Country Profile 2003

China

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Contents

3 Basic data

4 Politics 4 Political background 6 Recent political developments 7 Constitution, institutions and administration 10 Political forces 14 International relations and defence

20 Resources and infrastructure 20 Population 22 Education 23 Health 24 Natural resources and the environment 25 Transport, communications and the Internet 28 Energy provision

28 The economy 28 Economic structure 29 Economic policy 38 Economic performance 41 Regional trends

42 Economic sectors 42 Agriculture 45 Mining and semi-processing 45 Manufacturing 47 Construction 47 Financial services 50 Other services

51 The external sector 51 Tra d e i n go od s 55 Invisibles and the current account 55 Capital flows and foreign debt 56 Foreign reserves and the exchange rate

57 Appendices 57 Membership of regional organisations 57 Sources of information 59 Reference tables 59 Population 59 Labour force 60 Transport statistics 60 National energy statistics 61 Government finances 61 Investment in assets by source and purpose 62 Money supply and credit 62 Gross domestic product 62 Gross domestic product by expenditure 63 Gross domestic product by sector

63 Price indices 63 Agricultural production 64 Gross agricultural output value, by sector 64 Total sown area, by crop 65 Miscellaneous agricultural statistics 65 Industrial production 65 Sources and uses of credit funds by state banks 66 Exports 66 Imports 67 Balance of payments, IMF series 68 External debt 68 Official development assistance 69 Position of China vis-à-vis BIS-reporting banks 69 Foreign reserves 69 Exchange rates

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China

Basic data

Land area 9,561,000 sq km

Population 1.3bn (end-2001)

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 Hottest months, July and August, 23-33°C (average daily minimum and (altitude 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 2001: Rmb8.28:US$1. Exchange rate on January 3rd 2003: Rmb8.28:US$1

Fiscal year January-December

Time Eight hours ahead of GMT

Public holidays in 2003 January 1st (New Year’s Day); February 1st-3rd (Chinese New Year or Spring Festival); March 8th (International Women’s Day); May 1st-3rd (Labour Day), 4th (Youth Day); June 1st (Children’s Day); July 1st (anniversary of the founding of the Chinese Communist Party); August 1st (Army Day); October 1st-3rd (National 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. Politically, China remains a Marxist-style party-state, but free-market economic reforms since 1978 have transformed the structure of the economy and raised living standards. The new general secretary of the CCP, Hu Jintao, took up his position in November 2002; he is expected to replace Jiang Zemin as China’s president from March 2003, when the next session of the National People’s Congress (NPC, the largely rubber-stamp legislature) falls due. Political power is not fully institutionalised in China, and Mr Jiang will continue to exercise influence from behind the scenes, not least as chairman of the Central Military Commission (CMC, the party organisation that tops the military bureaucracy). The term of the current reform- friendly premier, Zhu Rongji, will also expire at the March 2003 NPC meeting; a vice-premier, Wen Jiabao, is tipped to succeed him.

Political background

China’s lengthy history First politically united in 221 BC, China quickly became the most powerful informs current opinion 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 her “rightful” position in the world.

The Chinese Empire collapses In the early years of the nineteenth century, China was confronted with the challenge 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, who 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, or 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 People’s Republic is A KMT government led by Chiang Kai-shek unified much of urban China in formed after years of warfare 1927, but failed to assume complete control over the country, much of which fell into the hands of the CCP. In 1931 Japan conquered Manchuria in the north-east, and in 1937 Japan launched a full-scale invasion of China. The KMT government was therefore engaged with fighting the Japanese as well as struggling to prevent territorial gains by the CCP. With the surrender of Japan in 1945, civil war broke out. Chiang’s forces were routed with unexpected ease by the better-disciplined

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CCP forces, forcing him in 1949 to flee with the ROC government to the island province of Taiwan (which had been under Japanese control from 1895 to 1945). On October 1st that year the CCP leader, Mao Zedong, proclaimed the founding of the People’s Republic of China with Beijing as its capital.

China moves from famine to The next 30 years were characterised by social and economic upheavals as reform landlords were punished in the drive to collectivise agriculture, dissidents were repressed and the population subjected to a series of political campaigns. In the “Great Leap Forward” of 1958 the government attempted to turn China overnight into an industrial economy. 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” of leaders, although prepared to reform the economy, was ultimately not prepared to countenance the party’s own fall from power. Therefore the party’s general secretary, Hu Yaobang, hitherto Deng’s heir apparent, was dismissed amid student demonstrations in 1986.

The Beijing massacre takes The death of Mr Hu in 1989 led to more demonstrations, but this time on a place in 1989 much larger scale, at times involving more than one million 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 at least 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.

China embarks on economic Deng’s swing to conservatism did not last long. His desire for continued reforms 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

Jiang Zemin and colleagues are Deng’s death did not lead to political turmoil. However, it was significant, marking technocrats the end of an era in which revolutionaries, bound by loyalties built up during the long pre-1949 struggle with the KMT—notably the Long March, the Red Army’s epic trek to safety during the 1930s—dominated politics in China. Mr Jiang and his colleagues are instead ”technocrats”, with careers dominated less by political struggle than by study of engineering and the natural sciences. Lacking the revolutionary background that would have bolstered his position, Mr Jiang had to work hard after 1989 to build a personal power base within the CCP bureaucracy, particularly in the military. However, although he has been notably successful in this task, and clearly established himself as the most senior leader in his generation, he has never enjoyed the deep-seated authority commanded by Deng, let alone Mao. Under Mr Jiang then the leadership has necessarily been much more collective than was the case in the past. Decisions have been the outcome of debate and compromise between Mr Jiang and other senior leaders, most importantly the former premier, Li Peng, who is now the chairman of the National People’s Congress (NPC, China’s largely rubber-stamp legislature) and Zhu Rongji, who succeeded Mr Li as premier at the meeting of the NPC in March 1998.

The era of the fourth Mr Jiang started to withdraw from his formal positions in November 2002 generation begins when, at the five-yearly congress of the CCP, he retired as party chairman. He remains state president, but his successor as party general secretary, Hu Jintao, is expected to assume this position too in March 2003, when the next annual session of the NPC is scheduled. Mr Zhu and Mr Li will also step down from their frontline political positions in March. Retirement will not, however, lead to the disappearance of the third-generation leaders. Mr Jiang is, for example, expected to remain chairman of the CMC. He will likely retain the loyalties of his personal power base for even longer. This is important: although Mr Jiang is not thought to be close to Mr Hu or Mr Zhu’s likely successor as premier, Wen Jiabao, his proteges fill at least of five of the other seven seats on the politburo standing committee (PSC) that was formed following the November congress (the PSC is the highest policymaking body in China). The rumoured rift between Mr Jiang and Mr Hu could cause difficulties in the event of policy disputes. Still, the odds remain against open disagreement. Although little is known about the personal views of the fourth-generation leaders, it is unlikely they would have reached the highest echelons of power if they did not share the obsession of their predecessors with social stability and preservation of the CCP’s monopoly on power. They are likely, however, to bring a different emphasis to policymaking in China. Although also technocrats, the new generation of leaders tends to be better educated and more familiar with the outside world than were their predecessors. Some policy challenges facing Mr Hu and his colleagues may differ little from those that confronted the third generation leadership when they took office in the early 1990s—reform of the state sector, for example, remains high on the agenda—but there are also important differences—China is now richer than it was ten years ago, but also much more unequal.

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Important recent events 1997 Deng Xiaoping dies in February, aged 92. Jiang Zemin smoothly assumes greater prominence. In July China resumes the exercise of sovereignty over Hong Kong, which becomes a Special Administrative Region (SAR) of China. The 15th national congress of the Chinese Communist Party (CCP) further consolidates the leadership around Mr Jiang and sanctions the deepening of economic reform. 1998 Zhu Rongji takes over from Li Peng as China’s premier. 1999 On a trip to the US in April Mr Zhu offers the US sweeping concessions in an attempt to win support for China’s accession to the World Trade Organisation (WTO), but is rebuffed. The bombing of the Chinese embassy in Belgrade, Yugoslavia, by NATO in May then quickens the downward spiral of Sino-US relations. In July the president of Taiwan, Lee Teng-hui, raises the stakes in the cross- Strait relationship by announcing that bilateral relations should be conducted on a “special state-to-state” basis. 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 votes to grant permanent normal trade relations (PNTR) status to China. Nevertheless, 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 10th five-year plan is revealed, with an emphasis on continuing economic reform and with membership of the WTO a key aim. At its second attempt, China wins the right to stage the Olympic Games, which will be held in 2008 in Beijing. The new US administration, under the president, 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 CCP at the party’s 16th congress. Mr Jiang’s theory of the “Three Represents”—that the CCP represents the foremost productive forces, the most advanced culture and the fundamental interest of the people—is officially adopted as the party’s ideology. This is designed to legitimise the party’s turn to capitalism and allow private entrepreneurs to join the party. Constitution, institutions and administration

China has two c0nstitutions China has not one but two constitutions: a state constitution, and that of the ruling CCP. Amendments to the state constitution tend to follow amendments 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”. This was designed to broaden the appeal of the party to private-sector entrepreneurs, who have been permitted to join the ruling party since mid-2002 in line with Mr Jiang’s theory of the “Three Represents”, which states that the CCP must represent the foremost productive forces, the most advanced culture and the fundamental interests of the people. The CCP’s new constitution cites the “Three Represents” as part of the party’s official ideology, along with Marxism-Leninism, Mao Zedong Thought and Deng Xiaoping Theory.

The NPC passes laws and In theory, the supreme organ of state power is the National People’s Congress approves the constitution (NPC). NPC representatives are replaced every five years. The body passes laws and treaties, nominates the executive and approves the constitution. It has 2,989 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 of around 200 members, which drafts laws and handles NPC business when the legislature is not in session. As in other party-state systems, the legislature is subordinate to the party. The NPC has, however, been encouraged in recent years to take more seriously its duty of holding the government to account. Delegates have started to question the premier more closely when he delivers his annual address to the full session. They have on occasion voted against appointees of the top leadership and, angered by corruption and concerned by rising crime, have registered protest votes against the reports of the procurator-general.

The Political Consultative The Chinese People’s Political Consultative Conference is a powerless forum that Conference is powerless 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 organisations and representatives of Hong Kong, Macau, Taiwan and Overseas Chinese.

The State Council is in effect The highest organ of state administration is the State Council, which is, in effect, the cabinet 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 (there are currently four vice-premiers), 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 size of this government bureaucracy appears to be shrinking. In 1998 the number of central government ministries was cut to 29 from 40 and half of the eight million civil servants employed in the central government were laid off, and in recent years many SOEs have been downsized or closed.

China is comprised of 22 For administrative purposes China is divided into 22 provinces, five autonomous provinces regions and four municipalities. The provinces range from the most populous and crowded, Henan, with 95.6m people (in 2001), to Qinghai, with 5.2m. The most recent adjustment to boundaries took place in March 1997, when the

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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, res ponsible for the forei gn affairs and defence o f Hong Kong and Macau.

Democracy is experimented Below the provincial level, there were in 2001 67 rural prefectures, 265 with at the grassroots level prefecture-level cities, 393 county-level cities and 1,660 other counties. There were 662 cities (including the four municipalities) and 808 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. More recently, officials have started to experiment with grassroots direct elections in urban areas. The government has also allowed, albeit reluctantly, a limited number of areas to conduct polls for the position of township chief. By giving people an institutionalised way of expressing their dissatisfaction with officialdom, the government hopes that the population will not resort 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 subordinate to village Communist Party secretaries. This is something that officials in the CCP, anxious to maintain their own power, are keen to ensure does not change. The State Council

Premier: Zhu Rongji Vice-premiers: Li Lanqing, Qian Qichen, Wu Bangguo, Wen Jiabao State councillors: Chi Haotian, Luo Gan, Wu Yi, Ismail Amat, Wang Zhongyu Secretary-general: Wang Zhongy u

State Development & Planning Commission Zeng Peiyan State Economic & Trade Commission Li Rongrong State Commission of Science, Technology & Industry for National Defence Liu Jibin Ministry of Agriculture Du Qinglin Ministry of Education Chen Zhili Ministry of Finance Xiang Huaicheng Ministry of Foreign Affairs Liu Huaqiu Ministry of Foreign Trade & Economic Co-operation Shi Guangsheng Ministry of Information Industry Wu Jichuan Ministry of Justice Zhang Fusen Ministry of Labour & Social Security Zhang Zuoji

Ministry of National Defence Chi Haotian Ministry of Health Zhang Wenkang Ministry of Public Security Zhou Yongkang Ministry of State Security Xu Yongyue

Note. A new government line-up will take effect in March 2003, when the next meeting of the National People’s Congress (China’s parliament) falls due. Political forces

The CCP has a relatively old In June 2002 the CCP had 66.4m members, 5.2% of the total population, making membership 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 over 35 years of age), 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 the high-school level or above, which underlines the growing technocratic basis of the CCP elite. By contrast, only 52.5% of the general membership have received high-school education. The party claims that women accounted for 25.4% of new recruits in 1997-2002. Party membership is a benefit in both material and professional life, and in some government bodies in effect a prerequisite of advancement. The CCP’s structure parallels and supervises that of the government and the legislature. Its main decision-making body is the central committee, the 16th of which was elected in November 2002 with 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 a politburo that currently has 24 members. 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, 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 party congress, the 16th, was held in November 2002.

The CCP includes many The apparently clear-cut line of pyramidal control within the CCP is complicated secretariats and commissions 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, with responsibility for the internal discipline of the party—and hence managing 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. Therefore, China has leading groups on foreign affairs and Taiwan.

Challenges to party rule Immediately after the government had embarked on a programme of economic include corruption 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

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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 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, 2,468 people were executed in China in 2001, more than 80% of the 3,048 executions world-wide known to Amnesty.) 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 acts as the protector The army was reduced in size in the 1980s, but, following the bloody crackdown of party rule in China 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 fully pushed out of politics; 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 where the real power lies. The chairmanships of the two commissions were the last official leadership positions that Deng held until 1989-90, when he handed both jobs to Mr Jiang. Mr Jiang’s successor as CCP general secretary, Hu Jintao, is vice-chairman of the CMC.

The party holds onto its The CCP has tried hard to maintain China’s monolithic power structure, monopoly on political power leaving various identifiable interest groups in effect under-represented. Although there are national organisations supposedly looking after the interests of women, farmers and workers, all are tame bodies 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 Solidarity 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 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—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 subject to a continuing fierce campaign of repression. Political leaders accept that vocal resistance to the process of reform on the part of 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 explains China’s support for the US-led “campaign against terrorism”.

There is a general trend of Although the CCP reacts strongly to the growth of regional independence decentralisation movements, local governments have at times in the last 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.

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Since then there has been a more consistent trend of 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-level officials—provincial governors are frequently reshuffled to prevent the emergence of a localist challenge. Moreover, the centre can usually win compliance, 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 As general secretary of the Chinese Communist Party (CCP) from November 2002, Mr Hu forms the core of the fourth generation of leaders to whom power is being officially transferred. He is likely to replace Jiang Zemin as China’s president in March 2003, but the continuing influence of Mr Jiang—notably through the large number of Mr Jiang’s protégés on the CCP politburo standing committee (PSC)—will at least initially constrain Mr Hu’s room for manoeuvre. Jiang Zemin Mr Jiang is expected to remain head of the military after he gives up the presidency in March 2003. It is certain that he will continue to wield influence as an elder statesman, particularly in his chosen field of international relations. Zhu Rongji Currently China’s premier, the reform-friendly Mr Zhu will retire from the frontline of politics in March 2003. However, Mr Zhu is thought to maintain close relations with Wen Jiabao, his likely successor as premier, and he may therefore retain some role in policymaking. Wen Jiabao Although pictured alongside the then CCP general secretary, Zhao Ziyang, visiting students demonstrating in Tiananmen Square in 1989, Mr Wen did not subsequently suffer the same fall from grace as Mr Zhao. Currently one of China’s vice-premiers, with a role in agricultural and financial reform, Mr Wen is expected to become China’s premier from March 2003. He is believed to have a much more consensual- style of leadership than Mr Zhu. Wu Bangguo Mr Wu, a protégé of Mr Jiang, is expected to succeed the outgoing Li Peng as chairman of the National People’s Congress (NPC, the rubber-stamp legislature). Zeng Qinghong Mr Zeng is the only member of the new PSC to have a “princeling” background—his father was a Red Army veteran—and is another protégé of Mr Jiang. Since 1999 he has been head of the Organisation Department of the CCP’s central committee.

There is speculation that he will succeed Mr Hu as vice-president in charge of foreign affairs from March 2003. His fifth place in the new PSC belies his real importance as Mr Jiang’s right-hand man. Li Peng Mr Li is currently placed second in the PRC hierarchy as chairman of the NPC. However, he will retire from this position in March 2003. He has managed to place a protégé, Luo Gan, on the new PSC. Luo Gan A member of the PSC, Mr Luo played a role in the 1989 crackdown in Tiananmen Square and has more recently been responsible for the “strike hard” campaign that has seen liberal use of the death penalty to punish and deter crime. Li Changchun A PSC member known as a confident reformer, Mr Li was most recently governor of Guangdong province, where he earned Mr Jiang’s appreciation by reining in localist tendencies in the provincial party. International relations and defence

De facto alliance with the US is China’s falling out with the Soviet Union in 1960 initially led to a period of marred by the Beijing massacre 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 the Currently, the relationship with the US is China’s most important—and most US is tricky 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 2000. More fundamentally, it is because the US has conflicting interests in China. The potential of a huge emerging market excites US business. However, many US politicians are horrified by China’s human-rights record; and, although China 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 promising to take a more assertive line towards China, only to adopt a more conciliatory stance once firmly established in the Oval Office. On the campaign trail the current US president, George W Bush, appeared intent on breaking this mould. Upon taking office he did indeed adopt a harder line towards China, although the subsequent need to win international support for the “war on terrorism”, including “regime change” in Iraq, promoted some easing of this stance.

The Taiwan issue divides The clearest change in US policy towards China under Mr Bush has been over China and the US 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

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independence—the ROC government is recognised by just 27 countries world- wide, 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 is legally required under the 1979 Taiwan Relations Act to provide Taiwan with the materiel with which to defend herself 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 more supportive US approach to Taiwan was made clear in May and June 2001, when the Taiwan president, Chen Shui-bian, was allowed to make lengthy transit stops in New York and Texas, where he held a meeting with US legislators. Even before this, Mr Bush had announced an US$8bn weapons package for Taiwan, the largest such sale 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”.

History overshadows relations China’s relationship with Japan is difficult too. The tension is centred on the with Japan 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 in both 2001 and 2002 by the current Japanese prime minister, Junichiro Koizumi, to Japan’s most famous war shine (where war criminals are memorialised among the dead) seemed to many people in China to illustrate his country’s equivocal stance 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.

China’s relationship with Relations between China and Russia have curiously improved as their respective Russia warms 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. Even in 2001 trade between the two countries amounted to just 2% 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, and both maintain working relations with Iraq, Iran and North Korea, countries that Mr Bush says form part of an “axis of evil”. The united Sino-Russian opposition to US policy appears to have weakened slightly since the September 2001 attacks on the US, but this incident has yet to undermine the military aspect of ties between Russia and China. In recent years Russia has been a major arms supplier to China.

China is allied with the North, North Korea is one of China’s traditional allies—PLA soldiers fought alongside but befriends the South North Korean forces in the Korean war of the early 1950s. Despite maintaining close relations with North Korea—China will aim for a diplomatic resolution to the current US-North Korean stand-off—China has in recent years been trying to improve links with South Korea. This has not been as difficult a task as it might first appear. Although differing on the issue of communism, China and South Korea have in common their respective historical experiences of brutal Japanese occupation. Since the establishment of diplomatic relations in 1992, economic and political ties have developed, albeit falteringly at times. For instance, the two countries fell out briefly in 2000 when South Korea moved to impose punitive tariffs on imports of Chinese garlic.

India and ASEAN have Relations with other countries in Asia have at times been tense. India, the concerns over China 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. However, since the late 1990s relations with the other claimant countries have been improving as China tries to demonstrate that it is a responsible regional power. In November 2002 China agreed to establish a free- trade area with the ASEAN countries from 2010; negotiations on the details will take place in 2003. China and the ASEAN countries have also reached an agreement that requires all parties to avoid any action that would lead to an escalation of tensions in the South China Sea.

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 retains 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 was budgeted to increase by 17.6% in 2002. However, 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 2002/03 China Japan Russia Taiwan US Army Personnel 1,600,000 148,200 321,000 240,000 485,500 Main battle tanks 7,010 1,040 21,870 926 7,620 Navy Personnel 250,000 44,400 171,500 62,000 385,400 Frigates 42 10 10 21 35 Submarines 69 16 53 4 72

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Air force Personnel 420,000 45,600 184,600 68,000 369,700 Combat aircraft 1,900 287 1,736 479 4,107

Source: International Institute for Strategic Studies, The Military Balance, 2002/03.

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 that would allow it, if necessary, to retake Taiwan by force. China’s posturing towards Taiwan currently takes the form of regular military exercises designed to intimidate the island’s leaders 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. Without there first being a crisis in the Taiwan Strait, foreign troops will not be posted on the island. Although Taiwan probably has the capacity to develop nuclear weapons, it is unlikely to do so. Although the three conditions stated as casus belli are unlikely to be met, conflict is still possible. China’s leaders have in recent years stressed a fourth ground for attack—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 after that. This is because it is doubtful that China could 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 be able to emerge victorious in any battle for Taiwan: such an attack could, after all, provoke US intervention. Given these considerations, more conceivable 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 perhaps do so quickly enough to avoid US military intervention. Even this strategy, however, 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 that was deemed as 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. For the past decade, China has regarded South Korea not only as a major trading partner, but even as an economic role model. China would, therefore, be highly unlikely to intervene in a war, especially if the conflict was triggered by North Korea itself. A large-scale North Korean attack on South Korea 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. Consequently, China can be relied upon to do its utmost to attain 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 former workers took to the streets in the north-eastern city of Liaoyang in March 2002 to complain about the non-payment of welfare benefits. In the same month in Daqing, another city in the north-east, thousands of former 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 are perhaps the largest worker-initiated protests in the history of the People’s Republic of China (PRC). According to government statistics, between 1998 and mid-2002 26.1m 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 denied adequate welfare payments. The government has been rushing to put in place an alternative benefits 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 in China 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 against 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 by the local public security bureau (PSB, 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—

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power. However, it is also a reflection of government policy, as officials stoke up nationalist feelings to deflect attention from the country’s real economic woes. Therefore, 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 US and other embassies. Even so, officials seem wary of the potential of nationalist sentiment to develop to the extent that it destabilises China’s external relations, and perhaps even the CCP regime itself. Thus, the government called a halt to the 1999 protests just a few days after they began. 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 avoid being identified (correctly or incorrectly) as members of the nationality that is 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 twenty 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 the London-based human-rights organisation, Amnesty International, 2,468 people were executed in 2001, more than in the rest of the world put together—they have not prevented the general level of crime from rising, albeit from what would be seen in international terms as a very 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. Therefore, although it is advisable to take the same precautions with personal property in Shanghai that are appropriate in London or New York and avoid situations (such as black-market currency or pirated VCD transactions in dark back streets) that give the advantage to the criminal, serious crime against foreigners (murder, rape, etc) 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 world-wide. At the same time, as elsewhere, Chinese cities have a growing problem of narcotics dependency. The persistence of the trade in illegal substances owes much both to official corruption and 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. However, as recently as last year it was revealed that government and CCP leaders in the large industrial north-eastern city of Shenyang had been operating hand in glove with organised crime. Triad protection rackets on the mainland and in Hong Kong tend to be worked at a fairly low level, for instance, as a monthly “protection payment” collected from local shops by street runners.

Resources and infrastructure Population

China’s population is its main China’s huge population is both its greatest resource and its greatest challenge. resource and challenge The population grew at an estimated average rate of 1% a year between 1991 and 2001, and at the end of 2001 was officially estimated at 1.28bn. 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 13.4 per 1,000 in 2001. 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 6.43 per 1,000 in 2001. China’s population is expected to continue growing until the middle of the 21st century, by which time the government hopes to have stabilised it at 1.6bn (see Reference table 1 for historical population data).

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 retiree in China was 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 (see Reference table 2 for data on the labour force).

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; %) 14.0 7.6 Average size of household 3.96 3.44 Han Chinese 1,042.5 1,159.4 Ethnic-minority population 91.2 106.4 Sex ratio (male/female) 106.0 106.7 Urban population 299.7 458.4 % of total population 26.4 36.2

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Population aged 0-14 (% of total) 27.7 22.9 Population aged 15-64 (% of total) 66.7 70.2 Population aged 65 and over (% of total) 5.6 7.0

Source: National Bureau of Statistics, China Statistical Yearbook.

Ethnic minority numbers are At the time of the 2000 census Han Chinese made up 91.6% of China’s total increasing 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, and 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” three children and often disregard restrictions anyway.

China’s income inequality is China has seen a rapid growth in income inequality in the reform period. This rising 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 the Gini coefficient was 0.487 in 1998 according to the World Bank. 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 though 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 Beijing in 2001 was Rmb19,155 (US$2,300), but the average in Beijing’s foreign-funded units was Rmb34,481. 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 though even this has begun to change as the government has sought to break the state sector’s “iron rice bowl”—26m people, for instance, have been laid off from SOEs since 1998. The gap between urban and rural China has also been growing in recent years. In 2001 income per head in urban areas had risen to Rmb6,860 compared with Rmb2,366 in rural areas from Rmb4,283 and Rmb1,578 respectively in 1995. Urban income per head is therefore now 2.9 times that in the countryside, up from 2.7 times 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. With increasing frequency government leaders now also announce initiatives to relieve rural poverty. 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 PRC in 1949, great strides have been made in basic- uneven, level education. By 2000 the number of illiterate people had fallen to 85m, 6.7% of the total population, down from 180m (15.9%) ten years previously (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 of a still impressive 80%). Official figures show that 99.1% (105.7m) of primary school-age children are enrolled in school, and of these 95.5% go on to junior middle school. Entrance to senior middle school (a further three years of study) is by examination—52.9% of students continue on to senior middle school. Student-teacher ratios in 2001 were 21.6:1 in the case of primary schools and 18.5:1 for middle schools. The overall figures mask some weaknesses, particularly in basic-level education. The average rural illiteracy rate stood at 8.3% in 2000, but it was as high as 36% in Tibet and was 10% in four other provinces (Gansu, Qinghai and Ningxia in the west, and Guizhou in the south-west). 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 the primary-school level and three years in junior middle school).

Higher education expands There were 1,225 universities and institutions of higher education in 2001, with a rapidly total student enrolment of 7.2m (2.5m of whom were studying engineering), a 29.3% increase compared with an enrolment of 5.6m in 2000. The rapid growth in higher education is clear from the fact that in 1990 only 2.06m students had been enrolled in 1,075 institutions of higher education. The rapid rise in enrolments has, however, been accompanied by a sharp rise in the student- teacher ratio. This stood at 13.5:1 in 2001, 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.

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China had 393,256 students enrolled as postgraduates in 2001, when 67,809 postgraduate degrees were awarded, as well as 83,973 students studying abroad (a large jump from the 38,989 studying abroad in 2000), typically on postgraduate programmes in the US. Students studying abroad often choose to find work overseas, but a range of incentives are in place to entice them back. A total of 12,243 such students returned to China in 2001. In 2001 62,000 foreign students were studying at 360 higher education institutions in China, 23,000 of whom were studying in the capital, Beijing. Language and medicine are the leading subjects studied by foreign students, the largest proporti0n of whom comes from South Korea, followed by Japan and the US.

Education is beset by funding The education system is beset with funding difficulties. In 2001 the premier, Zhu shortages Rongji, admitted that education spending as a share of GDP had fallen to 2.55% compared with the average among developing countries of 4.1%. The government’s goal is eventually to raise the proportion of GDP spent on education to 4%, but the state has had to call on the private sector to help to expand educational provision. Private middle schools were first authorised in 1992, and since the early 1990s higher education institutions have imposed tuition fees, averaging around Rmb5,000 a year in 1999, not far short of annual average urban incomes. Interest-free loans are available to students from poorer households.

Health

Health varies greatly between The increase in life expectancy since 1949 has partly been the result of greatly 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, free of charge or at a nominal cost. There was, however, a big difference in 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 virtually 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 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 65,424 hospitals in 2001, of which 15,451 were at the county level or above, with a total of 2.97m beds. In addition there were 248,061 clinics and a number of other medical institutions. The number of doctors per 1,000 head of population has crept up slowly, reaching 1.69 in 2001 compared with 1.07 in 1978. Official figures show that in 2000 expenditure on health was Rmb476.4bn (US$57.5bn), of which Rmb288.7bn (60.6%) was accounted for by private individuals’ expenditure on health services and health insurance.

China’s pressing healthcare China does face some particularly pressing healthcare issues. One is AIDS. issues are AIDS and smoking Although reported cases of HIV/AIDS were only 23,905 at end-March 2001, the Ministry of Health said in September 2002 that the real figure could be as high as 1m owing to the use of contaminated blood in the mid-1990s. The UN believes that China could have more than 10m sufferers from HIV or 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 as many as 50 million Chinese alive today face premature death as a result. Natural resources and the environment

Arable land is scarce China’s land area is 9,561,000 sq km. It is notable for the small proportion of land cultivated (13.6% in 2001) 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. There are three main farming zones: • south of the Yangtze River, where there is abundant rainfall, two crops of rice and one of spring wheat a year, 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 are rich 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 the coal 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. 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.

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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 needs of sustainable development.

Transport, communications and the Internet

Railways are being upgraded 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 (see Reference table 3 for transport statistics). 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—May 1st—and National Day—October 1st.) Recent railway projects include the laying of a second track along the Beijing to 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. During the 10th five-year plan (2001-05) period 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.

Highway network increases by Just a dozen years ago China had no highway system linking its provinces; now 18% in 1996-2000 it has more than 12,000 km of such highways. During 1996-2000 216,900 km of highways were built, increasing the nation’s entire highway network by 18% to 1.4m km. This came close to matching a 20% growth in passenger traffic over the period. Under the 10th 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 still inadequate for the demands for transport in China. Only 672,000 km of the 1.7m km of highways in China in 2001 were considered to be of high or average quality. Around 19,000 km were classed as expressways, exceeding the Canadian total for the first time, placing China second in the world in terms of total expressway length.

Shanghai plans a deepwater Port facilities have improved rapidly in recent years. China’s 14,500-km coastline port hosts 200 seaports, which handled 1.4bn tonnes of goods in 2001, up from just 483m tonnes in 1990. Most ports are relatively shallow—including some of the largest, such as Shanghai. This prevents modern container ships from using many of the ports. However, this is changing. Shanghai, which handled 6.3m TEUs in 2001, plans to develop a new offshore deepwater port over the next 20 years

costing an estimated Rmb100bn. The first five berths are expected to be completed by 2005 and will boost the port’s capacity by 2m TEUs a year. 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 sees strong Over the last ten years considerable effort has been made to improve the quality growth 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 aviation. Passenger numbers expanded by 15% a year in 1991-2000, and cargo tonnage rose even more strongly, by 18.2% a year. About 75m passengers travelled by air in 2001, a rise of 11.9% compared with 2000, but the domestic airlines are only barely profitable and heavily indebted. These problems are the result of overcapacity and fierce competition. In 1988 the national flag carrier, the Civil Aviation Authority of China (CAAC), ceased to operate as an airline and became a regulatory authority. Since then around 30 airline companies have appeared in China. The government has been keen to see consolidation in the industry, and in February 2002 unveiled plans to merge nine state-owned airlines into three large aviation groups, based in Beijing, Shanghai and Guangzhou respectively.

Telecommunications are China’s telecoms sector is booming—from fixed-line to Internet services. China booming now boasts more subscribers for cable television (100m) and mobile phones (145.2m at end-2001) than the US. It had more than 180m fixed-line users at end- 2001; its paging market has matured with 36m subscribers; and the Internet is gaining in popularity with 36.6m subscribers to Internet services (up from 9m at end-2000). The government estimates that the number of fixed-line and mobile phone users will exceed 600m in 2005. With only 16 fixed-line phones per 100 people, or 35 phones per 100 people in urban areas, and 11 mobile phones for every 100 people, the growth potential in China remains substantial. Supply-side developments will also ensure that the industry continues to grow. Internet protocol (IP) telephony is displacing conventional international and long-distance trunk traffic, and third-generation (3G) mobile systems will be rolled out. Optic- fibre cable links in the home may allow every urban household to have broadband multimedia access by as early as 2010.

The media are still closely At end-2001 a total of 2,111 newspapers were being published in China, with monitored total annual circulation of 35.1bn copies. There were 8,889 magazines, 357 TV stations and at least 311 radio stations. The media sector remains monopolised 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, with an annual circulation of 3m in 1998. Other party newspapers include the Economic Daily (1.5m); 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

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newspapers such as Xinmin Evening News (1.75m), published by the Shanghai municipal government; Yangcheng 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. 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 the US-based 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 significant proportion of 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 and upwards.

Energy provision

Electricity supplies are Although China first achieved a small surplus of electricity in 1998, and then improving again in 2000, there is little reason for complacency. The country’s energy consumption per head is relatively low, but is growing rapidly. By the end of 2000 China’s installed generating capacity had exceeded 319m kw, and total electricity output reached 1.37trn kwh in 2001, both figures ranking second in the world. Yet 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 do not have access to electricity. Many cities, such as Guangzhou, urgently need more power to meet their economic development targets. The government estimates that, assuming GDP growth of 7.5-8% a year, demand for power will expand by 5% a year over the next five years. The government is confident that it will be able to continue to match capacity to demand in the longer term. Installed capacity is planned to rise from 290 gw in 2000 to 550 gw by 2010. The massive Three Gorges Dam power station will add more than 18 gw alone when it comes on stream in 2009. Officials are also planning to expand existing hydropower generating capacities at the upper reaches of the Yangtze river, the Lianchangjiang, the Nujiang and the Pearl river. The Three Gorges plant will be at the centre of a new central China electricity grid (see Reference table 4 for energy production and consumption statistics).

Development of gas reserves As a result of changes in the structure of the economy and government becomes a priority attempts to reduce pollution, energy consumption from coal has fallen from around 80% in the 1970s to 68% in 2001, according to national data. China has seven nuclear power plants and a further four are under construction and due for completion by 2005. When all 11 plants are operational, they will have a combined capacity of 8.35 gw, compared with 5.3 gw for the seven plants

currently operating. Onshore oil production, which provided much of the foreign exchange that fuelled the trade growth of the early 1980s, has expanded only slowly in recent years. Hopes now centre on supposedly vast gas reserves in the Tarim Basin in the far west (natural gas has also been discovered in the south, off Hainan island, and in Sichuan province). Developing them, and putting in place the necessary system for transporting oil to the coast, has become a national priority. On July 4th 2002 China’s largest gas producer, PetroChina, reached an agreement with the UK/Dutch oil company, Royal Dutch Shell, the US firm, ExxonMobil, and Russia’s Gazprom, to develop gas reserves in the west and transport them via a 4,000-km pipeline to Shanghai. This is a risky project; building the pipeline alone will cost US$5.2bn.

Energy balance (m tonnes of oil equivalent) 2001 Oil Gas Coal Electricity Other Total Primary supply Production 168 27 548 72a 220 1,035 Imports 88 0 1 0a 0 89 Exports -17 -2 -47 -3a 0 -69 Stock change 0 0 19 0 0 19 Total 239 25 521 69a 220 1,074 23b Processing & transformation Losses & inputs to refining & transformation -226 -4 -223 -69a -1 -523 Transformation output 210 6 0 126b 0 342 Energy industry/fuel losses -25 -8 -35 -29b 0 -97 Final consumption Transport fuels 79 0 5 1b 0 85 Industrial fuels 35 8 195 62b 0 300 Residential, etc 41 6 56 34b 219 356 Non-energy uses 43 5 7 0 0 55 Total 198 19 263 97b 219 796 a Expressed as input equivalents on an assumed generating efficiency of 33%. b Output basis. Source: Energy Data Associates.

The economy Economic structure

Main economic indicators 2001 Real GDP growth (% change, year on year) 7.3 Consumer price inflation (av; %) 0.7 Current-account balance (US$ bn) 20.5a Exchange rate (av; Rmb:US$) 8.28 Population (year-end; bn) 1.3 a 2000. Sources: National Bureau of Statistics, China Statistical Yearbook 2002; IMF, International Financial Statistics; Economist Intelligence Unit, CountryData.

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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 total GDP rose from 30% in 1980 to 33% three years later. Since then, however, the share of agriculture has fallen fairly steadily and by 2001 it accounted for only 15% of GDP. During the 1980s agriculture was substituted for largely by a growing services sector: the share of tertiary industry in total output rose 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 industrial sector, which in 2001 accounted for around 44% of GDP.

Private entrepreneurs launch The structure of China’s secondary industry changed fundamentally during the ventures 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 (TVEs)—or, increasingly, by private entrepreneurs or foreign investors either in wholly owned enterprises or in joint ventures with Chinese interests. By 2001 the share of state-owned and state-holding enterprises in gross industrial output value had shrunk to 44%. However, state-owned companies, controlled by economic ministries in Beijing, taken in isolation represented only 18% of industrial output. State-holding enterprises may control large numbers of state firms, and are not 100% state-owned.

Comparative economic indicators, 2001 China India Japan Germany US GDP (US$ bn) 1,159 481 4,167 1,855 10,082 GDP per head (US$) 910 467a 32,869a 22,605 35,454a GDP per head (US$ at PPP) 4,332a 2,509a 26,608a 26,680 - Consumer price inflation (av; %) 0.7 3.7 -0.7 2.5 2.8 Current-account balance (US$ bn) 17.4 0.7a 87.8 2.4 -393.4 Current-account balance (% of GDP) 1.5 0.1a 2.1 0.1 -3.9 Exports of goods fob (US$ bn) 266.1 44.6a 383.6 570.0 718.8 Imports of goods fob (US$ bn) 232.1 52.5a 313.4 481.4 1,145.9 External debt (US$ bn) 147.7a 100.1a n/a n/a n/a Debt-service ratio, paid (%) 6.5a 12.8a n/a n/a n/a a Estimates. Source: Economist Intelligence Unit, CountryData. Economic policy

Economic reforms have been During the last 20 years China’s economy has been fundamentally transformed piecemeal from one in 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 (SEZs), whose authorities were given the power to offer tax incentives to attract foreign direct investment (FDI). Over time reforms have affected all sectors and have become progressively far-reaching: SOEs have been privatised, 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.

Economic reform operates Yet although the invisible hand of the market has gained a greater role, China’s within limits economy cannot yet be described as “free”. Of the 171,256 industrial enterprises with an annual sales income of more than Rmb5m (US$600,000) registered in 2001, 46,767 were officially partly or fully owned by the state—these are the state-owned and state-holding enterprises—and the government probably had a stake in many, if not all, of the 31,018 firms defined as “collective” and the 10,864 firms categorised as “co-operative”. China’s banking sector is still overwhelmingly state-owned. That the extent of reforms is limited should not be surprising. The government, for example, continues to publish five-year plans, although these are now more advisory than prescriptive. More fundamentally, official attachment to market forces is more pragmatic than principled. It is clear that the government does not want to withdraw completely—the authorities are officially aiming to establish a “socialist market economy”. The government has long abandoned the idea that the ownership of the means of production should be communal. Instead, “socialist” is now best understood as indicating that the Chinese Communist Party (CCP) 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 do appear agree with the conclusion of a making SOEs is problematic prominent US academic, Nicholas Lardy, that China’s economic revolution is “unfinished”. Officials realise that further reforms, namely rationalisation of the inefficient state-owned sectors of the economy, are needed. The performance of China’s SOEs has steadily deteriorated in recent years. 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 has risen, 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. Even though in recent years GDP growth in China has been driven by the expansion of the private sector, 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). This being the case, it is hardly surprising that China’s state-owned banking system is now weighed down by non-performing loan (NPL) ratios which are officially around 25%, but which outside estimates suggest could be as high as 50%.

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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. 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, by, for example, restructuring the central bank, the People’s Bank of China (PBC), to reduce damaging political interference from 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, China Construction Bank, the Industrial and Commercial Bank of China. and the Agricultural Bank of China). The government then established individual asset management companies (AMCs) for each of the big four.

The social security system is To complement SOE reforms, the government has been trying to introduce a reformed new social-security system. This is an urgent task. SOEs have not just provided employment for large numbers of workers; both 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. Therefore, 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 pensions system, in which firms and workers contribute to a communal pension fund, but also make payments into individual pension accounts.

Restructuring has been real These efforts have met with some success. Restructuring of SOEs has been real— according to officials, SOEs laid off more than 26m workers between 1998 and mid-2002. 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 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 four big institutions that dominate China’s banking system appear to have become more prudent in lending, with government figures showing that value of “big four” loans outstanding barely increased in 1999-2000 (in the go-go years of the early 1990s double-digit rates of credit growth had not been uncommon). The banking sector as a whole has been diversifying away from commercial lending, with mortgage loans accounting for 35% of new credit issued in 2000. NPL ratios have also been cut: the transfer after 1998 of Rmb1.4trn (US$170bn) in bad loans to the AMCs is estimated to have cut the main banks’ NPL ratios by ten percentage points.

SOE profitability has Despite the government’s figures, many observers, particularly foreign ones, improved, but continues to lag remain sceptical that the problems in the SOE sector have been reversed. Approaching 50% of the 2000 profits of the entire state sector 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. The recovery in SOE profits was also in part the result of lower interest rates, which were cut from 8.6% at the beginning of 1998 to 5.9%, thereby lowering debt-repayment obligations. Interest rates have remained low since, but in 2001 the 46.767 state-owned and state-holding companies produced a profit of Rmb238.86bn, a fall of around 1%. In 2002 SOE profits did pick-up again, but while in absolute terms the performance of SOEs appears to have improved, it continues to lag that of private firms. In the first eleven months of 2002 net profits of SOEs grew by 10.2% year on year, while profits of all industrial enterprises rose by 19.5%. That progress has been limited should not be surprising. China’s economy has been hit by two external shocks since 1997—the Asian downturn of 1998 and the 2001 slowdown in the US—which have lowered the rate of domestic GDP growth and consequently of employment creation. This has made the government reluctant to allow SOEs to shed labour at a rate faster than they have so far done so. More fundamental factors have also been at work. SOEs have, for example, 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 these instruments now exist only in a notional sense. But with a functioning social security net still missing, “big bang” reform 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

1997-99 Experimentation with different forms of ownership, including joint-stock shareholding, is declared to be compatible with socialism; it becomes clear that the authorities are willing, if not eager, to countenance the merger, closure or privatisation of thousands of smaller state-owned enterprises (SOEs), while ensuring state retention of a majority stake in larger enterprises and maintaining total control of around 500 of the largest. The government slashes the number of industrial ministries. An amendment to the state constitution in March 1999 upgrades the private sector to the status of an “important” part of the economy from its previous status of being merely complementary to the state sector. The average tariff rate on imports is reduced to 17%. In 1999 the government signals its willingness to make wide-ranging concessions in order to join the World Trade Organisation (WTO). 2000-01 Progress is made in restructuring 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 had been running at a loss in 1997, 70% had 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 WTO.

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2002 China begins the process of adapting its institutional and legal system to comply with WTO-related undertakings: tariffs on car imports are cut, and the government announces that in 2003, in order to satisfy the WTO principle of “national treatment”, it will unify the 15% preferential tax rate paid by most foreign-invested enterprises and the 33% standard rate for domestic enterprises (officials did not specify what the new rate would be). A new division of corporate taxation revenue between the central government and the provinces is introduced in the 2002 budget. Entry to the WTO will Officials are intending to continue pushing through reforms of the state sector. reinforce reform This was made clear by the government’s decision in the late 1990s to make the far-reaching market-opening concessions necessary to secure membership of the World Trade Organisation (WTO). The government had long wanted to join the trade body, viewing accession as a milestone in China’s emergence as a regional—and perhaps eventually global—economic and political power. China originally registered a bid to join the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT), in 1986, but in the late 1990s the issue did not appear to be near the top of the leadership’s agenda. However, in April 1999, during a trip to the US, China’s premier, Zhu Rongji, offered to open up the economy to the outside world on a scale that even to seasoned China watchers was almost shocking. That Mr Zhu was willing to contemplate making such radical changes was apparently because he thought that they could be used to push through structural reforms of the domestic economy that otherwise might stall. Thus, in the final agreement that cleared the way for China’s entry to the WTO in December 2001, the government pledged to reduce subsidies to SOEs and allow foreign banks to enter the domestic banking market. In theory, if the government did not first act to improve the financial health of the SOEs and state-owned banks, the implementation of these and other related WTO changes would lead to their collapse. World Trade Organisation (WTO) schedule for market access in China

Automotive Provincial governments have the authority to approve investment in car manufacturing of up to US$150m. In principle, car financing by non-bank financial institutions is permitted, and regulations were drafted in late 2002 to implement this. The manufacture of vehicle parts by wholly owned foreign-invested enterprises (FIEs) is permitted. From 2003 FIEs can decide on the class and model of vehicles to be produced. Import tariffs are to fall to a maximum of 25% by 2006. Quotas and local content requirements are to be phased out by 2005. Banking and financial services Geographical restrictions on foreign-exchange business with either foreign or domestic Chinese clients have been lifted. Geographical restrictions on local-currency business have been lifted in selected cities (Shanghai, Shenzhen, Tianjin, Dalian, Guangzhou, Zhuhai, Qingdao, Nanjing and Wuhan) and are to be phased out by 2006. Foreign banks can provide local-currency services to Chinese enterprises from 2003 and to individuals from 2006. The minimum asset requirement for a foreign bank wishing to establish a subsidiary is US$10bn, rising to US$20bn in the case of the establishment of a branch. To gain permission to conduct local-currency business, a foreign bank must first have operated in China for three years, including two consecutive years of returning a profit.

Insurance Permitted business locations for foreign insurers have been extended from Guangzhou and Shanghai to include Dalian, Shenzhen and Foshan. Geographical restrictions are to be phased out by 2005. Only 20 foreign insurers are allowed to operate (others may be considered on a case-by-case basis) and the permitted range of services is initially narrow (for instance, no group, health or pension policies can be offered before 2006). To be eligible for a licence, foreign insurers must have had a representative office in China for two years and must have total assets of US$5bn (insurance brokers must have assets of more than US$500m). The Chinese branch must have paid-up capital of at least Rmb200m (US$24m). No company is allowed to offer life and property insurance services simultaneously. Foreign insurers are initially allowed to own up to 50% of joint ventures (JVs)—existing operations with higher equity stakes will be grandfathered across—to exercise management control and to choose their JV partners. The permitted foreign equity stake rises to 51% in 2004 and to 100% in 2006. For reinsurance, foreign parties can hold up to 50% equity in JVs; there are no geographical restrictions and permitted business areas include large commercial risks and international marine, aviation and transportation. Securities Foreign securities houses may engage directly in “B” share business (“B” shares are traded in foreign currency and mainly held by foreigners). Foreign securities houses are permitted to own up to 33% of an investment fund management (domestic securities) JV, rising to 49% by 2004. Representative offices of foreign securities houses may become “special members” of both stock exchanges (Shanghai and Shenzhen). Foreign-invested institutions are to be allowed to underwrite domestic- and foreign-currency-denominated securities and trade in foreign-currency-denominated securities (debt and equity) by 2004. Licensing requirements are solely prudential. Legal Geographical limitations on representative offices have been removed, although each foreign law firm is allowed only one office in China. Representative offices are allowed to engage in profitmaking activities, but foreigners cannot practise Chinese law. Management consulting and taxation advisory services Foreign majority ownership in JVs is permitted. By 2007 wholly owned firms will be allowed. Advertising Foreign majority ownership in JVs is to be permitted in 2004. Wholly foreign-owned subsidiaries are to be allowed in 2005. Courier services From 2003 foreign service suppliers are allowed to establish JVs with majority ownership. Wholly foreign-owned subsidiaries are to be permitted by 2005. Distribution Foreign service suppliers may establish JVs to engage in the commission agents’ business and wholesale business of all imported and domestically produced products except for the following: books, newspapers, magazines, pharmaceuticals, pesticides and mulching films. Foreign majority ownership is to be allowed by 2004. Product restrictions on distribution are to be eased in 2004, although ownership restrictions will remain for JVs involved in the distribution of chemical fertilisers, and processed and crude oil. All restrictions on auxiliary services—warehousing, advertising, technical testing and analysis, and packaging services—are to be phased out by 2005. Logistics Foreign ownership of up to 49% of JVs in storage and warehousing is permitted, rising to majority ownership by 2003. Wholly foreign-owned subsidiaries are to permitted by 2004. Foreign freight-forwarding companies that have had agents established in China for three consecutive years may set up JVs. They must have a minimum registered capital of US$1m. Foreign investment is initially capped at 50%. Majority ownership is permitted from 2003 and wholly owned subsidiaries by 2005. Foreign freight forwarders will be allowed to establish further JVs from 2003. At least US$120,000 in capital is required for each branch set up by a JV.

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Transport In air transport services foreign minority stakes in JVs are allowed, but the Chinese side must retain control of aircraft repair and maintenance services. In the case of rail freight transportation, foreign investment is allowed. The maximum permitted equity stake is to rise from 49% to majority ownership in 2004 and wholly foreign-owned subsidiaries are to be permitted by 2007. Foreign majority ownership of road haulage services is permitted and wholly foreign-owned subsidiaries are to be permitted by 2004. Shipping (including passenger liner and cargo traffic) Foreign shipping service suppliers may establish JVs with domestic shipping companies with foreign equity capped at 49%. Foreign involvement is permitted in maritime agency services (ownership capped at 49%) and cargo handling, containerisation and depot services (majority ownership is permitted). Retailing Geographical restrictions on FIE retailers—currently permitted in eight cities and five special economic zones—are to be phased out by 2004. Severe restrictions on external trading rights are to be eased in 2004. FIE retailers may trade in most products (but not publications). FIE retailers are to be permitted to trade in pharmaceuticals, pesticides, mulching film and processed oil in 2004, and in chemical fertilisers by 2006. Restrictions on the size of foreign ownership in most retailing operations, including franchising, are to be lifted by 2004. Restrictions on the size of foreign ownership in chemical fertiliser outlets and multi-product chain stores with more than 30 outlets are to be eased by 2006. Oil (crude and processed) Domestic retail and wholesale markets are to be opened to foreign participation in 2005. Telecommunications services Geographical restrictions—foreign investment is initially allowed only in the Beijing-Shanghai-Guangzhou corridor—are to be phased out by 2006. Foreign investment is allowed in JVs providing value-added services (up to 30%), mobile telecommunications and data services (up to 25%). Foreign investment is to be permitted in fixed-line services (up to 25%) by 2004. The maximum permitted foreign equity holdings are to be gradually increased to 50% for value-added services and 49% for all other services by 2007. Tou ri sm Foreign investors are permitted to take majority shares in hotel JVs. Foreign travel agencies can be established provided that they can show a minimum turnover of US$40m. Wholly foreign-owned hotels are to be allowed by 2004. Reform will now follow a The threat to domestic companies is in reality not so great. Even after entry to structured programme the WTO the government will be 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 an unprecedented amount of pressure to ensure that these reforms are implemented. If they are dissatisfied with the progress of reform, China’s trade partners 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 textiles industry will be a particular beneficiary, as quotas in WTO member countries under the multi-fibre arrangement (MFA, a system of preferential quotas governing trade in textiles and clothing) are being phased out on an annual basis, with the last quotas to be abolished by the end of 2004. WTO membership is also likely to prompt an increase in investment. This already seems to be happening—according to national figures, FDI rose by 15.1% in 2001 to US$46.88bn and in 2002 increased to over US$50bn for the first time.

FDI is important in China 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 over the last 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 difficult to turn a profit in China. Entry into the WTO, which should result in the creation of a more rules-based system as well as the opening up of previously restricted areas of the economy to FDI, seems to have revived foreign investor interest in China.

Government finances are The reform-period deterioration in the government’s finances has been reversed in gradually strengthened recent years. Government revenue as a proportion of GDP has risen steadily since 1996, reaching 17.1% in 2001 (see Reference table 5 for data on government finances). 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 has risen from 12.1% in 1996 to 19.6% of GDP in 2001. This improvement is largely the result of the pro-active fiscal

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stance that has been adopted by the government since 1998. Officials initially loosened fiscal policy to support GDP growth during the Asian financial crisis of 1997-98. However, the economy has remained weak since—domestic demand was only just beginning to recover from this shock when the economy was hit by the US downturn in 2001, and so in 2002 the government has continued to spend in support of GDP growth. The government’s fiscal efforts have focused on investment spending: between 1997 and 2001 state budgetary investment spending almost quadrupled from Rmb69.6bn (US$8.4bn at the 2001 average annual exchange rate) to Rmb254.6bn. To support this spending, the finance ministry in 1998-2002 issued Rmb660bn in special bonds. This boosted government revenue, but raised debt repayment commitments. In 1998 repayment of debt accounted for a worrying 21.8% of government revenue; by 2001 this ratio had fallen to 10.6%, but only because interest rates had been lowered. Government spending is in reality almost certainly higher than the 19.6% of GDP cited in the official statistics, which seem to exclude 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 by such high NPL ratios. Given the extent of these financial difficulties, it is unlikely that the banking sector will ever be fully restored to health without a large injection of public funds. It is not just because of its contingent liabilities in the banking sector that the government’s debt is in reality far higher than the 16% of GDP suggested by official figures. 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 with 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 around 70-80% of GDP—will have to be financed by the government instead. This is not 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.

Monetary instruments remain During much of the reform period monetary policy has remained a fairly blunt 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. Even so, the use of interest rates remains limited. Banks still do not have much freedom to price loans according to risk. When setting interest rates the PBC must weigh up the conflicting interests of the indebted

banking sector on the one hand and ailing SOEs on the other. Lending rates have fallen over the past few years as the PBC has sought to boost economic growth in general and alleviate some of the woes of the SOEs in particular; deposit rates have fallen further, as the PBC has tried to bolster margins earned by the banking sector and induce the wider population to spend rather than save (see Reference table 7 for money supply and credit data).

Government budgets (Rmb bn) Actual Budget 2001 2002 Central government budget Revenue 917.1 1,064.6 Collected by central government 857.8 1,004.2 Remitted by local authorities 59.3 60.4 Expenditure 1,176.9 1,374.4 Expenditure by central government 575.4 641.2 Subsidies for local authorities 601.5 733.2 Balance -259.8 -309.8 Local authorities' budget Revenue 1,380.8 1,530.5 Collected by local authorities 779.3 797.3 Subsidies from centre 601.5 733.2 Expenditure 1,368.3 1,530.5 Expenditure in local budget 1,309.0 1,470.1 Remitted to central government 59.3 60.4 Balance 12.5 0.0 Total Revenue 1,637.1 1,801.5 Expenditure 1,884.4 2,111.3 Balance -247.3 -309.8 Memorandum items Central revenue from issuance of debt 460.4 567.9 Revenue & expenditure from funds 105.3 86.0

Source: Finance minister's report to the National People's Congress. Economic performance

Growth has been rapid, but Since China’s move away from central planning began in 1978, the economy has volatile grown by almost 10% a year (see Reference table 8 for recent GDP data). Although there is debate about the accuracy of these statistics, anyone who has visited the country regularly over the last few years can testify 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, with the country experiencing three distinct economic cycles since 1978. The first 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 emerged, with GDP expanding by almost 14% a year in 1992-93, and prices surging by 24% in 1994.

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Gross domestic product (% real change) Annual average 2001 1997-2001 Private consumption 6.5 6.2 Government consumption 10.0 9.4 Gross fixed investment 10.3 9.1 Exports of goods & services 3.4 15.4 Imports of goods & services 2.0 12.3 GDP 7.3 7.8 Source: Economist Intelligence Unit, CountryData.

Investment led growth in the Although similar in numerical terms, these cycles have had different underlying 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 for property development and manufacturing industry—fixed investment expanded by almost 25% 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, like the slowdown that followed the boom of the early 1980s, was brief, and cyclical rather than structural. The recent downturn has been more prolonged—GDP growth slowed every year between 1992 and 1999, and since then even official figures show the economy has grown by no more than 8% a year (see Reference table 9 for GDP by expenditure).

Growth is now slower than It is true that since the mid-1990s officials have been keen to avoid a repeat of officials would like the damaging boom-bust cycles that had characterised the reform period up to that point. However, in recent years the government has become concerned that the underlying momentum of the economy has slowed too far: according to officials GDP growth of 7% creates 8m jobs a year, but during the 1990s around 13m people entered the labour force each year. Since 1998 the government has therefore been supporting the economy through a programme of heavy public-

sector spending, as well as possible statistical manipulation. However, although these efforts have supported rates of GDP growth, they have not tackled one of the main causes of the economic slowdown: the continued misallocation of resources towards the state sector at the expense of private enterprises. GDP growth in China is unlikely to pick up strongly until this disparity is resolved.

Inflation (% change, year on year) Annual average 2001 1997-2001 Retail prices -0.8 -1.4 Overall consumer prices 0.7 0.3 Urban consumer prices 0.7 0.5 Rural consumer prices 0.8 0.1 Agricultural means of production -0.9 -2.4 Ex-factory industrial products -1.3 -1.1 Source: National Bureau of Statistics, China Statistical Yearbook 2002.

China’s statistics 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 are rarely revised afterwards. Moreover, in 1997-2001 these data, as revealed in a thorough critique by a professor at the University of Pittsburgh, Thomas Rawski, have also been 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. Mr Rawski blames these inconsistencies on political manipulation. The Economist Intelligence Unit agrees that China’s growth figures have almost certainly been subject to exaggeration in recent years. However, suggesting that growth is slower than stated is one thing; coming up with an accurate assessment of just how slow is quite another. Mr Rawski has tried to produce alternative figures, suggesting that in 2000, for example, the economy grew by just 2-3%, but he admits that these are “little more than guesses about China’s recent GDP performance” that are “not firmly grounded in empirical data”. In defence of China’s statistics, other data, such as the rapid growth of imports in recent years, suggest that the overall economy has 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 is 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 rely 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, the government in mid-April 2002 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.

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Regional trends

Reforms exacerbate regional In the reform period economic growth has been much more rapid in the coastal disparities 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 Fujian, the province directly to the north of Guangdong, have benefited from Taiwanese investment—most private-sector analysts estimate that Taiwanese 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 and remit 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 and physical infrastructure.

Regional disparities Population a GDP FDI Foreign trade 2001 (m) % of total (Rmb bn) % of total (US$ m) (US$ m) North Beijing 13.6 1.1 284.6 3.0 1,768 27,638 Tianjin 9.8 0.8 184.0 1.9 2,133 18,270 Hebei 66.7 5.4 557.8 5.8 670 5,816 Shanxi 32.5 2.6 178.0 1.9 234 3,272 Inner Mongolia 23.3 1.9 154.6 1.6 107 2,185 North-east Liaoning 41.8 3.4 503.3 5.2 2,516 21,039 Jilin 26.8 2.2 203.2 2.1 338 3,502 Heilongjiang 36.2 2.9 356.1 3.7 341 4,102 East Shanghai 16.4 1.3 495.1 5.2 4,292 60,707 Jiangsu 73.0 5.9 951.2 9.9 6,915 54,479 Zhejiang 45.9 3.7 674.8 7.0 2,212 36,914 Anhui 59.0 4.7 329.0 3.4 337 3,645 Fujian 34.1 2.7 425.4 4.4 3,918 24,387 Jiangxi 40.4 3.3 217.6 2.3 396 1,804 Shandong 90.0 7.2 943.8 9.8 3,521 32,330 South-east Henan 91.2 7.3 564.0 5.9 457 3,423 Hubei 59.5 4.8 466.2 4.9 1,189 4,164 Hunan 63.3 5.1 398.3 4.2 810 2,923 Guangdong 85.2 6.9 1,064.8 11.1 11,932 180,013

Guangxi 43.9 3.5 223.1 2.3 384 2,082 Hainan 7.6 0.6 54.6 0.6 467 1,631 South-west Chongqing 30.5 2.5 175.0 1.8 256 2,137 Sichuan 82.3 6.6 442.2 4.6 582 3,360 Guizhou 35.2 2.8 108.5 1.1 28 867 Yunnan 42.4 3.4 207.5 2.2 65 2,151 Tibet 2.6 0.2 13.9 0.1 - 106 North-west Shaanxi 35.4 2.8 184.4 1.9 352 2,647 Gansu 25.1 2.0 107.3 1.1 74 915 Qinghai 4.8 0.4 30.1 0.3 36 254 Ningxia 5.5 0.4 29.8 0.3 17 635 Xinjiang 18.5 1.5 148.5 1.5 20 2,370 Total 1,242.6 100.00 9,593.3b 100.0 46,878c 509,768 a 2000. b The total of GDP figures reported by the provinces exceed the national total. c Including a further US$510.6m classified under "ministries and other departments". Source: China Statistical Yearbook 2002.

Economic sectors Agriculture

Over 40% of the population Agriculture is an important sector of the Chinese economy. Although agricultural work in agriculture production now accounts for only around 15% of nominal-price GDP, around 324.5m people—43.6% of the labour force—still make 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 of real net rural income per head slowed each year in the late 1990s, falling to 3.8% and 2.1% in 1999 and 2000 respectively. Official statistics point to an improvement in the real growth rate of net rural income per head to 4.2% in 2001. Early indications are that net rural income per head rose to around Rmb2,470 (US$300) in 2002 from Rmb2,366 in 2001.

Rural incomes are diversified Despite this apparent bounceback, anecdotal evidence, including the increasing amount of government attention now being paid to agricultural issues, suggest rural discontent continues to rise. One problem is that the recent pick-up in rural wages has not prevented the already large gap between rural and urban incomes from widening further. 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 1995 and 2001 net rural incomes rose by 50%, but the average net income from household business rose by only 30% to Rmb1,460. Over the same period, income earned through wages increased by 118% to Rmb772 in 2001. 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 2001 48.6% of the average

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Rmb4,582 earned by rural families in the prosperous province of Zhejiang came from wage income; in Guangxi, by contrast, wages accounted for just 28% of the average Rmb1,944 earned by rural households.

There is a policy-induced glut Rural income growth has been weak in recent years partly because of soft prices in grain output for agricultural goods. Food prices fell year on year in 1997-2000 and were stable in 2001, although grain prices continued their fall, dropping by a further 0.7%. That prices have remained soft is not surprising. Preliminary figures show 457m tonnes of grain was produced in 2002. This was well below the peak in output of 512.3m tonnes recorded in 1998, but still significantly higher than before the first round of agricultural reforms began in 1978, when just 305m tonnes was produced. Per head, the increase in production has not been so dramatic—output per head in 2002 was 358 kg, compared with 327 kg in 1980. However, during this period dietary patterns have moved against foodgrain consumption as consumers have become increasingly prosperous—by 2001 urban grain purchases per head had fallen to 79.7 kg a year from 97 kg in 1995 and 130.7 kg in 1990.

The government maintains a These problems are partly the result of government policy. Under Mao the state grain procurement programme 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. The methods used have changed less; the government has maintained a comprehensive grain procurement programme in rural areas, managed by state agents. At various times during the last twenty years the government has tried to reduce its role in the markets for agricultural products, freeing up, for example, trading in summer grains in the eastern provinces surrounding Shanghai in late 2000. These latest reforms were spread to other provinces, and in 2002 the government was considering extending them to the whole country. Whether the government follows through with a such nationwide programme, however, remains to be seen—previous attempts to reform the grain market have been abandoned after they triggered a fall in production.

Rural output is diversified The government’s continued preference for grain production has not prevented change in the countryside. Between 2000 and 2001 the proportion of the sown

area devoted to grain production fell from 74% to 68%. 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 rising. The land area used for growing oil-bearing crops and vegetables increased from 12.6m ha to 14.6m ha and from 10.5m ha to 16.4m ha between 1996 and 2001 (see Reference tables 12-15 for agricultural production data).

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. Further migration of surplus rural labour to urban areas is also necessary. 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.

Secure land rights are needed The central government is now encouraging villages to grant more secure land rights by replacing the original 15-year contracts agreed with farmers with 30- year written contracts. Officials are also seeking to strengthen mechanisms to allow the transfer of rural land rights, an initiative which would not only clear the way for greater migration, but 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 CCP rule.

Farmers suffer from ad hoc The central government has not yet been able to improve local-level treatment local government feeds 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 erroneously 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, together 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 grassroots 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 is now being expanded further.

WTO entry will increase During the coming years policy changes prompted by China’s 2001 entry into the competition World Trade Organisation (WTO) will have an effect on rural areas. To accede to the trade body the government pledged to allow an unprecedented degree of

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foreign competition in the agricultural sector. According to the Development Research Centre of the State Council (China’s cabinet), entry into the WTO will result in the displacement of 9.7m agricultural workers. Agricultural imports will rise and foreign investment in the sector will be sought. WTO entry could also affect grain production in China. A more open market will tend to reduce the domestic prices of agricultural products, increasing the pressure for fundamental change in the methods of agricultural production.

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 of 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 2001, and gross industrial output value fell from 1.9% of the national total in 1998 to 1.6% in 2001. The 1,204 state enterprises in this sector have a gross industrial output value of Rmb128.3bn (US$15.5bn) compared with the Rmb153.1bn produced by the sector’s 2,603 firms as a whole.

Gold production is increasing 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 182 tonnes in 2001. However, the industry is still immature, with many small mines. In 1994 China announced that it would allow foreign participation in gold mining, 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 entitled Deregulation of the Gold Market in China, consumption per head is only one-half that of India, one-fifteenth that of Taiwan and one-thirtieth that of Hong Kong.

Rare metals are increasingly China has recently become an important producer and exporter of rare metals important crucial to high-technology industries. These metals 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 at the Bayan Obi mine in Inner Mongolia.

Manufacturing

Industrial output soars, The manufacturing sector in real terms grew by an average of almost 13% a year initially driven by TVEs in 1992-2001. 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 seemed to have taken the opportunity to

restructure. By 2001 TVE employment was back up to 130.9m. The government expects TVE employment to top 135m once more by 2005. The TVE sector produced 47.8% of industrial value added in 2001, or Rmb2.03trn (US$245bn).

Foreign and private enterprises Private and foreign-invested enterprises (FIEs) have grown rapidly in the reform become important period. In 2001 private enterprises accounted for 9.2% of all industrial output in China, up from 4.5% in 1999, and employed 15.3m urban workers. FIEs produced 16.1% of all industrial output in China in 2001, up from 13.7% in 1999. If enterprises partly or fully owned by investors from Taiwan, Hong Kong or Macau are included, then FIEs in 2001 accounted for 28.5% of industrial output and employed 6.71m workers. FIEs have played a particularly important role in the rapid increase in the value of China’s merchandise exports recorded in recent years—in 2001 FIEs produced 50% of China’s exports by value.

Industrial value added 2001 Rmb bn % change Light 1,051.7 10.5 Heavy 1,781.2 12.2 State-owned & state-holding 1,465.2 6.3 Collective-owned 261.6 -14.8 Share-holding 450.9 25.8 Foreign-funded 394.7 23.2 Units with funds from Hong Kong, Macau & Taiwan 318.1 10.2 Total 2,832.9 11.6

National Bureau of Statistics, China Statistical Yearbook 2002.

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 2001 SOEs accounted for just 18.1% of industrial output. The extent of this fall is admittedly misleading. During the 1990s the government sold shares in government firms, which were then classified as state-holding, rather than state-owned, firms. If these are included, the decline in importance of SOEs has been much less dramatic. In 2000 state-owned and state-holding firms together accounted for 44.4% of national industrial output. SOEs were originally established, not to generate financial profit, but rather to help the government achieve wider social and economic aims. Consequently, 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, when, 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 in non-performing loans (NPLs) in the banking system.

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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 ones partly privatised, but with majority state ownership—to 46,767 by end-2001, down from 118,000 in 1995.

Construction

Demand for construction is Given the huge size of the country, and the still relatively undeveloped nature of strong 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 6.1% in 2000, by 8.5% in 2001, and surged by almost 25% year on year in the first nine months of 2002. 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 is The fastest growing area of capital spending in recent years has been related to becoming more important real estate. Investment in real estate development increased by 19.5% in 2000, by 25.3% in 2001, and by 29.4% year on year in the first nine months of 2002. By 2001 investment in real estate development accounted for over 20% of all investment in China and the construction industry employed 21.1m people. Booms in real estate investment are not 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 while government officials voiced concern in 2002 that a bubble was forming in the real estate market, the recent rapid growth in property investment is not all froth. Much of the heightened activity has instead been driven by real demand, as people in the late 1990s 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).

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, and the China Construction Bank (CCB)—and a collection of rural credit co-operatives. Over the last twenty years, this situation has been transformed. In the late 1970s the status of both the Bank of China and CCB was upgraded, 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, and is also the regulator for the banking industry. 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 system is dominated by The banking sector today is dominated by the “big four”, with these institutions four state institutions accounting for around 75% of total banking assets. None of them, however, are 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 accounted for less than 1% of loans outstanding in 2000. This data is not perfect, and in reality the figure is likely to be higher, but anecdotal evidence also suggests that China’s private sector has difficulty gaining access to bank credit. The result has been a build-up of bad loans in the banking sector. Following a recent reclassification, officials in China have announced that domestic banks have a non-performing loan ratio of around 30%. Outside estimates suggest the figure could be as high as 50% (see Reference table 17 for sources and uses of funds by state institutions).

Banking sector reforms are However, although the banks do continue to suffer from damaging official implemented intervention, the scale of this meddling has lessened in recent years. The government has also been undertaking explicit moves 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 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 small and medium-sized enterprises. The government is also allowing banks to list themselves 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, and in July 2002 the Bank of China sold shares in its Hong Kong subsidiary on the Hong Kong stock exchange, where the offering was received enthusiastically.

Foreign banks are entering the Reforms are being spurred in part by the entry of foreign banks into the market 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 China’s entry into the WTO, China will allow foreign banks to undertake renminbi-denominated business with local businesses throughout China in early 2004—a liberalisation that has already begun to be rolled out in more prosperous cities—and with local individuals from early 2007. 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

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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.

China has stockmarkets in Once the third largest in the world, the Shanghai Stock Exchange was Shenzhen and Shanghai 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-2001 was US$525.6bn, compared with US$578bn in 2000, and turnover on the two markets totalled US$462.6bn in 2001, compared with US$738bn in 2000. Capitalisation as a percentage of GDP fell to 45% in 2001 from 57% in 2000—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 Dalian and Zhengzhou Commodity Exchanges.

The stockmarkets suffer from The stockmarkets remain mature, with some prominent local economists likening structural weaknesses them more to 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 example, 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 where almost all listed firms are SOEs, by allowing more private firms to undertake Initial Public Offerings (IPOs). In a further step forward, 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, fundamental improvement in the quality of the market will not happen overnight. The conditions under which foreigners can buy either “A” shares or non-traded state shares are, for example, 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. Traditionally “allocated”, a euphemism for forced purchases by SOEs and state employees, state bonds are now sold on a voluntary basis through a variety of sources, 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 Treasury rather than 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 Treasury bonds.

The insurance industry, while In 1998 the People’s Insurance Company of China (PICC) was split into three developing, remains small 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 being pushed by 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-2001 there were 14 domestic companies and 21 joint- venture or foreign-invested companies offering insurance through more than 230,000 outlets and employing more than 1m people (including marketing personnel and agents). Nonetheless, the insurance market is tiny by international standards. Premium revenue increased by 32% in 2001 to Rmb210.9bn. Life insurance premiums accounted for the bulk of the revenue, at Rmb142.4bn, up by 43% year on year, whereas property premiums had grown by 15% to Rmb68.5bn. At end-2000 total assets held by the industry amounted to Rmb337.4bn. The China Insurance Regulatory Commission (CIRC, the industry’s regulatory body) forecasts annual growth of 12% in the industry over the next five years. Other services

Retail sales growth slows The value of retail sales increased every year between 1993 and 2001 to reach sharply Rmb3.8trn. The annual rate of increase in value terms has been decreasing, from a peak of 30.5% in 1994 to 10.1% in 2001. This, however, partly reflects the easing of retail price inflation from 21.7% in 1994 to –0.8% in 2001. A factor constraining 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. The average retail price of home appliances fell by 6.3% in 2000 and by 6.1% in 2001, according to the National Bureau of Statistics.

There is no integrated national Excess production capacity has been sustained in many markets because of the market absence of fully functioning market forces. China does not have an integrated national retail market. Instead consumer goods markets are fragmented and sometimes subject to local protectionism, especially in second-tier provinces and rural areas. As well as using protectionist measures, local governments have ordered local branches of state banks to supply credit to local SOEs, which provide employment and local government revenue—an opaque system that offers many opportunities for graft. The fragmentation of the national market makes the task of achieving nationwide retail penetration a considerable challenge for domestic or foreign-invested enterprises. 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. These restrictions are to be phased out over three years for most products and foreign manufacturers can expect greatly improved access to local markets as a result.

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The external sector Trade in goods

Trade in goods, 2001 (US$ bn) Main exports fob Food & live animals, etc 12,779 Beverages & tobacco 874 Non-edible raw materials 4,173 Mineral fuels, lubricants, etc 8,416 Animal & vegetable oils, fats, waxes 111 Chemicals & related products 13,354 Light industrial products, rubber, minerals, iron, etc 43,823 Machinery & transport equipment 94,918 Total incl others 266,155 Main imports cif Food & live animals, etc 4,976 Beverages & tobacco 412 Non-edible raw materials 22,128 Mineral fuels, lubricants, etc 17,495 Animal & vegetable oils, fats, waxes 763 Chemicals & related products 197,840 Light industrial products, rubber, minerals, iron, etc 32,106 Machinery & transport equipment 41,939 Total incl others 243,613

Source: China Statistical Yearbook 2002.

Merchandise trade growth is There have been wide fluctuations in export growth in the reform period, rapid although the 20-year period to 2001 saw an annual average expansion in the US dollar value of merchandise exports of 14%. 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 the subsequent two years as overseas demand was hit by the Asian regional downturn. The export sector bounced back strongly in 2000, with overseas sales rising by 27.9% to US$249.1bn in balance-of-payments terms. Customs data give a 2000 export figure of US$249.2bn, rising by 6.8% in 2001 to US$266.2bn. A 19.4% year-on-year rise in exports to US$232.6bn (customs basis) was recorded in the first nine months of 2002.

Trade by type of enterprise (US$ bn unless otherwise indicated; Jan-Dec 2001) Exports % change Imports % change Balance State-owned 113.2 -2.8 103.5 4.7 9.7 Foreign-invested 133.2 11.6 125.9 7.3 7.3 Collective 14.2 34.6 8.0 29.4 6.2 Other 5.5 98.4 6.2 127.6 -0.7 Total 266.2 6.8 243.6 8.2 22.5

Source: Economic Information & Consultancy, China's Customs Statistics.

Export growth is fuelled by The double-digit rate of export growth achieved during the last 20 years has foreign enterprises been fuelled by output from foreign-invested companies (FIEs). Between 1992 and 2001 merchandise exports produced by FIEs surged from US$17.4bn to US$133.2bn, or from 20% to 50% of total exports. Non-state domestic enterprises have also become a more important source of exports, producing 5.3% of the total in 2001 (up from 4.3% in 2000). At the same time the share of exports produced by state-owned enterprises (SOEs) has fallen, reaching 42.5% in 2001, down from 46.7% in 2000. The shift away from SOEs is likely to continue—the foreign trade and economic co-operation ministry has recently started to issue foreign trade licences to FIEs and non-state domestic enterprises for the first time.

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 2001 manufactured goods accounted for over 90% of China’s exports (see Reference table 18 for data on exports by type). Within this there has been a shift away from basic manufactured products towards the production of electronic goods. Between 1996 and 2001 textiles fell from 23.1% of all exports to 18.7%, whereas exports of machinery and electrical equipment rose from 20.6% to 31.9% 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% and 29% respectively of the desktop computers and mobile phones produced by Taiwan firms.

Import growth is determined Imports of consumer goods have been increasing in recent years. Nevertheless, by that of 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 2000 was accompanied by a massive influx of imports. Furthermore, imports are largely of manufactured goods: their share of the total was 81.2% in 2001, compared with 18.8% 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 2001. The manufactured goods import bill includes a high proportion of intermediates, notably chemicals and related products (13.2% of total imports in 2001), but also raw materials, iron and steel, and textiles yarn (see Reference table 19 for a breakdown of imports by category).

The US is China’s largest The US is China’s largest export market, absorbing 20.4% of China’s total export market exports in 2001. Another important market in the West is Germany. But although it is China’s fifth biggest export market, Germany accounted for only 3.7% of total export sales in 2001. (The EU as a whole is a far bigger market, taking US$40.9bn, or 15.4% of China’s total exports, in 2001.) Separating the US and Germany were 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 56.5% of China’s total trade in 2001. As well as being a large export market, Japan is by far the largest supplier of goods to China at US$42.8bn in 2001, making the country China’s largest trade partner. The second largest source of imports is Taiwan, which sold US$27.3bn of goods to China in 2001, followed by the US at US$26.2bn.

Main trading partners 2001 2001 Exports fob % of total Imports cif % of total US 20.4 Japan 17.6 Hong Kong 17.5 Taiwan 11.2 Japan 16.9 EU 14.7 EU 15.4 Germany 5.7 Germany 3.7 France 1.7 Netherlands 2.7 US 10.8 UK 2.5 South Korea 9.6 South Korea 4.7 Hong Kong 3.9

Source: China Statistical Yearbook 2002.

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 Americans do in their statistics.

Direction and composition of trade, 2001 (US$ m) Exports fob US Hong Kong Japan EU Total Food, beverages & tobacco 990 1,722 5,196 1,295 13,624 Meat & fish & preparations 558 434 2,776 507 5,479 Fruit & vegetables & preparations 235 166 1,662 560 3,677

Mineral fuels 373 1,189 2,000 515 8,416 Chemicalsa 3,999 2,287 2,192 3,859 19,493 Organic & inorganic 1,052 323 993 1,729 7,462 Plastics & manufactures 2,187 1,274 668 1,221 6,698 Leather manufactures, handbags, travel goods 1,989 796 895 1,578 6,989 Textile fibres & manufacturesb 4,690 10,506 13,551 4,740 50,460 Cotton & manufactures 120 1,688 142 116 3,658 Synthetic fibres & manufactures 81 812 124 399 4,284 Clothing 3,490 5,625 11,544 3,018 33,036 Footwear 5,041 345 1,010 1,086 10,096 Non-metallic mineral manufactures 909 466 789 646 4,204 Precious stones, metals & jewellery 436 1,278 40 446 2,403 Base metals & manufacturesc 3,429 2,254 1,815 2,767 16,100 Iron & steel & manufacturesc 1,790 896 1,050 1,429 8,254 Machinery excl electric 7,335 7,228 3,229 6,570 33,585 Electric machinery 10,642 10,843 7,468 8,380 51,306 Transport equipment 1,829 1,239 931 2,021 9,383 Road vehicles & tractors 1,222 269 673 555 4,777 Optical, medical instruments, etc 1,657 1,018 1,351 1,263 6,477 Furniture, etc 312 805 954 1,276 7,561 Toys, etc 301 1,406 728 1,657 9,083 Total incl others 54,283 46,547 44,958 40,904 266,155

Imports cif Japan Taiwan US EU Total Food, beverages & tobacco 203 40 953 566 5,352 Ores, slag & ash 12 3 29 34 4,176 Mineral fuels 278 186 102 218 17,546 Chemicalsa 5,659 5,594 3,584 4,192 34,332 Organic 1,888 902 748 948 8,976 Plastics & manufactures 2,453 3,629 1,198 1,090 15,261 Hides, skins & leather 78 489 487 417 3,169 Wood & manufactures 11 27 166 430 3,468 Paper & manufactures 446 438 460 561 3,650 Textile fibres & manufacturesb 3,352 3,083 349 692 16,266 Synthetic fibres & manufactures 1,582 1,738 552 195 6,262 Base metals & manufacturesc 4,766 3,753 1,243 2,198 21,913 Iron & steel & manufacturesc 3,282 2,449 543 1,208 13,038 Copper & manufacturesc 882 717 363 433 4,887 Machinery excl electric 8,995 4,500 5,416 10,583 40,554 Electric machinery 13,002 7,277 5,963 9,197 55,889 Transport equipment 1,668 194 2,308 2,932 10,018 Road vehicles & tractors 1,459 191 275 2,038 4,531 Aircraft 3 0 2,014 658 4,545 Optical, medical instruments, etc 2,521 880 2,432 1,877 9,775 Total incl others 42,797 27,339 26,202 35,723 243,613 a Including crude fertilisers and photographic goods. b Including clothing. c Including scrap. Source: Economic Information & Agency, Hong Kong, China’s Customs Statistics.

Invisibles and the current account

Current account (US$ bn) 2001 Merchandise exports fob 266.1 Merchandise imports fob -232.1 Trade balance 34.0 Services balance -5.9 Income balance -19.2 Current transfers balance 8.5 Current-account balance 17.4

Source: IMF, International Financial Statistics.

The current-account balance is China’s current account is dominated by the trade balance—two-way merchandise dominated by goods trade trade accounted for 80% of the value of all transactions on the current account in 2001. The merchandise trade account was in deficit until 1993, but improved fairly steadily thereafter, and a merchandise trade surplus of more than US$46bn (around 5% of GDP) was recorded in 1997-98. The trade surplus narrowed in 1999- 2000, but remained substantial, and according to customs data it widened again in 2002, rising in January-October by over 40% year on year. This robust trade surplus has supported the overall current-account surplus, which peaked at US$37bn (4.1% of GDP) in 1997. The income balance, which was in surplus for much of the 1980s, has since fallen into substantial and persistent deficit, owing to flows related to large foreign direct investment inflows.

Tourism revenue increases The deficit on the services account has increased in recent years. The shipping account has tended to be in deficit in recent years. The balance of flows related to tourism has, however, been in surplus. Mainland Chinese residents have become increasingly active travellers in recent years, particularly within Asia. According to figures from the World Tourism Organisation, mainland Chinese citizens spent US$13.1bn abroad in 2000, placing China seventh in the organisation’s league table of tourism spenders. Tourism to China has also been increasing. World Tourism Organisation figures show that China was the fifth most popular tourist destination in the world in 2001, receiving 33.2m visits, up from 31.2m in 2000. Earnings from foreign tourism grew from US$16.2bn in 2000 to US$17.8bn in 2001.

Capital flows and foreign debt

Inward FDI dwarfs outward Although some local companies, most notably China’s biggest producer of FDI home appliances, Haier, have invested abroad, such cases remain the exception rather than the rule. 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 erroneously 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 are likely in 2002 to have risen over US$50bn for the first time—utilised FDI in the

first eleven months of last year totalled US$48bn. According to the UN Conference on Trade and Development, China may have been the largest recipient of FDI in 2002, as FDI in the US is expected to fall by two-thirds to around US$44bn. Chinese officials have predicted that China will receive more than US$100bn in FDI in each year of the 2006-10 11th five-year plan period.

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 at least an implicit government guarantee. However, in 1997-98 several Chinese corporations apparently backed by local governments—notably the Guangdong International Trust and Investment Corporation (GITIC) and Guangdong Enterprises— defaulted on external debt repayments, demonstrating that this blanket guarantee did not exist. Foreign creditor sentiment towards China consequently soured, and partly as a result debt inflows more than halved in 1998. Inflows picked up gradually in 1999-2002, and are expected to rise more rapidly in the next few years as GDP growth and world trade pick up. The Economist Intelligence Unit estimates that China’s total external debt fell to US$147.7bn at end-2001, but picked up in 2002 to reach US$149bn by year-end (see Reference table 21 for World Banks data on external debt).

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$273bn at end-October 2002 (see Reference table 24 for data on foreign reserves). 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, as well as 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. The large negative numbers appearing in the errors and omissions line of the balance of payments suggest that China has suffered from large unregistered capital outflows in recent years. Balance-of-payments errors and omissions rose to US$22.1bn in 1997 and US$18.9bn in 1998, before dropping to US$11.7bn in 2000 and US$4.7bn in 2001.)

The renminbi has been stable The renminbi was massively undervalued in the 1980s and early 1990s, and a since 1995 parallel currency, foreign-exchange certificates (FECs), circulated until 1994 to enable foreign-trade corporations to purchase foreign exchange at a more reasonable rate. The currency was unified in 1994 and the renminbi 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 since then (see Reference table 25 for exchange rates). The People’s Bank of China (PBC, the central bank) is committed to maintaining a stable currency. There has been speculation, however, that the bank will allow the currency to fluctuate in a wider range, probably within 15%, as China opens its markets in compliance with WTO agreements.

Appendices Membership of regional organisations

Asia-Pacific Economic APEC started life in 1989 as a forum for informal discussion between six Co-operation (APEC) forum members of 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” 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 eleven 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 transportation. 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; ABAC is based in the Philippines. APEC’s main business is done at annual meetings of member states’ ministers of foreign affairs and economic affairs, which are followed by informal gatherings of member states’ heads of state or government. Every other ministerial meeting is held in a South-east Asian country. The chairmanship of APEC rotates each year. During the 1990s APEC’s star waxed brighter and then started to wane. The highpoint was probably 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 2001 terrorist attacks on the US) in 2001. 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.

Sources of information

National statistical sources Beijing Review Press, Beijing Review (weekly), Beijing Beijing Review Press, China Daily, Beijing

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), Washington , DC

International statistical sources Bank for International Settlements, International Banking and Financial Market Developments (quarterly) Energy Data Associates, Bishops Walk House, 19-23 High Street, Pinner, Middlesex HA5 5PJ 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) Worl d Bank, Global Development Finance (annual) Worl d 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): http://www.chinafdi.org.cn Commission of Science, Technology, Industry for National Defence: http://www.costind.gov.cn/ Ministry of Finance (in Chinese): http://www.mof.gov.cn/ Ministry of Foreign Trade and Economic Co-operation: http://www.moftec.gov.cn/ People’s Bank of China: http://www.pbc.gov.cn/ People’s Daily, official newspaper: http:/english.peopledaily.com.cn/ South China Morning Post, Hong Kong-based newspaper: http://www.scmp.com/ State Development Planning Commission: http://www.sdpc.gov.cn/china/ State Economic and Trade Commission: http://www.setc.gov.cn/ State Statistical Bureau: http://www.stats.gov.cn/ US embassy, China: http://www.usembassy-china.org.cn/english/ Xinhua, official news organisation: http://www.xinhuanet.com/

Reference tables

These reference tables provide the most up-to-date statistics available at the time of publication.

Reference table 1 Population (m; year-end) 1997 1998 1999 2000 2001 Male 631.3 636.0 641.3 654.4 656.7 Female 605.0 611.6 616.6 613.1 619.6 Total 1,236.3 1,247.6 1,257.9 1,267.4 1,276.3 % change, year on year 1.0 0.9 0.8 0.8 0.7 Urban 394.5 416.1 437.5 459.1 480.6 % of total 31.9 33.4 34.8 36.2 37.7 Rural 841.8 831.5 820.4 808.4 795.6 % of total 68.1 66.7 65.2 63.8 62.3

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

Reference table 2 Labour force (m; year-end) 1997 1998 1999 2000 2001 Urban employment State-owned units 110.4 90.6 85.7 81.0 76.4 Urban collective-owned units 28.8 19.6 17.1 15.0 12.9 Co-operative units 0.0 1.4 1.4 1.6 1.5 Joint-ownership units 0.4 0.5 0.5 0.4 0.5 Limited liability corporations 0.0 4.8 6.0 6.9 8.4 Share-holding corporations 4.7 4.1 4.2 4.6 4.8 Private enterprises 7.5 9.7 10.5 12.7 15.3 Units with funds from Hong Kong, Macau & Taiwan 2.8 2.9 3.1 3.1 3.3 Foreign-funded units 3.0 2.9 3.1 3.3 3.5 Self-employed individuals 19.2 22.6 24.1 21.4 21.3 Totala 207.8 216.2 224.1 231.5 239.4 Rural employment Township & village industries 130.5 125.4 127.0 128.2 130.9 Total incl others 490.4 490.2 489.8 489.3 490.9 Employment by sector Primary industries 348.4 351.8 357.7 360.4 365.1 Secondary industries 165.5 166.0 164.2 162.2 162.8 Tertiary industries 184.3 188.6 192.1 198.2 202.3 Total employment 698.2 706.4 713.9 720.9 730.3 Registered urban unemployment 5.7 5.7 5.8 6.0 6.8 Economically active population n/a 720.9 727.9 739.9 744.3 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.

Reference table 3 Transport statistics 1997 1998 1999 2000 2001 Railways Length of track in operation ('000 km) 66.0 66.4 67.4 68.7 70.1 Passengers carried (bn person-km) 358.5 377.3 413.6 453.3 476.7 Freight traffic (bn tonne-km) 1,325.3 1,251.7 1,283.8 1,366.6 1,457.5 Roads Highways ('000 km) 1,226.4 1,278.5 1,351.7 1,402.7 1,698.0 Passengers carried (bn person-km) 554.1 594.3 619.9 665.7 720.7 Freight traffic (bn tonne-km) 527.2 548.3 572.4 612.9 633.0 Passenger vehicles ('000) 5,805.6 6,548.3 7,402.3 8,537.3 9,939.6 Freight trucks ('000) 6,012.3 6,278.9 6,769.5 7,163.2 7,652.4 Water Length of waterways ('000 km) 109.8 110.3 116.5 119.3 121.5 Waterway freight traffic (bn tonne-km) 1,923.5 1,940.6 2,126.3 2,373.4 2,598.9 Freight handled by major coastal ports ('000 tonnes) 908,220 922,370 1,051,620 1,256,030 1,426,340 Air Length of civil aviation routes ('000 km) 1,425.0 1,505.8 1,522.2 1,502.9 1,553.6 International routes ('000 km) 504.4 504.4 523.3 508.4 516.9 Passengers carried (bn person-km) 77.3 80.0 85.7 97.0 109.1 Freight traffic (bn tonne-km) 2.9 3.4 4.2 5.0 4.4

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

Reference table 4 National energy statistics (% of total unless otherwise indicated) 1997 1998 1999 2000 2001 Energy production (m tonnes standard coal equivalent) 1,324 1,243 1,091 1,070 1,210 Coal 74.1 71.9 68.3 66.6 68.0 Oil 17.3 18.5 21.0 21.8 20.2 Natural gas 2.1 2.5 3.1 3.4 3.4 Hydroelectric 6.5 7.1 7.6 8.2 8.4 Energy consumption (m tonnes standard coal equivalent) 1,378 1,322 1,301 1,303 1,320a Coal 71.5 69.6 68.0 66.1 67.0a Oil 20.4 21.5 23.2 24.6 23.6a Natural gas 1.7 2.2 2.2 2.5 2.5a Hydroelectric 6.2 6.7 6.6 6.8 6.9a Note. 0.1229 kg standard coal equivalent=1 kwh. a Estimates. Source: National Bureau of Statistics, China Statistical Yearbook 2002.

Reference table 5 Government finances (Rmb bn) 1997 1998 1999 2000 2001 Revenue 865.1 987.6 1,144.4 1,339.5 1,638.6 % of GDP 11.6 12.4 13.8 15.0 17.1 Tax 823.4 926.3 1,068.3 1,258.2 1,530.1 Tariff revenue 31.9 31.3 56.2 75.0 84.1 Net subsidies to enterprises -36.8 -33.3 -29.0 -27.9 -30.0 Extra-budgetary revenue 282.6 308.2 338.5 382.6 n/a Debt issuance 247.7 331.1 371.5 418.0 460.4 Expenditure 923.4 1,079.8 1,318.8 1,588.7 1,890.3 % of GDP 12.3 13.6 15.9 17.8 19.7 Capital construction 102.0 138.8 211.7 209.5 251.1 Defence 81.3 93.5 107.6 120.8 144.2 Culture, health & education 190.4 215.4 240.8 273.7 336.1 Administration 113.7 132.7 152.6 178.8 219.8 Price subsidies 55.2 71.2 69.8 104.2 74.2 Debt service 191.8 235.3 191.1 158.0 200.8 Extra-budgetary expenditure 268.6 291.8 313.9 352.9 n/a Balance -58.2 -92.2 -174.4 -249.1 -251.7 % of GDP -0.8 -1.2 -2.1 -2.8 -2.6

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

Reference table 6 Investment in assets by source and purpose (Rmb bn) 1997 1998 1999 2000 2001 By unit State-owned 1,309.2 1,536.9 1,594.8 1,650.4 1,760.7 Collective 385.1 419.2 433.9 480.2 527.9 Self-employed individuals 342.9 374.4 419.6 470.9 543 Joint-ownership 12.3 6.0 9.8 9.5 9.5 Share-holding 138.7 194.7 247.9 406.2 566.3 Foreign-funded 195.6 164 143.3 131.3 141.5 Units with funds from Hong Kong, Macau & Taiwan 93.7 133.4 121.8 129.3 158.3 Others 16.6 11.9 14.4 14.0 14.2 By use Capital construction 991.7 1,191.6 1,245.5 1,342.7 1,482.0 Investment in innovation 392.2 451.7 448.5 510.8 592.4 Real estate development 317.8 361.4 410.3 498.4 634.4 Total investment incl others 2,494.1 2,840.6 2,985.5 3,291.8 3,721.4

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

Reference table 7 Money supply and credit (Rmb bn unless otherwise indicated; % change year on year in brackets; end-period) 1997 1998 1999 2000 2001 Currency in circulation (M0) 1,017.8 1,120.4 1,345.6 1,465.3 1,568.9 (15.6) (10.1) (20.1) (8.9) (7.1) M1 3,482.6 3,895.4 4,583.7 5,314.7 5,987.2 (22.1) (11.9) (17.7) (15.9) (12.7) Quasi-money 5,616.9 6,554.5 7,406.1 8,146.3 9,843.0 (18.1) (16.7) (13.0) (10.0) (20.8) M2 9,099.5 10,449.9 11,989.8 13,461.0 15,830.2 (19.6) (14.8) (14.7) (12.3) (17.6) Stock of domestic credit 7,950.3 9,542.4 10,697.5 11,866.4 12,741.6 % of GDP 106.3 120.0 128.6 132.7 132.8 Memorandum items Deposit rate (%) 5.67 3.78 2.25 2.25 2.25 Lending rate (%) 8.64 6.39 5.85 5.85 5.85

Sources: IMF, International Financial Statistics; National Bureau of Statistics, China Statistical Yearbook 2002.

Reference table 8 Gross domestic product (at market prices) 1997 1998 1999 2000 2001 Total (US$ bn) At current prices 902 961 1,005 1,080 1,159 Total (Rmb bn) At current prices 7,477 7,955 8,319 8,940 9,593 At constant (1990) prices 3,908 4,213 4,510 4,868 5,226 % change, year on year 8.8 7.8 7.1 7.9 7.3 Per head (US$) At current prices 735 775 804 856 910 At constant (1990) prices 3,183 3,400 3,607 3,858 4,105 % change, year on year 7.8 6.8 6.1 7.0 6.4

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

Reference table 9 Gross domestic product by expenditure (Rmb bn; current prices) 1997 1998 1999 2000 2001 Private consumption 3,486 3,692 3,933 4,291 4,592 % change (real terms; 1990 prices) 4.7 6.6 6.7 6.3 6.5 % of GDP 46.6 46.4 47.3 48.0 47.9 Government consumption 873 949 1,039 1,171 1,303 % change (real terms; 1990 prices) 8.1 8.4 8.4 12.0 10.0 % of GDP 11.7 11.9 12.5 13.1 13.6 Gross fixed investment 2,515 2,763 2,948 3,262 3,681 % change (real terms; 1990 prices) 6.0 14.2 6.7 8.3 10.3 % of GDP 33.6 34.7 35.4 36.5 38.4

Stockbuilding 318 247 154 -8 -204 % contribution to real GDP growth 1.9 -1.6 1.2 -1.0 -0.7 Exports of goods & services 1,671 1,744 2,030 2,445 2,470 % change (real terms; 1990 prices) 22.9 7.2 13.9 32.0 3.4 % of GDP 22.3 21.9 24.4 27.4 25.7 Imports of goods & services 1,384 1,438 1,785 2,221 2,248 % change (real terms; 1990 prices) 11.1 3.1 22.3 24.8 2.0 % of GDP 18.5 18.1 21.5 24.8 23.4 GDP 7,477 7,955 8,319 8,940 9,593 % change (real terms; 1990 prices) 8.8 7.8 7.1 7.9 7.3

Sources: World Bank; China Statistical Information Centre.

Reference table 10 Gross domestic product by sector (Rmb bn; current prices) 1997 1998 1999 2000 2001 Primary 1,421 1,455 1,447 1,463 1,461 Secondary 3,722 3,862 4,056 4,494 4,907 Industry 3,241 3,339 3,509 3,905 4,261 Construction 481 523 547 589 646 Tertiary 2,303 2,517 2,704 2,988 3,225 Transport, post & telecommunications 380 412 446 541 522 Domestic trade 616 658 691 732 782 GDP 7,446 7,835 8,207 8,944 9,593

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

Reference table 11 Price indices (% change) 1997 1998 1999 2000 2001 Retail prices 0.8 -2.6 -3.0 -1.5 -0.8 Overall consumer prices 2.8 -0.8 -1.4 0.4 0.7 Urban consumer prices 3.1 -0.6 -1.3 0.8 0.7 Rural consumer prices 2.5 -1.0 -1.5 -0.1 0.8 Agricultural means of production -0.5 -5.5 -4.2 -0.9 -0.9 Ex-factory industrial products -0.3 -4.1 -2.4 2.8 -1.3

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

Reference table 12 Agricultural production (m tonnes) 1997 1998 1999 2000 2001 Grain 494.2 512.3 508.4 462.2 452.6 Cereal 443.5 456.2 453.0 405.2 396.5 Rice 200.7 198.7 198.5 187.9 177.6 Wheat 123.3 109.7 113.9 99.6 93.9 Maize 104.3 133.0 128.1 106.0 114.1

Cotton 4.6 4.5 3.8 4.4 5.3 Oil-bearing crops 21.6 23.1 26.0 29.5 28.6 Fibre crops 0.7 0.5 0.5 0.5 0.7 Sugarcane 78.9 83.4 74.7 68.3 75.7 Sugarbeet 15.0 14.5 8.6 8.1 10.9 Tobacco 4.3 2.4 2.5 2.6 2.4 Fruits 50.9 54.5 62.4 62.3 66.6 Tea 0.6 0.7 0.7 0.7 0.7 Aquatic products 36.1 39.1 41.2 42.8 43.8 Meat 52.7 57.2 58.2 61.3 63.3 Beef 4.4 4.8 5.1 5.3 5.5 Pork 36.0 38.8 38.9 40.3 41.8 Mutton 2.1 2.3 2.5 2.7 2.9

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

Reference table 13 Gross agricultural output value, by sector (Rmb bn) 1997 1998 1999 2000 2001 Crop cultivation 1,385.3 1,424.2 1,410.6 1,387.4 1,446.3 Forestry 81.8 85.1 88.6 93.7 93.9 Animal husbandry 683.5 702.6 699.8 739.3 796.3 Fisheries 228.3 242.3 252.9 271.3 281.5 Total 2,378.8 2,454.2 2,451.9 2,491.6 2,618.0

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

Reference table 14 Total sown area, by crop ('000 ha) 1997 1998 1999 2000 2001 Grain crops 112,912 113,787 113,161 108,463 106,080 Cereal 91,964 92,117 91,617 85,264 82,596 Rice 31,765 31,214 31,284 29,962 28,812 Wheat 30,057 29,774 28,855 26,653 24,664 Maize 23,775 25,239 25,904 23,056 24,282 Beans 11,164 11,671 11,190 12,660 13,268 Tubers 9,785 10,000 10,355 10,538 10,217 Oil-bearing crops 12,381 12,919 13,906 15,400 14,631 Cotton 4,491 4,459 3,726 4,041 4,810 Fibre crops 327 224 205 262 323 Sugar crops 1,923 1,984 1,644 1,514 1,654 Tobacco 2,353 1,361 1,374 1,437 1,340 Vegetables 11,288 12,293 13,347 15,237 16,402 Memorandum items Total sown area 153,969 155,706 156,373 156,300 155,708 Area of tea plantations 1,076 1,057 1,130 1,089 1,141 Area of orchards 8,648 8,535 8,667 8,932 9,043

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

Reference table 15 Miscellaneous agricultural statistics 1997 1998 1999 2000 2001 Grain yields (kg/ha) 4,823 4,953 4,945 4,753 4,800 Cotton yields (kg/ha) 1,025 1,009 1,028 1,093 1,107 Irrigated area (m ha) 51.2 52.3 53.2 53.8 54.2 Chemical fertiliser applied (m tonnes) 39.8 40.8 41.2 41.5 42.5 Grain imports (m tonnes) 4.2 2.4 1.7 3.2 3.4

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

Reference table 16 Industrial production (m units unless otherwise indicated) 1997 1998 1999 2000 2001 Cloth (bn metres) 24.9 24.1 25.0 27.7 29.0 Colour television sets ('000 units) 27,113 34,970 42,620 39,360 40,937 Refrigerators ('000 units) 10,444 10,600 12,100 12,790 13,513 Washing machines ('000 units) 12,545 12,073 13,422 14,430 13,416 Coal (m tonnes) 1,373 1,250 1,045 998 1,161 Crude oil (m tonnes) 160.7 161.0 160.0 163.0 164.0 Steel (m tonnes) 108.9 115.6 124.3 128.5 151.6 Cement (m tonnes) 511.7 536.0 573.0 597.0 661.0 Plate glass (m weight cases) 166.3 171.9 174.2 183.5 209.6 Chemical fertiliser (m tonnes) 28.2 30.1 32.5 31.9 33.8 Motor vehicles ('000 units) 1,582.5 1,630.0 1,832.0 2,070.0 2,341.7 Cars ('000 units) 486.0 507.1 571.0 607.0 703.6 Integrated circuits 2,555 2,626 4,150 5,880 6,363 Microcomputers 2.1 2.9 4.0 6.7 8.8 Fax machines ('000 units) 1,625 1,287 1,600 1,963 3,182 Copying machines ('000 units) 1,078 1,179 2,103 1,566 1,441 Computers (units) 2,443 4,237 8,199 8,625 15,040

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

Reference table 17 Sources and uses of credit funds by state banks (Rmb bn unless otherwise indicated; year-end balances) 1997 1998 1999 2000 2001 Sources Deposits 8,239.0 9,659.8 10,887.9 12,380.4 14,361.7 Urban & rural savings deposits 4,628.0 5,340.8 5,962.2 6,433.2 7,376.2 % of total 56.2 55.3 54.8 52.0 51.4 Deposits of enterprises 2,865.6 3,248.7 3,718.2 4,409.4 5,154.7 Liabilities to international financial institutions 19.6 17.4 37.2 36.8 48.5 Currency in circulation 1,017.8 1,120.4 1,345.6 1,465.3 1,568.9

Uses Short-term loans 5,541.8 6,061.3 6,388.8 6,574.8 6,732.7 Industrial loans 1,652.7 1,782.2 1,794.9 1,701.9 1,863.7 Commercial loans 1,835.7 1,975.2 1,989.1 1,786.8 1,856.3 Construction loans 159.1 162.8 147.8 161.7 210.0 Agricultural loans 331.5 444.4 479.2 488.9 571.1 Medium- & long-term loans 1,546.9 2,071.8 2,396.8 2,793.1 3,932.8 Credit loans 232.2 252.1 250.5 241.0 249.8 Other loans 170.5 267.2 337.4 328.2 325.2 Securities & investments 367.2 811.2 1,250.6 1,965.1 2,211.3 Purchase of foreign exchange 1,346.7 1,372.8 1,479.2 1,429.1 1,785.6 Government debt 240.9 158.2 158.2 158.2 158.2 Total assets & liabilities incl others 9,500.8 11,042.0 12,323.1 13,548.4 15,487.6

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

Reference table 18 Exports (US$ m; fob) 1997 1998 1999 2000 2001 Primary goods 23,953 20,489 19,941 25,460 26,353 Food & live animals, etc 11,075 10,513 10,458 12,282 12,779 Beverages & tobacco 1,049 975 771 745 874 Non-edible raw materials 4,195 3,519 3,921 4,462 4,173 Mineral fuels, lubricants, etc 6,987 5,175 4,659 7,855 8,416 Animal & vegetable oils, fats, waxes 647 307 132 116 111 Manufactured goods 158,839 163,220 174,990 223,743 239,802 Chemicals & related products 10,227 10,321 10,373 12,098 13,354 Light industrial products, rubber, minerals, iron, etc 34,432 32,477 33,262 42,546 43,823 Machinery & transport equipment 43,709 50,217 58,836 82,600 94,918 Miscellaneous products 70,467 70,200 72,510 86,278 87,123 Products not classified elsewhere 4 5 9 221 584 Total 182,792 183,709 194,931 249,203 266,155

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

Reference table 19 Imports (US$ m; cif) 1997 1998 1999 2000 2001 Primary goods 28,620 22,949 26,846 46,739 45,774 Food & live animals, etc 4,304 3,788 3,619 4,758 4,976 Beverages & tobacco 320 179 208 364 412 Non-edible raw materials 12,006 10,715 12,740 20,003 22,128 Mineral fuels, lubricants, etc 10,306 6,776 8,912 20,637 17,495 Animal & vegetable oils, fats, waxes 1,684 1,491 1,367 977 763

Manufactured goods 113,750 117,288 138,853 178,355 197,840 Chemicals & related products 19,297 20,158 24,030 30,213 32,106 Light industrial products, rubber, minerals, iron, etc 32,220 31,075 34,317 41,807 41,939 Machinery & transport equipment 52,774 56,845 69,453 91,931 107,042 Miscellaneous products 8,550 8,456 9,701 12,751 15,076 Products not classified elsewhere 909 754 1,352 1,653 1,677 Total 142,370 140,237 165,699 225,094 243,613

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

Reference table 20 Balance of payments, IMF series (US$ m) 1997 1998 1999 2000 2001 Exports: goods fob 182,670 183,529 194,716 249,131 266,075 Imports: goods fob -136,448 -136,915 -158,734 -214,657 -232,058 Trade balance 46,222 46,614 35,982 34,474 34,017 Exports of services 24,569 23,895 26,248 30,430 33,334 Imports of services -27,967 -26,672 -31,589 -36,031 -39,267 Income: credit 5,710 5,584 8,330 12,550 9,388 Income: debit -16,715 -22,228 -22,800 -27,216 -28,563 Transfers: credit 5,477 4,661 5,368 6,861 9,125 Transfers: debit -333 -382 -424 -550 -633 Current-account balance 36,963 31,472 21,115 20,518 17,401 Direct investment abroad -2,563 -2,634 -1,775 -916 -6,884 Direct investment in China 44,237 43,751 38,753 38,399 44,241 Portfolio investment assets -899 -3,830 -10,535 -11,307 -20,654 Portfolio investment liabilities 7,842 98 -699 7,317 1,249 Other investment assets -39,608 -35,041 -24,394 -43,864 20,813 Other investment liabilities 12,028 -8,619 3,854 12,329 -3,933 Financial balance 21,037 -6,275 5,204 1,958 34,832 Capital-account balance -21 -47 -26 -35 -54 Net errors & omissions -22,122 -18,902 -17,641 -11,748 -4,732 Overall balance 35,857 6,248 8,652 10,693 47,447 Financing (- indicates inflow) Movement of reserves -35,857 -6,248 -8,652 -10,693 -47,447 Use of IMF credit & loans 0 0 0 0 0

Source: IMF, International Financial Statistics.

Reference table 21 External debt (US$ m unless otherwise indicated; debt stocks at year-end) 1996 1997 1998 1999 2000 Total external debt 128,817 146,697 154,599 154,223 149,800 Long-term debta 103,410 115,233 126,667 136,541 132,625 Short-term debt 25,407 31,464 27,933 17,682 17,174 Public & publicly guaranteed long-term debt 102,260 112,821 99,424 108,163 104,709 Official creditors 39,433 39,755 45,146 50,416 50,955 Multilateral 17,695 18,973 22,283 23,856 26,349 Bilateral 21,737 20,782 22,863 26,560 24,606 Private creditors 62,828 73,066 54,278 57,747 53,755 Banks 24,437 34,873 24,400 25,878 20,673 Bonds 11,106 12,616 13,941 14,601 12,294 Total debt service 15,756 18,445 18,435 20,655 21,728 Principal 10,260 11,527 11,209 13,502 14,134 Interest 5,496 6,918 7,226 7,153 7,594 Short-term debt 812 1,365 1,651 1,140 1,168 Ratios (%) Total external debt/gross national income 16.0 16.5 16.6 15.8 14.1 Debt-service ratiob 8.7 8.5 8.6 9.0 7.4 Short-term debt/total external debt 19.7 21.5 18.1 11.5 11.5 Concessional external debt/total external debt 14.5 12.3 17.4 19.2 18.7 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.

Reference table 22 Official development assistance (US$ m) 1996 1997 1998 1999 2000 Bilateral OECD 1,670.9 1,238.2 1,731.7 1,821.6 1,257.5 Germany 461.1 381.9 321.3 304.6 212.8 France 97.2 50.1 29.8 46.2 46.0 Austria 4.9 3.3 -2.5 -6.4 5.0 Multilateral 916.0 828.5 707.8 548.3 462.2 International Development Association 790.7 687.1 553.8 406.8 315.5 UN Development Programme 22.4 26.8 14.4 15.5 12.7 Total incl others 2,646.0 2,053.2 2,447.8 2,384.6 1,735.0 Memorandum item European Commission & EU states 763.5 575.4 499.7 516.7 434.6

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

Reference table 23 Position of China vis-à-vis BIS-reporting banks (US$ m; end-period) 1997 1998 1999 2000 2001 Assets 89,373 82,400 67,589 59,741 54,147 Liabilities 65,078 71,800 67,988 101,964 93,692

Source: Bank for International Settlements, BIS Quarterly Review.

Reference table 24 Foreign reserves (US$ m unless otherwise indicated; end-period) 1997 1998 1999 2000 2001 Foreign exchange 139,890 144,959 154,675 165,574 212,165 SDRs 602 676 741 798 851 Reserve position in the IMF 2,270 3,553 2,312 1,905 2,590 Total reserves excl gold 142,762 149,188 157,728 168,278 215,605 Gold 601 624 608 578 3,093 Gold (m fine troy oz) 12.7 12.7 12.7 12.7 16.1

Source: IMF, International Financial Statistics.

Reference table 25 Exchange rates (Rmb per unit of currency; annual averages) 1997 1998 1999 2000 2001 US$ 8.2898 8.2791 8.2783 8.2784 8.2770 HK$ 1.0709 1.0688 1.0666 1.0618 1.0608 ¥100 6.8600 6.3488 7.2932 7.6864 6.8075

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

Editors: Paul Cavey (editor); Graham Richardson (consulting editor) Editorial closing date: January 6th 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]