.2 4.6 1,569 5,109 Hunan 66.6 5.2 463.9 4.0 1,018 3,732 Guangdong 79.5 6.2 1,362.6 11.6 7,823 283,525 Guangxi 48.6 3.8 273.5 2.3 419 3,187 Hainan 8.1 0.6. 67.1 0.6 421 2,275 South-west Chongqing 31.3 2.4 225.1 1.9 261 2,595 Sichuan 87.0 6.7 545.6 4.7 412 5,634 Guizhou 38.7 3.0 135.6 1.2 45 984 Yunnan 43.8 3.4 246.5 2.1 84 2,669 Tibet 2.7 0.2 184.5 1.6 - 160 North-west Shaanxi 36.9 2.9 239.9 2.0 332 2,783 Gansu 26.0 2.0 130.5 1.1 23 1,327 Qinghai 5.3 0.4 39.0 0.3 25 339 Ningxia 5.8 0.4 38.5 0.3 17 653 Xinjiang 19.3 1.5 187.8 1.6 15 4,770 Total 1,292.3c 100.0 11,725.2c 100.0 53,505d 850,988 a 2000. b Foreign direct investment. c The totals reported by the provinces exceed the national totals. d Including a further US$564m classified under “ministries and other department”. Source: China Statistical Yearbook.

Economic sectors

Agriculture

Over 40% of the population Agriculture is an important sector of the Chinese economy. Although work in agriculture agricultural production now accounts for less than 15% of nominal-price GDP, in 2003 around 313m people!accounting for 42% of total nationwide employment!still made a living from farming, forestry, animal husbandry and fisheries. The process of economic reform began in 1978 with the transfer! initially without the sanction of the central government!of the control of land from collectives back to individual families. The effect of reintroducing individual economic incentives in the countryside and allowing farmers a degree of freedom in planting crops was enormous!real net income per head in the countryside rose fivefold between 1978 and 2001. However, the rate of inflation in real net rural income per head slowed each year in the late 1990s, falling to 3.8% in 1999 and 2.1% in 2000. Since then there has been some

improvement, with real net rural incomes rising by 4.2% in 2001, 4.8% in 2002 and 4.3% in 2003. High grain prices and government attempts to lighten the tax burden on the peasantry are likely to have boosted rural incomes yet further in 2004.

Rural incomes are diversified Despite this apparent bounceback, senior government officials continue to worry about the health of the rural economy. One problem is that the recent pick-up in rural wages has not prevented the gap, already large, between rural and urban incomes from widening further: the 9.3% rise in real net rural incomes in 2001-03 failed to match the 23.6% rise in real disposable urban incomes over the same period. Another is that the rural income growth that has occurred in recent years has not been the result of increased earnings from traditional agricultural activities. Between 2000 and 2003 net rural incomes rose by 13.9%, but the average net income from household business rose by only 8% to Rmb1,541 (US$186). Over the same period, income earned through wages increased by 30.8% to Rmb918 in 2003. In recent years, then, overall income growth has been strongest in those rural areas best able to diversify away from traditional farming activities. This ability is not evenly spread. In 2003, 47.8% of the average of Rmb5,389 earned by rural families in the prosperous province of Zhejiang came from wage income; in Guizhou, by contrast, wages accounted for just 29.3% of the average of Rmb1,565 earned by rural households.

A domestic grain glut Rural income growth was weak between 1997 and 2002, partly because of soft prices for agricultural goods. Food prices fell year on year in 1997-2000 and remained soft in 2001-02. They began to increase again only in 2003, when they were boosted by one-off climatic factors and also by an apparent ending of the supply glut that had previously depressed grain prices. In the late 1990s record amounts of grain were produced: 512.3m tonnes in 1998 alone, significantly more than before the first round of agricultural reforms began in 1978, when output totalled just 304.8m tonnes a year. The harvests of the late 1990s produced far more than could be consumed, particularly because in recent years dietary patterns have moved away from foodgrain consumption as consumers have become increasingly prosperous!by 2003 urban grain purchases per head had fallen to 79.5 kg a year, from 97 kg in 1995 and over 130 kg in 1990. The surplus of grain was partly the result of government policies. Under Mao the state used agricultural resources to feed China’s industrialisation. Agricultural prices, which were set by the government, were therefore kept artificially low. Since 1978 the goal of the government’s agricultural policy has shifted from providing for the needs of industry to ensuring national food security. To achieve this goal, throughout the 1980s and 1990s officials maintained a comprehensive grain procurement programme in rural areas. At various times the government tried to reduce its role in the markets for agricultural products, for example freeing up trading in summer grains in the eastern provinces surrounding Shanghai in late 2000. These latest reforms to the so-called grain circulation system are gradually being introduced in the rest of the country, but do not signal an end to government manipulation of rural

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markets. Government concern about grain production has not disappeared, and indeed became a prominent theme in official statements with the apparent ending in 2003 of the 1990s glut. In 2004 officials sought to encourage grain production with direct subsidies rather than a comprehensive grain procurement programme, with the result that grain production is likely to have exceeded the target of 455m tonnes, compared with a fall in grain production in 2003 to 430.7m tonnes, the lowest outturn since 1989. As a consequence, the increase in grain prices that had been driving up inflation in mid-2004 began to ease as the year drew to a close.

Fruit and vegetable production The government’s continued preference for grain production has not prevented rises at the expense of grain change in the countryside. Between 1999 and 2003 the proportion of the sown area devoted to grain production fell from 72% to 65%. This suggests that officials have realised that diversification away from grain production to market gardening and fruit production is essential if incomes in rural areas are to continue to rise. The land area used for growing oil-bearing crops increased from 12.6m ha to 15m ha between 1996 and 2003, and that used for growing vegetables rose from 10.5m ha to 18m ha during the same period.

Further migration is needed to Diversification of output away from land-intensive grain is not the only change raise incomes needed to bring about faster increases in rural incomes. Despite reports of shortages of migrant labour in eastern seaboard provinces in 2004 as rural workers returned home to take advantage of the upturn in agriculture, this is likely to be a temporary phenomenon, and further migration of surplus rural labour to urban areas will be necessary if rural incomes are to rise further. In recent years the government has been changing regulations to make it easier for rural residents to reside temporarily in cities. However, municipal authorities do not always heed these instructions from the centre. Rural-urban migration is anyway discouraged by insecure land rights in agricultural areas. The allocation of land is still controlled by village authorities, and there is the possibility that land will be reassigned to other families while the original tenants are away working in the cities. Around 80% of villages have reallocated land at least once during the reform period, and in some villages the process occurs regularly.

The government has tried to The central government is now encouraging villages to grant land rights that are strengthen land rights more secure, and on March 1st 2003 a new Law on Land Contracts in Rural Areas was promulgated. Officials are also seeking to strengthen mechanisms to allow the transfer of rural land rights, an initiative that would not only clear the way for greater migration, but which would also allow successful farmers and rural entrepreneurs to expand, thereby generating economies of scale. The government is, however, reluctant to privatise agricultural land fully lest a class of landless peasants re-emerge, adding to social tensions and calling into question the legitimacy of Chinese Communist Party rule.

Farmers suffer from ad hoc The central government has only fitfully been able to improve local-level local government fees treatment of farmers. Local authorities frequently suffer from cash shortages, and at such times they pay farmers for their contracted grain with white slips, or IOUs, rather than cash. Corruption also cuts into the incomes of rural farmers. One ruse has been for state-owned grain enterprises to claim wrongly

that the quality of grain offered to them by farmers is poor, and to use this to justify a reduction in purchase prices. The financial difficulties faced by authorities in rural regions, combined with official corruption, also result in local farmers facing a range of ad hoc fees and charges. Besides “fees” charged for entertaining visiting inspection teams or for investment in industrial enterprises, many farmers are still being charged exorbitant prices for inputs such as fertiliser, seeds and pesticide. The central government hopes that the introduction of grass-roots democracy in rural areas will help to resolve some of these issues. In 2000 officials launched a scheme in rural Anhui province to replace arbitrary fees with standard taxes. In 2001 the trial was extended to Jiangsu province and counties in other provinces across China, and it is now being expanded further. In 2004, as part of a package of policies to encourage more equitable growth, the government promised to make more money available to local governments to enable them to reduce the fees levied on peasants, and said that the tax on special agricultural products would be completely eliminated within five years.

WTO entry will increase During the coming years policy changes prompted by China’s entry into the competition World Trade Organisation (WTO) in 2001 will have an impact on rural areas. As part of its WTO accession commitments, the government pledged to allow an unprecedented degree of foreign competition in the agricultural sector. This was generally expected to lead to an increase in imports, and also to a fall in domestic employment: the Development Research Centre of the State Council (China’s cabinet) expected 9.7m agricultural workers to be displaced as a consequence of WTO entry. Such disruption has not yet been evident, however. In 2003 there was a fall in imports of cereals and cereal flour, wheat, and maize, and exports of some types of grains increased. China has also managed to expand exports of vegetables. By contrast, the poor 2003 harvest led to a 1,780% increase in wheat imports in January-November 2004 to 6.6m tonnes and a 236% increase in rice imports to 671,200 tonnes.

Mining and semi-processing

The coal mining sector is being China’s mining industry has been plagued by a skewed pricing system and by downsized safety problems. Coal mines, in particular, have a reputation as death traps. Industry ownership is mixed. State-run mines are, in many cases, as unsafe as the thousands of privately run mines. Low prices for coal have discouraged investment in safety precautions and in the exploitation of deposits. In recent years the government has been trying to rationalise the industry by closing large numbers of small or uneconomic mines. Partly as a result, the number of workers in the coal mining and processing industry fell from 5.1m in 1996 to 3.3m in 2002. The increase in mining employment to 4.8m in 2003 no doubt reflects higher demand for minerals in tandem with China’s investment boom in that year.

Gold production Similar problems have dogged the gold industry. China ranks fifth in the world in gold production. Output has risen in recent years, and stood at 200.6 tonnes in 2003. However, the industry is still immature, with many small mines. In 1994 China announced that it would allow foreign participation in gold mining,

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but although some joint-venture deals were subsequently announced, none have progressed far. The industry does, however, have enormous potential consumer demand. According to a December 2000 report by John S Adams, Deregulation of the Gold Market in China, consumption per head is only one- half of that in India, one-fifteenth of that in Taiwan and one-thirtieth of that in Hong Kong.

Rare metals China has recently become an important producer and exporter of rare metals crucial to high-technology industries. These include vanadium, titanium, germanium and gallium. Polycrystalline silicon exports are also important. China is thought to hold the world’s largest reserves of rare earths in a single location, at the Bayan Obi mine in Inner Mongolia.

Manufacturing

Industrial value added, 2003 Rmb bn % change, year on year Light industry 1,465.3 14.6 Heavy industry 2,639.2 18.6 State-owned & state-holding enterprises 1,940.8 14.3 Collective-owned enterprises 278.7 11.5 Share-holding enterprises 1,687.8 18.3 Foreign-funded enterprises 1,117.4 20.0 National total 4,104.5 17.0

Source: National Bureau of Statistics, China Statistical Yearbook.

Industrial output soars, The manufacturing sector grew in real terms by an average of almost 11.4% a initially driven by TVEs year during 1993-2002. In the early 1990s growth was led by increasing industrial output in agricultural areas as local governments encouraged the development of town and village enterprises (TVEs). In effect, local agricultural surpluses were invested in manufacturing, often in small, low-technology and labour-intensive processes. The economic slowdown of the late 1990s created difficulties for the TVE sector, and by 1998 the TVEs were employing only 125.4m rural workers, down from 135.1m in 1996. The TVEs seem to have taken advantage of the opportunity to restructure. By 2002 TVE employment was back up to 132.9m. The government expects TVE employment to top 135m once more by 2005.

Foreign and private enterprises Private firms and foreign-invested enterprises (FIEs) have grown rapidly in the become important reform period. In 2003 private enterprises accounted for 14.7% of all industrial output in China, up from 4.5% in 1999, and employed 20m urban workers. FIEs produced 18.9% of all industrial output in China in 2003, up from 13.7% in 1999. If enterprises partly or fully owned by investors from Taiwan, Hong Kong and Macau are included, FIEs accounted for 31.2% of industrial output and employed 12.6m workers in 2003. FIEs have played a particularly important role in the rapid increase in the value of China’s merchandise exports recorded in recent years: in 2003 FIEs produced more 54.8% of China’s exports by value.

The importance of the state The least dynamic industrial enterprises have been those that are state-owned. sector declines Whereas in the late 1970s state-owned enterprises (SOEs) accounted for around 80% of manufacturing output in China, in 2003 SOEs accounted for just 13% of industrial output. The extent of this fall is admittedly misleading. During the 1990s the government sold shares in government firms, which were then reclassified as state-holding rather than state-owned firms. If these are included, the decline in importance of SOEs has been far less dramatic, although still real. In 2003 state-owned and state-holding firms together accounted for 37.5% of national industrial output. SOEs were originally established not to generate financial profit but rather to help the government to achieve wider social and economic aims. Con- sequently, on the eve of reform they were weighed down by overemployment and expensive welfare provision structures (the so-called iron rice bowl), bureaucratic management structures and pervasive government interference. State ownership of industry was also concentrated in heavy industry, despite the fact that, given the huge supplies of low-cost labour available, China’s comparative advantage seemed to be in light industry. Until the early 1990s, however, the government, fearing rising unemployment and lacking a social security system that was not based on individual work units, was unwilling to close SOEs. Officials were equally reluctant to continue supporting these loss-making institutions through direct payments from the state budget. Instead, the state-owned banks were called upon to support the SOEs, and the result has been a build-up of non-performing loans in the banking system. Since the mid-1990s government attempts to resolve the problems in the state- owned industrial sector have gathered pace. The part-privatisations that have resulted in the creation of state-holding companies have been one measure employed by officials. However, they have also been willing to allow smaller SOEs to be sold off, closed or merged with larger ones, and have allowed all sizes of SOEs to lay off staff. The process of industrial rationalisation reduced the number of industrial SOEs!including those partly privatised, but with majority state ownership!to 34,280 by end-2003, down from 118,000 in 1995.

Construction

Demand for construction Given the huge size of the country and the still relatively undeveloped nature is strong of the economy, there is an almost insatiable demand for construction of infrastructure in China. Recent government attempts to support the economy through fiscal spending have helped to meet some of this demand. Investment in capital construction increased by 10.4% in 2001, by 19.2% in 2002 and by 29.7% in 2003. This spending has produced visible improvements in the quality of China’s infrastructure. Much, however, remains to be done, particularly in the west of the country.

Real-estate investment surges The fastest-growing area of capital spending in recent years has been real-estate investment. Investment in real-estate development increased by 27.3% in 2001, 22.8% in 2002 and 30.3% in 2003. Booms in real-estate investment are not

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unknown in post-reform China, with government funds intended for “productive” investment, especially in much-needed infrastructure projects, frequently being diverted by lower-level officials to spending on hotels, town halls and pure property speculation. But although government officials voiced concern in 2002-03 that a bubble was forming in the real-estate market, the recent rapid growth in property investment has not all been froth. Much of the heightened activity has instead been driven by real demand, as in the late 1990s people gained for the first time the right to buy their own homes (previously, most urban housing was provided either free or at low rents by government institutions or SOEs). Even so, the government intervened in 2004 to try to prevent overinvestment in real estate. As a result, short-term loans to the construction sector began to contract on a year-on-year basis from February 2004.

Financial services

A commercial banking system On the eve of reform in 1978 China had just three banks!the People’s Bank of emerges China (PBC), the Bank of China (BOC), and the China Construction Bank (CCB)!and a collection of rural credit co-operatives. Over the past 20 years, this situation has been transformed. In the late 1970s the status of both the BOC and the CCB was upgraded and the Agricultural Bank of China was formed, and in 1984 the Industrial and Commercial Bank of China (ICBC, the largest of the “Big Four” state-owned banks) took on the commercial banking functions of the PBC. The PBC has since become a proper central bank. Beginning in the mid-1980s, new commercial banks were formed, some national in scope and some regional. All but one of these are state-owned; the only private bank is Minsheng Bank, established in 1995. In 1994 three policy banks were established, and there are also a number of municipal commercial banks, as well as large numbers of urban and rural credit co-operatives. A large number of foreign banks now have representative offices and branches in China.

The Big Four The banking sector today is dominated by the Big Four, with these institutions accounting for around 60% of total banking assets. None of them, however, is in a particularly healthy state. This is because of continued government intervention and regulation. Officials have forced banks to lend to support struggling SOEs. At the same time, interest-rate restrictions have prevented banks from freely pricing loans according to risk. This, and the absence of the (at least implicit) government guarantee that exists in the state sector, has discouraged China’s banks from lending to the private sector. Officially lending to private enterprises and individuals accounts for around 1% of loans outstanding. The data are not perfect, and in reality the figure is likely to be higher, but anecdotal evidence too suggests that China’s private sector has difficulty gaining access to bank credit.

Banking sector reforms are However, although the banks continue to suffer from damaging official implemented intervention, the scale of this meddling has lessened in recent years. The government has also been taking explicit steps to improve the health of the banking sector. Four asset-management companies (AMCs) were established in 1999, one for each of the Big Four state banks. By end-2000 the four AMCs had

bought non-performing assets worth Rmb1.4trn (US$170bn) from the state banks, and 580 SOEs had agreed to swap a further Rmb405bn of debt for equity. Even before this, the government had injected US$32bn of public funds into the Big Four, and officials have been encouraging these institutions to lend more to consumers and to small and medium-sized enterprises. In early 2004 the government announced a further recapitalisation, transferring ownership of US$45bn of foreign assets to the CCB and the BOC. The government is also allowing banks to list on stockmarkets. In November 2000 Minsheng Bank raised Rmb4.1bn on the Shanghai stock exchange. Shanghai Pudong Development Bank and Shenzhen Development Bank have also listed. In July 2002 the BOC sold shares in its Hong Kong subsidiary on the Hong Kong stock exchange, and this is expected to be followed by a listing of the BOC parent company, and of the CCB, in 2005-06. Foreign banks have also been active in acquiring interests in second-tier banks. Thus in August 2004 a UK- headquartered bank, HSBC, took a 19.9% stake in the Shanghai-based Bank of Communications, China’s fifth-largest bank with a network of 2,700 branches in the country.

Foreign banks are entering Reforms are being spurred in part by the entry of wholly owned foreign banks the market into the market. Foreign banks were initially restricted to certain cities and to dealing only with foreign-currency transactions by foreign companies in China. Both the geographical and functional limitations are being gradually relaxed. Since April 2002 some foreign banks have been able to provide local residents and businesses with foreign-currency transactions. As part of the WTO accession agreement, China is in the process of allowing foreign banks to undertake renminbi-denominated business, with the market for local individuals scheduled to be opened up in 2007. Foreign banks are also gradually gaining permission to enter the car financing market, and the insurance market was fully opened to foreign institutions on January 1st 2005. Foreign banks will not gain market share quickly: the government has been imposing burdensome licensing requirements that make it costly for foreign banks to expand their branch networks quickly. Foreign banks will, however, gain customers from local banks as the market opens up, and this prospect has added urgency to the government’s attempts to clean up the domestic banking system.

The Shanghai and Shenzhen Once the third-largest in the world, the Shanghai Stock Exchange was stockmarkets re-established after a gap of 31 years in 1990, quickly followed by the establishment of a stockmarket in the southern city of Shenzhen, abutting Hong Kong. Total market capitalisation of the Shanghai and Shenzhen stock exchanges at end-2003 was Rmb4.2trn, compared with Rmn3.8trn in 2002 and a record high of Rmb4.8trn in 2000, and turnover on the two markets totalled Rmb3.2trn in 2003, compared with Rmb2.8trn in 2002 and Rmb6.1trn in 2000. Capitalisation as a percentage of GDP fell to 35% in 2003: China lags behind other Asian markets in this area, with a number of more developed economies, such as Singapore and Hong Kong, having a market capitalisation that exceeds total GDP. There are three futures exchanges in mainland China, the Shanghai Futures Exchange and the Dalian and Zhengzhou Commodity Exchanges.

The stockmarkets suffer from The stockmarkets remain immature, and some prominent local economists say structural weaknesses that they are more like casinos than proper capital markets. The situation has improved in recent years as the nominally independent China Securities Regulatory Commission (CSRC) has taken steps to resolve some of the most obvious deficiencies. The CSRC has, for instance, started to end the division between local-currency-priced “A” shares, which initially only domestic residents could buy, and hard-currency-denominated “B” shares, which were originally reserved for foreigners. It has also sought to change the situation whereby almost all listed firms are SOEs, by allowing more private firms to undertake initial public offerings. In a further step forwards, foreigners have been allowed to apply to buy the two-thirds of shares that are untradeable (these shares, either “state shares” or “legal person” shares, are a legacy of previous government attempts to list SOEs without losing managerial control). Although these moves are welcome, a fundamental improvement in the quality of the market will not happen overnight. For example, the conditions under which foreigners can buy either “A” shares or non-traded state shares are restrictive.

The bond market is small and China’s bond market is small and immature, consisting of two distinct immature elements: an interbank over-the-counter (OTC) market, where liquidity is limited, and a market at the Shanghai stock exchange, where trading volume has in recent years been stagnating. State bonds have traditionally been “allocated” (a euphemism for forced purchases by SOEs and state employees), but are now sold on a voluntary basis through a variety of channels, including commercial banks, policy banks and brokerages. Individual investors hold about 60% of Treasury bonds, buying them over the counter from banks. Corporate debt issues are still extremely limited, a result of deliberate government policy to channel investors’ savings into T-bonds rather than enterprise bonds (in 2003 T-bond issues amounted to Rmb628bn, compared with Rmb35.8bn for enterprise bonds). Some progress was made in 1999 in opening up the secondary debt market, and the government has been working in more recent years to develop the bond market, for example by allowing banks from June 2002 to undertake OTC trading of T-bonds.

The insurance industry grows In 1998 the People’s Insurance Company of China (PICC) was split into three rapidly companies: People’s Insurance Company of China (formerly PICC Property), China Life Insurance (formerly PICC Life) and China Reinsurance (formerly PICC Reinsurance). This has helped to boost the development of the industry, which was anyway receiving impetus from the declining availability of state- sector welfare benefits. In recent years the Chinese insurance market has been growing at twice the rate of GDP. At end-2003 there were 26 domestic companies and 36 joint-venture or foreign-invested companies offering insurance, employing a total of more than 1m people (including marketing personnel and agents). The insurance market is nevertheless tiny by international standards. Premium revenue stood at Rmb388bn in 2003, with claims and payments at Rmb84.1bn. Life insurance premiums accounted for the bulk of revenue, at Rmb301.1bn, while property premiums amounted to Rmb86.9bn. The China Insurance Regulatory Commission (the industry’s regulatory body) forecasts annual growth of 12% in the industry during the next few years.

Other services

The retail sector suffers from The value of retail sales increased every year between 1993 and 2003 to reach oversupply Rmb4.6trn in the latter year. The annual rate of increase in value terms has been volatile, but a general decrease in the rate from a peak of 30.5% in 1994 to 9.1% in 2003 has been recorded. This, however, partly reflects the easing of retail price inflation from 21.7% in 1994 to 1.2% in 2003. A factor restraining retail price inflation has been the emergence of oversupply in many consumer-goods markets, reducing enterprises’ pricing power. Markets for basic consumer appliances are saturated, mainly with products from local manufacturers. In an indication of this, the manufacturing component of China’s ex-factory industrial price index fell every year in 1997-2002 and rose by only 0.2% in 2003, with the result that in 2003 the index was down by 13.4% compared with 1996.

There is no integrated national Excess production capacity has been sustained in many markets by local market protectionism, with local authorities keeping out imports from other areas in order to help the growth of local enterprises. In addition to encouraging overcapacity, such protectionism, together with a deficient transport infrastructure, has also ensured that for many goods China has no single integrated national market. Instead, consumer-goods markets in China are best thought of in regional or even provincial terms. The fragmentation of the national market makes the task of achieving nationwide retail penetration a considerable challenge for both domestic companies and FIEs. However, chain stores and other modern retailers are beginning to emerge in China’s large urban centres, making it easier for manufacturers to co-ordinate distribution in certain subsectors, such as high- value consumer goods and clothing. This trend is expected to deepen over the next five years, as limitations on foreign retailers are eased under the terms of China’s accession to the WTO. Distribution is also being opened up to foreign firms. Previously, foreign companies were permitted to distribute only locally made products in China, and were not allowed to set up distribution networks or wholesale outlets. China agreed to phase out most restrictions on distribution within three years of its December 2001 entry to the WTO, and foreign manufacturers can look forward to greatly improved access to local markets as a result.

The external sector

Trade in goods

Merchandise trade growth There have been wide fluctuations in export growth in the reform period, but is rapid the 20-year period to 2002 saw an annual average expansion of 15% in the US-dollar value of merchandise exports. In 1996 export revenue grew by only 1.5% in US-dollar terms, following a rapid rate of growth in 1995 that distorted the base for year-on-year comparison. Exports surged again in 1997, but grew much more slowly in 1998-99 as overseas demand was hit by the Asian

regional downturn. In three of the following four years, however, exports grew by more than 20% year on year. The performance was particularly strong in 2003 and 2004, when the value of exports surged by 34.6% and 35% year on year respectively. The value of exports in 2004 stood at US$593.4bn.

Trade in goods, 2003 (US$ bn) Main exports fob Food & live animals, etc 17,531 Beverages & tobacco 1,019 Non-edible raw materials 5,032 Mineral fuels, lubricants etc 11,114 Animal & vegetable oils, fats, waxes 115 Chemicals & related products 19,581 Light industrial products, rubber, minerals, iron etc 69,018 Machinery & transport equipment 187,773 Total incl others 438,230 Main imports cif Food & live animals, etc 5,960 Beverages & tobacco 490 Non-edible raw materials 34,124 Mineral fuels, lubricants etc 29,189 Animal & vegetable oils, fats, waxes 3,000 Chemicals & related products 48,975 Light industrial products, rubber, minerals, iron etc 63,902 Machinery & transport equipment 192,826 Total incl others 412,760

Source: China Statistical Yearbook.

Export growth is fuelled by The double-digit rate of export growth achieved during the past 20 years has foreign enterprises been fuelled by output from foreign-invested companies (FIEs). Between 1992 and 2003 merchandise exports produced by FIEs surged from US$17.4bn to US$240.3bn, or from 20% to 54.8% of total exports. At the same time the share of exports produced by SOEs fell, reaching 31.5% in 2003, down from 46.7% in 2000.

Manufactured goods exports The expanding FIE sector has also ensured a continual upgrading of the goods become more important exported by China. In 1985 primary goods still accounted for around 50% of all exports. By 1990 this proportion had fallen to 25.6%, as the migration of factories from Hong Kong to mainland China boosted China’s manufacturing exports. These firms were mainly involved in the production of low-end light industrial products, such as toys and textiles. By 2003 manufactured goods accounted for over 92% of China’s exports. Within this overarching trend, there has been a shift away from basic manufactured products towards the production of electronic goods. Between 1996 and 2003 textile exports fell from 23.1% to 16.7% of all exports, whereas exports of machinery and electrical equipment rose from 20.6% to 40% of all exports. This change was again partly the result of foreign investment, particularly by firms from Taiwan, Japan and South Korea. In 2001 plants on the Chinese side of the Taiwan Strait manufactured over 48% of the desktop computers and 29% of the mobile phones produced by Taiwan firms.

Import growth is determined Imports of consumer goods have been increasing in recent years. Nevertheless, by growth in exports because many FIEs are export-processing plants relying on imports of components, the pattern of imports has largely been determined by that of exports. For instance, the export boom of 2002-03 was accompanied by a massive influx of imports. Furthermore, imports consist largely of manufactured goods: the share of total imports accounted for by manufactures was 82.4% in 2003, compared with 17.6% for primary products. The main exception to the strong link between imports and exports concerns petroleum products, imports of which have increased rapidly in recent years, from just 0.1% of total imports in 1985 to around 7% in more recent years. The manufactured goods import bill includes a high proportion of intermediates, notably chemicals and related products, but also iron and steel as well as textile yarn.

The US is China’s largest The US is China’s largest export market, absorbing 21.1% of China’s total exports export market in 2003. Another important market in the West is Germany. But although it is China’s fifth-biggest export market, Germany accounted for only 4% of total export sales in 2003. Separating the US and Germany in 2003 are three Asian economies: Hong Kong, Japan and South Korea. Reflecting the importance of FIEs that are linked to companies from other Asian economies, intra-Asian trade made up 58% of China’s total trade in 2003. As well as being a large export market, Japan is by far the largest supplier of goods to China, at US$59.4bn in 2003. The second-largest source of imports is Taiwan, which sold US$49.4bn of goods to China in 2003, followed by South Korea at US$43.1bn. The accession of ten new countries to the EU in May 2004 allowed the 25-member body to emerge as China’s largest trade partner in January- November 2004. China exported US$84.6bn of goods to the EU in the period, below the US$99.7bn exported to the US but ahead of the US$58.4bn exported to Japan. China imported US$77.4bn of goods from Japan in the period, compared with US$57.5bn from the EU and US$36.8bn from the US. Consequently total trade with the EU reached US$142.1bn, ahead of the totals of US$136.5bn with the US and US$135.8bn with Japan.

Trade by type of enterprise, 2003 (US$ bn unless otherwise indicated) % change, % change, Exports year on year Imports year on year Balance State-owned 138,033 12.4 142,479 24.4 -4,446 Foreign-invested 240,338 41.4 231,914 44.7 8,423 Collective 25,131 33.3 13,236 39.7 11,895 Other 34,869 150.6 25,207 129.8 9,662 Total 438,371 34.6 412,836 39.9 25,534

Source: China’s Customs Statistics.

China’s statistics overstate the importance of Hong Kong as an import source and export market. The central authorities count as exports to Hong Kong a large volume of goods that are transported to Hong Kong only for re-export to third markets; the same process in reverse is seen in the case of imports. Hong Kong’s role as an entrepôt leads to disagreement over the size and nature of China’s trade balance with other countries. Trade statistics published by other countries attribute to China the value added by Hong Kong’s transshipment

services. They also appear to understate the value of China’s imports from third countries. The result is that China claims much smaller bilateral trade surpluses with the EU and the US than the Europeans and the Americans do in their statistics.

Main trading partners, 2003 Exports fob % of total Imports cif % of total US 21.1 Japan 18.0 Hong Kong 17.4 Taiwan 12.0 Japan 13.6 South Korea 10.4 South Korea 4.6 US 8.2 Germany 4.0 Germany 5.9 Netherlands 3.1 Malaysia 3.4 UK 2.5 Hong Kong 2.7 Taiwan 2.1 Singapore 2.5

Source: China Statistical Yearbook.

Invisibles and the current account

The current-account balance is China’s current account is dominated by the trade balance: two-way dominated by goods trade merchandise trade accounted for 84% of the value of all transactions on the current account in 2003. The merchandise trade account was in deficit until 1993 but improved fairly steadily thereafter, and merchandise trade surpluses of more than US$46bn (around 5% of GDP) were recorded in both 1997 and 1998. The trade surplus narrowed in 1999-2000, but it remained substantial, and rose above US$40bn once again in 2002 and 2003. This robust trade surplus has supported the overall current-account surplus, which peaked at US$37bn (4.1% of GDP) in 1997 and reached a fresh high of US$45.9bn (3.2% of GDP) in 2003. The income balance, which was in surplus for much of the 1980s, has since fallen into substantial and persistent deficit, owing to outflows related to large foreign direct investment (FDI) inflows.

Current account, 2003 (US$ bn) Merchandise exports fob 438,270 Merchandise imports fob -393,618 Trade balance 44,652 Services balance -8,573 Income balance -7,838 Current transfers balance 17,634 Current-account balance 45,875

Source: Economist Intelligence Unit, CountryData.

Tourism revenue increases The deficit on the services account has increased in recent years. The shipping account has tended to be in deficit recently; the balance of flows related to tourism has, however, been in surplus. According to the World Tourism Organisation, China is already the fifth-largest international tourist destination in the world, with its 36.8m visitors in 2002 representing 5.1% of the world total. (Arrivals in 2003 were lower, owing to the regional outbreak of Severe Acute Respiratory Syndrome, or SARS, in that year.) The country is a slightly less important tourist destination in terms of revenue, but is still not insignificant:

according to the World Tourism Organisation, international tourism spending in China of US$17.8bn in 2001 was equivalent to 2.8% of the world total, and tourism revenue rose further, to US$20.4bn, in 2002. Mainland Chinese residents have also become increasingly active travellers in recent years, particularly within Asia. The number of overseas trips made by Chinese residents has risen rapidly in recent years, from 8.4m in 1998 to 20.2m in 2003. Overseas travel has been boosted by the same higher incomes and longer holidays that have driven growth in the domestic tourism market, but the government’s loosening of restrictions on outbound travel has also played a part. Hong Kong and Macau are important destinations for mainland tourists, in line with the Chinese government’s decision to promote economic growth in its two Special Administrative Regions.

Capital flows and foreign debt

Inward FDI dwarfs Some local companies, most notably China’s biggest producer of home outward FDI appliances, Haier, have invested abroad, but such cases remain the exception rather than the rule. The acquisition by China’s largest domestic carmaker, Shanghai Automotive Industry Corporation (SAIC), of a 48.9% stake in the South Korean car manufacturer, Ssangyong, for US$500m in October 2004 and SAIC’s proposed US$1bn takeover of an ailing British carmaker, MG Rover, may mark the beginning of a new trend of foreign expansion for China’s companies. Foreign companies, on the other hand, have invested huge amounts of money in China. There is some confusion about the exact size of such inflows, as official figures do not exclude the effects of “round-tripping”, whereby local companies and individuals take money offshore and reinvest it in China to benefit from the generous tax incentives that have been offered to foreign investors. However, even if the FDI figures have been inflated by this practice, real inflows have still been huge. According to official figures, FDI inflows totalled around US$40bn a year in the late 1990s, and in 2002 rose to an all-time high of US$49.3bn. According to the UN Conference on Trade and Development (UNCTAD), China was the largest recipient of FDI in the world in 2002, surpassing the US for the first time. FDI inflows fell to US$47.1bn in SARS- hit 2003, but are expected to have recorded a new high in 2004. Chinese officials have predicted that the country will receive more than US$100bn in FDI in each year of the 11th five-year plan period from 2006 to 2010.

Large debt inflows stall in 1998 Medium- and long-term external borrowing averaged US$7.5bn a year in 1985-89, but rose to US$14.1bn a year in 1990-94 and to over US$20bn a year in the following three years. As a result, according to the World Bank, China’s stock of external debt surged from US$16.7bn (5.6% of GDP) in 1985 to US$154.6bn (16.1% of GDP) in 1998. Much of this capital was lent to Chinese companies whose debts foreign creditors apparently believed were covered by an implicit government guarantee. However, in 1997-98, apparently backed by local governments, several Chinese corporations!notably the Guangdong International Trust and Investment Corporation (GITIC) and Guangdong Enterprises!defaulted on external debt repayments, demonstrating that this blanket guarantee did not in fact exist. Foreign creditor sentiment towards China consequently soured, and partly as a result debt inflows more than

halved in 1998. But inflows picked up thereafter, and according to the World Bank China’s stock of external debt reached US$170.1bn (14.5% of GDP) in 2001, before falling back to US$168.3bn (13.2% of GDP) in 2002.

Foreign reserves and the exchange rate

China has large After totalling US$53.6bn at the end of 1994 foreign-exchange reserves (including foreign-exchange reserves gold) have risen every year, reaching US$412.2bn at end-2003. Foreign-exchange reserves continued to grow in 2004, and rose above US$500bn late in the year. This rapid rise is a reflection of strong inflows of capital, both from the current- account surpluses that have been consistently recorded in recent years and also from high net FDI inflows. At the same time, outflows of funds are strictly controlled and restricted by the government. This control has, however, been far from perfect. In the late 1990s large negative numbers appeared in the errors and omissions line of the balance of payments; this suggests that China has suffered from large unregistered capital outflows. Balance-of-payments errors and omissions rose to US$22.1bn in 1997 and US$18.9bn in 1998. The situation has since been reversed, and in 2002-03 growing positive figures were recorded in the errors and omissions line.

The renminbi has been stable A parallel currency, foreign-exchange certificates, circulated until 1994 to enable since 1995 foreign-trade corporations to purchase foreign exchange at a more reasonable rate. The currency was unified in 1994, and the renminbi was pegged at Rmb8.7:US$1. Since then, the foreign-exchange rate has been managed. It appreciated from Rmb8.446:US$1 in January 1995 to Rmb8.265:US$1 in July 2000, and has remained near this level ever since. The People’s Bank of China (PBC, the central bank) thus defied expectations that the authorities would react to the Asian financial crisis by devaluing the currency. Sentiment has now swung in the opposite direction, and by late 2003 many market participants were expecting a slight revaluation of the renminbi. By early 2005 no change to the renminbi peg against the US dollar had yet been implemented. However, the PBC has stressed that although an adjustment to the exchange-rate system is likely to be made at some point, the bank’s policy is to ensure the broad overall stability of the currency.

Regional overview

Membership of organisations

Asia-Pacific Economic APEC started life as a forum for informal discussion between six members of Co-operation (APEC) forum the Association of South-East Asian Nations (ASEAN), Brunei, Indonesia, Malaysia, the Philippines, Thailand and Singapore, and their six dialogue partners in the Pacific, Australia, Canada, Japan, New Zealand, South Korea and the US. In 1991 China, Hong Kong and Taiwan became members, followed by Mexico and Papua New Guinea in 1993, and Chile in 1994. Peru, Russia and Vietnam joined in 1998. APEC describes itself as “the primary vehicle for promoting open trade and practical economic co-operation” in the region, with the goal of advancing “Asia-Pacific economic dynamism and sense of community”. APEC has had a permanent secretariat since 1992, and also runs four permanent committees!on budget and managerial issues, on trade and investment, on economic trends generally, and on economic and technical co- operation. In addition, there are 11 working groups!on agricultural technical co- operation, energy, fisheries, human resources, industrial science and technology, marine resource co-operation, small and medium-sized enterprises, telecommunications, tourism, trade promotion and transport. There is also an APEC business advisory council (ABAC), which includes up to three senior private- sector representatives from each member country. APEC as a whole has its headquarters in Singapore, while ABAC is based in the Philippines. APEC’s main business is done at annual meetings of member states’ ministers of fo re ign affairs and e cono mic affairs, whi ch are fol lowe d by i nfo rmal gatheri ngs of members’ heads of state. Every other ministerial meeting is held in a South- east Asian country. The chairmanship of APEC rotates on a yearly basis. During the 1990s APEC’s star first waxed brighter and then started to wane. The high point was probably reached in 1994, when members agreed a timetable for the liberalisation of trade across the region: the ambitious aim was to eliminate all trade barriers by 2020, and then to extend reciprocal concessions to non-members. In 1995 and 1996 APEC debated how best to achieve this target, but discussions in 1997 and 1998 were driven off course by the regional financial crisis. APEC’s response to the crisis!generally worded exhortations to member states to develop financial and capital markets, and so on!was far from convincing and signalled the inherent weaknesses of the organisation. Subsequent meetings also provided other distractions from the trade liberalisation theme: East Timor in 1999, information technology in 2000 and security (following the September 11th terrorist attacks on the US) in 2001. Discussion returned to trade relations in 2002, but was only very general in nature. The 2003 meeting in the Thai capital, Bangkok, made little further progress, concluding with broad commitments to multilateral trade and investment liberalisation and to improving regional security arrangements. These commitments were reiterated by the November 2004 meeting, held in the Chilean capital, Santiago. The meeting’s communiqué also acknowledged the growing number of regional and bilateral trading arrangements (without condemning or

commending them), and touched in the most general way on contemporary problems such as maritime security and HIV/AIDS. The unfortunate conclusion to be drawn from recent meetings is that APEC has in effect gone back to its roots and become an informal talking shop, giving up all aspirations to be a serious regional reformer.

Appendices

Sources of information

National statistical sources Beijing Review Press, Beijing Review (weekly) Beijing Review Press, China Daily Economic Information and Consultancy, China’s Customs Statistics (quarterly), Hong Kong Economic Information and Consultancy, China Economic News (weekly), Hong Kong Far Eastern Economic Review, China Trade Report (monthly), Hong Kong National Bureau of Statistics, China Statistical Yearbook (annual), Beijing US-China Business Council, The China Business Review (bi-monthly), Washi ngton , DC

International statistical sources Bank for International Settlements, International Banking and Financial Market Developments (quarterly) IMF, International Financial Statistics (monthly) OECD, Geographical Distribution of Financial Flows to Aid Recipients (annual) UN, Monthly Bulletin of Statistics UN, World Investment Report (annual) World Bank, Global Development Finance (annual) World Bank, World Development Report (annual)

Select bibliography and Nicholas Lardy, China’s Unfinished Economic Revolution, Washington DC, 1998 websites Cheng Li, China’s Leaders: the New Generation, Oxford, 2001 Peter Nolan, China and the Global Economy, Basingstoke, 2001 China FDI (a website on investment in China): www.chinafdi.org.cn Commission of Science, Technology, Industry for National Defence: www.costind.gov.cn Ministry of Finance (in Chinese): www.mof.gov.cn National Bureau of Statistics: www.stats.gov.cn People’s Bank of China: www.pbc.gov.cn People’s Daily, official newspaper: english.peopledaily.com.cn South China Morning Post (a Hong Kong-based newspaper): www.scmp.com State Development Planning Commission: www.sdpc.gov.cn

State Economic and Trade Commission: www.setc.gov.cn US embassy, China: www.usembassy-china.org.cn Xinhua (official news organisation): www.xinhuanet.com

Reference tables

Population (m; year-end) 1999 2000 2001 2002 2003 Male 646.9 654.4 656.7 661.1 665.6 Female 610.9 613.1 619.5 623.4 626.7 Total 1,257.9 1,267.4 1,276.3 1,284.5 1,292.3 % change, year on year 0.8 0.8 0.7 0.7 0.6 Urban 437.5 459.1 480.6 502.1 523.8 % of total 34.8 36.2 37.7 39.1 40.5 Rural 820.4 808.4 795.6 782.4 768.5 % of total 65.2 63.8 62.3 60.9 59.5

Source: National Bureau of Statistics, China Statistical Yearbook 2002.

Labour force (m; year-end) 1999 2000 2001 2002 2003 Urban employment State-owned units 85.7 81.0 76.4 71.6 68.8 Urban collective-owned units 17.1 15.0 12.9 11.2 10.0 Co-operative units 1.4 1.6 1.5 1.6 1.7 Joint-ownership units 0.5 0.4 0.5 0.5 0.4 Limited liability corporations 6.0 6.9 8.4 10.8 12.6 Share-holding corporations 4.2 4.6 4.8 5.4 5.9 Private enterprises 10.5 12.7 15.3 20.0 25.4 Units with funds from Hong Kong, Macau & Taiwan 3.1 3.1 3.3 3.7 4.1 Foreign-funded units 3.1 3.3 3.5 3.9 4.5 Self-employed individuals 24.1 21.4 21.3 22.7 23.8 Totala 224.1 231.5 239.4 247.8 256.4 Rural employment Township & village industries 127.0 128.2 130.9 132.9 135.7 Total incl others 489.8 489.3 490.9 489.6 487.9 Employment by sector Primary industries 357.7 360.4 365.1 368.7 365.5 Secondary industries 164.2 162.2 162.8 157.8 160.8 Tertiary industries 192.1 198.2 202.3 210.9 218.1 Total employment 713.9 720.9 730.3 737.4 744.3 Registered urban unemployment 3.1 3.1 3.6 4.0 4.3 Economically active population 727.9 739.9 744.3 753.6 760.8 a Totals, adjusted by the NBS in accordance with census data, do not sum in source. Source: National Bureau of Statistics (NBS), China Statistical Yearbook 2002.

Transport statistics 1999 2000 2001 2002 2003 Railways Length of track in operation (‘000 km) 67.4 68.7 70.1 71.9 73.0 Passengers carried (bn person-km) 413.6 453.3 476.7 496.9 478.9 Freight traffic (bn tonne-km) 1,291.0 1,377.1 1,469.4 1,565.8 1,724.7 Roads Highways (‘000 km) 1,351.7 1,402.7 1,698.0 1,765.2 1,809.8 Passengers carried (bn person-km) 619.9 665.7 720.7 780.5 769.6 Freight traffic (bn tonne-km) 572.4 612.9 633.0 678.3 710.0 Passenger vehicles (‘000) 7,402.3 8,537.3 9,939.6 12,023.7 14,788.1 Freight trucks (‘000) 6,769.5 7,163.2 7,652.4 8,122.2 8,535.1 Water Length of waterways (‘000 km) 116.5 119.3 121.5 121.6 124.0 Waterway freight traffic (bn tonne-km) 2,126.3 2,373.4 2,598.9 2,751.1 2,871.9 Freight handled by major coastal ports (m tonnes) 1,051.6 1,256.0 1,426.3 1,666.3 2,011.3 Air Length of civil aviation routes (‘000 km) 1,522.2 1,502.9 1,553.6 1,637.7 1,749.5 International routes (‘000 km) 523.3 508.4 516.9 574.5 715.3 Passengers carried (bn person-km) 85.7 97.1 109.1 126.9 126.3 Freight traffic (bn tonne-km) 4.2 5.0 4.4 5.2 5.8

Source: National Bureau of Statistics, China Statistical Yearbook.

National energy statistics (% of total unless otherwise indicated) 1999 2000 2001 2002 2003 Energy production (m tonnes standard coal equivalent) 1,091 1,070 1,209 1,384 1,603 Coal 68.3 66.6 68.6 70.7 74.2 Oil 21 21.8 19.4 17.2 15.2 Natural gas 3.1 3.4 3.3 3.2 2.9 Hydroelectric 7.6 8.2 8.7 8.9 7.7 Energy consumption (m tonnes standard coal equivalent) 1,301 1,303 1,349 1,482 1,678 Coal 68 66.1 65.3 65.6 67.1 Oil 23.2 24.6 24.3 24 22.7 Natural gas 2.2 2.5 2.7 2.6 2.8 Hydroelectric 6.6 6.8 7.7 7.8 7.4 Note. 0.1229 kg standard coal equivalent=1 kwh. Source: National Bureau of Statistics, China Statistical Yearbook.

Government finances (Rmb bn) 1999 2000 2001 2002 2003 Revenue 1,144.4 1,339.5 1,638.6 1,890.4 2,171.5 % of GDP 13.9 15.0 16.8 18.0 18.5 Tax 1,068.3 1,258.2 1,530.1 1,763.6 2,001.7 Tariff revenue 56.2 75.0 84.1 70.4 92.3 Net subsidies to enterprises -29.0 -27.9 -30.0 -26.0 -22.6 Extra-budgetary revenue 338.5 382.6 430.0 447.9 n/a Debt issuance 371.5 418.0 460.4 567.9 615.4 Expenditure 1,318.8 1,588.7 1,890.3 2,205.3 2,465.0 % of GDP 16.1 17.8 19.4 21.0 21.0 Capital construction 211.7 209.5 251.1 314.3 342.9 Defence 107.6 120.8 144.2 170.8 190.8 Culture, health & education 240.8 273.7 336.1 397.9 450.6 Administration 152.6 178.8 219.8 297.9 343.8 Price subsidies 69.8 104.2 74.2 64.5 61.7 Debt service 191.1 158.0 200.8 256.3 295.2 Extra-budgetary expenditure 313.9 352.9 385.0 383.1 n/a Balance -174.4 -249.2 -251.7 -314.9 -293.5 % of GDP -2.1 -2.8 -2.6 -3.0 -2.5

Source: National Bureau of Statistics, China Statistical Yearbook.

Investment in assets by source and purpose (Rmb bn) 1999 2000 2001 2002 2003 By unit State-owned 1,594.8 1,650.4 1,760.7 1,887.7 2,166.1 Collective 433.9 480.1 527.9 598.7 800.9 Self-employed individuals 419.6 470.9 543.0 651.9 772.0 Joint-ownership 9.8 9.5 9.5 13.8 18.8 Share-holding 247.9 406.2 566.3 832.9 1,273.4 Foreign-funded 143.3 131.3 141.5 168.5 253.4 Units with funds from Hong Kong, Macau & Taiwan 121.8 129.3 158.3 176.5 237.5 Others 14.4 14.0 14.2 19.8 34.6 By use Capital construction 1,245.5 1,342.7 1,482.0 1,766.7 2,290.9 Investment in innovation 448.5 510.8 592.4 675.1 862.5 Real-estate development 410.3 498.4 634.4 779.1 1,015.4 Total investment incl others 2,985.5 3,291.8 3,721.3 4,350.0 5,556.7

Source: National Bureau of Statistics, China Statistical Yearbook.

Money supply and credit (Rmb bn unless otherwise indicated; end-period) 1999 2000 2001 2002 2003 Currency in circulation (M0) 1,345.6 1,465.3 1,568.9 1,727.8 1,974.6 % change, year on year 20.1 8.9 7.1 10.1 14.3 M1 4,583.7 5,314.7 5,987.2 7,088.2 8,411.9 % change, year on year 17.7 16.0 12.7 16.8 18.7 Quasi-money 7,406.1 8,146.3 9,843.0 11,412.5 13,710.4 % change, year on year 13.0 10.0 15.5 16.8 20.1 M2 11,989.8 13,461.0 15,830.2 18,500.7 22,122.3 % change, year on year 14.7 12.3 17.6 16.8 19.6 Stock of domestic credit 10,461.1 12,120.3 12,959.0 16,890.5 20,127.5 % of GDP 127.5 135.5 133.2 160.6 171.7 Memorandum items Deposit rate (%) 2.25 2.25 2.25 1.98 1.98 Lending rate (%) 5.85 5.85 5.85 5.31 5.31

Sources: IMF, International Financial Statistics; National Bureau of Statistics, China Statistical Yearbook.

Gross domestic product (at market prices) 1999 2000 2001 2002 2003 Total (US$ bn) At current prices 991 1,081 1,176 1,271 1,445 Total (Rmb bn) At current prices 8,207 8,947 9,731 10,517 11,963 At constant (1990) prices 4,497 4,857 5,221 5,639 6,164 % change, year on year 7.1 8.0 7.5 8.0 9.3 Per head (Rmb) At current prices 6,524 7,059 7,625 8,188 9,257 At constant (1990) prices 3,575 3,832 4,091 4,390 4,770 % change, year on year 6.2 7.2 6.8 7.3 8.7

Sources: World Bank; China Statistical Information Centre; Economist Intelligence Unit, CountryData.

Gross domestic product by expenditure (Rmb bn; current prices unless otherwise indicated) 1998 1999 2000 2001 2002 Private consumption 1,823 1,969 2,138 2,272 2,422 % change (real terms; 1990 prices) 6.8 8.0 8.6 6.3 6.6 % of GDP 43.4 43.8 44.0 43.5 43.0 Government consumption 468 520 584 645 690 % change (real terms; 1990 prices) 9.5 11.0 12.2 10.5 7.0 % of GDP 11.1 11.6 12.0 12.4 12.2 Gross fixed investment 1,481 1,615 1,771 1,975 2,269 % change (real terms; 1990 prices) 12.5 9.1 9.6 11.5 14.9 % of GDP 35.3 35.9 36.5 37.8 40.2 Stockbuilding 103 67 -7 35 10 % contribution to real GDP growth -1.8 -0.8 -1.6 0.9 -0.5 Exports of goods & services 809 932 1,217 1,334 1,726 % change (real terms; 1990 prices) 7.2 15.2 30.6 9.6 29.4 % of GDP 19.3 20.7 25.1 25.6 30.6 Imports of goods & services 791 969 1,207 1,337 1,705 % change (real terms; 1990 prices) 3.1 22.6 24.5 10.8 27.5 % of GDP 18.8 21.5 24.9 25.6 30.2 GDP 4,199 4,497 4,857 5,221 5,639 % change (real terms; 1990 prices) 7.8 7.1 8.0 7.5 8.0

Sources: World Bank; China Statistical Information Centre.

Gross domestic product by sector (Rmb bn; current prices) 1999 2000 2001 2002 2003 Primary 1,447 1,463 1,541 1,612 1,709 Secondary 4,056 4,494 4,875 5,298 6,127 Industry 3,509 3,905 4,237 4,598 5,309 Construction 547 589 638 701 818 Tertiary 2,704 2,990 3,315 3,607 3,889 Transport, post & telecommunications 446 541 597 642 672 Domestic trade 691 732 792 848 924 GDP 8,207 8,947 9,731 10,517 11,725

Source: National Bureau of Statistics, China Statistical Yearbook.

Price indices (% change) 1999 2000 2001 2002 2003 Retail prices -3.0 -1.5 -0.8 -1.3 -0.1 Overall consumer prices -1.4 0.4 0.7 -0.8 1.2 Urban consumer prices -1.3 0.8 0.7 -1.0 0.9 Rural consumer prices -1.5 -0.1 0.8 -0.4 1.6 Agricultural means of production -4.2 -0.9 -0.9 0.5 1.4 Ex-factory industrial products -2.4 2.8 -1.3 -2.2 2.3

Source: National Bureau of Statistics, China Statistical Yearbook.

Agricultural production (m tonnes) 1999 2000 2001 2002 2003 Grain 508.4 462.2 452.6 457.1 430.7 Cereal 453.0 405.2 396.5 398.0 374.3 Rice 198.5 187.9 177.6 174.5 160.7 Wheat 113.9 99.6 93.9 90.3 86.5 Maize 128.1 106.0 114.1 121.3 115.8 Cotton 3.8 4.4 5.3 4.9 4.9 Oil-bearing crops 26.0 29.5 28.6 29.0 28.1 Fibre crops 0.5 0.5 0.7 1.0 0.9 Sugarcane 74.7 68.3 75.7 90.1 90.2 Beetroots 8.6 8.1 10.9 12.8 6.2 Tobacco 2.1 2.6 2.4 2.4 2.3 Fruits 62.4 62.3 66.6 69.5 145.2 Tea 0.7 0.7 0.7 0.7 0.8 Aquatic products 41.2 42.8 43.8 45.6 47.0 Meat 58.2 61.3 63.3 65.9 69.3 Beef 5.1 5.3 5.5 5.8 6.3 Pork 38.9 40.3 41.8 43.3 45.2 Mutton 2.5 2.7 2.9 3.2 3.6

Source: National Bureau of Statistics, China Statistical Yearbook.

Gross agricultural output value by sector (Rmb bn) 1999 2000 2001 2002 2003 Crop cultivation 1,411 1,387 1,446 1,493 1,487 Forestry 89 94 94 103 124 Animal husbandry 700 739 796 845 954 Fisheries 253 271 282 297 314 Total 2,452 2,492 2,618 2,739 2,969a a Does not sum in source. Source: National Bureau of Statistics, China Statistical Yearbook.

Total sown area, by crop (‘000 ha) 1999 2000 2001 2002 2003 Grain crops 113,161 108,463 106,080 103,891 99,410 Cereal 91,617 85,264 82,596 81,466 76,810 Rice 31,284 29,962 28,812 28,202 26,508 Wheat 28,855 26,653 24,664 23,908 21,997 Maize 25,904 23,056 24,282 24,634 24,068 Beans 11,190 12,660 13,268 12,543 12,899 Tubers 10,355 10,538 10,217 9,881 9,702 Oil-bearing crops 13,906 15,400 14,631 14,766 14,990 Cotton 3,726 4,041 4,810 4,184 5,111 Fibre crops 205 262 323 338 337 Sugar crops 1,644 1,514 1,654 1,818 1,657 Tobacco 1,374 1,437 1,340 1,328 1,264 Vegetables 13,347 15,237 16,402 17,353 17,954 Memorandum items Total sown area 156,373 156,300 155,708 154,636 152,415 Area of tea plantations 1,130 1,089 1,141 1,134 1,207 Area of orchards 8,667 8,932 9,043 9,098 9,437

Source: National Bureau of Statistics, China Statistical Yearbook.

Miscellaneous agricultural statistics 1999 2000 2001 2002 2003 Grain production ‘000 tonnes) 508,386 462,175 452,637 457,058 430,695 Cotton production (‘000 tonnes) 3,829 4,417 5,324 4,916 4,860 Irrigated area (‘000 ha) 53,158 53,820 54,249 54,355 54,014 Chemical fertiliser applied (‘000 tonnes) 41,243 41,464 42,538 43,394 44,116 Grain imports (‘000 tonnes) 3,390 3,140 3,440 2,870 2,070

Source: National Bureau of Statistics, China Statistical Yearbook.

Industrial production 1999 2000 2001 2002 2003 Cloth (bn metres) 25.0 27.7 29.0 32.2 35.4 Colour television sets (‘000 units) 42,620.0 39,360.0 40,937.0 51,550.0 65,414.0 Refrigerators (‘000 units) 12,100.0 12,790.0 13,512.6 15,988.7 22,425.6 Washing machines (‘000 units) 13,421.7 14,429.8 13,416.1 15,957.6 19,644.6 Coal (m tonnes) 1,045.0 999.2 1,160.8 1,380.0 1,667.0 Crude oil (m tonnes) 160.0 163.0 164.0 167.0 169.6 Steel (m tonnes) 124.3 128.5 151.6 182.4 222.3 Cement (m tonnes) 573.0 597.0 661.0 725.0 862.1 Plate glass (m weight cases) 174.2 183.5 209.6 234.5 277.0 Chemical fertiliser (m tonnes) 32.5 31.9 33.8 37.9 38.8 Motor vehicles (‘000 units) 1,832.0 2,070.0 2,341.7 3,251.0 4,443.9 Cars (‘000 units) 566.1 612.4 703.5 1,103.3 2,022.9 Integrated circuits (m) 4,150.0 5,880.0 6,362.9 9,631.0 14,831.0 Microcomputers (m) 4.0 6.7 8.8 14.6 32.2 Fax machines (m units) 1.6 2.0 3.2 3.0 7.5 Copying machines (m units) 2.1 1.6 1.4 2.1 2.6 Computers (units) 8,199.0 8,625.0 15,040.0 26,622.0 50,910.0

Source: National Bureau of Statistics, China Statistical Yearbook.

Sources and uses of credit funds by state banks (Rmb bn unless otherwise indicated; year-end balances) 1999 2000 2001 2002 2003 Sources Deposits 10,878 12,380 14,362 17,092 20,806 Urban & rural savings deposits 5,962 6,433 7,376 8,691 10,362 % of total 55 52 51 51 50 Deposits of enterprises 3,718 4,409 5,155 6,003 7,249 Liabilities to international financial institutions 37 0 0 42 48 Currency in circulation 1,346 1,465 1,569 1,728 1,975 Uses Loans 9,373 9,937 11,231 13,129 15,900 Short-term loans 6,389 6,575 6,733 7,425 8,366 Industrial loans 1,795 1,702 1,864 2,019 2,276 Commercial loans 1,989 1,787 1,856 1,797 1,799 Construction loans 148 162 210 275 300 Agricultural loans 479 489 571 688 841 Medium- & long-term loans 2,397 2,793 3,924 4,864 6,340 Trust loans 250 241 250 217 228 Other loans 337 328 325 623 965 Portfolio investment 1,251 1,965 2,311 2,679 3,026 Purchase of foreign exchange 1,479 1,429 1,786 2,322 3,485 Government debt 158 0 0 158 0 Total assets & liabilities incl others 12,323 13,333 15,354 18,402 22,531

Source: National Bureau of Statistics, China Statistical Yearbook.

Exports (US$ m; fob) 1999 2000 2001 2002 2003 Primary goods 19,941 25,460 26,338 28,540 34,810 Food & live animals, etc 10,458 12,282 12,777 14,621 17,531 Beverages & tobacco 771 745 873 984 1,019 Non-edible raw materials 3,921 4,462 4,172 4,402 5,032 Mineral fuels, lubricants etc 4,659 7,855 8,405 8,435 11,114 Animal & vegetable oils, fats, waxes 132 116 111 98 115 Manufactured goods 174,990 223,743 239,760 297,056 403,420 Chemicals & related products 10,373 12,098 13,352 15,325 19,581 Light industrial products, rubber, minerals, iron etc 33,262 42,546 43,813 52,955 69,018 Machinery & transport equipment 58,836 82,600 94,901 126,976 187,773 Miscellaneous products 72,510 86,278 87,110 101,153 126,088 Products not classified elsewhere 9 221 584 648 956 Total 194,930 249,200 266,100 325,600 438,230

Source: National Bureau of Statistics, China Statistical Yearbook.

Imports (US$ m; cif) 1999 2000 2001 2002 2003 Primary goods 26,846 46,739 45,743 49,271 72,760 Food & live animals, etc 3,619 4,758 4,976 5,238 5,960 Beverages & tobacco 208 364 412 387 490 Non-edible raw materials 12,740 20,003 22,127 22,736 34,124 Mineral fuels, lubricants, etc 8,912 20,637 17,466 19,285 29,189 Animal & vegetable oils, fats, waxes 1,367 977 763 1,625 3,000 Manufactured goods 138,853 178,355 197,810 245,899 340,000 Chemicals & related products 24,030 30,213 32,104 39,036 48,975 Light industrial products, rubber, minerals, iron, etc 34,317 41,807 41,938 48,489 63,902 Machinery & transport equipment 69,453 91,931 107,015 137,010 192,826 Miscellaneous products 9,701 12,751 15,076 19,801 33,011 Products not classified elsewhere 1,352 1,653 1,676 1,564 1,282 Total 165,700 225,090 243,550 295,170 412,760

Source: National Bureau of Statistics, China Statistical Yearbook 2004.

Balance of payments, IMF series (US$ m) 1999 2000 2001 2002 2003 Exports: goods fob 194,716 249,131 266,075 325,651 438,270 Imports: goods fob -158,734 -214,657 -232,058 -281,484 -393,618 Trade balance 35,982 34,474 34,017 44,167 44,652 Exports of services 26,248 30,430 33,334 39,745 46,734 Imports of services -31,589 -36,031 -39,267 -46,528 -55,306 Income: credit 8,330 12,550 9,388 8,344 16,095 Income: debit -22,800 -27,216 -28,563 -23,289 -23,933 Transfers: credit 5,368 6,861 9,125 13,795 18,482 Transfers: debit -424 -550 -633 -811 -848 Current-account balance 21,115 20,518 17,401 35,422 45,875 Direct investment abroad -1,775 -916 -6,884 -2518 152 Direct investment in China 38,753 38,399 44,241 49,308 47,077 Portfolio investment assets -10,535 -11,307 -20,654 -12,095 2,983 Portfolio investment liabilities -699 7,317 1,249 1,752 8,444 Other investment assets -24,394 -43,864 20,813 -3,077 -17,922 Other investment liabilities 3,854 12,329 -3,933 -1,029 12,040 Financial balance 5,204 1,958 34,832 32,341 52,774 Capital-account balance -26 -35 -54 -50 -48 Net errors & omissions -17,641 -11,748 -4,732 7,504 17,985 Overall balance 8,652 10,693 47,447 75,217 116,586 Financing (- indicates inflow) Movement of reserves -8,652 -10,693 -47,447 -75,217 -116,586 Use of IMF credit & loans 0 0 0 0 0

Source: IMF, International Financial Statistics.

External debt (US$ m unless otherwise indicated; debt stocks at year-end) 1998 1999 2000 2001 2002 Total external debt 144,006.8 152,085.3 145,705.9 170,059.4 168,254.9 Long-term debta 126,666.8 136,905.3 132,625.9 128,449.4 120,369.9 Short-term debt 17,340.0 15,180.0 13,080.0 41,610.0 47,885.0 Public & publicly guaranteed long-term debt 99,424.1 99,217.3 94,836.9 91,705.4 88,530.9 Official creditors 45,145.9 50,443.6 50,367.2 50,493.6 50,738.6 Multilateral 22,283.4 23,855.6 25,788.2 26,790.3 27,339.0 Bilateral 22,862.5 26,588.0 24,579.0 23,703.3 23,399.6 Private creditors 54,278.2 48,773.7 44,469.7 41,211.8 37,792.3 Banks 24,400.4 13,485.0 10,621.7 6,762.0 6,064.0 Bonds 13,941.0 11,029.0 11,371.0 11,851.8 10,567.8 Total debt service 18,434.9 26,862.2 27,092.1 24,297.3 30,615.8 Principal 11,209.1 19,834.6 19,925.1 16,642.7 24,713.5 Interest 7,225.8 7,027.6 7,167.0 7,654.6 5,902.3 Short-term debt 1,651.2 1,140.4 1,167.7 1,495.0 1,676.5 Ratios (%) Total external debt/gross national income 15.5 15.6 13.7 14.7 13.4 Debt-service ratiob 8.6 11.7 9.3 7.8 8.1 Short-term debt/total external debt 12.0 10.0 9.0 24.5 28.5 Concessional external debt/total external debt 20.6 21.6 20.7 17.3 17.8 a Long-term debt is defined as having original maturity of more than one year. b Debt service as a percentage of earnings from exports of goods and services. Source: World Bank, Global Development Finance.

Official development assistance (US$ m) 1997 1998 1999 2000 2001 Bilateral OECD 1,238.2 1,731.7 1,821.6 1,257.5 1,075.1 Germany 381.9 321.3 304.6 212.8 163.8 France 50.1 29.8 46.2 46.0 42.8 Austria 3.3 -2.5 -6.4 5.0 1.1 Multilateral 828.5 707.8 548.3 460.4 334.9 International Development Association 687.1 553.8 406.8 313.6 223.7 UN Development Programme 26.8 14.4 15.5 12.7 8.9 Total incl others 2,053.2 2,447.8 2,384.6 1,733.2 1,459.9 Memorandum item European Commission & EU states 575.4 499.7 516.7 434.6 341.3

Source: OECD Development Assistance Committee, Geographical Distribution of Financial Flows to Aid Recipients.

Position of China vis-à-vis BIS-reporting banks (US$ m; end-period) 1999 2000 2001 2002 2003 Assets 67,988 101,964 93,693 92,800 89,227 Liabilities 67,589 59,741 54,150 44,041 61,110

Source: Bank for International Settlements, BIS Quarterly Review.

Foreign reserves (US$ m unless otherwise indicated; end-period) 1999 2000 2001 2002 2003 Foreign exchange 154,675 165,574 212,165 286,407 403,251 SDRs 741 798 851 998 1,102 Reserve position in the IMF 2,312 1,905 2,590 3,723 3,798 Total reserves excl gold 157,728 168,278 215,605 291,128 408,151 Gold 608 578 3,093 4,074 4,074 Gold (m fine troy oz) 12.7 12.7 16.1 19.3 19.3

Source: IMF, International Financial Statistics.

Exchange rates (Rmb per unit of currency; annual averages) 1999 2000 2001 2002 2003 US$ 8.3 8.3 8.3 8.3 8.3 HK$ 1.1 1.1 1.1 1.1 1.1 ¥100 7.3 7.7 6.8 6.6 7.1

Source: National Bureau of Statistics, China Statistical Yearbook 2004.

Editors: Paul Cavey (editor); Graham Richardson (consulting editor) Editorial closing date: January 18th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]