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Dilemmas of Reform in Jiang Zemin’s China, by Andrew J. Nathan, Zhaohui Hong, and Steven R. Smith (eds.)
10. Macroeconomic Issues and Policies
Western scholars have long wondered if there would be a major change, or even a setback in Chinese economic policies after the death of Deng Xiaoping. Such speculation has gradually faded as reform became more evidently irreversible. Indeed, the death of Deng on February 19, 1997, changed nothing in the current economy and economic policies. It is now widely expected that the economic reform will continue into the twenty-first century.
While few believe that China will return to central planning, most scholars agree that the road to a free-market economy will be bumpy. China has enjoyed rapid economic growth since 1978, when reform started, but it has also experienced high inflation, rising unemployment, deterioration in income distribution, failures in restructuring state-owned enterprises, and other problems. Whether China can continue its rapid growth in the long run is still uncertain; it depends on many factors, including the government’s skill in handling emerging difficulties. One of the most important requirements for growth is macroeconomic stability.
This chapter focuses on macroeconomic issues and policies in the post-Deng era. It first reviews economic events in the “soft-landing” period. This was the time when the current leadership started to play the dominant role in economic policymaking. Their practice in the period was an important preview of their current policies and the likely policy orientation in the future. Then the chapter examines the current debate among Chinese scholars over macroeconomic policies. Mainstream macroeconomic thought has shifted from the pro-growth ideology that was dominant during Mao’s Great Leap Forward period to the current emphasis on maintaining macroeconomic stability for sustained growth. A new bureaucratic and academic elite has matured, and its thinking is in line with official policy, both echoing and influencing official policies. Finally, the chapter discusses policy options. China’s future macroeconomic policies have particular significance as China’s neighbors are currently experiencing monetary and financial crises.
The Macroeconomic Policies in the “Soft-Landing” Period
The leadership responsible for the current and future economic policies was formed long before Deng’s death. Deng’s speech on acceleration of the reform and liberalization of the economy during his 1992 visit to Shenzhen, a special economic zone in southern China, was the last episode of his direct influence on economic policy. After that, he was seriously ill with Parkinson’s disease and unable to supervise daily decisionmaking. Economic policies hence were made by Vice Premier Zhu Rongji and his associates, the same people who constitute the current leadership. Their philosophy of macroeconomics has dominated economic affairs for the past five years and will continue to dominate macroeconomic affairs in the future.
The current philosophy of macroeconomics can be seen in practice during the five years from 1992 to 1997, which was known as the “soft-landing” period. This was a period in which the government exercised macroeconomic contraction but avoided a drastic decline in the GDP growth rate. The new leadership has distinguished themselves from the old generations of Deng and Mao in their training and knowledge of modern macroeconomics and in their skill in handling a market-oriented economy. The new leadership has emphasized macroeconomic stability for sustained growth. They are not as zealous as Mao or Deng about a high growth rate; they are more concerned with inflation and macroeconomic stability. Unlike Mao and his associates, the current leadership knows that macroeconomic stability is essential for sustained growth. Yet they pursue a cautious macroeconomic policy probably for a more important reason—they cannot afford any risk that would jeopardize political and social stability. For the same reason they are also afraid of a slowdown in the economy, which could cause widespread unemployment. That is why they adopted a “soft-landing” strategy to allow the economy to cool down during 1992–1995.
The Chinese economy became overheated shortly after Deng’s visit to special economic zones in Southern China in 1992. During this trip, Deng called for an acceleration of both economic growth and liberalization. Deng’s message spurred rapid economic growth and reform; nevertheless, at the same time, it loosened macroeconomic discipline. More than ten thousand new construction projects were launched. Money supply surged. The growth rates of currency in circulation (denoted by M0), currency and demand deposits (denoted by M1), and “broad money” (which includes M1 and quasi-money, denoted by M2) accelerated to 36.4 percent, 35.9 percent, and 31.3 percent, respectively (see Table 10.1). Fixed capital investment grew 44.4 percent from the previous year. 1 In July, observing that the economy was overheating, the central bank attempted to tighten credit but failed, largely due to pressure from local governments and the inability of the central banks to control local commercial banks, and other investment trust corporations. Overexpansion created shortages of construction materials, including steel, cement, and lumber. Accordingly, their prices rose dramatically: steel prices rose 80 percent and cement prices doubled. 2
| Table 10.1: Growth Rates of Money and Fixed Assets | ||||
| M0 | M1 | M2 | Fixed Assets | |
| 1991 | 20.2 | 24.2 | 26.5 | 23.9 |
| 1992 | 36.4 | 35.9 | 31.3 | 44.4 |
| 1993 | 35.3 | 38.8 | 37.3 | 61.8 |
| 1994 | 24.3 | 26.2 | 34.5 | 30.4 |
| 1995 | 8.2 | 16.8 | 29.5 | 17.5 |
| 1996 | 11.6 | 18.9 | 25.3 | 14.8 |
| 1997 | 15.6 | 22.1 | 19.6 | 10.2 |
| Source: From State Information Center, China Economic Information Network, www.cei.gov.cn. | ||||
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Note: M0 refers to currency in circulation. M1 includes M0 and demand deposits. M2 includes and quasi-money. |
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| Table 10.2: Macroeconomic Indicators of the Chinese Economy | |||
| 1995 | 1996 | 1997 | |
| GDP (billion yuan) | 5,848 | 6,789 | 7,345 |
| GDP growth rate (%) | 10.5 | 9.6 | 8.8 |
| Inflation rate (CPI, %) | 17.3 | 8.3 | 2.8 |
| Inflation rate (Retail Price Index, %) | 14.8 | 6.1 | 0.8 |
| Urban unemployment rate (%) | 2.9 | 3.0 | 3.1 |
| Money growth rate (currency, M0)(%) | 8.2 | 11.6 | 15.6 |
| Money growth rate (M1)(%) | 16.8 | 18.9 | 22.1 |
| Money growth rate (M2)(%) | 29.5 | 25.3 | 19.6 |
| Fixed asset investment growth rate (%) | 17.5 | 14.8 | 10.2 |
| Central government budget deficit (billion yuan) | -58.2 | -52.9 | -58.2 |
| Trade balance (billion U.S. dollars) | 16.7 | 12.3 | 46.2 |
| Current account balance (billion U.S. dollars) | 1.6 | 7.2 | 29.7 |
| External debt service ratio (%) | 7.3 | 6.7 | 7.3 |
| External debt/GDP ratio (%) | 15.5 | 14.3 | 14.8 |
| Foreign reserve (billion U.S. dollars) | 73.6 | 105 | 140 |
| Source: All data are from the most recent issue of the China Satistical Yearbook, except the money growth rates are from the State Information Center, China Economic Information Network, www.cei.gov.cn. | |||
Deng and Mao differed in their attitudes toward a modern, market-oriented, and open economic system. Deng accepted the modern market-oriented system because of his pragmatic philosophy, while Mao had rejected the modern economic system due to dogmatism. However, the two strongmen were similar in one aspect: their zeal for rapid growth. This was probably due to their strong aspiration to catch up to the West as well as their lack of economics training. They did not understand that an overheated economy is detrimental to long-term growth. The unbalanced growth from overinvestment could not be sustained in the long run. It would induce inflation and macroeconomic instability, thus eventually resulting in economic stagnation and decline. Mao’s Great Leap Forward movement in 1958 is an example of a short-run economic overexpansion that turned into an economic catastrophe.
It is now widely recognized that macroeconomic stability is indispensable for sustained growth. The new leadership is maturer than the older generations in this respect. As the inflation rate rose to 10.2 percent (the two-digit psychological barrier) in March 1993, the central government was alarmed. By mid-1993, the Politburo dismissed Li Guixian, the chairman of the central bank, for his failure to contain overinvestment and inflation, and appointed First Vice Premier Zhu to supervise macroeconomic policy.
Zhu immediately ordered a series of stabilizing measures. The first was monetary contraction, including contracting the money supply, increasing interest rates on loans, tightening credit and loans, and attracting savings by paying consumer price index (CPI) interest rates on saving deposits. The second measure was controlling the scale of investment, including reducing fixed asset investment, restricting construction investment, and scrapping new construction projects. The third measure was monetary and financial discipline. This included imposing strict regulations on local and regional capital fund-raising, reexamining and suspending various new financial institutions, and controlling the capital and cash holdings of all financial organizations. Most of these macroeconomic stabilizing measures were as conventional as those used by other countries in dealing with similar problems. Controlling the investment scale was somewhat indigenous because this involved the soft budget constraint behavior of state-owned businesses.
The macro contraction seemed to have had positive effects at the beginning of 1994. The inflation rate decelerated in February and this continued into May. Prices of construction materials and consumer durables even began to fall. In June, the government thought inflation was already under control and decided to raise the grain procurement price, a long-delayed step of price reform. Unexpectedly, inflation resumed as prices of grain and other food products rose quickly. The inflation rate surged to a record 27.7 percent in October. In August, the Politburo convened a special meeting, declaring fighting inflation to be the number-one task of the government.
The 1994 inflation was different in nature from that of 1992–1993. While the 1992–1993 inflation was due to monetary overexpansion, the 1994 inflation was due to restructuring from a previously existing price distortion. 3 In 1994, there was a macroeconomic contraction rather than expansion. The growth rates of money (measured by M1 in Table 10.1) and fixed asset investment fell by 12.6 and 31.4 percentage points, respectively, from those of 1993. Prices of construction material and consumer durables fell. Inflation in 1994 was due mainly to increasing food prices.
The leadership recognized the structural nature of the 1994 inflation. In addition to maintaining a tight money supply, the August meeting of the Politburo added other measures to control food prices. These policies included accelerating structural adjustment by increasing investment and other inputs in agriculture to raise food production, and accelerating industrial restructuring to increase productivity. In addition, the government also adopted administrative measures to control inflation. Price reforms were suspended and state enterprises and food stores increased supplies while holding prices steady. Food prices in free markets would be monitored and anyone guilty of price gouging would be penalized.
Under these measures, the inflation rate, based on the CPI, fell to 17.3 percent in 1995 and further dropped to 8.3 percent in 1996 (Table 10.2). The CPI and retail price index in September 1997 rose only 3.4 percent and 1.3 percent, respectively, from a year before. Meanwhile, the annual growth rate of the GDP was kept above 9 percent each year during the disinflation period. Hence, the government called it “a successful soft landing.”
During macroeconomic stabilization and the soft landing, the bureaucratic elite responsible for macroeconomic policy was also formed. These people are now making macroeconomic policies. In addition to Zhu, the chief figure, the group includes Dai Xianglong, who succeeded Zhu as president of the People’s Bank of China (PBC); Chen Yuan, vice president of the PBC; Zhu Xiaohua, vice president of the PBC; Zhou Xiaochuan, vice president of the Bank of China, and now the chief of the State Foreign Exchange Administration; and Lou Jiwei, director of the Macroeconomic Balance Bureau of the State Committee of Reform and Restructuring. Compared with the older generation of leaders and economists, these new figures are more professional and mature in their understanding and handling of a modern economy. They have modern macroeconomics backgrounds, understand the importance of macroeconomic stability, and are knowledgeable about the market system and international financial institutions. They can effectively communicate with officials and economists from the World Bank and International Monetary Fund (IMF). They advocate a cautious macroeconomic and monetary policy, which has become the mainstream not only among the bureaucratic elite but also among academic economists. This is a noticeable contrast to the situation under Mao and Deng.
During the soft-landing period, the central bank adopted a “moderately tight” monetary policy. Dai Xianglong, chairman of the People’s Bank, has emphasized that the central bank will continue this policy in the near future. 4 Other mainstream economists support his position. They have set a long-term goal of a GDP growth rate of around 8–9 percent and an inflation rate of 6 percent or lower. 5 Most Western economists would think that a growth rate of 8–9 percent would be too high and lead to inflation, yet many Chinese economists believe this high growth rate can be sustained with stable prices, since the GDP growth rate remained above 9 percent during the disinflation period. The World Bank’s view was just slightly different from that of the Chinese. The World Bank and IMF believed that a growth rate around 7–8 percent is more likely to be compatible with monetary stability. Despite the slight disagreement, the World Bank and IMF are cooperating quite well with Chinese bureaucrats and economists over the issues of maintaining macroeconomic stability and cautious monetary policy.
The Current Debate over the Economic Situation
The macroeconomic thought that dominated policy during the soft-landing period has recently been challenged. With an inflation rate close to zero, an increasing number of economists are suggesting that the central bank relax monetary supply to stimulate the economy in order to create more jobs. 6 Their arguments are based on signs of an economic slowdown, and they cite the following facts.
First, statistics show that the factory capacity utilization rate continues to slide. Two-thirds of factories report considerable idle capacity. An increasing number of factories have virtually no orders for their products. A survey of ninety-four major industrial products in 1995 showed that 65 percent have excess supply and only 35 percent have adequate demand. The products having adequate demand were mostly energy and chemicals. The situation worsened in 1996 and 1997. Shortages have been replaced by surpluses in the markets. These economists describe the situation as “insufficient effective demand.”
Second, the financial situation of the state-owned enterprises (SOEs) is deteriorating. At the end of 1996, 44 percent of the SOEs reported losses. The situation could be even worse because many enterprises misstated their condition so they could continue to apply for bank loans. Operation profits also declined in 1996 by 55 percent from the previous year.
Third, bad loans and nonperforming loans are estimated to be more than 20 percent of receivables in bank accounts. Arrears among enterprises are continuously increasing. An extensive survey of 380,000 enterprise entities in November 1996 found that unreasonable arrears exceeded more than 300 billion yuan. Excessive inventory amounted to more than 150 billion yuan.
Fourth, layoffs and unemployment rose. In September 1997, there were more than 80 million unemployed workers. Among them, 60 million were laid off by their companies. The official unemployment figure was 4 percent, higher than the previous level. However, if the underemployment and rural surplus labor were included, the unemployment rate was estimated to be 17 percent.
Finally, while disinflation is continuing, prices of some products have fallen. For instance, the price index of machinery and electric goods fell by 3.3 percent in March 1997.
Li Yining of Beijing University and others believe that these facts signal an economic recession. They argued that the recession will cause high unemployment and slow down the improvement of living standards. 7 They indicated that money supply (in M2) in the first half of 1997 rose only 19 percent from a year before, which was not only the lowest growth rate in the last five years but also lower than the planned target of 23 percent. The growth rate of fixed asset investment in the same period was 13.5 percent, which was also low compared with other years. Fan Gang, a prominent economist, said that these indicators imply that the macroeconomic policy is too tight, leading to insufficient effective demand. 8 These economists advocate increasing the money supply and capital investment scale. 9
In response to the challenges, PBC Chairman Dai, in a speech on August 25, reiterated that the central bank will continue the “moderately tight” monetary policy. He said that the central bank would control the overall scale of loans and credit. However, he left room for flexibility. He said that the bank would support structural adjustment and reform, and that banks should issue loans to profitable enterprises, including nonstate enterprises. The state banks should particularly support the key enterprises that are selected by the government for modern enterprise experiment.
Dai’s speech represents the official view of the macroeconomic policy. Qiu Xiaohua, chief economist of the State Statistical Bureau, holds the same view, 10 saying that macroeconomic policies in the coming years should not change substantially. The government’s general macroeconomic policy should still be “moving with stability, moderately tight, and tight but with certain flexibility.” 11 Like Dai, Qiu believes that macroeconomic policy should support structural adjustment and reform. Although the overall amount of investment should be controlled, the government should give preference to selected areas for investment projects. For instance, the government should allocate more funds for urban infrastructure and high technology.
The macroeconomic policy views of most mainstream economists are similar to those of government economists. Liu Guoguang, adviser to the Chinese Social Science Academy, objected to the pessimistic view represented by Li Yining. Liu said that the current economy is not “too cool” because the growth rate is still the highest in the world. The growth rate in 1997 exceeded the original target of 8 percent. M0, M1, and M2 in 1997 rose by 15.6 percent, 22.1 percent, and 19.6 percent respectively. None of these were low by international standards. So the general money supply is not as tight as Li and others have suggested. The current state of the buyer’s market and the excess supply of some products in the market are normal in a healthy market economy. Such indicators are good for restructuring and reform. The rise in unemployment was not simply caused by a “tight” money supply, but by institutional factors such as historical inefficiency, longtime overstaffing in SOEs, and existing structural distortion. Hence a loose monetary policy would only do harm to the economy. Liu thinks that the most urgent task of economic policies in the near future is accelerating institutional reform and structural adjustment. 12
Other mainstream economists, including many younger experts, support Liu’s argument. They contend that the current money supply is adequate and the investment scale should be controlled. They attribute the current economic difficulty to structural problems rather than macroeconomic contraction. 13
This debate over macroeconomic strategy has important implications about future policies and the prospect of the economy and should be watched carefully by Sinologists for the following reasons.
First, the debate is over macroeconomic expansion versus contraction. While this has been debated for decades, the current debate is fundamentally different from those of the past. During Mao’s era, the debate was of a political nature. Those who disagreed with Mao’s progrowth line were politically persecuted. During Deng’s era, the debate was of an academic nature and nonmainstream opinions were politically tolerated, but the mainstream was still generally progrowth. 14
Because growth was often placed above macroeconomic stability, the economy in Deng’s era was like a roller coaster, swinging up and down drastically. Now that debate over macroeconomic policy has been encouraged, the mainstream has shifted to the pro-stability school, which is consistent with the official line. Yet disagreement with the official line has been allowed. One example was that in 1994, Li Yining openly criticized Zhu’s macroeconomic contraction in a Hong Kong newspaper. Zhu was very angry with Li, but Li was still able to continue to voice his opinion.
Second, the nature of the debate has changed considerably. Both sides consist of professional economists who have good training in modern macroeconomics, use concepts based on theories commonly accepted by economists all over the world, and are knowledgeable about empirical experience in other countries. They all agree on the importance of macroeconomic stability. All are concerned with the consequences of unemployment due to economic slowdown. The key difference between them lies in how the economy may change and what the best strategy is. Mainstream opinion has preferred continuing a cautious policy to accelerate economic restructuring, while the minority view has preferred some macroeconomic expansion to fine-tune the economy in order to alleviate the pain of the rise in unemployment. The debate is much like that among alternative economic schools in the United States.
Third, although the debate takes place in academic circles, it is not isolated from the bureaucrats. In fact, the debate likely will influence the policies to be adopted by the government. Although the official line favors cautious policies, there are signs that the government is moving in an expansionary direction. For instance, although the central bank originally said that it planned no interest cut at the beginning of 1997, shortly after the news about the slowdown in economic growth in the third quarter was released, it cut the interest rate on October 23. The government is also accelerating approval of new projects. More money is being pumped into large state enterprises at a faster speed. The government also announced that it would lift the cap on loans made by the state-owned commercial banks, starting on January 1, 1998. 15 All these changes signaled that the leadership is accepting some points advocated by the minority side in the debate and is now moving in an expansionary direction.
Fourth, as leadership becomes more technocratic, there is no clear personnel line between academic economists and bureaucrats. There are frequent personnel exchanges between the two circles. For instance, influential economic officials Lou Jiwei and Wang Zhan were prominent academic economists before they took government posts. Disagreements in academic circles likely are the same among government economists. Contact between the two groups is more frequent than in Japan, where academic discussion has little influence on government economic decisions.
Therefore, debate among economists over macroeconomic policy will largely reflect the likely policies and should be followed closely.
The Effects of the Current Financial Crisis in Asia
The Asian financial crisis was the top economic event of 1997 and alerted the Chinese leadership to the potential for monetary and financial danger. The crisis began with the sharp devaluation of the Thai baht under speculators’ attacks in the foreign exchange market. Shortly after Thailand, the “Fifth Asian dragon,” experienced financial trouble, the crisis spread to other Asian countries, including Japan. It eventually led to the dramatic event of the near bankruptcy of South Korea, the eleventh largest economy in the world. The crisis was rather unexpected because it occurred in a region that had experienced continuous rapid growth for decades.
The only currencies that did not depreciate in the region during the crisis were the Hong Kong dollar and Chinese yuan. The yuan stood firmly for several reasons. The first is that the yuan is not fully convertible. The government restricts exchange conversion in the capital account. Second, China has a formidable foreign reserve of US$140 billion, the second largest in the world. The third reason is that China has low debt ratios in all categories according to international standards. However, the stability of the yuan does not mean that the Chinese financial system is risk-free. Certainly, the financial crises in South Korea and Japan have had a profound impact on the thinking of the Chinese leadership. South Korea did not open its financial market to foreign investors, and Japan had even larger foreign reserves and lower foreign-debt ratios. If these two Asian countries were not immune from financial crises, China cannot be either.
Indeed, a financial crisis in China is very likely if the government does not take precautions. A crisis would more likely be indigenously produced rather than the result of an attack from speculators in the foreign exchange market. Three serious problems exist in the Chinese financial market.
First, the current monetary and financial system is underdeveloped and deficient. Transactions lack efficient supervision and monitoring. Formal and informal financial institutions exist that conduct banking transactions but are not monitored by the authorities. Several cases have occurred recently in which officials illegally used bank reserves to speculate in the stock and forward markets. 16
Second, it is estimated that nonperforming and bad loans accounted for about 20 percent of the total outstanding loans of state-owned banks. Considering that the percentage in the South Korean banks is only about 17 percent, Chinese banks, according to Western standards, are virtually insolvent. These bad or nonperforming loans mainly consist of delinquent loans from SOEs and unsold real estate projects.
Third, the rapid increase in money supply has resulted in a large amount of “hot money” in the economy. The ratio of M2 to GDP exceeded 1.1 to 1, which is much larger than that in other comparable economies. The magnitude of this indicator implies that much of the “hot money on deposit” is in the hands of a volatile public. Financial difficulty could easily lead to a crisis of confidence and therefore to a bank rush and panic purchasing.
The government is very much aware of the danger. In November 1997, the Central Committee of the Communist Party and the State Council convened a three-day conference on preventing financial crises. The main focus was said to be “to make concrete arrangements for resolving major issues in financial reform and development.” 17
The conference claimed that “as China continues to develop a market economy, financial activities penetrate every part of society, and the economy and the financial sector play an increasingly important role in macro-control. . . . Safe, highly-efficient and stable financial operations are essential for the sustained and healthy development of the national economy.” 18 It acknowledged problems such as the inability of the financial system to meet the needs of economic reform and development under the new situation, imperfections in the legal system, weak financial supervision, and relative confusion in the financial sector.
The proposed solutions for the financial problems and for speeding up the financial reform include the following: 19
The supervisory function of the central bank should be intensified. The pace of commercialization of state-owned commercial banks should be accelerated. A multi-tier system of financial institutions should also be established.
The financial sector must be ruled by law. Financial order must be safeguarded and financial controls consolidated. The government must deal sternly with criminal activities in the financial sector.
The transformation of the economic system should be speeded up to create a favorable environment for financial operations, especially reforms of state-owned enterprises.
The financial sector must improve its service to better serve the reforms and development. Financial reforms and solving financial problems should be accelerated in the current good macroeconomic situation.
Financial laws and policies should be publicized and society made aware of financial risks. More qualified people should be trained to meet the financial reform and development needs.
These decisions show how the Asian financial crisis has influenced future macroeconomic policy in two directions. Reform in the domestic financial and banking system and in state-owned enterprises will be accelerated. Also, the government will be more cautious in its monetary and foreign exchange policies, slowing down the openness of the capital market to match that of the rest of the world.
The government recently announced its macroeconomic policies at the annual Central Economic Conference by the Central Committee and the State Council in December 1997. 20 The policies specified in the platform are consistent with this analysis. The polices include the following:
“Based on the premise of structural optimization, China should maintain moderately rapid overall economic growth and an appropriate rate of growth in investment, exports and consumption, and avoid major fluctuations in economic development”;
The government should avoid “any factors which could spark inflation and the use of economic and legal means to establish a price regulation system to maintain a relatively low inflation rate”;
“The relationship of foreign exchange, trade, investment and debt must be properly handled to maintain an appropriate level of foreign exchange reserves and ensure the balance of international payments”;
“The conference voiced great concern about the financial sector, and urged a speeding up of the financial reform needed to establish a modern financial system. The supervisory role of the central bank must be strengthened, while existing State-owned commercial banks should be transformed into true commercial banks.” 21
The first three points are consistent with what was practiced during the soft-landing period and what is being done now. The last two points reflect new concerns arising from the Asian financial crisis. The platform largely summarized the likely policies of the near future.
Outlook for Macroeconomic Policy and Concluding Remarks
The above discussion has summarized the background and philosophy of the economic policymakers. Macroeconomic policies and actions in the future will shift from previous practice, as the leadership develops policies consistent with practices in other countries, taking into account the special circumstances of China.
But the new leadership and the academic elite, although being more familiar with modern economics concepts than the older generation, will not simply follow the Western textbook on economics. They face concrete and practical problems and must consider unique institutional circumstances and devise practical, indigenous solutions. For instance, they have to incorporate the structural problems in formulating macroeconomic policy. From time to time, they may have to resort to administrative measures for solving problems rather than relying on market means. These measures may not be justified by Western standards, but may be functional in China, a transitional economy moving from the old planning system to a market system.
Monetary policy will continue to be “moderately tight,” which means that it will be cautious. Overexpansion such as occurred in 1992 will not be allowed. Macroeconomic policies will be fine-tuned according to the rates of inflation and unemployment. Structural adjustment and job creation will be priorities in the allocation of loans and credits. Financial and banking reform will be accelerated. In 1998, money supply and capital investment will be more expansionary than in 1997 in order to stop further deceleration of growth and to create more jobs.
Economic performance will determine macroeconomic policies. Economists have set a goal of a GDP growth rate of 8–9 percent with an inflation rate of 4–6 percent. Economists will closely monitor the unemployment rate, hoping that it will not further climb above the 4 percent level. They expect economic growth to create enough jobs to absorb the majority of laid-off workers in urban areas and to reduce the surplus labor in rural areas. A growth rate of 9 percent may not be acceptable from the point of view of the central banks in developed countries. For instance, Alan Greenspan, chairman of the Federal Reserve Board in the United States, would think that a growth rate of 9 percent would inevitably cause inflation. But, based on their own experience, Chinese leaders think a 10 percent growth rate with price stability is feasible, although they do not like to live with a growth rate of below 7 percent.
However, if the GDP growth rate falls below 7 percent, unless there is high inflation, the government will seek stimulus measures. This can be surmised from the recent changes in the central bank’s attitude toward expansion, as previously discussed. Macroeconomic stimulus measures will include increases in money supply and fixed asset investment. These are equivalent to the expansionary monetary and fiscal policies practiced in the West, although the implementation methods will be adapted to the Chinese situation. The role of the Open Market Operation will increase because of the immaturity of the securities market in China. Allocation of credit and loans will be heavily influenced by the government, though the leadership has reiterated that it will rely more on market means. Loans and credits will be channeled, by market or other means, to selected areas such as infrastructure, environmental protection, agriculture, and key state-owned enterprises.
In sum, the bureaucratic and academic economists are reform-minded and pragmatic. Reform in the monetary and financial system will continue and accelerate. The new leadership has consistently adopted cautious macroeconomic policies with flexibility and will continue to do so.
Endnotes
Note 1: es 1. China National Statistics Bureau, Zhongguo tongji nianjian, 1993 and 1994 [The China Statistical Yearbook, 1993 and 1994] (Beijing: Zhongguo tongji chubanshe, 1993 and 1994). Back.
Note 2: Gene Hsin Chang and Jack Hou, “Structural Inflation and the 1994 ‘Monetary’ Crisis in China,” Contemporary Economic Policy, July 1997, pp. 73–81. Also see Gene Hsin Chang, “What Caused Hyperinflation at Big Bang: Monetary Overhang or Structural Distortion?” China Economic Review 6 (1995): 137–147. Back.
Note 3: Chang and Hou, “Structural Inflation,” pp. 73–81. Back.
Note 4: Speech on August 15, reported by the State Information Center, August 25, 1997. Back.
Note 5: State Information Center, “Dui jingji ‘ruan zhaolu’ de fenxi he sikao” [“Analysis and Reflection of the Economic Soft-Landing”], Jingji redian fenxi (Economic Hotspot Analysis), October 20, 1997. Back.
Note 6: Li Yining, “Braking Is Easy but Starting Is Difficult.” Reported by the State Information Center, China, available at Webpage: www.cei.gov.cn, August 18, 1997. Back.
Note 8: Beijing National Economic Research Institute and China Economic Reform Research Foundation, “Zhongguo hongguan jingji fenxi” [“Analysis of the Chinese Macroeconomy”] (Beijing: available at webpage, www.cei.gov.cn, October 1997). Back.
Note 9: Yang Qixian, “Shidang zengjia touzi guimo” [“Properly Increasing Investment Scale”], Jingji redian fenxi (Economic Hotspot Analysis), August 18, 1997. Back.
Note 10: Jingji redian fenxi (Economic Hotspot Analysis), September 15, 1997. Back.
Note 12: Liu Guoguang, “Muqian jingji bing bu taileng” [“The Current Economic Status Is Not Too Cool”], Jingji redian fenxi (Economic Hotspot Analysis), September 8, 1997. Back.
Note 13: See Yang Zaiping, “Baochi ruan zhaolu de hao shiduo” [“Keeping the Good Momentum of ‘Soft-Landing’”], Jingji redian fenxi (Economic Hotspot Analysis), October 20, 1997; Ji Hong, “Jixu kongzhi touzi guimo” [“Continue to Control Investment Scale”], Jingji redian fenxi (Economic Hotspot Analysis), September 8, 1997. Back.
Note 14: Strictly speaking, progrowth thinking dominated during the period from 1978 through 1992, but Deng was the paramount leader of China from 1980 to 1997. In the final four-year period of Deng from 1993 to 1997, however, policy was made by Zhu. As discussed previously, Zhu adopted a cautious policy. Back.
Note 15: News Release, CCTV (China Central TV Station), December 25, 1997. Back.
Note 16: China’s State Information Center, Meiri baodao (Daily Report), December 11, 1997. In February 1995, the largest security company, Shanghai Wanguo Securities Company, went bankrupt in an illegal government security speculation. Back.
Note 17: China Daily, November 21, 1997, p. 1. Back.
Note 20: See China Daily, December 12, 1997, p. 1. Back.
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