China Mongolia · COUNTRY PROFILE China Mongolia Our quarterly Country Report on China and Mongolia analyses current trends. This annual Country Profile provides background political

COUNTRY PROFILE

China

MongoliaOur quarterly Country Report on China and Mongoliaanalyses current trends. This annual Country Profileprovides background political and economic information.

1996-97The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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ISSN 1352-089X

December 20, 1996 Contents

China

3 Basic data

4 Political background4 Historical background9 Constitution and institutions

11 Political forces14 International relations and defence

16 The economy16 Economic structure18 Economic policy29 Economic performance31 Regional trends

33 Resources33 Population34 Education35 Health36 Natural resources and the environment

36 Economic infrastructure36 Transport and communications37 Energy provision38 Financial services

40 Production40 Industry42 Mining and semi-processing43 Agriculture and forestry45 Construction

46 The external sector46 Merchandise trade51 Invisibles and the current account52 Capital flows and foreign debt54 Foreign reserves and the exchange rate

56 Appendices56 Sources of information57 Reference tables

1

EIU Country Profile 1996-97 © The Economist Intelligence Unit Limited 1996

Mongolia

69 Basic data

70 Political background70 Historical background71 Constitution and institutions71 Political forces72 International relations and defence

73 The economy73 Economic structure74 Economic policy76 Economic performance78 Regional trends

78 Resources78 Population79 Education79 Health79 Natural resources and the environment

80 Economic infrastructure80 Transport and communications81 Energy provision82 Financial services82 Other services

83 Production83 Industry83 Mining and semi-processing84 Agriculture and forestry85 Construction

85 The external sector85 Merchandise trade87 Invisibles and the current account87 Capital flows and foreign debt89 Foreign reserves and the exchange rate

90 Appendices90 Sources of information90 Reference tables

2


China

Basic data

Land area 9,561,000 sq km

Population 1,211 million (end-1995 estimate)

Main towns Population in million, end-1995 estimate

Chongqing 15.2 Tianjin 8.9Shanghai 13.0 Shijiazhuang 8.5Beijing (Peking) 10.7 Wuhan 7.1Chengdu 9.7 Guangzhou (Canton) 6.5

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

Weather in Shanghai(altitude 7 metres)

Hottest months, July and August, 23-32°C (average daily minimum andmaximum); coldest month, January, 1-8°C; driest month, December, 36 mmaverage rainfall; wettest month, June, 180 mm average rainfall

Language Mainly Putonghua, based on northern Chinese (the Beijing dialect known asMandarin); local dialects and languages are used

Weights and measures The metric system is used alongside certain standard Chinese weights andmeasures, of which the most common are:

1 catty or jin=0.5 kg 2,000 catties=1 metric ton (approximately)1 picul or dan=50 kg 20 piculs=1 metric ton1 mu=0.0667 hectare 15 mu=1 shang=1 hectare

Currency 1 yuan/renminbi (Y/Rmb)=10 jiao=100 fen. Average exchange rates in 1995:Rmb8.35:$1; Rmb13.2:£1; exchange rates on December 20: Rmb8.3:$1;Rmb13.83:£1.

Fiscal year January-December

Time Zone 1 (Urumqi) 6 hours ahead of GMT, zones II, III and IV (Chongqing,Lanzhou, Beijing, Shanghai, Harbin) 8 hours ahead of GMT, 9 hours ahead ofGMT during Beijing summer time, mid-April to mid-October

Public holidays January 1, Chinese New Year (three days), May 1, October 1, 2

China: Basic data 3


Political background

Historical background

5,000 years of history China claims to be the world’s oldest continuous civilisation, with, its leaderslike to intone, 5,000 years of history. It is certainly a civilisation of remarkablecontinuity, many of whose features have endured ever since the country wasfirst unified by the fearsome founder of the Qin dynasty, the first recordedemperor, Qin Shih Huang Di, in 221 BC. Traditional Chinese historians de-scribed subsequent history as following a “dynastic cycle”. Over a period, some-times lasting several hundred years (the dates of the last dynasty, the Qing, were1644-1911 and of its predecessor, the Ming, 1368-1644), a dynasty would ex-pand, flourish, decline and finally lose power, often in an insurrection sparkedby a discontented peasantry, or in a foreign invasion. There would be periods ofwarlordism and disunity. The last imperial dynasty, the Qing, was “foreign”,composed of a Manchu nobility from the north-east, whose language and cul-ture differed from that of the majority Han Chinese population. But like theMongol Yuan dynasty (1276-1368) before them, the Qing became assimilated.In 1911 the dynasty collapsed after a long period of decline. The empire wasundermined by a moribund political and economic system further weakened bylong and debilitating internal revolts and by the depredations of foreign powersseeking to carve out spheres of interest in China.

The Communists’ rise topower

The republic established in 1911 likewise proved unable to preserve China’sterritorial integrity. Centrifugal pressures emerged, and by the early 1920s thecountry had disintegrated into a patchwork of warring fiefdoms. The countrywas united by the Nationalist Party (the Kuomintang, or KMT) a bourgeoisparty founded by Sun Yatsen and then led by Chiang Kai-shek, which wasreorganised in 1924 along Leninist lines. A united front, formed in 1924 withthe infant Chinese Communist Party (CCP), ended in 1927 when the KMTturned against the CCP. The CCP, after a few failed attempts at urban insurrec-tion, became predominantly a rural, peasant-based party. It survived severalencirclement attempts in its remote rural fastnesses in southern China, and in1934-35 trekked across vast distances to a new base in Yan’an, in Shaanxiprovince in the north-west—the famous “Long March”. It was during thisarduous and dangerous journey that Mao Zedong established his position asthe supreme leader of the CCP, a position which he retained until his death in1976. Japan’s annexation of Manchuria, in the north-east, in 1931 was fol-lowed by full-scale invasion in 1937. A second, uneasy united front, imposedon Chiang Kai-shek by his mutinous troops in December 1936, saw the CCPand the KMT combine to resist Japanese aggression. The Japanese surrender in1945, however, was the prelude to full-scale civil war in 1946. The KMT wasdivided and corrupt, its troops ill-disciplined and its support base eroded byrampant inflation and corruption. The US-backed KMT forces were routed withimprobable ease by armies of the worse-equipped, but well-disciplined, CCP. In1949 the KMT established a government-in-exile on the “unliberated” islandprovince of Taiwan, and on October 1 Mao Zedong proclaimed the founding ofthe People’s Republic of China, with Beijing as its capital.

4 China: Historical background


Important recent events

June 1989: The Beijing Tiananmen Square massacre of anti-government protesters.

November 1989: Deng Xiaoping retires from his post as chairman of the Central

Military Commission.

January-February 1992: Deng goes on his “southern tour” to launch a new cam-

paign for economic reform.

August 1992: The 14th Communist Party National Congress adopts platform of

“socialist market economy”.

March 1993: The National People’s Congress re-elects Li Peng as prime minister for

five years; Jiang Zemin becomes head of state as well as party leader.

November 1993: Jiang Zemin meets the US president, Bill Clinton, in Seattle, and the

meeting signals a shift in US-Chinese policy from sanctions to “engagement”.

May 1994: Mr Clinton decides to renew, unconditionally, China’s Most Favoured

Nation (MFN) trading rights and no longer to link their annual renewal to the issue of

human rights.

November 1994: Jiang Zemin visits Vietnam, the first Chinese head of state to visit

that country since their border war in 1979. Territorial disputes appear to take second

place to the development of economic links.

February 1995: The president of the Philippines, Fidel Ramos, accuses China of

stationing armed vessels in an area of the Spratly islands in the South China Sea. Parts

of this area are claimed by China, Taiwan, Vietnam, the Philippines, Malaysia and

Brunei.

May 1995: China is outraged at the US decision to allow the president of Taiwan, Lee

Teng-hui, to make a private visit to Cornell University, from which he has a doctorate.

Relations with the USA and with Taiwan come under severe strain. China’s perceived

assertiveness in the Asia-Pacific region and its ambitious plans to upgrade its military

capacity cause widespread anxiety.

September 1995: A more pragmatic foreign policy line appears to be in the ascen-

dant, manifest, in August, in a wish to improve relations with the USA. The deportation

of the Chinese-born US citizen, Harry Wu, on conviction of spying (a capital offence),

signals a softer approach to the outside world and is interpreted as a sign of Jiang

Zemin’s enhanced influence. The publication of a Proposal for Formulating the Ninth

Five-Year Plan at the fifth plenary session of the 14th Central Committee signals a

renewed commitment to gradual reform.

Early 1996: China’s truculence in the run up to the first ever democratic elections in

Taiwan, which includes the holding of military exercises using live ammunition, causes

widespread anxiety about China’s intentions. Jiang Zemin continues to strengthen his

hold on power by intensifying a drive against corruption and crime and appointing his

supporters to key positions in the military.

Late 1996: Relations with the USA and Taiwan show signs of improving, although not

sufficiently to allow China’s entry to the WTO.

December 1996: South Africa announces the intention to switch recognition from

Taiwan to China.

Mao and internal partystruggles, 1949-76

The “Long March” generation of senior communists has played the major rolein national politics, and the history of the period since 1949 has to a largeextent been that of their personal battles for power, for the favour of Mao

China: Historical background 5


Zedong, and for differing visions of socialism. The personality of Mao, whotowered over his colleagues and sought to gather absolute power into his ownhands, weakened, some would argue fatally, the institutional basis of the party-state, because it precluded the establishment of a secure succession mechanismor consensus-building system. The struggle was at its most intense during theCultural Revolution of 1966-69, when Mao, seeing his own influence erodedafter the disastrous Great Leap Forward and the famine in 1959-60, turned tothe “masses” to overthrow his rivals in the party hierarchy, with the ideologicalpretext of pursuing his own millenarian brand of egalitarian socialism againstthe forces of pragmatism and revisionism. The chaos of the CulturalRevolution left the army for a while as the only viable political institution andMao turned to the military to restore order in the early 1970s. After the deathin 1976 of both Mao and his widely respected lieutenant, the prime minister,Zhou Enlai, senior military figures moved quickly to arrest the most prominentof Mao’s “leftist” colleagues, including his wife and the other members of the“Gang of Four”.

The 1980s: economic butnot political change

Mao’s designated successor, Hua Guofeng, presided over a period of normalis-ation, which was marked by the return to power of Deng Xiaoping, the mostsenior of the purged pragmatists to survive the Cultural Revolution. InDecember 1978, at a watershed meeting of the party’s 11th central committee,Deng and his supporters achieved predominance over Hua Guofeng and other“leftists”. In 1980 the Cultural Revolution was reassessed as a national disasterand Mao himself was deemed to have been only 70% “good”.

Deng has never taken the top positions for himself. He has sought to ensure thecontinuity of the reforms that he instituted by ruling through a succession ofyounger men who share his belief in the priority of economic advance overpolitical purity. But such was the damage done by the later Mao years to theinstitutions of party and state that Deng’s personal prestige has been necessaryto maintain the pace of reform and secure the all-important acquiescence ofthe army. Political legitimacy in China depends on personal prestige and noton the holding of office. This is why Deng Xiaoping’s repeated efforts to stepdown definitively and leave power to a designated successor failed and whythere has been speculation about the durability of the system, even the integ-rity of the country, after his death. Tensions between “reformers”, like Deng,and “conservatives” worried about the dilution of socialist orthodoxy broughtby greater economic liberalism, have been a persistent feature and Deng’spersonal imprimatur has at times been necessary to push forward the reformprocess. One reason for Deng’s prestige, especially with the army, is that he wasnever seen as anything other than orthodox politically. The harsh crackdownon dissidence after the Democracy Wall movement of late 1978 and early 1979had outlived its usefulness made it clear that Deng was committed to themaintenance of order, which those who engage in elite politics see as synony-mous with the continued monopoly on power of the CCP.

The Tiananmen Squaremassacre

Market-oriented reforms and a rapid expansion of foreign trade and links withdeveloped countries inevitably brought demands for political change. To theChinese elite such demands spelled inevitable chaos and were, as such, tanta-mount to sedition. Deng Xiaoping’s first two chosen party leaders were ousted



after large-scale street protests—Hu Yaobang in 1987, and Zhao Ziyang in 1989,when mass, student-led demonstrations countrywide were ended only by the mas-sacre of unarmed civilians around Tiananmen Square, Beijing, on June 4, 1989.As party leaders, the two men had to take the blame for the failure of communistindoctrination.

The 1990s: Marx and themarket

The 1989 massacre was followed by a period of intense political repression, andan obsession with the need for “stability”. However, the collapse of commu-nism in the Soviet Union and elsewhere in eastern Europe led to a rethink. Themain danger to the CCP’s rule, it was argued, was not the pressure for democ-ratisation that economic reform had brought, but rather that as a socialistregime it might fail to achieve healthy and rapid economic growth. In 1992Deng, then aged 88 and in theory fully retired, re-emerged in a famous tour ofthe rapidly growing areas of the south to launch a new campaign—presumablyhis last—for faster and bolder economic reform. As in the mid-1980s, the stressin political rhetoric was no longer on the importance of Marxist orthodoxy buton the need to achieve rapid economic growth by whatever means seemedmost appropriate.

Deng’s latest front-man as party leader is Jiang Zemin, a former mayor ofShanghai, who has proved rather more adept at projecting himself as primusinter pares than he seemed likely to do when first elevated in late 1989. By thetime Deng turned 92 in August 1996, Jiang combined the key roles of partyleader, state president and chairman of the Central Military Commission.

The collective leadership:cracking down on

corruption

Jiang now heads a collective leadership; at its apex are the prime minister, LiPeng, the chairman of the National People’s Congress and of its standingcommittee, Qiao Shi, and the senior deputy prime minister, Zhu Rongji. Alsoon the key Standing Committee of the Politburo are Li Ruihuan, the chairmanof the Chinese People’s Political Consultative Conference (CPPCC, a pseudo-democratic advisory body which incorporates the few non-communist polit-ical organisations allowed), and the slightly younger Hu Jintao, a formergovernor of Tibet and now president of the Central Party School, who special-ises in matters doctrinal. Still representing the military on the standing com-mittee is the aged Liu Huaqing ( born 1916), who is co-vice chairman of thecentral Military Commission.

Over the last couple of years Jiang Zemin has managed to have his protégés andassociates promoted to senior positions in the People’s Armed Police (PAP) andthe military. At the 1995 meeting of the National People’s Congress he was ableto secure the promotion to the rank of vice-premier of Wu Bangguo (formerlyparty secretary of Shanghai) and Jiang Chunyun (formerly party secretary ofShandong), and place them in charge of overseeing industry and agriculturerespectively. There was some opposition, especially to the promotion of JiangChunyun, and there have been mutterings about Jiang Zemin’s “Shanghaiclique”. Jiang has apparently responded to this by forming a closer alliance withQiao Shi, whose own protégé, Wei Jianxing, was elevated to the position ofBeijing party secretary on the political demise of the previous incumbent. LiPeng is due to step down from his position as premier in 1998 when his secondfive-year term expires, or possibly earlier, as his health is not good; his successor

China: Historical background 7


is likely to be Qiao Shi or another figure with a good working relationship withJiang Zemin.

The two men have collaborated closely in a campaign against corruption in theparty and lawlessness in society that has dominated the political atmosphere in1995-96. Corruption is widely believed to run wide and deep within the partyand the fact that only a few high level officials (most notably, the secretary ofthe Beijing municipal committee, Chen Xitong) have been exposed as corrupttends to confirm the cynicism with which much of the population regards theparty and even the conduct of politics. Attempts are now being made to rein-vigorate the CCP and to stiffen its ideological sinews by means of nationwidecampaigns which, in the late 1990s after nearly 20 years of reform, have acurious anachronistic ring.

If the call for renewed ideological purity rings hollow with most Chinese, thereis no doubt that they are concerned about crime and corruption, especiallywhen the privileged abuse their positions. Public executions and purges, espe-cially of minor party functionaries, can be expected to continue and even toincrease as the regime seeks ways to renew its mandate.

The army: the guarantorof party rule

Notable for his continued presence on the Politburo and the Central MilitaryCommission is the aged Liu Huaqing (80). The military have reportedly resistedattempts by Jiang to replace him on these bodies with one of Jiang’s own allies.Although the armed forces stand guarantor to the party, there is still unease inthe People’s Liberation Army. Firing on unarmed civilians in 1989 was anunwelcome task; the army worries about its relative technological backward-ness. Jiang Zemin does not and may never command the degree of personalauthority over the military as would a veteran of the liberation war. The rel-ationship between the party-state and the armed forces has therefore changed.Jiang Zemin shows an eagerness to project himself as the leader of the armedforces; rising defence budgets and the war games played in the Taiwan straits inearly 1996 testify to this desire and perhaps suggest that Jiang has not yet beenaccepted as the sole supreme leader.

The collective leadership Rumour has it that Jiang Zemin may use the occasion of the 15th CommunistParty Congress, due to take place in late 1997, to have himself elevated to theposition of chairman of the CCP, a post that has not been filled since the deathof its last incumbent, Mao Zedong. It was abolished in 1980 to discourageexcessive concentration of power. Even if Jiang Zemin has the nerve to take thishallowed title, there is no mistaking the fact that the leadership over which hepresides is collective. On the one hand the consensus-building which a collec-tive leadership makes necessary could be seen as impeding the decision-makingprocess, especially when difficult choices must be made. On the other hand, tothe extent that a collective leadership involves the putting in place of an insti-tutional rather than a purely personal base for the exercise of collective author-ity, it must be seen as a step forward in the process of building the institutionsneeded to ensure stability. Even if the Chinese political system cannot survivethe reform process in the long run, there are signs that it is maturing. JiangZemin may be China’s Brezhnev; China’s Gorbachev has yet to emerge.



Constitution and institutions

The constitution is subjectto frequent changes

The constitution is essentially descriptive rather than normative and has beensubject to frequent revision. The latest version, promulgated in 1982 andamended in 1988, describes China as a socialist state of the dictatorship of theproletariat led by the working class, and based on an alliance of workers,peasants and intellectuals. Despite much talk, and some limited action on“political reform” during the 1980s, the basic political structure remains that ofan authoritarian one-party state.

Provinces, SEZs andautonomous regions

China is divided into 22 provinces, five autonomous regions and threemunicipalities. The provinces range from the most populous, Sichuan, with113 million people, to its vast neighbour Qinghai, with just 4.8 million. Themost recent adjustment was in 1988, when Hainan Island was hived off fromGuangdong province on the south coast to become a separate province, as wellas a Special Economic Zone (SEZ). Four other SEZs had been established in 1980on the southern seaboard. The SEZs enjoy considerable financial autonomy,and offer a more liberal climate for foreign investors, although their role wassomewhat undercut by the opening in 1984 of 14 more “coastal cities” withsimilar incentives for foreign investment, and, in the 1990s, a cut-throat com-petition for foreign investment by localities all over China, whether or not theyhad been designated for the task by Beijing. The Autonomous Regions haveno more autonomy than provinces. The names, however, recognise the pre-revolutionary predominance of non-Han ethnic groups in Guangxi (Zhuang,an ethnic group in south-west China), Tibet, Xinjiang (Turkic, UighurMuslims), Inner Mongolia (Mongols) and Ningxia (Chinese, Hui Muslims). Themunicipalities of Peking, Shanghai and Tianjin are provincial-level entities.

Subprovincialadministration

Below the provincial level, administration is further subdivided into prefectures,counties and townships, and within cities, into districts. The “communes”established during the Great Leap Forward of 1958 as the country’s basic admin-istrative unit have been disbanded. In some places, however, the communes’subdivisions—"production brigades" comprising several villages, and“production teams”, of part of or an entire village—still function within the newframework of contract responsibility systems. By the end of 1995 there were124 rural prefectures, 210 prefecture-level cities, 427 county-level cities and2,143 counties. Excluding the three municipalities with the status of provinces,there were 637 cities and 706 districts, the urban administrative subdivision.The next major administrative changes will be the incorporation of: the SpecialAdministrative Region of Hong Kong, when it reverts from British to Chinesesovereignty in 1997; Macau, which is to be handed back by Portugal in 1999;and Taiwan, to be “reunified” soon.

The legislature In theory, the supreme organ of state power is the National People’s Congress(NPC). It passes laws and treaties, nominates the executive and approves theconstitution. It has roughly 3,000 members, indirectly elected from lower-levelPeople’s Congresses every five years. It meets in a plenary session of two tothree weeks once a year, usually in March-April. Between these sessions manyof its powers are vested in a Standing Committee of around 200 members,

China: Constitution and institutions 9


which drafts laws and handles NPC business in the time when it is not insession. Traditionally, as in most socialist party states, the legislature, like therest of the state apparatus, has been subordinate to the party. The NPC is noexception and has been a rubber stamp, approving decisions made by theCommunist Party. But since the advent of Qiao Shi as chairman of the NPCand its standing committee in 1993, it has shown more muscle. Delegates havetaken to questioning the prime minister more closely when he delivers theannual address to the full session and it was notable that there was oppositionto the elevation of Jiang Zemin’s two protégés to the rank of vice-premier inMarch 1995.

Under Deng Xiaoping, a measure of direct electoral democracy has been intro-duced at the lower-level People’s Congresses, at the township (or district) andcounty levels. There are triennial elections. In theory, any candidate can standif nominated by ten voters, and there have to be between 30% and 50% morecandidates than seats. In practice, however, all candidates are required to sup-port the leading role of the Communist Party.

Main political figures

The Politburo Standing CommitteeJiang Zemin: born 1926; president, CCP general secretaryand chairman of the Central Military Commission. Ideologi-cally conservative but pragmatic as regards economic and for-eign policy.Li Peng: born 1928; prime minister, studied in the SovietUnion. Conservative and unpopular.Qiao Shi: born 1924; chairman of the National People’sCongress; reported reformist with a background in the CentralCommission for Discipline Inspection.Li Ruihuan: born 1934; Chairman of the Chinese People’sPolitical Consultative Conference (CPPCC), the umbrellaorganisation that provides democratic window dressing to thedictatorship of the CCP. Reputed reformist and one of thepossible contenders to succeed Li Peng as premier.Zhu Rongji: born 1928; deputy premier. Economic reformistand political pragmatist, popular with the urban middleclasses.Hu Jintao: born 1942; former party boss in Tibet. Youngestman at the top.

Vice premiersZhu Rongji: (see above).Zou Jiahua: born 1926; chairman of the National MineralResources Committee; vice chairman of the Three Gorges Pro-ject Construction Committee; head of the Leading Group forNuclear Power Plants; Politburo member.Qian Qichen: born 1928; head of the foreign ministry.Li Lanqing: born 1932; head of the National Leading Groupfor Work Concerning Foreign Capital and the Leading Group

for Cracking Down on Smuggling; Politburo member.Wu Bangguo: born 1941; Politburo member; responsibilityfor industry.Jiang Chunyun: born 1930; Politburo member; responsi-bility for agriculture.

Central Military Commission (Party and State)Chairman: Jiang ZeminVice chairmen: Admiral Liu Huaqing; General Zhang Zhen(born 1914), Politburo alternate (PA); General Zhang Wannian( born 1928), PA; General Chi Haotian, Minister of Defence; PA

OthersHuang Ju: served with Wu Bangguo as mayor of Shanghai;promoted to Politburo in 1994 and succeeded Wu Bangguo assecretary of Shanghai Municipal CCP. Protégé of Jiang Zemin.Wei Jianxing: born 1931; protégé of Qiao Shi; succeededChen Xitong as secretary of Beijing Municipal CCP Committeeon the latter’s disgrace in 1995. Politburo member, previouslysecretary of the Central Commission for Discipline Inspectionof the National People’s Congress (NPC).Fu Quanyou: Central Committee member. Appointed toCentral Military Commission in 1992, chief of general staff ofthe People’s Liberation Army (PLA) in 1995.Zhang Wannian: PLA general and ally of Jiang Zemin;replaced Yang Baibing as head of the General PoliticalDepartment of the PLA in 1993; recently promoted to vice-chairman of the CMC; expected to succeed Liu Huaqing onthe Politburo.

10 China: Constitution and institutions


The State Council The highest organ of state administration is the State Council, which is ineffect the cabinet. Its composition is decided by the NPC, acting on recom-mendation from the Communist Party. It is headed by a prime minister, whoseterm is in theory concurrent with the five-year life of the NPC. The work of theState Council is presided over by an executive board, usually with about15 members, composed of the prime minister, his deputies (in 1996 there weresix deputy premiers), state councillors, and a secretary-general. Below the StateCouncil come the various ministries and commissions, as well as a number ofimportant state-owned industrial enterprises.

Political forces

The role of the ChineseCommunist Party

By 1996 the CCP had about 57 million members, just over 4.7% of the popul-ation of China at the end of 1995. It was thus by some measure the world’slargest political party, although the proportion of party members to total popul-ation was not large in comparison with other socialist states. As elsewhere, partymembership is a benefit in material and professional life, and in some govern-ment bodies is in effect a prerequisite to advancement.

The Central Committee The CCP’s structure parallels, and supervises, that of government and legis-lature. Its main decision-making body is a Central Committee of, in 1996,188 full members and 127 alternates. The Central Committee is elected at aparty congress convened in theory once every five years, normally in themonths preceding the first session of a new NPC. The next party congress,the 15th, will be held in late 1997 and preparations for it are under way. TheCentral Committee meets in plenary session about twice a year. In the interim,most of its power is vested in a Politburo of 15-20 members, currently 19.

The Standing Committee Uniquely, the CCP adds a further tier of centralised leadership, the PolitburoStanding Committee, of 7 members, who are the most powerful people in thecountry. Usually, the Politburo will include some people of purely party stand-ing, and provincial- or municipal-level party secretaries. But it will also includethe prime minister and his deputies and other key state councillors, and repre-sentatives of the Chinese military.

Party and governmentfunctions are still

intertwined

In the late 1980s there was much talk of the “separation of functions” of partyand government. The party would concentrate on its proper role of providingideological leadership, while day-to-day economic and administrative manage-ment would be in the hands of the government. This separation has not takenplace, however, and at the national level it seems irrelevant whether it is theState Council or the Communist Party which makes administrative decisions,since the top echelons of both bodies are staffed by almost the same people.Since 1989 there has been increased participation by the military at the highestlevel of the party-state, reversing the trend towards disengagement of the armyin day-to-day politics that was apparent in the 1990s.

The secretariats andcommissions

The apparently clear-cut line of pyramidal control within the CCP is compli-cated by its various secretariats and commissions. The Central Secretariathandles the day-to-day business of the party. The general secretary is the party

China: Political forces 11


leader, following the abolition in 1980 of the post of chairman, and has thepower to convene Politburo meetings. The Central Commission for DisciplineInspection, with responsibility for the internal discipline of the party, andhence a strong network of informers and spies as well as personnel files, is apowerful body.

The People’s LiberationArmy

One of Deng Xiaoping’s aims, using his prestige as a legendary military com-mander in the revolutionary war, and his status from 1973, and again from1977 to 1980, as the chief-of-staff of the People’s Liberation Army (PLA), was todemilitarise politics. Representation of the PLA in the top organs of state andparty has steadily diminished. Until the 14th Party Congress in 1991 only onePolitburo member, the then defence minister, Qin Jiwei, was a “military man”,although the president, Yang Shangkun, also a Politburo member, had stronglinks with the PLA. The army’s share of the government budget similarly de-clined from about 6% of GNP in the late 1970s, to under 3% in the late 1980s.The size of the army was reduced by about 25%, to 3 million. But after 1989 thearmy’s presence has once more been felt on the Politburo; there are reports thata number of generals attend its meetings, albeit in a non-voting capacity. Theincreased politicisation of the military can also be seen in the role that the PLAhas played in the conduct of foreign policy. As the self-appointed guardian ofChina’s sovereignty , the PLA has exerted its influence across a broad spectrumof foreign policy areas, including the conduct of relations with Taiwan andHong Kong.

A “depoliticised” armystill has a political role

In the 1980s the army saw a drop in its popular prestige. The new economicopportunities available to young men in the countryside and the downplayingby Deng of the concept of “people’s war” served to make the army less attrac-tive on material and ideological grounds. At the same time the streamliningthat took place under Deng Xiaoping produced a better-educated and moreprofessional officer class. The army’s role in the suppression of the 1989 pro-democracy protests earned it a budgetary increase and also helped to enhancemilitary influence in the political process. But it also created problems, otherthan the lingering resentment among many sections of the populace, at leastin Beijing. A corps of younger officers had acquired their military experience ata time when the emphasis was on technical upgrading and depoliticisation.Paradoxically, the frustrations of a “depoliticised” army asked to assume apolitical role as the guardian of the party’s rule, at a time when there is nolonger a clear paramount leader, make direct military intervention in politics astronger possibility in the 1990s than at any time since the mid-1960s.

The extent of the personal authority which Jiang Zemin commands over themilitary is unclear. He has attempted to court a constituency in the military,not least by presiding over rising expenditure on military technology. He hasshown himself responsive to the reluctance of the army to be drawn into thedistasteful task of policing the population by presiding over the expansion ofthe People’s Armed Police, which is responsible for maintaining order on thestreets and whose ranks have been swollen by transfers from the PLA. He hasused the powers of patronage at his disposal by undertaking large-scale pro-motions and by reshuffling the leadership of all the seven military regions.

12 China: Political forces


Jiang has also thrown his weight behind the current drive to foster ideologicalcorrectness in an army whose undeniably heightened professionalism could beundermined by its labyrinthine economic undertakings, some of them illegal,and by the opportunities for corruption which they afford. He has thus farnot ventured (or has been unable) to dislodge the two elderly allies of DengXiaoping, Liu Huaqing and Zhan Zhen, from their posts on the CentralMilitary Commission and replace then with his own allies. This suggests thatthe authority of the chairman of the CMC is by no means complete. Theultimate test of the PLA’s loyalty to Jiang may never be made. But it is notunquestionable as was the loyalty of the army to Deng Xiaoping.

A rapid response elite The CCP Central Committee and the CMC are understood to be restructuringelite PLA units to form rapid response armed police entities under the directcommand of the Armed Police Headquarters and the CMC—which wouldmake them operable at Jiang’s behest, and satisfy the professional army, whichhas never been comfortable with the domestic security role it was obliged toplay during the 1989 protests, when units were deployed against the civilianpopulation. The new rapid response organisation will number a few hundredthousand personnel, bringing People’s Armed Police (PAP) strength to wellover one million, more than one-third the size of the PLA.

The Central MilitaryCommission

Control over the army was vested in two parallel commissions, the State MilitaryCommission and the Party Military Commission. The bodies usually haveidentical membership, and the State Military Commission is rarely reported asmeeting, leaving no doubt as to the intended truth behind the oft-repeatedmaxim, that “the party controls the gun”. The chairmanships of the two com-missions were the last posts Deng Xiaoping held until November 1989, when heresigned the party post and announced his intention to relinquish the state postat the next NPC, in March 1990. He handed both jobs to his designated succes-sor, Jiang Zemin, a man of no military experience, leaving suspicions that realpower in the party-military nexus resided with the executive vice-president ofthe commissions, Yang Shangkun, and his younger brother, the secretary-general of the commissions, Yang Baibing. In 1993 the Yangs were purged. Itseemed that Deng feared they were building up an alternative power centre, andneeded to replace them with less equivocal loyalists. The two commissions arerarely referred to by their party and state prefixes these days, when they arejointly described as the Central Military Commission.

Worker organisation isdiscouraged

The CCP has tried hard to maintain China’s monolithic power structure, leav-ing various identifiable interest groups in effect unrepresented. Although thereare national organisations supposedly looking after the interests of women,farmers and workers, all are tame bodies pliant to the will of the CCP. It isnoteworthy, for example, that even before the CCP mobilised against studentprotesters in 1989, it had denounced as “counter-revolutionary” the inde-pendent trade unions that had sprung up during the protests. The CCP remainsextremely nervous of any sign of worker organisation, mindful of the role ofSolidarity in the downfall of party rule in Poland.

The party has enforced social control and political discipline in large measurethrough the pervasive role of the “work unit”. State factories provide not just

China: Political forces 13


a salary but housing, education and political indoctrination. In the cities“neighbourhood committees”, often composed of retired busybodies, provideanother mechanism of control in areas such as family planning and crimeprevention. But growing disillusionment with the authorities makes such com-mittees less and less effective.

International relations and defence

Four periods of foreignpolicy

Foreign relations since 1949 can be divided into four periods. From 1949 to1960 China was in alliance with the Soviet Union, although this relationshipwas already under severe strain in the late 1950s. There followed, in 1960-72, aperiod of isolation, during which China sought to identify itself as a naturalleader of the developing world in its resistance to “US imperialism” and “Sovietsocial hegemonism”. From 1972 China found itself in de facto alliance with theUSA against perceived Soviet expansionism. That epoch came to a definitiveend in 1989, when relations with the Soviet Union were normalised and theBeijing massacre introduced new and severe strains into Sino-US relations.

The next superpower Since then, and especially after the collapse of the Soviet Union, China hastried to sustain an independent stance, as the next superpower-in-waiting. Thecountry’s relations with the USA are subject to continual strain over humanrights and trade issues; its relationship with Japan is marked by sensitivitiesabout Japan’s imperial past; and relations with Europe have been cordial byand large, with the notable exception of its ties with the UK, which havesuffered from disagreements over Hong Kong. In the modernisation of China,Beijing has found eager help from the large community of overseas Chinese inHong Kong, Taiwan, South-east Asia and even further afield. It has tried to stayon good terms with both North and South Korea.

During 1995-96 China’s sensitivity to any potential or actual infringement ofits sovereignty was demonstrated in several ways. The private visit of theTaiwan president, Lee Teng-hui, to the USA in mid-1995 infuriated a Chineseleadership already seriously concerned by his successful efforts to raiseTaiwan’s international profile and thereby bolster its de facto independence.The process of negotiating practical trade, investment and communicationslinks across the straits ground to a virtual standstill; relations reached a nadirduring the campaign for Taiwan’s first elected president, who was elected inMarch 1996. China indulged in military manoeuvres which appeared to havethe aim of influencing the outcome of the elections by intimidating voters onTaiwan in the hope that they would chose a less assertive president. This tactichaving failed, as of late 1996 relations have still not recovered, although thereare signs that both sides would like them to.

What the behaviour of China towards Taiwan demonstrates is that China isadamant about what it considers to be an internal matter. China sees Taiwan asan inalienable part of China and it is axiomatic that China is not answerable onworld fora for its conduct vis-à-vis Taiwan. The same is true, but more immed-iately so, of China’s attitude towards Hong Kong. It has consistently resisted any

14 China: International relations and defence


actions by the British in Hong Kong, such as speeding up the process of democ-ratisation, that it regards as infringing on its own soon-to-be-sovereign right tointerpret the 1984 agreement by which the territory is to be returned to Chinain 1997.

Further afield, China’s new-found assertiveness in pursuit if its territorialclaims in the South China Sea, notably in its stationing in early 1995 of mili-tary personnel on Mischief Reef—an atoll in the Spratly islands claimed by thePhilippines—has caused consternation in the region. China’s reluctance toagree to multilateral negotiations on the Spratly islands, which are claimed byseveral other South-east Asian countries, and its apparent belief that it canclaim to be an archipelagic state, despite having ratified the UN Law of the Sea,make its behaviour appear irrational. Observers have detected the undue influ-ence of the military in these areas. Although, as noted, the Chinese militarytotally lacks the forward capacity to press claims so far from the mainland (asof 1996, for example, it has no aircraft carrier) the fact that it undoubtedlyintends to acquire such capacity is a matter of concern in the region.

WTO membership remainselusive

The perceptual gap which can often bedevil China’s foreign relationships isapparent in the protracted and so far unsuccessful negotiations towards admit-ting (or readmitting in China’s eyes; it was a founder member of the GATT)China to the World Trade Organization (WTO).

From China’s perspective its failure to be readmitted to the WTO, in particularthe fact that it has not joined in time to count as a founder member, ispositive proof of discrimination. Chinese leaders point to the very substantialliberalisation of the import tariff regime—the unweighted average tariff ratehas been brought down from 43% in 1992 to 22-23% in 1996 and is targeted tofall to 15% in 1997—as well as other measures that have liberalised the eco-nomy as evidence for China’s good intentions to support its claim to join theWTO. Trade partners, chiefly the USA but backed by Japan and the EU, arguethat the reforms have not gone far enough and that the sheer size of theChinese economy gives China the potential to disrupt world trading patterns.Specific conditions should therefore be attached to China’s entry, binding it tofurther measures. China argues that its still-underdeveloped economy entitlesit to join the WTO as a developing country, exempt for the time being fromsome of the measures demanded of WTO members.

This stand-off has left China feeling that it is being discriminated against, notfor fundamentally economic reasons but by a US government which, despitehaving formally decoupled the issue of China’s human rights from the annualextension of Most Favoured Nation ( MFN) trading status by the US Congress,still seeks to wield undue influence over China.

The priorities of themilitary have changed

Since 1949 China has been engaged in the war in Korea, on the North’s side,and in disputed territory on its borders with India and Vietnam. By the mid-1990s there were no obvious military threats. In 1994 China agreed with Russianot to target nuclear warheads at each other. The army is now engaged in anexpensive programme of modernisation. Most experts calculate that it will takeChina several decades to close the technology gap between its armed forces andthose of Taiwan or Japan, much less the USA. China’s determination to acquire

China: International relations and defence 15


the potential to project its military power far beyond its borders neverthelessgives rise to worldwide concern, heightened by secrecy about spending onmilitary technology and a refusal, to date, to be tied down by any bilateral ormultilateral security arrangements.

The army is most likely to be called on to use its new technology in a conflictover disputed waters and islands in the South China Sea, in a new Koreanconflict, or, conceivably, in the recovery of Taiwan. Under Deng the army haslost about 25% of its manpower, but the slimmed-down fighting force remainsthe world’s largest standing army with some 3 million personnel.

The economy

Economic structure

“Leaving the land, but notthe countryside”

China is in the throes of an industrial revolution. Although, as in other indus-trial revolutions, there is movement from the countryside to the towns, anindustrial revolution is being encouraged in the countryside. While the vastmajority of the labour force of some 460 million is classified as rural, ie livingin the countryside, only 250 million are farmers, according to the ChineseAcademy of Social Sciences (CASS). With their dependants, the true peasantrynow number between 480 million and 530 million . The “non-agriculturalvillage population” includes more than 120 million employed in the townshipand village enterprises (TVEs) and more than 80 million who have movedto the cities in search of work. They and their dependants number about400 million, giving the lie to the notion that the majority of the Chinesepopulation is still made up of peasants. This process of industrialising thecountryside is encouraged for many reasons; established urban centres arealready lacking in infrastructure and the existing, already stretched, social con-trol system could not withstand a larger rural-urban migration.

Main economic indicators, 1995

GDP growth (%) 9.0

Consumer price inflation (%) 17.1

Current-account balance ($ bn) 1.6

Foreign debt ($ bn) 106.7a

Exchange rate (Rmb:$) 8.351b

Population (m) 1,211.21a

a End-period. b Period average.

Sources: State Statistical Bureau, China Statistical Yearbook; IMF, International Financial Statistics; EIU.

The dominant role ofindustry

Economic growth has been led for many years on the supply side by increasesin industrial output. Even before Deng Xiaoping’s reforms, the Chineseeconomy was characterised by an unusually large share in gross output valueoccupied by industry. This was particularly striking because so much ofthe workforce remained deployed on the land. At first, in the early 1980s, the

16 China: Economic structure


reforms represented a shift of national resources towards agriculture, through asharp rise in the procurement price paid for agricultural crops and whatamounted to the privatisation of agriculture. However, by the late 1980s andearly 1990s industry’s contribution was again increasing year by year as parts ofthe countryside industrialised. Meanwhile, services have been growing rapidly,as controls on the economy have been lowered and demand for personalservices has grown.

The state now producesless than half of industrial

output

Industry itself had undergone a fundamental shift. Until 1978 output wasdominated by large state-owned enterprises. Since then much of the boom inmanufacturing output has been produced by “collective” enterprises, owned byTVEs or, increasingly, by private entrepreneurs or foreign investors either inwholly owned enterprises or in joint ventures with Chinese interests. By theearly 1990s the share of the state sector in industrial output had shrunk to nomore than half.

Measuring the Chinese economy

Measuring China’s GDP per head using the official exchangerate gives a value of $470 in 1992, compared with $23,240 inthe USA, suggesting that in per head terms the average UScitizen was nearly 50 times as well off as his Chinese counter-part. Recalculating using an exchange rate which more accu-rately reflects the relative purchasing power of the renminbiand the US dollar in their respective economies would raisethat figure. This is a complicated process involving detailedprice comparison across a wide range of goods and services,not all of which are traded. China has not yet completed theUN International Comparisons Project (ICP), which conductsfive-yearly price surveys in many countries to form the basis ofa purchasing power parity (PPP) calculation of countries’ GDPin international dollars. The PPP estimates that have beenmade to date for China are therefore bilateral rather thanbased on international dollars.

In most developing countries the relative price of services tendsto be lower than in developed economies, which tends to raisethe PPP measure of GDP. In China there is a further complic-ation. In order to arrive at a realistic local currency estimate fornominal GDP, adjustments to the official Chinese calculationsneed to be made. Chinese official GDP statistics, which are notyet fully based on the UN System of National Accounts (SNA)method of measuring GDP, need to be adjusted to take accountof under-reporting of parts of the economy. In 1992 forexample, the World Bank estimated that housing consumption,grain output, rural industrial output and rural consumption ofservices were underestimated to the tune of 11.8% of official

GDP. Price controls lower the value of the output of somesectors. Taking account of these and certain further adjust-ments to the national accounts in that year led the World Bankto calculate that GDP was about 34% higher than officiallymeasured.

It hardly needs to be added that all these re-estimations neces-sarily increase the margin of error. Moreover, the calculation ofPPP-based GDP is rendered less valid in China’s case by mis-matches between the quality of items in the USA and in China.This leads to an overestimate of China’s PPP-based GDP perhead.

In 1994 the World Bank estimated China’s GNP per head at$1,910 in 1992. On reflection, particularly in light of the qual-ity mismatch, the Bank had decided by mid-1995 that thisfigure was on the high side. Estimates of GNP per head con-ducted in the early 1990s had placed it at nearly $3,000. Morerecent World Bank estimates, for 1992, which the World Bankhas stated are based on more reliable data, put China’s PPP-based GNP per head at $1,800 (GNP and GDP are virtuallyidentical in China’s case). These figures, which are of coursestill subject to wide margins of error, suggest that US incomeper head in 1992 was 12.8 times that of China. It should alsobe noted that there is a very wide variance between the pricesand quality of goods and services within China which throwsdoubt on the validity of a concept of national PPP-based in-come per head.

China: Economic structure 17


GNP per head, 1992(US$; PPP-based estimates)

China 1,800

India 1,210

Indonesia 2,970

USA 23,120

Japan 20,160Sources: World Bank; China GNP per capita (Report No 13580); Penn World Tables 5.6.

Comparative economic indicators, 1995($ bn unless otherwise indicated)

China India Russia Brazil Japan USA

GDP 695.3 328.3 363.9 732.3 5,114.0 7,246.0

GDP per head ($) 575.0 350.1 2,455.0 4,531.0 40,717.0 27,505.0

Exports of goods 128.1 32.4 64.9 46.5 427.8 576.8

Imports of goods –110.1 –39.4 –42.3 –49.7 –296.7 –749.8

Foreign trade (% of GDP)a 34.3 21.9 29.5 13.1 14.2 18.3

a Exports of goods plus imports of goods divided by GDP.

Sources: National sources; EIU.

Various problems surrounding the comparison of output levels betweencountries mean that the comparative GDP figures in the table above should betreated with some caution. But China is clearly a more open economy than itsgreat neighbours, India and Russia, at least as measured by foreign trade’s shareof GDP. Industry’s share of GDP is also higher than in India.

Inland regions have lostout

Change has exacerbated the development of what is sometimes called the “twoChinas”. The coastal areas have benefited from their accessibility, their linkswith overseas Chinese, and their more developed infrastructure. They haveconsistently shown far higher rates of growth than the interior, western prov-inces. This trend is by no means new. Western China is in many places arid,mountainous or otherwise infertile. The centres have always been the wheat-growing plains of northern China and the rice paddies of the Yangtze delta.The current, ninth, five-year plan aims to address the widening inequalities ofwealth and income between the coast and the interior by concentrating invest-ment, both domestic and foreign, in the interior provinces.

Economic policy

Economic policy in the Deng era has been dominated by attempts to stimulategrowth through the expansion of trade and the harnessing of market forces,without causing destabilising disruption through the destruction of the oldsystem. The reform process, which started in the late 1970s , has essentiallybeen a combination of restoration of land to the tiller and the creation of newforms of economic organisation. It has therefore not yet threatened the vestedinterests of powerful constituencies. Most important among these are the100 million workers and party cadres in the traditional state-owned enterprises,whose mounting financial losses are a source of macroeconomic instability.

18 China: Economic policy


Seeking means ofmacroeconomic control

The government’s goal of a “socialist market economy” has never been clearlyspelled out. According to an important meeting of the Communist Party’sCentral Committee in November 1993, the “state sector” is to remain thebackbone of the economy. However, the dynamism in the economy comesfrom the private, foreign-invested and “collective” sectors. Many parts of theeconomy have slipped the leashes of central state control. The government’sdilemma is how to exercise macroeconomic control when, on the one hand, itsfiscal and monetary policy levers remain deficient and, on the other, its formalpower to run the economy by administrative fiat has been eroded.

A related question that dominates policy is the balance between inflation andunemployment; the prospect of social unrest continues to preoccupy policy-makers. Inflation was seen as a major factor in the mass unrest of 1989. But theunemployment that would follow from tough anti-inflationary retrenchmentis seen as equally dangerous.

Towards the end of 1995 the draft “Proposal for Formulating the Ninth Five-Year Plan (1996-2000) for National Economic and Social Development and theLong-Term Target for the Year 2010” was presented to the Central Committee.As before, the aim is to move towards balanced growth, with a trickle-downeffect from the rapidly advancing eastern seaboard into the interior. During theninth plan period and thereafter an attempt will be made to attract investment,from foreign as well as domestic sources, into the interior of the country.Overall growth is targeted at 8-9% per year over the ninth plan period.

Food self-sufficiency has become an issue of key concern and over the next fiveyears there will be a reconcentration of effort on the neglected area of ruraldevelopment.

Policies to attract foreigninvestment have proved

successful

China has been remarkably successful in attracting foreign investment. By theearly 1990s it was the largest recipient of foreign direct investment (FDI) in thedeveloping world. At first, a cordon sanitaire was erected around foreign invest-ments, with the establishment in 1980 of four Special Economic Zones in thesouth, offering tax and other incentives. Such privileges were later extendedacross most of the country. By the 1990s, and especially after Deng’s “southerntour” in 1992, localities were competing with each other to offer foreign invest-ors the most attractive terms. By the end of 1995 there were 233,564 registeredenterprises with foreign capital in China, with a total pledged capital of$399.1bn, of which $256.9bn was provided by foreign partners. Between 1979and 1995 a total of $132bn of FDI was actually put in place. About 258,000contracts were signed over the same period; according to the Ministry ofForeign Trade and Economic Cooperation the total value of contracted foreigninvestment between 1979 and 1994 was $304.6bn. Of the total, 81.9% wascommitted to coastal areas and provinces, with Guangdong province aloneaccounting for 33.7% of total committed investment. Much the most impor-tant source of foreign funds was Hong Kong, with 68% of total committedinvestment.

China: Economic policy 19


The industrial reforms: a brief chronology

1979: Law on joint ventures; price liberalisation starts in agriculture.

1980: Fiscal autonomy to local governments; Special Economic Zones created; private

income tax introduced.

1981: Individual enterprises encouraged in urban centres.

1982: Price liberalisation of industrial products starts; Patent Law and Trademark Law

enacted.

1983: State-owned enterprises (SOEs) begin to be taxed instead of turning over profits

; bank lending to SOEs begins to replace allocations from budget; collective enterprises

are encouraged; People’s Bank of China begins to assume some of the functions of a

central bank.

1984: 14 Coastal Cities are opened; Director-responsibility system and “above plan”

pricing and production autonomy introduced; township and village enterprises (TVEs)

created.

1986: Labour contract system replaces virtual lifetime employment for urban new

recruits.

1988: SOE contract responsibility system begins; on the basis of negotiated multiyear

contracts, managers’ (and sometimes workers’) rights of control and obligations to the

state are defined; Regulations on Private Enterprises published; Enterprise and

Bankruptcy laws passed.

1989: Regulations on mergers, joint-stock companies and commercialisation of banks.

1990: Copyright Law enacted.

1991: Delegation of direct trade rights to (some) SOEs; beginning of pension and

housing reform; encouragement of enterprise groups and corporatisation,

whereby the state’s ownership rights take the form of shares managed by State Asset

Administration Bureaux and State Asset Investment Companies and the firm has man-

agement autonomy.

1992: Deng Xiaoping’s southern tour; New Operating Mechanism and 14 Autono-

mous Rights to SOEs give SOE managers authority to “use and dispose of the property

entrusted to them by the state for management and business purposes”; phasing out

of production targets and price controls; Patent Law and Trademark Law revised.

1993: Principle of “socialist market economy” replaces “socialist commodity

economy”; Decision of Third Plenum on establishing Modern Enterprise System;

promulgation of a Competition Law; new accounting standards introduced.

1994: Foreign exchange reform; fiscal and tax reform; implementation of Company

Law. Launch of “10,000-1,000-100-10" programme.

1995: New Commercial Banking Law; People’s Bank of China Law; Provisional

Regulations Guiding Foreign Investment; Insurance law; move to a five-day week;

legislation to regulate the securities and debt markets; draft of ninth five-year plan.

Announcement of tariff reduction of 30% for 4000 of 6000 lines; 179 non-tariff barriers

(30% of total) to be replaced with tariffs.

1996: Programme of transforming 1,000 enterprises into fully autonomous

corporations announced; smaller enterprises to be encouraged to merge; average

unweighted tariff falls to less than 23% with implementation of reductions from April.



In more recent years, the volume of Hong Kong investment has included asizeable but unknown proportion of mainland Chinese money; in order toqualify for tax exemptions, and to make it easier to take capital out of thecountry, a large number of Chinese investors have established Hong Kong shellcompanies and posed as “foreign investors”. Taiwan was the second mostimportant foreign investor with 8.3% of the contracted total, although becauseof the restrictions imposed by Taipei most of that investment is also routedthrough Hong Kong. Singapore accounted for 2.2% of foreign investment.Therefore the percentage of “foreign” capital in China of overseas Chineseorigin was 78.5%; it was higher still if ethnic-Chinese investors from the USA,Canada, Thailand and Australia are included.

The spectacular foreign investment boom is in fact very much an ethnic-Chinese affair. In the period in question (1979-93) the USA was the secondlargest foreign investor after Hong Kong, with 6.5% of the total contracted. Itwas followed by Japan, with just 4%. These percentages, however, understatethe importance of Western investment, which tends to be in higher value-added sectors involving a degree of badly needed technology transfer, ratherthan in the labour-intensive processing and assembly operations favoured byinvestors from Hong Kong and Taiwan, which have helped to fuel the boom inTVE output along the eastern seaboard.

The government has decided that it wishes to level the playing field betweendomestic and foreign investment. Part of the motivation for this is a feeling thatthe economy has matured to the point that special incentives are no longerneeded to attract foreign funds, which will seek entry to China because of thelure of its vast market. There is also a pressing need to augment the fiscalposition by being able to tax all enterprises at the same rate and a desire to bringan end to round-tripping. Although the timing of the change has not beenmade clear and there will also be exceptions granted by the many authorities atlower levels with the power to approve investment projects, “nationaltreatment” is already being offered to foreign capital in Shenzhen. This will meanforfeiting tax privileges in exchange for better access to the domestic market.

Meanwhile the government is going to have to offer incentives and sweetenersto lure foreign investment, especially for projects with long payback periods,into the interior of China where infrastructure is poor. Incentives will continueto be a feature of the investment regime for some time. (Data on investment inassets is in Reference table 2.)

Currency reforms The Chinese currency, the renminbi, is still not fully convertible although theauthorities have emphasised that convertibility is their goal. For most of the1980s they adopted what amounted to a policy of parallel exchange rates. An“official” rate covered the imports of some state-owned enterprises, and thatoffered to foreign residents and tourists, who had their own legal tender, calledforeign exchange certificates (FECs). Meanwhile, a growing proportion of for-eign trade was conducted at a lower rate closer to a true market price, availableon a number of “swap” markets. Usually, there would be a third, parallel-market rate as well, reflecting the demand for foreign exchange. At the end of1993 the swap and official rates were merged and the FECs abolished. A primi-tive interbank market was set up, although most traders still found themselves



having to use the swap markets. One effect of the reforms has been the steadydevaluation of the renminbi, although it remained stable for more than a yearafter central government intervention in July 1993. It fell from Rmb8:SDR1 atthe end of 1993 to Rmb12.3:SDR1 at the end of 1994. During 1995 the Chinesecurrency was stable against the SDR but appreciated in annual average termsagainst a weak US dollar. It then held firm against a strong dollar in 1996.Having been devalued by 50% against the dollar in January 1994, the inflationdifferential has turned the modest appreciation against the dollar that tookplace in 1995 and its stability in 1996 into a significant appreciation in realterms. This has been helpful in restraining domestic inflation but has damagedexport competitiveness. Strong inflows of foreign exchange in the form of FDIand a continuing trade surplus have helped to put upwards pressure on thecurrency. On December 1 the Chinese made formal the established de factoconvertibility of the currency on current account by announcing conformitywith the requirements of Article VIII of the IMF. Full convertibility of thecurrency on the capital account is not expected until the end of the century. Atthe beginning of December 1996 the exchange rate was Rmb8.3:$1.

Fiscal challenges One of the consistent inflationary pressures has been a large and growing centralgovernment budget deficit (see Reference table 1). In part, this has been theeffect of the reforms themselves—the expense of subsidising both urban con-sumer prices and loss-making state enterprises—as well as an inadequate taxbase and failures in tax collection. There has also been a continuing debateabout the division of tax revenue between Beijing and provincial and lower-level governments. In 1994 a reform of the tax system was undertaken, designedboth to redress what was seen as an imbalance in favour of provincial govern-ments, and to clarify and simplify a system of bewildering complexity. Revenuerose quite sharply in 1994-95 and the rise in expenditure was held below that ofrevenue, reducing the growth of the deficit. But the true public-sector deficit ismuch higher than the 1% of GDP that the 1995 figures imply. First, borrowingis taken as revenue. Second, many of the public sector’s financial obligations arenot fully recorded in the budget. One is military expenditure. Another is thehigh, and in 1996 rising, cost of policy lending to state-owned enterprises(SOEs). This is done through the state-owned banks (rendering them chronicallyloss-making). The World Bank argues that more accurate representation ofgovernment activities is provided by the concept of the consolidated govern-ment deficit (CGD) . This consists of the fiscal (ie budget) deficit plus the part ofthe People’s Bank of China (PBC, the central bank) lending to the financialsystem that finances the government-directed expenditure of the SOEs. Thislending, the World Bank argues, is a major source of inflationary pressure.Defined as the sum of the budget deficit and the net policy lending of thecentral bank the CGD is estimated to amount to 5-6% of GDP. It has been kepthigh not just because of the need to make subsidised working capital loans to“priority” enterprises but also by the need to sustain the large amount of invest-ment that is channelled through loans to SOEs or used for rural or social-sectordevelopment. Much of this spending, it should be noted, is undertaken at thelocal level. In the five years 1988-92, for example, an average 42.9% of the totalfixed investment by central and local government was undertaken by centralgovernment and 57.1% was undertaken by local governments.



Summary of government finances(Rmb bn)

1993 1994 % change

Revenue 508.8 639.3 25.6 Taxes 425.5 512.7 20.5 Enterprise receipts 4.9 0.0 n/a Enterprise loss subsidies –41.1 –36.6 –10.9 Regulating fund 11.8 5.4 –54.2 Other 33.8 40.3 19.2 Receipts from borrowinga 73.9 117.5 59.0

Expenditure –528.7 –579.3 9.6 Capital construction 90.1 64.0 –29.0 Agriculture 32.3 40.0 23.8 Education, science & health 95.8 127.8 33.4 Defence 42.6 55.1 29.3 Administration 58.6 76.5 30.5 Price subsidies 29.9 31.4 5.0 Enterprise development 42.1 41.5 –1.4 Debt service 33.6 49.9 48.5 Other 103.7 93.1 –10.2

Balance –19.9 60.0 –

a Taken as revenue, understating the deficit as a result.

Source: State Statistical Bureau, China Statistical Yearbook.

Monetary policy The fiscal problems faced by the central government, exacerbated by the needto subsidise the state-owned industrial sector, have hampered the effectivereform of the financial sector. A persistent feature of the Chinese system re-mains the fusion of the fiscal and monetary roles of the state. The large CGD,which has been financed by the central bank, has meant that monetary policyhas been subordinated to fiscal imperatives. The People’s Bank of China has noeffective independence and is subject to the State Council (or cabinet); 60-80%of its lending is in the form of policy loans which are essentially governmentexpenditure.

Traditionally, an annual credit plan has been the chief instrument of monetarypolicy. It is compiled annually in accordance with directives established by theState Council for growth in the major macroeconomic variables and the puttingtogether of sectoral and local needs. It is implemented, after being approved bythe State Council, by means of credit ceilings set for the main banks (ceiling fornon-bank financial institutions are part of an indicative credit plan). Theseceilings cover different kinds of credit and are also disaggregated by provinceusing estimated increases in bank deposits and the previous year’s performanceas guidelines. Provincial ceilings are not revealed by the centre. The quotas areallocated by the head office of the PBC to the head office of the relevant bank,leaving the PBC branch network in a supervisory role. Funds can be transferredby the PBC when provincial branches of the banks have unused lending quotasbut not funds (banks can also seek funds in the growing interbank market).

Decentralisation, especially as manifested in the investment hunger of localgovernments, poor coordination, and the emergence of informal and unoffi-cial financial activity have combined to render the annual credit plan ineffec-tive. The rapid pace of financial broadening and deepening and a poor



regulatory system have permitted the diversion of funds to unintended usesand the availability of alternative financial assets, formal and otherwise, hasrendered the system prone to disintermediation crises.

Interest rates do not reflect the market. The soft budget constraints of SOEshave made it impossible to use interest rates as an effective method of financialintermediation in the formal sector and interest rates have been changed infre-quently and are generally negative in real terms. Interest rates on deposits havebeen adjusted upwards several times to help combat disintermediation andthey have been reduced in 1996 in an effort to stimulate growth and to aidcash-starved SOEs. But the state banks cannot afford to pay attractive interestrates to depositors when they cannot earn positive interest spreads on theirown assets. To prevent disintermediation, since March 1994 the central bankhas been paying an inflation rate subsidy on maturity on deposits of threeyears and above. The rate is fixed monthly. Treasury bonds issued in 1994 and1995 have also been paying positive real interest rates and were easily disposedof as a result.

Monetary policy therefore, is heavily constrained. To curb excessive growth ofliquidity and curb investment demand it has been official policy to restrain thelending of the state banks as part of a 16-point programme to cool the eco-nomy, the so called austerity programme introduced in 1993. This has been of

The 1994 tax reforms

• A sliding scale for income tax. There is now a sliding scale ofindividual income tax (applying to foreigners as well asChinese), ranging from a top rate of 45% for those earningmore than Rmb100,801 ($12,119) per month, to a minimumof 5% for those earning more than Rmb800 ($96) per monthand less than Rmb1,301.

• A unified corporation tax. A single 33% profits tax wasapplied to all companies; a hefty reduction for state-ownedenterprises (SOEs), which had paid 55%. Foreign investors,however, were reassured that existing preferential arrange-ments granted by individual localities would remain intact.Many enjoy one or more years of complete tax holiday, andthen pay at a rate often as low as 15%, such is the competitionbetween regions to attract foreign businesses.

• A new value-added tax (VAT). The old ConsolidatedCommercial and Industrial Tax (CCIT) on sales has been re-placed by VAT on production, payable at each stage of themanufacturing process. The rate will vary. Most goods aretaxed at 17%, but agricultural and food products are taxed at13%, and small-scale businesses pay a flat rate of 6%. Unlikeunder the CCIT system, credits will be granted for tax paid at anearlier stage of the manufacturing process (eg a manufacturerof plastic toys would pay tax at 17% of the price he sells to awholesaler, less the amount of VAT paid by the supplier of theplastic). In theory the tax should be passed on automatically to

the consumer. However, there appears to be no provision toclaim tax credits for VAT costs paid to the suppliers of capitalequipment. The system appears bewilderingly complex for acountry which has only rudimentary accounting standards.Opinions are divided about the impact of the measure. It ap-pears, overall, to be rather inflationary. The authorities saidthat rebates would be available to ensure that taxpayers’ billsdid not rise inordinately, but made no details available.

• A new and complex capital gains tax. This applies to bothproperty and stock transactions. Property developers are sub-ject to three sorts of tax: business tax at a rate of 5% (seebelow), capital gains tax (CGT), and corporation tax. Althoughresidential property developers making a profit of less than20% are exempt, and development, acquisition and construc-tion costs are deductible, there appears to be no provision forindexing the profit calculation to inflation, which, with pricesrising at their present rate, is a significant disincentive to devel-opers. The composite tax rate for property developers hasbeen variously estimated at 45-60%.

• A consumption tax. Luxury items, including alcohol, to-bacco and cars are subject to a separate sales tax, on a slidingscale of rates up to 45%.

• A business tax for services. Service industries face a businesstax on sales instead of VAT, which ranges from 3% to 20%.



limited effect. The needs of SOEs for cheap working capital have not dimin-ished and indeed in some cases have increased because of the chain of unpaidenterprise debts that has built up. The state itself has continued to borrow fromthe central bank to finance policy lending, creating further reserves. Thusliquidity has gone on increasing. Money supply growth has been running atover 30% since 1992 and total loans outstanding have grown by an annualaverage of 20% per year in 1990-94 (see Reference table 3 for data on moneysupply and credit). Meanwhile, a very large unofficial financial sector hasemerged, where the rates of interest are truly those of the market, which under-mines the attempt to curb the growth of credit in the formal sector.

Reform of the financial system is a key priority and various changes are beingcontemplated. These include the following.

• Strengthening the People’s Bank of China by means of a new law whichaims to make the central bank more autonomous and curb its role in creditallocation. Reorganising the branch network of the PBC along regional, notprovincial, lines to decrease the susceptibility of the network to pressure fromlocal governments.

• Introduction of a new payments system which will reduce the number ofsettlement accounts held by banks and make it possible to close many PBCbranches below the county level.

• Creation of a national interbank market.

• Clarification of the relationship between banks and non-bank financialinstitutions and reform of the supervision function.

• Establishment of policy banks to separate this kind of lending from commer-cial activities.

• Increased use of the issue of government securities and creation of a securi-ties market across a range of maturities.

• Interest rate reform.

Not all these changes will be introduced rapidly. They represent challenges inreconciling competing interests and conflicting goals. Reform of the financialsystem would have consequences for the management of public-sectorfinances and for the funding of SOE activities. But there is no doubt that thegovernment has recognised that the financial system will have to change ifmonetary policy is to become a meaningful macroeconomic tool.

Price policy Price policy in China since 1978 has pursued two not always compatible goals;a gradual lifting of state controls over the prices of most products and themaintenance of price stability for consumers, especially in agricultural staples.

Price reform, by which is meant the removal of the distortions caused byadministered prices, started in the early 1980s. By 1992 the proportion of pricesset by the government in the retail sector had fallen from 97% in 1978 to 10%;those for agricultural and sideline products from 94.4% to 15%; and in prod-uction materials from 99.7% to 20%.



Within the picture of an overall freeing of prices, however, the prices of certainkey commodities, for example grain, coal, oil and rail freight, remain subject tosome regulation, generally only over the portion of output that is still coveredby the planning mechanism. In these cases there is both an official and a freemarket price. In the case of grain, this is partly because the historical legacy ofkeeping the price paid by urban consumers low has meant careful control of theprocurement price and a high degree of government subsidy. Procurement bythe state still accounts for a significant part of the harvest, which is bought atcontracted prices. In the case of key raw materials prices continued price controlhas reflected a general scarcity which has meant that the government has trad-itionally not only set prices but also overseen allocation, favouring key SOEs.

A secular trend towards the decontrol of prices is now well established, al-though there are still significant policy-induced distortions. Import prices areinfluenced by a tariff regime which keeps the prices of some imports artificiallyhigh to protect domestic producers; these include potassium fertiliser, poly-styrene, and selected high-technology consumer products. Within agricultureexport prices for some commodities, notably maize and rice, are kept artifi-cially low to benefit domestic consumers. By the early 1990s the domestic priceof wheat (both planned and free market) was close to import parity. Theauthorities have been able, in the case of certain commodities for which Chinais a price-maker on the international market, such as tungsten, to use taxes andlicenses to help to raise the export price relative to the domestic price andthereby to maximise the foreign exchange gained. When China becomes amember of the World Trade Organization (WTO), such policies will be moreproblematic.

After 1992 however, economic overheating exacerbated inflation and the paceof price reform slowed. In the 16-point programme announced in July 1993price reform was frozen, the price of coal used in power generation and washedcoal having been deregulated in January of that year. During the first half of1993 prices for crude oil and steel products were liberalised, the grain couponsystem was abolished and grain prices were liberalised. In 1994 food prices,under the influences of shortfalls and higher costs for farmers, rose sharply.The surge in prices at mid-year led the government to reintroduce subsidies,price controls and even rationing in some cities. There was a 24.1% rise in thenational consumer price index in 1994; food prices rose by 31.8%. A rise in thegrain procurement price in late 1996 will boost inflationary pressure in the lastmonths of the year unless the authorities decide not to pass it on to consumers.But inflation cannot be repressed indefinitely by price controls. Controls arenot likely to be lifted until fears about inflation have eased and certainly notuntil after the 15th Communist Party Congress, in 1997.

Trade policy Despite progressive measures to liberalise, simplify and streamline China’strade regime, it remains complex and comparatively regulated, with tariff andnon-tariff barriers a prominent feature. A Foreign Trade Law was promulgatedin 1994, but couched in very broad terms. During 1995 a number of enablingregulations designed to foster the aim of joining the WTO were announced,including cuts in tariffs. With the exception, in general, of foreign investedenterprises, trade is still conducted within the framework of the planning



mechanism under the supervision of the Ministry of Foreign Trade andEconomic Cooperation (MOFTEC), previously the Ministry of ForeignEconomic Relations and Trade (MOFERT). Trade is carried out through themediation of Foreign Trade Corporations (FTCs), national and provincial,which work to contracted goals.

Before 1984 trade was highly centralised and in the pre-reform days the planwas driven by the need to export enough to meet the foreign exchange needsgenerated by import requirements. But after the decentralisation of the tradesystem in 1984 the plan for foreign trade became more export-driven, withimports being scaled in accordance with export earnings. Export targets weresplit into a command and guidance plan, with the command plan fixed quan-titatively and applied to specific products. The guidance plan, which com-prised two categories of products defined according to which FTCs couldhandle them, contained only value targets.

Imports were divided into mandatory essential imports of raw materials, im-ports of other raw materials, spare parts and plant for key projects, and alicensing system for the rest, which were not centrally financed. Like exports,products were divided into two categories according to which FTCs couldhandle them.

FTCs incurred losses under this system as they bore the difference betweendomestic and international prices.

Trade decentralisation inthe late 1980s

In 1988 and 1991 the system was reformed; contracts signed with MOFERT byprovincial administrations and national FTCs specified: the value of foreignexchange to be earned; the amount to be remitted to the government; and thedomestic subsidy to be provided to cover losses. In 1991 the contracts becameannual (rather than for three years as before) and the targets were set on abottom-up basis. Fiscal subsidies on domestic currency losses were formallyabolished, at least on exports. Meanwhile the government set about trying toreduce the burden that resulted from subsidies on losses on imports by seekingto close the gap between domestic and international prices for key imports.

The key feature of the reforms has been the scaling down of the plan. Themandatory plan for exports has been eliminated, although the state retainscontrol through canalisation and licensing of a few goods that are still classi-fied by category. Although the plan has remained more important for imports,because of a perceived need to protect domestic industry and conserve foreignexchange, the number of goods subject to categorisation had fallen to 20 in1992. Meanwhile, the number of FTCs has grown rapidly.

Use of trade barriers as apolicy tool

Like other developing countries, China uses tariffs and taxes and non-tariffbarriers on imports and to a lesser extent on exports as a policy tool. Non-tariffbarriers include controls, canalisation, the trade plan and the export and im-port licensing system. Tariffs are not an important source of government reve-nue and a desire to join the WTO means that China is following a policy ofprogressive relaxation of trade barriers and lifting of tariffs.

In 1992 the average unweighted tariff rate was 43% (up 5% from the ratereported in 1986) and, when weighted by the value of trade in each category at



world prices, the tariff rate was 32%. Products considered essentials such ascereals, animal feed and raw materials have low tariffs; manufactured finishedgoods carry high tariffs. textiles yarns and fabrics and vehicles carry high tariffsbecause of the importance of protecting domestic production.

Average tariff rates in China are, according to the World Bank, “ relatively highby international standards” But it should be noted that there are many exemp-tions, especially for exporters. In 1992 the trade-weighted average was the thirdhighest of a number of developing countries (after India and Pakistan). As wellas being high, China’s tariffs are highly dispersed. But they are coming down.In 1992 and again in 1995 there were substantial reductions in tariffs. In April1996 another set of reductions came into force, the aim being to reduce theaverage tariff rate from 35.9% to 23% in an effort to move towards the 15% rateallowed under WTO rules for developing countries. As noted above, a furtherpackage has just been announced. As the rates move down, so the governmenthas decided to remove some of the exemptions currently enjoyed; for examplefrom April 1996 new ventures with foreign investment will lose the right toimport equipment and raw materials. A further package was announced at theWTO meeting held in Singapore in late 1997. The issue of China’s WTO statusremained unresolved, but is likely to be settled during 1997.

The overall impact of the tariff and non-tariff barriers regime on the economy isto raise the price of final consumer goods relative to intermediates and therebyto afford a high degree of protection to domestic producers of consumer goods.This helps to reinforce distortions in the industrial sector. The impact ofmembership of the WTO will therefore be favourable to Chinese industry.

Internal trade, discouraged by the autarchic policies encouraged in the pre-reform era, which led to a widely dispersed industrial development structure inwhich each province sought to produce as wide a range of goods as possible,has been stimulated by reforms and the greater economic specialisation thathas accompanied liberalisation. But some local governments seek, illegally, toerect internal trade barriers both to collect taxes on cross-provincial trade andto protect local producers.

Economic reform itself has also tended to reduce internal trade in some goods.The comparatively developed eastern seaboard, which is the springboard ofexport-oriented manufacturing, is becoming more closely linked to regionaltrading partners than to the interior of China. This is exemplified by the lowdomestic value-added in many assembly operations; in 1991 imports for pro-cessing represented 77% of the value of processed exports. The current tariffstructure exacerbates this because it allows relatively high cost production ofintermediate inputs to continue for the domestic market, encouraging exportersto favour imported intermediates. Exemptions on import duty for export pro-cessing have been so important that the value of exports associated with conces-sional imports had reached 64% of the value of manufactured exports in 1993.



Economic performance

Statistics should betreated with some caution

China’s striking and, in recent years, spectacular, rates of real economic growthhave been led, on the supply side, by huge increases in industrial production,and on the demand side by a combination of rapid growth in personal con-sumption and consistently high rates of fixed investment. (For gross socialproduct, gross national product and national income totals, see Referencetable 4.) However, the statistics should be treated with some caution. TheChinese media themselves have carried official complaints about the inaccuracyof data that make up the national growth figures. In particular, local officialsand executives have been accused of inflating production figures in order tocurry favour with their superiors. It is also not clear whether the value figuresproduced as evidence of “real” growth have been deflated in a rational or con-sistent way to take account of inflation.

The ninth plan

The ninth plan envisages an annual growth rate of around 8-9%, more realistic thanprevious plans and consistent with the long-established goal of quadrupling 1980GDP by 2000 and doubling it again ten years later. Other aims, presented in theform of a “Proposal for Formulating the Ninth Five-Year Plan (1996-2000) forNational Economic and Social Development and the Long-Term Target for theYear 2100” are as follows.

• A commitment to the continuance of the “dominant position of the publicsector” with the caveat that state-owned and collectively-owned assets shouldpredominate in total gross social assets.

• Strengthened control by the central government over the macroeconomy.

• A reconcentration on rural development, with a view to increasing agriculturaloutput and achieving a better regional balance of growth, which has previouslybeen disproportionately concentrated along the eastern seaboard of the country,where most of the foreign direct investment has taken place.

• Inflation to be contained below the real rate of GDP growth.

• Further reform of the state-owned industrial sector, especially those 1,000 keyenterprises of which 800 account for 63% of state-owned enterprises’ output . Thiswill involve encouragement of mergers, conversion of some of their outstandingdebt into government-held equity and some write-off of debt.

• Inland regions will receive a greater proportion of state-allocated investment andforeign investors will be “encouraged” to locate in such regions.

• Although still encouraged, foreign investment will increasingly be “guided” intothose areas deemed most suitable. Foreign invested enterprises will increasingly beaccorded “national” treatment.

• The need to reform and develop the financial sector is explicitly recognised.

China: Economic performance 29


Investment-led growth inthe 1990s

Nevertheless, there is no doubting the vibrancy of economic activity in China.The boom of the early 1990s was fuelled by huge increases in investment, muchof it destined for property development as well as for manufacturing industry.(For divisions of the national accounts by expenditure and output, see Referencetables 5 and 6.) The boom in this sense differed from the two earlier peaks inChina’s economic cycle since the reforms were launched in 1978. They were ledon the demand side by increases in consumption after the austerity of theCultural Revolution, and the rapid rises in rural disposable income.

Gross domestic product(% change; at constant prices)

1991-951995 average

Primary sector 5.0 4.2

Secondary sector 14.1 17.5 Industry 14.3 17.7 Construction 12.4 14.9

Tertiary sector 8.0 9.9 Transport 9.5 10.6 Trade 8.7 8.2

GDP 10.5 12.0Source: State Statistical Bureau, China Statistical Yearbook.

Hence, as it became clear in mid-1993 that the economy was in danger ofserious overheating, the rate of investment growth became a prime targetof government concern. The problem was exacerbated by the diverse sources offunds now available to the localities. Senior officials in Guangdong, forexample, noted that central government austerity had little effect on them,since they raised about one-third of their funds from their local tax base,one-third from the local banking system, and one-third from abroad.

Rapid growth is now seenas sustainable—

In the 1990s the government wanted to break out of a “boom-bust” cycle ofperiods of rapid growth accompanied by rising inflationary pressures, followedby sharp slowdowns in periods of retrenchment. There was much debate aboutthe sustainable rate of economic growth without unacceptable inflation. TheEighth Five-Year Plan, produced in 1991, and a Ten-Year Development Strategyproduced in the same year, estimated this at around 6%. Any faster, it wasargued, and the shortcomings of infrastructural development and of basicindustries, such as agriculture and energy, would lead to intolerable inflationaryand social tensions. This strategy was abandoned in 1992 by Deng. Double-digitgrowth became seen as sustainable, desirable and even essential in order tocreate the opportunities China’s massive population were coming to expect. Butonce again, when overheating became a serious problem in 1993-95, the authori-ties decided that sustainable growth would be in single digits, now at 8-9%.

—but the price is highinflation

It has proved impossible to have rapid growth without high rates of price infla-tion (see Reference table 7), and the debate goes on about how to slow downwithout too much pain: how, in the official jargon, to achieve “a soft landing”.The overall retail price index has tended to understate the extent of inflation inurban areas, where it is most felt among civil servants and others on fixedsalaries. In 1994 the overall national retail price inflation rate was nearly 22%, a

30 China: Economic performance


level seen only briefly in the second half of 1988, when it provoked panic-buying and hoarding. The government was panicked into austerity measures,most of which are still in effect in late 1996. They have been applied withvarying degrees of rigour since their inception and were partly lifted inmid-1996 when interest rates and reserve requirements were adjusted to giverelief to SOEs and banks. Such measures, since they are mainly administrative(in the form of price controls and limits on investment), are suppressing invest-ment hunger and inflation. In 1994 some economists argued that living stand-ards had kept pace with inflation. Others argued that this was true only in someareas, and that, in the countryside in particular, the benefits of the boom hadbeen more or less totally eroded. In 1996 inflation has been held down to singledigits; the EIU estimates that the rise in the retail price index will be held to 7%in 1996. This is a political imperative in the run-up to the 15th congress.

Inflation(%)

1991-951995 average

Overall retail prices 14.8 11.4

Overall consumer prices 17.1 12.9

Urban consumer prices 16.8 14.1

Rural consumer prices 17.5 12.0

Farm products purchasing prices 19.9 14.0

Industrial products producer prices 14.7 9.8Source: State Statistical Bureau, China Statistical Yearbook.

Regional trends

Reforms have exacerbatedregional disparities

Under Mao Zedong, regional policy was always torn between the conflictingideals of egalitarianism and local self-sufficiency. They are in conflict becauseof the poverty, inaccessibility and inhospitable terrain of most of the interiorcoastal regions compared with the more fertile coastal deltas and plains. Thecontradiction has been exacerbated by the reforms. The coastal areas have beenfar more able to achieve rapid growth. Guangdong province in particular,bordering Hong Kong, has been able to tap that territory’s wealth of capital,technology and entrepreneurial skill.

Further north, the Yangtze delta is the focus of an effort to create a foreigninvestment-led boom to compare with that in the Pearl River Delta. Shanghaiwould become the “dragon’s head”, the Hong Kong of central China.Shandong and Manchuria are also well placed to capitalise on growing linkswith Japan and South Korea. Taiwan’s growing investments in China havetended to concentrate in Guangdong, and in Fujian, just over the TaiwanStrait. However, the interior provinces have been left behind. The hope thatdevelopment in the coastal areas would “trickle down” to the inland regionshas not been entirely misplaced. In particular, tens of millions of migrantworkers send remittances back home. But some official Chinese commentatorshave claimed that in fact capital is being drained out of the poorer regions toinvest in the coastal boom towns.

China: Regional trends 31


Gross domestic product by region

1995 1991-95% share Average %of total real growth

Guangdong 9.2 11.8

Jiangsu 8.8 11.8

Shandong 8.6 14.6

Sichuan 6.1 10.1

Zhejiang 6.1 24.7

Liaoning 4.8 25.2

Henan 5.2 26.0

Hebei 4.9 7.9

Shanghai 4.2 13.0

Hubei 4.1 18.1

Hunan 3.8 19.1

Fujian 3.7 11.7

Heilongjiang 3.5 19.3

Anhui 3.4 13.6

Guangxi 2.8 16.1

Beijing 2.4 13.0

Jiangxi 2.1 12.9

Yunnan 2.1 11.0

Jilin 1.9 19.1

Shanxi 1.9 16.7

Shaanxi 1.7 17.8

Tianjin 1.6 11.1

Inner Mongolia 1.4 8.6

Xinjiang 1.4 10.2

Guizhou 1.1 9.9

Gansu 0.9 9.4

Hainan 0.6 9.7

Qinghai 0.3 7.6

Ningxai 0.3 8.1

Tibet 0.0 11.8Source: State Statistical Bureau, China Statistical Yearbook.

The central governmentstill shoulders a

considerable fiscal burden

The 1994 tax reforms represented an attempt by the central government to securesome of the benefits of increased growth, by redistributing tax receipts. For thefirst time, the finance minister’s budget speech in March included a breakdownof the division of revenue and expenditure between Beijing and the provinces.

The figures show that the central government made a net transfer to theprovinces in 1994 of Rmb150.6bn, rising to Rmb184.2bn in 1995. It also shoul-dered the entire budget deficit. Since it is not known what arrangements werepreviously applied, it is impossible to judge how the centre’s relative positionhas changed. However, the figures demonstrate that the cost to the centre ofsubsidising the poorer provinces, which are largely in the interior, far out-weighs the transfers from locally collected tax revenue in the surplus provincesof the coastal seaboard. At the time it was reported that the intention was to

32 China: Regional trends


increase the centre’s share of total tax revenue from around 30% to around60% over a period of years. In 1995 its gross share of total revenue was 52.2%,up from 29.8% reported for 1991.

Resources

Population

China’s leaders like to point out that China has to support about 22% of theworld’s population on about 7% of its arable land; its huge population is bothits greatest resource and its greatest challenge.. At the end of 1995 the popul-ation was estimated at 1.21 billion and was growing at a rate of 14 million peryear. In 1980 a harsh one-child family policy was introduced with the aim oflimiting the population to 1.2 billion by 2000. So unpopular was the policy inthe countryside that it was relaxed in many areas to allow families whose firstchild was a girl a second chance. Chinese press reports now speak of a probablepopulation of between 1.30 billion and 1.32 billion in 2000 (see Referencetable 8 for historical population data).

The 1986-97 “baby boom” Population control experts have praised China as a role model, as birth rateshave fallen, although in the last decade that process seems to have ended asbirth rates have reached a natural low. In part, lower population growth ratesare attributable to a demographic trough, although foreign as well as Chinesedemographers credit the family planning drive with having “averted” as manyas 200 million births in the 1980s. But the whole 1986-97 period is regarded asa “baby-boom period”, a legacy of an earlier baby bulge in the last years of therule of Mao Zedong, who believed in national strength through numbers. It isestimated that between 11 million and 13 million women per year will reachchild-bearing age during this period.

Meanwhile, the total fertility rate for women, after declining quite sharply fromaround 6 children per woman in the 1950s and 1960s, to as low as 2.2 childrenper woman in 1981 and 1985, is now fairly steady at 2.3-2.4 children perwoman. The birth rate fell from 37 per 1,000 in 1952 to 17.12 per 1,000 in1995.The death rate fell from 17 per 1,000 in the early years of the People’sRepublic to 6.6 per 1,000 in 1995. It is this lag between the sharp decreases in themortality rate achieved under communist rule (although with an interruptionin the famine years of the early 1960s when many millions died of starvation)and the slower drop in the fertility rate that leaves China with its enormouspopulation problem today.

One consequent problem is that the population is ageing. The proportion ofthe elderly (defined as males aged 60 and over, and females aged 55 and over)increased from 9.3% in 1982 to 10.3% in 1990. One of the reasons families inthe countryside found the one-child policy so harsh was because of the trad-itional obligation of sons to care for their parents in old age. The labour force(the economically active population) was estimated at 697 million at the endof 1995 and was growing by 1.3% per year in 1990-95. Throughout the 1990s

China: Population 33


the labour force is expected to grow by about 7 million per year, presenting aformidable challenge to policy-makers.

But there are in effect tens of millions of additional new workers in the coun-tryside. Because large numbers of farm workers are underemployed for much ofthe year, industrial growth also raises the expectations of potential migrantswho do not figure in the unemployment statistics. It is the pressure of thesteady increase in the size of the workforce that, more than any other singlefactor, has dictated the strategy of pursuing high economic growth despite theattendant social and political risks (see Reference table 9).

Ethnic minorities aregrowing faster than the

Han

At the time of the 1990 census China’s population was still dominated byethnic Han Chinese, who made up 91.92% of the total. Ethnic minorities,which include the Zhuang, Turkic groups, Tibetans, Mongols and several dozenothers, had been growing much faster than the Han population, with a 35.8%increase over the last census, in 1982, compared with 10.9% for the Han.

Population indicators(m unless otherwise indicated; census results)

1982 1990

Population 1,004 1,131

Crude birth rate (per ’000) 20.91 17.70

Natural growth (per ’000) 14.55 11.21

Average size of household (no) 4.54 4.06

Han 937 1,039

Minority population 67 91

Sex ratio (male:female) 105.5 106.0

Urban population 206.3 296.1

Urban population (% of total) 20.6 26.2

Population aged 0-14 337.3 313.0

Population of working age 550.9 679.0

Men over 60 & women over 55 93.0 116.8Source: State Statistical Bureau, China Statistical Yearbook.

Some minorities have been granted exemptions from the one-child family pol-icy, which has been deeply unpopular in the Chinese countryside. Tibetan andMongol nomads, for example, are usually “allowed” three children, and oftendisregard restrictions anyway. The official press in 1991 began to hint at tougherbirth control rules for the minorities, a politically risky move, especially in Tibetand in Uighur areas of Xinjiang, where anti-Chinese sentiment runs high andlarge families are a cultural norm.

Education

Although, to judge by the 1990 census, China had made considerable strides inreducing the number of illiterate people from 284 million to 205 million be-tween 1980 and 1990, the provision of basic education remains a problem.Many rural schools are inadequately funded, relying on charges to the localfamilies who send their children there, and there is widespread truancy andabsenteeism, despite a notional nine years of compulsory education. An even

34 China: Education


bigger problem is the very small percentage of people in higher education. In1994 only 2% of the people in the relevant age group were enrolled in tertiaryeducation.

Education is improving,but remains a problem

area

China suffers, and will continue to suffer in the future, from an acute shortageof skilled personnel. In part this is the legacy of the Cultural Revolution wheneducation was seriously disrupted. But it is also due to years of underfunding ofthe educational system. Under Deng Xiaoping the prejudice against intellec-tual activity encouraged by Mao was reversed. Examination-based entrancesystems were reintroduced for universities and have become highly compet-itive. More than 100,000 students have attended courses abroad, in particularin the USA. Tens of thousands have never returned. In secondary education,the trend in recent years has been towards the development of vocationalschools to prepare students directly for their role in the workplace. In universi-ties, however, the old system of “job assignments” for graduates is breakingdown, with university leavers more often competing in the marketplace forwork. Funding of education, especially in rural areas, remains a problem andthere is an increasing incidence of children, especially girls, dropping out ofprimary schools.

Education(% of total population unless otherwise indicated)

1982 1990census census

Educated to university level 0.6 1.4

Educated to senior middle level 6.6 8.0

Educated to junior middle level 17.8 23.3

Educated to primary level 35.4 37.2

Illiterate & semi-illiterate persons 28.3 18.1

Illiterate & semi-illiterate persons (m) 283.7 204.9Source: State Statistical Bureau, China Statistical Yearbook.

Health

Healthcare is increasinglycommercialised

The increase in life expectancy since 1949 has been marked, partly as a result ofgreatly improved healthcare systems. By 1975 insurance coverage and the ruralCooperative Medical System (CMS) operated by the communes reached nearly90% of the population. Basic healthcare facilities were available to nearlyeverybody, free of charge or at a nominal cost. There was, of course, a big gapbetween the facilities available in the big cities and those on offer in poorerrural areas. Now that the communes have disappeared the CMS has virtuallybroken down in many rural areas, leaving the rural population to fend forthemselves. Only about 10% of the rural population is now covered by com-munity-financed healthcare. Since 1985, according to a World Bank study, thefall in the infant mortality and under-five mortality rate has levelled off, andthe rate has shown signs of rising. In 1991 it was about 45 per 1,000, comparedwith about 22 in Sri Lanka and 111 in Indonesia.

The urban population has been better-insulated against the market forcessweeping though the healthcare system. Half the urban population is covered

China: Health 35


by health insurance systems and in many state enterprises healthcare is stillone of the facilities offered to the workforce. In practice, however, medical careis being increasingly commercialised. In the 1995 budget, health, scienceand education combined took just 21.5% of total budgeted government ex-penditure. In 1994 there were 1.57 doctors per 1,000 people, up from 0.85 in1970. There were 2.36 hospital beds per 1,000 people in 1994, up from 1.33 in1970, and only 0.15 in 1949.

Natural resources and the environment

The land area of China, at 9,561,000 sq km, is slightly larger than that of theUSA, and occupies similar latitudes. It is notable for the small proportion ofland cultivated (11.3% in 1995), and the large share of this which is irrigated(25%), reflecting centuries of intensive land use. An estimated 149.9m ha weresown to crops in 1995, the area under crops having tended to fall since 1985.Irrigation efforts in arid western areas are failing to keep pace with the loss ofarable land to building in the more fertile areas.

There are three main farming zones:

• south of the Yangtze, where there is abundant rainfall, two crops of rice andone of spring wheat, as well as jute, sugarcane and other subtropical crops;

• between the Yangtze and Yellow rivers, where a two-crop system of wheatand rice is used; and

• a one-crop wheat system in the north where the climate is cold and dry.

China is also well endowed with most minerals and metals. Sizeable reserves offerrous and ferro-alloy minerals support a major iron and steel industry. Chinais a world leader in the production of some 17 minerals, including phosphate,tungsten, molybdenum and titanium.

Economic infrastructure

Transport and communications

Railways China’s inadequate transport system constitutes a serious obstacle to futureeconomic growth, with virtually every facet of it already run to capacity (seeReference table 10). The backbone of the system remains the railway, which in1995 carried 36% of cargo, by ton-km, and 39.4% of passengers, by passenger-km. Some 40% of freight by volume was accounted for by coal and coke, and60% of total national coke and coal production was transported by railway. Thenetwork is congested and overloaded for both cargo and passengers, especiallyaround the annual Chinese New Year holiday, after which tens of millions ofmigrant workers flock to the railway stations. New railways under constructioninclude a north-south link, bisecting the existing coastal route (via Shanghai)and the inland route, the Beijing to Kowloon line that crosses the Yangtze at

36 China: Natural resources and the environment


Maccheng, Hubei, and is expected to bring prosperity to the central inlandprovinces though which it runs. It is scheduled for opening in 1997.

Roads The road network has also failed to keep pace with a rapid expansion of thenumber of cars on the roads. By the end of 1995 China had 10.4 millionpassenger road vehicles, an increase of 14% per year since 1990. The length ofthe highway network, however, had increased by only 2.4% per year over thesame period, to 1,115,700 km.

Ports Similar problems affect ports, of which Shanghai remains the most important,accounting in 1995 for 21% of sea-cargo handled. A new port is to be developedsouth of Shanghai, and in 1994 a new container port was opened at Shenzhen,the Special Economic Zone (SEZ) neighbouring Hong Kong.

Civil aviation Civil aviation is undergoing an extraordinary boom, expanding at a rate ofmore than 24% per year in terms of passenger-km in 1990-95. In 1988 thenational flag carrier, CAAC, ceased to operate as an airline and became aregulatory authority. There are now about 30 Chinese airlines, including theinternational Air China. The industry has been plagued by safety problems.

Telecommunications There is a parallel boom in telecommunications, although having a telephoneat home remains a privilege, enjoyed in 1995 by only one household in every20. The number of telephones has risen quite markedly, to 4.8 for every100 people in 1995. In 1994 China launched its first commercial satellite,APSTAR 1, owned by a consortium of Chinese state enterprises and Thai, HongKong and Singaporean interests. Since 1984 China has launched satellites forforeign operators.

(For historical data on most of the above sectors, see Reference table 10.)

Energy provision

China is rich in energy resources, but they are not being developed fast enoughto keep pace with demand. China is the world’s largest producer of coal, whichis still the most important source of primary energy, providing about 70% oftotal output. (For coal, oil and gas production statistics, see Reference table 11.)Much of the coal is of poor quality, and is a major contributor to air pollution.About 80% of coal deposits are in the north and west, far from the regionswhere demand is booming, and also far from adequate supplies of water forcoal-washing at the pithead.

Efforts to develop the oilindustry

Onshore oil production, which provided much of the foreign exchange thatfuelled the trade growth of the early 1980s, has been stagnant at around140m tons/year for some years. China is now a net importer of crude oil. Effortssince the early 1980s to develop a big offshore industry have yet to make animpact. Hopes now centre on supposedly vast oil reserves in the Tarim Basin inthe far west. Developing them, and a system for transporting oil to the coast,remains a distant goal.

China: Energy provision 37


Natural gas has been discovered in the south, off Hainan Island, and in Sichuanprovince, but has not as yet made a big contribution to energy supplies.

Energy balance, 1995(m tons oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Primary supplyProduction 149 16 655 52a 51 923Imports 32 0 1 0a 0 33Exports –23 0 –16 –2a 0 –41Stock change 0 0 0 0 0 0Total 158 16 640 50a 51 915

17b 882

Processing & transformationLosses & transfers 24 6 242 15 1 288Transformation output 0 1 0 68b 0 69Total 24 7 242 15 1 357

Final consumptionTransport fuels 56 0 7 1b 0 64Industrial fuels 34 3 272 51b 2 362Residential etc 19 3 119 18b 48 207Non-energy uses 25 5 0 0 0 30Total 134 11 398 70b 50 663

Note. Losses and transfers comprise input to transformation processes (electricity generation, gasmanufacture, liquids from coal etc), plus energy industry fuel and losses.a Expressed as input equivalents on an assumed generating efficiency of 38.5%. b Output basis.

Source: Energy Data Associates.

There is a wealth of hydro resources, and a number of grandiose schemes todevelop more. In addition, by 1995 China had two functioning nuclear powerplants, and plans to build several more. In many areas in recent years energyshortages have been a major bottleneck to industrial growth. In mid-1994, forexample, even the capital, Beijing, had to introduce electricity rationing, aftera hot spell led to a surge in the use of air conditioners.

Financial services

Major bankingrestructuring is under way

In the mid-1990s structural problems in the banking system were the focus ofmuch attention. The government appeared to have lost its ability to controlcredit expansion. Within the state banking system, there was widespread disre-gard for loan ceilings set by the People’s Bank of China (the central bank), anda proliferation of illegal or “grey” markets for raising capital.

In 1993 the beginnings of a thorough overhaul of the banking system wereinitiated. The aim was to transform the People’s Bank, which still retainedvestiges of the monopoly bank of a state socialist regime, into something closerto a monetary authority that controls the market but is no longer a frontlineparticipant. Accompanying the attempt to transform the People’s Bank into akind of Chinese Federal Reserve will be a restructuring of the rest of the state-owned banking system. There are four “specialised” and eight “comprehensive”banks. They will eventually operate in a genuine commercial environment,

38 China: Financial services


while their policy lending (loans made under government instruction to “key”projects, unprofitable state-owned enterprises and government itself) is hivedoff to new, purpose-formed institutions. At present such lending usually falls tothe specialised banks (Agricultural, Industrial and Commercial, Construction,and Bank of China, which deals in foreign exchange). Now there is a newState Development Bank, a reorganised Agricultural Bank, and an export creditinstitution.

The separation of functions will not of itself reduce the budgetary burden onthe state banks. Nor will the People’s Bank’s huge network of retail outlets beeasily dispensed with. Moreover, the state-owned banking system is beset bynon-performing loans to loss-making state enterprises. It is therefore easier toset up new financial institutions, sometimes with foreign capital, than to trans-form the operations of the state banks. Nevertheless, the introduction of posi-tive rates of interest on deposits and some loans during 1995-96 is a step in theright direction, as is the widening of spreads that took place as a result of thetwo interest rate reductions of 1996.

Bond sales help establishsecurities markets

The development of secondary capital markets was in part necessitated by thegovernment’s consistent budget deficits. There have been quite high savingsrates, although a large proportion of domestic savings was lying idle, as “under-the-mattress money”. It was perceived that funding the deficits by printingmoney was a prime cause of the inflationary surge that began in 1993. But inthe past it had been difficult to raise money through selling Treasury bonds,except by the coercive deduction of bond payments from state workers’ paypackets, a practice which was much resented. The paper was seen as illiquid.Thus, from 1990 the government started issuing bonds underwritten by finan-cial institutions. By the mid 1990s issues of more than Rmb100bn could bedisposed of, apparently without undue difficulty.

Share categories maynot last

The securities exchanges where Treasury bonds were sold formed the basis forChina’s first two stock exchanges, which opened in 1990, in Shanghai andShenzhen. The markets have been extremely volatile. There are two categoriesof shares. “A” shares, denominated in renminbi, are open only to Chineseinvestors. By the end of 1995 some 322 companies has listed on the rowexchanged and there were also 56 “B” shares, also denominated in renminbi,but traded in US and Hong Kong dollars by foreigners. There were also, by theend of 1995, 17 “H” shares, listed on the Hong Kong Exchange, and plans toissue another 14 “H” shares. Other Chinese stocks are listed in New York.Foreigners who like Chinese equities will be able to buy them on well-regulatedexchanges, with relatively strict disclosure requirements, and, crucially, liquid-ity to spare.

The distinction between “A” and “B” shares may not last long. Joint venturesbetween foreign finance houses and Chinese institutions are to be allowedto invest in “A” shares, and Chinese investors are to be given access to the“B” market. Chinese officials, however, have suggested that a full merger of thetwo markets will have to await renminbi convertibility.

(For key banking statistics, see Reference table 12.)

China: Financial services 39


Production

Industry

Despite the reservations noted earlier (see Economic performance), there is nodoubting that industrial output has increased at huge rates in China in recentyears. Industrial output growth averaged 12.6% per year in real terms through-out the 1980s. For most of that period, it was led by the township and villageenterprises. In effect, local agricultural surpluses were invested in manufac-turing, often in small, low-technology and labour-intensive processes. In the1990s, and especially since 1992, the sector called “private and other”, whichincludes the fast-growing foreign-invested enterprises, has been making anoticeable impact on production figures.

Industrial enterprises by ownership, end-1995

’000 % of total

State-owned 118.0 1.6Collectives 1,475.0 20.1 of which: township-owned 228.8 3.1 village-owned 689.9 9.4Privately owned 5,688.2 77.5

Total 7,341.5 100.0Source: State Statistical Bureau, China Statistical Yearbook.

The industrial sector, 1995

% of % changeRmb bn total on 1994

State enterprises 3,122.0 34.0 19.2

Collectives 3,362.3 36.6 27.0

Others 2,705.2 29.4 54.6

Gross output 9,189.4 100.0 30.9Source: State Statistical Bureau, China Statistical Yearbook.

Although in absolute terms the contribution of private and foreign-investedenterprises remains small, the proportion is growing rapidly. In 1995 “joint” (iejoint venture) enterprises contributed 2.3% of national gross output, while“private” ones contributed 13%, up from a combined share for these twocategories of 4.4% in 1990. State-owned industry, meanwhile, saw its share oftotal output fall from 54.6% in 1990 to 34% in 1995, while the proportioncontributed by collectively owned enterprises grew from 35.6% to 37%.

Nevertheless, there were still 118,000 state-owned enterprises at the end of1995, compared with 104,700 in 1991. In 1995 the number of individuallyowned enterprises had reached 5,688,200, down from 8,007,400 in 1994. Themajority of them were based in rural areas and the fall in their number in 1995will have owed a lot to the difficult operating conditions, which also helpedreduce the number of collective enterprises by 12.5%, to 689,900.

40 China: Industry


Problems ofoverproduction persist

In terms of the structure of industrial output, the trend has been for a gradualshift away from a traditional dominance by heavy industrial products from thestate sector towards light industry. The acute shortage of consumer goods at theend of the 1970s created enormous pent-up demand for both domestic andimported goods. There has, however, been a continual problem of over-production in some sectors, notably of a number of basic consumer durablessuch as refrigerators and washing machines. Demand for these was high in themid-1980s. Thereafter, a more sophisticated consumer market preferred to payfor imported products that were seen as being of higher quality. Stockpiles builtup, and were a major factor in the mounting “triangular debt” between banks,enterprises and their suppliers, which preoccupied policy-makers in 1991 andagain in 1994-96.

Industrial policy

The 1993 Decision

The current goals of industrial policy at the macro level aresummarised in the “Decision on Issues Concerning theEstablishment of a Socialist Market Economic Structure” issuedafter the third plenum of the 14th Party Congress.

The major goals identified are as follows.

• A “modern enterprise system” covering corporate structure,governance and management and fully separating the state’sexercise of ownership and the enterprise’s exercise of legalperson property rights.

• Diversified ownership forms.

• Competition on equal terms between different ownershipforms.

• Better macroeconomic and monetary policy tools, includ-ing provision for the central bank to become fully independentand manage money supply and credit and interest ratesthrough open market operations.

• An expanded capital market and financial system in whichthe specialised banks become commercial and three policybanks are established.

• Labour market and human resource development to beimproved and a national social security system created.

• Developing the services sector.

• Enhancing the taxation and income distribution system.

• Further liberalisation of trade and foreign investment.

• Greater attention to science and technology.

• Creation of an appropriate, market-oriented legal system.

• Formulation of specific sectoral plans for key industries.

Implementation of this ambitious plan is bound to be slow.The matter of bringing both the state-owned enterprises(SOEs) and the banks closer to the market is a difficult andnecessarily gradualist process. In addition, there is a need toensure compliance from local-level actors, with changes thatmay appear to be against local interests. Since the an-nouncement of the blueprint, the tackling of inflation hastaken priority, but there have been some moves towards enter-prise reform on an experimental basis.

One such reform is the “10,000-1,000-100-10" experiment.Introduced in 1994, this provides that:

• 10,000 large SOEs will implement the new accountingstandards, new ways of valuing assets and all the “14 autono-mous management rights” within 2 years;

• 1,000 large SOEs will implement the new state asset admin-istration regulations within 2-3 years and delegate their assetsto a supervisory committee which will strive to increase theirvalue;

• 100 large and medium SOEs are to be fully corporatisedwithin 2 years under the Company Law; and

• Ten municipalities are to undertake comprehensive enter-prise and social reform, including bankruptcy and divestiturefrom SOEs of social services (the number of municipalities waslater extended to 18).

China: Industry 41


In trying to control overproduction, the government also faced a dilemma. Thestate enterprises are quickest to respond to austerity measures such as creditcontrols. But they are also the weakest sector of the industrial economy, andmost vulnerable to bankruptcy. A bankruptcy law introduced in 1988 hasrarely been enforced, because of the social consequences of unemployment inthe cities. Time and again since then senior government leaders have suggestedthat this was a bullet they were about to bite. The state sector appeared to cryout for a dose of the “reform” meted out to much of the rest of the economy.Many SOEs, possibly at least half, are loss-making and subsidising them is amajor component of the public-sector deficit. The economic system that has tobe maintained to protect them is a serious obstacle to the development of otherparts of the economy, and to some of Beijing’s most cherished internationalobjectives, namely smooth trade relations with its major partners and admis-sion to the World Trade Organization (WTO). However, each time the issue hasrisen to the top of the agenda, China’s leaders have shied away. There are manypowerful vested interests fighting for the protection of state-owned industries.More fundamentally, the social and political consequences of large-scale bank-ruptcies make market discipline hard to enforce. In the 1990s there have beenefforts made to develop a social security system which would leave more polit-ical room for manoeuvre. But it will be years before the state industries can bereplaced not so much as productive forces, but as providers of housing, health-care and many other basic welfare services. (Production statistics for light andheavy industrial products are given in Reference table 13.)

Mining and semi-processing

China’s mining industry has been plagued by a skewed pricing system and bysafety problems. Coal mines, in particular, have a reputation as death-traps.Industry ownership is mixed. State-run mines are responsible for 58% ofChina’s annual output, but are in many cases as unsafe as the thousands ofprivately run mines. The low price of coal has discouraged investment in safetyprecautions, and in exploiting some deposits.

Foreign involvement ingold production will be

allowed

Similar problems have dogged the gold industry, where national production hasbeen regarded as a state secret. In late 1995 Beijing claimed that China’s goldoutput ranked sixth in the world, and revealed that total output that year hadbeen 105 tons, up 16% compared with 1994, which implies output of 88.2 tonsin 1994. Plans are in place to allow a floating gold price to stimulate production.Gold is officially a state monopoly, but the gap between the state purchasingprice and the parallel-market price has led to widespread illegal mining. In 1994China announced that it would in future allow foreign participation in goldmining. A gold-mining joint venture, involving a Canadian company, AsiaMinerals Corporation, and the Shandong Zhaoyuan Gold Industry GroupCompany, has been formed. There is enormous potential consumer demand. In1992 and 1993 China imported more than 200 tons/year, almost 10% of worldproduction. But per head gold consumption is only around 0.2 grams, comparedwith around 6-7 grams per head in other Chinese societies such as Hong Kongand Taiwan. Total deposits are estimated at 4,500 tons.

42 China: Mining and semi-processing


In recent years China has also emerged as an important producer and exporterof rare metals vital for high-technology industries such as aerospace and elec-tronics. These metals include vanadium, titanium, germanium, gallium andpolycrystalline silicon. It is also thought to hold the world’s largest reserves ofrare earths at the Bayan Obi mine in Inner Mongolia.

Agriculture and forestry

Hailed as a spectacular success when they were initiated, Deng Xiaoping’s agri-cultural reforms a decade later faced criticism that they had been a “one-shotdeal”. The big production rises that followed the reforms were only partly attrib-utable to the introduction of material incentives. The old commune system,which awarded farmers work-points, had explicitly related output to reward.

The reforms did lead to big one-off gains from the rationalisation of crops thatresulted from giving individual farmers a measure of freedom over how to usetheir land. However, individual land plots are in many areas very small, andtitle to them still belongs to the state.

There is a serious problem of underinvestment in the land, and hence of degra-dation. The government has tried to encourage a degree of recollectivisation,now known as scale-farming, in order to counter these problems and encouragemechanisation.

Farmers suffer from pricedistortions

An equally important problem since the mid-1980s has been the decliningterms of agricultural trade. Despite regular procurement price rises, and a cam-paign against the illegal extortion of levies and fees by local officials, there is stillconcern about the exploitation of farmers, and the concomitant risk of ruralunrest. Besides “fees” charged for entertaining visiting inspection teams, or forinvestment in industrial enterprises, many farmers are still being charged exor-bitant prices for inputs such as fertiliser, seeds and pesticide. It has been esti-mated that since 1986, the purchase price of farm goods had risen overall by anaverage of 188.7%, but the price of inputs had gone up by 192%. The “scissors”gap in which the farmers are caught had thus actually widened. Discontent inthe countryside has been heightened by periodic cash shortages among localgovernments, which have resorted to paying farmers for their contracted grainwith white slips, or IOUs.

As a result of such pressures, the government has had difficulty in persuadingfarmers to continue to grow grain. It had to emphasise that its “contracts” withhouseholds were mandatory. In 1995-96 it appeared that problems in grainproduction were continuing. The total area under cultivation was reported tohave shrunk by 0.9% in 1995; the area planted to grain shrunk by 0.4% andthat to rice, wheat and corn by a “comparatively big margin”. Total output wasdown in 1994, at 445.1m tons. Strenuous efforts to improve matters brought anincrease to 466.4m tons in 1995. The aim is to produce 500m tons by 2000. (Foragricultural data see Reference tables 14-17.)

China: Agriculture and forestry 43


Deforestation is nowrecognised as a serious

problem

The reforms also appear to have exacerbated the effects of the almost annualclimatic disasters to which Chinese agriculture is subject. The experience in1994 was bad but by no means exceptional. Serious flooding in the south wasaccompanied by a prolonged drought in the north and west. Flood preventionmeasures have been neglected in many areas because of the collapse of the oldcollective systems that were responsible for them. Irrigation techniques innorthern China have had the effect of lowering the water table, to such anextent that it is often said the capital will have to be moved from Beijing.

Agriculture: raising grain output

The total output of grain in 1995 was 466.6m tons, up by 1.2% per year since 1984

(compared with growth of 4.9% per year in 1979-84). Non-grain food supply has risen

faster than before. Grain demand per head will be 400 kg in 2030, when the popul-

ation peaks, up from 380 kg in 1995. Half will be used for staples, and the rest as

feedstock for protein.

In 2000 grain demand per head will be 385 kg, or 500m tons, and the population will

be 1.3 bn. Demand will rise by 1.4% per year. In 2010 grain demand per head will be

390 kg, or 550m tons, population 1.4bn. Demand will rise by 1% per year.

In 2030 grain demand per head will be 400 kg, or 640 tons, with a population of

1.6bn. Output will rise by 0.8% per year.

China is virtually self sufficient in grain now, and aims to be about 95% self-sufficient

in future. Net imports of about 25m tons in 2000, 27.5m tons in 2010 and 32m tons

in 2030 will be needed.

Peak imports were 20.8m tons in 1995, up from 9m tons in 1994.

The additional output needed of around 10m tons/year could be achieved in the

following ways.

Increase yields by an annual average of 1% in 1996-2010 and 0.7% in 2011-2030,

assuming land area sown is stable.

Extend sown area by reclamation of 14.7m ha out of 35m ha of waste; bring

300,000 ha per year into cultivation.

Upgrade technology by raising the contribution of science and technology to

agriculture.

Reduce losses from a rate of at least 10%, ie over 45m tons/year at present, by better

planting, harvesting, transport and storage and less waste along the retailing and

processing chain.

Protect agricultural land.

Increase the irrigated area from 49.3m ha to 53.3m ha by 2000, 56.7m ha by

2010 and 66.7m ha by 2030 , accounting for 56%, 60% and 70% of the cultivated

area.

Raise chemical fertiliser output from 24.5m tons at present so that China is

basically self-sufficient in nitrogenous fertiliser by 2000.

Increase central investment in agriculture, from 17% to more than 20% of

planned capital investment.

Reform pricing and marketing of grain so that prices are primarily market driven,

but subsidies are used for those on low incomes.

44 China: Agriculture and forestry


Deforestation has also been a factor in the flooding. With the emphasis, in MaoXedong’s words, on “taking grain as the key link”, many forests disappeared inthe 1960s. Tree-planting is now being actively encouraged. The area underforest has expanded, but China still remains a timber-starved country, and it isthe world’s second largest importer of logs. The problem has been made worsein recent years by the construction boom among newly prosperous farmers inthe countryside, as well as by mass theft, forest fires and pests. The Chinesemedia have warned that in just a few years China may run out of trees to fell,and have focused on the economic consequences of this, notably unemploy-ment for millions of timber workers. But there is mounting concern, too, aboutthe ecological consequences.

According to one estimate, as much as one-seventh of China’s land—an areafive times the size of the UK—has suffered soil erosion, destroying farmland,silting up rivers and reservoirs, and thus contributing to serious flooding.Hence, according to press reports, China’s Ninth Five-Year Plan, which cameinto effect in 1995, is to introduce provincial tree-felling quotas and limittimber consumption to a level one-fifth below that prevailing in 1994.

Construction

Chinese official statistics make a distinction between “productive” and“non-productive” investment. The central government’s consistent difficultyin recent years has been to allocate enough funds to “productive” investment,especially in much-needed infrastructural projects, while restraining invest-ment in residential construction, hotels, town halls and, increasingly, pureproperty speculation.

Land-use plans have beenenhanced

As one of the key measures designed to cool the economy in mid-1993, regul-ations about “basic construction” were tightened. This foreshadowed an an-nouncement that the country’s overall land-use plan would be enhanced. Anytype of land used in construction projects, including land used for develop-ment zones, would be listed from now on in the state’s annual land-use plans.Hitherto, the plans had only covered land used by the state, major collectiveprojects and that used for rural housing. Hence far more arable land was beingdeveloped for housing or industry than the state intended. In 1992 the statehad set aside 266,600 ha of land for construction, but more than 400,000 hawere actually used. However, in July 1994 it was found that investment inproperty development or speculation was up by 95.8% compared withJuly 1993, while investment in capital projects had grown by 76.8%. Therewere 5,447 new projects in “fixed assets” sectors, a 20% increase on the year-earlier period. Much foreign investment, mainly from Hong Kong, was nowalso going into property speculation. In Fuzhou, for example, such investmentaccounted for 45% of all foreign investment. The result has been a propertybubble along the southern coast, with large areas of arable land left fallow fordevelopment which may never happen. The relaxation of credit that took placein 1996 has prompted fears of a renewed bout of property speculation.

China: Construction 45


The external sector

Merchandise trade

Export growth has beenrapid—

Every year since 1978, with the exception of 1989, China’s exports have out-paced world export growth. Furthermore, every year, apart from 1983 and1984, manufactures have increased their importance as a proportion of mer-chandise exports. China has more than doubled its share of total world exportsin that time. Since the late 1980s a rising share of China’s exports has beenaccounted for by the re-exports of processing facilities with foreign investment.The imports of these plants have swollen the import bill as well. In 1994 exportgrowth was boosted by the effective devaluation of the renminbi at the begin-ning of the year. In 1995 exports were being overstated because of changes tothe value-added tax (VAT) rebate system that were introduced at mid-year andagain in January 1996. This led to implausible rises in recorded exports indollar terms, especially in the first half of the year. For 1995 as a whole, thedollar value of exports was reported by customs figures as having risen by 23%,to $148.9bn. This has distorted the base for comparison during 1996, whendollar exports have been falling in year-on-year terms.

China’s competitive advantage as an exporter lies in its massive and cheaplabour force. Too often this has been wasted by low productivity and poorquality work. But this now appears to have been successfully overcome in someof the thousands of enterprises in Guangdong producing for export under thewatchful eye of expatriate quality controllers who speak the same language andoffer personal examples of the benefits of economic efficiency and the conse-quent prosperity.

—and China will moveupmarket

There seems, on the face of it, no reason why China should not follow HongKong, Taiwan and South Korea in moving upmarket and conquering newmarkets, especially in electronics, on the basis of the assembly-type arrange-ments it has used so successfully for light manufactures such as garments andclothes. In 1995 textiles (including garments) accounted for 24.3% of Chineseexports. Pharmaceuticals have already shown impressive growth, because ofthe popularity of traditional Chinese medicines among overseas Chinese, andbecause of the wider availability of chemicals for Western medicines.

Imports are dominated bymanufactures—

Imports are dominated by manufactures. Their share of the total reached 82%in 1995, compared with 18.5% for primary products. However, the manufac-tures bill includes a high proportion of intermediates, notably chemicals andrelated products (13.1% of total imports in 1995), but also raw materials, ironand steel, and textiles yarn.

—but non-staple food andpetroleum imports will

increase

This pattern is unlikely to undergo a radical change in composition in the1990s. However, as the decade progresses, food imports may well rise in yearsof bad harvest, even if the overall goal of increased grain production is met overthe ten-year period. The emphasis on the grain harvest is also likely to lead togreater imports of non-staple foods. Petroleum imports are likely to rise sharplyin the mid- to late 1990s, as domestic production fails to keep pace with

46 China: Merchandise trade


demand, and in particular as new refining and petrochemicals capacity comeson stream. (For data on foreign trade by commodity, see Reference tables18 and 19.)

Merchandise trade, 1995($ bn)

Exports fob 148.8 Primary goods 21.5 of which: food & live animals 10.0 raw materials 4.4 mineral fuels 5.3 Manufactured goods 127.3 Chemicals 9.1 Light industriala 32.2 Machinery & transport equipment 31.4 Miscellaneous 54.5

Imports cif –132.1 Primary goods 24.4 of which: food & live animals 6.1 raw materials 10.2 mineral fuels 5.1 Manufactured goods 107.7 Chemicals 17.3 Light industriala 28.8 Machinery & transport equipment 52.6 Miscellaneous 8.3

Trade balance 16.7 Primary goods –2.9 Food & live animals 3.8 Raw materials –5.8 Mineral fuels 0.2 Manufactured goods 19.6 Chemicals –8.2 Light industriala 3.5 Machinery & transport equipment –21.2 Miscellaneous 46.3

a Light and textiles industrial products, rubber products, minerals and iron products.

Source: General Administration of Customs of the People’s Republic of China, China’s Customs Statistics.

Trade relations with theUSA remain fraught

Continued rapid growth in exports, however, relies on a hospitable inter-national environment, and on continued reform of China’s foreign trade sys-tem. The biggest question-mark over future export growth was removed in1994 when the US president, Bill Clinton, renewed China’s Most FavouredNation (MFN) trading status unconditionally, without making further annualrenewals conditional, as in the past, on China’s human rights policies. How-ever, trade relations with the USA remain fraught. The root of the problem isChina’s massive and growing bilateral trade surplus. This reached $33.7bn inthe first ten months of 1996 on US figures (Chinese data for the first ninemonths of 1996 show a smaller US deficit, of $7.2bn). In the short term, furtherexport growth will be constrained by tougher enforcement of quota restrictionson imports of textiles and some other goods into both the US and Europeanmarkets. The USA, in particular, has found large-scale Chinese “cheating” on

China: Merchandise trade 47


Comparative economic indicators, 1995

0 100 200 300

China

South Korea

Taiwan

Indonesia

Thailand

Hong Kong

Singapore

Malaysia

Philippines

Vietnam

Mongolia (a)

Gross domestic product$ bn

(a) $1.1 bn, 1994 estimate.Sources: EIU estimates; national sources.

455.5455.5455.5455.5455.5455.5455.5455.5455.5455.5455.5

695.3695.3695.3

455.5

695.3

0 5,000 10,000 15,000 20,000

Singapore

Hong Kong

Taiwan

South Korea

Malaysia

Thailand

Philippines

Indonesia

China

Mongolia (a)

Vietnam

Gross domestic product per head$

(a) 1994 estimate.Sources: EIU estimates; national sources.

27,92227,92227,92227,92227,92227,92227,92227,92227,92227,92227,92227,922

0 10 20 30 40 50 60

Mongolia (a)

China

Vietnam

Indonesia

Hong Kong

Philippines

Thailand

South Korea

Taiwan

Malaysia

Singapore

Consumer prices% change, year on year

(a) Dec 1995 on Dec 1994.Sources: EIU estimates; national sources.

0 2 4 6 8 10 12

China

Vietnam

Malaysia

South Korea

Singapore

Thailand

Indonesia

Mongolia

Taiwan

Philippines

Hong Kong

Gross domestic product% change, year on year

Sources: EIU estimates; national sources.

48


quotas through transshipment and relabelling in countries such as Honduras.In the long term, China’s relations with the USA may benefit from the phasingout of the Multi-Fibre Arrangement under the Uruguay Round of the GATT,although China may face limited sanctions for its failure to protect intellectualproperty rights. The relationship is vital. The USA probably takes as much asone-third of Chinese exports, a proportion disguised in Chinese figures by thelarge volume which is transshipped in Hong Kong, much of which appears inthe US figures as being of Chinese origin, thus adding the further irritant ofwide discrepancies between the totals quoted.

Administrative controlson imports will bedifficult to replace

Imports remain much more tightly controlled by administrative fiat and quotathan do exports. The intention is gradually to replace administrative controls onimports by a tariff-based system, in which the exchange rate would also performa significant regulatory function; it is a reform the government is nervous aboutpursuing. It fears that a lifting of absolute import quotas would be followed by aflood of imports, as in 1985-86. But there is also a worry about the difficulty ofcollecting tariffs, and the possibility of a new avenue of corruption for theofficials involved. Given the degree of domestic protection through quotas atthe moment, tariffs would have to be set at unrealistically high levels to achievethe same effect.

However, joining the body set up by the 1994 GATT agreement, the WorldTrade Organization (WTO), is a foreign policy priority, and the trade regime isbeing adjusted accordingly, most recently with the tariff reductions mentionedearlier.

Main trading partners, 1995$ m % of total

Exports to:Hong Kong & Macau 36,777 24.7Japan 28,463 19.1USA 24,711 16.6South Korea 6,689 4.5Germany 5,672 3.8Singapore 3,501 2.4Netherlands 3,232 2.2Taiwan 3,098 2.1UK 2,792 1.9Russia 1,665 1.1

Imports from:Japan 29,005 22.0USA 16,118 12.2Taiwan 14,784 11.2South Korea 10,293 7.8Hong Kong 8,591 6.5Germany 8,038 6.1Russia 3,799 2.9Singapore 3,398 2.6Italy 3,115 2.4Australia 2,585 2.0Source: State Statistical Bureau, China Statistical Yearbook.

50 China: Merchandise trade


The trade surplus issomewhat surprising—

Having been in deficit in the late 1980s, the merchandise trade account swunginto surplus in 1990 and, apart from 1993 which saw a high rise in domesticdemand, has remained in surplus in the first half of the 1990s. This surplus haspartly been the result of the demand management of 1989-90, which slashedthe import bill, and partly the result of the surge in export-oriented manufac-turing, often based on foreign investment, that has occurred since 1992 alongthe eastern seaboard. The trade surplus has also been swollen by over-reportingof export values in order to benefit from rebates on VAT. The incentive toover-report exports has been reduced with the reduction of the rebate rates in1995 and again in January 1996. Meanwhile, with the announcement thattariff concessions on capital goods imports of foreign-invested enterpriseswould be reduced from April 1996, a surge in such imports took place in thefirst few months of 1996 (their dollar value rose by 22%), further muddyingthe trade data.

The requirements of China’s development are such that the volume of importgrowth is likely to be faster than that of exports over the next five years, duringwhich time the trade surplus will disappear.

—even forforeign-invested

enterprises

In recent years a large and growing proportion of China’s exports and importshas been accounted for by foreign-invested enterprises. In 1995 they took54.3% of China’s total import bill, and supplied 31.2% of total exports. Whilesome of this can be explained by imports of plant and equipment, and of rawmaterials and semi-manufactures for re-export, there also appears to be a con-siderable degree of misinvoicing and transfer pricing.

Invisibles and the current account

In 1995 the current-account surplus fell from $6.5bn to only $1.6bn. The largetrade surplus that year was virtually wiped out by a huge rise in the deficit oninvisibles. Shipments are normally in deficit, the surplus on the travel accountbeing insufficient to pull overall services into surplus in 1995. In 1995, how-ever, the income account deficit soared as outward payments of interest roseand profits and dividends outflows were reportedly recorded for the first timeever. This casts doubt upon the previous data for the 1990s and may lead toadjustments, perhaps reducing some of the large errors and omissions thatappear on the capital account (see Reference table 20).

The current account, 1995($ bn)

Merchandise trade balance 18.1

Net services balance –6.1

Net income balance –11.8

Net transfers 1.4

Current-account balance 1.6Source: IMF, International Financial Statistics.

China: Invisibles and the current account 51


Tourism and shippingdominate invisibles

transactions

The two major items on the services account are tourism and shipping. Chinahas been running a sizeable surplus of about $1.5bn per year on the travelaccount, and the continued boom in foreign trade and investment will con-tinue to bring in large numbers of foreign travellers, of whom the majority areoverseas Chinese. The shipping account has tended to be in deficit by about$1bn per year.

China also has some invisible income from tens of thousands of constructionworkers, mainly in the Middle East, but increasingly in recent years in theRussian Far East. Overall, the healthy rise in foreign exchange reserves in1994-96 will tend to boost invisibles income, but the invisibles account willcontinue in deficit, and the diminishing trade surplus implies a current-account deficit from 1996.

Capital flows and foreign debt

China’s total foreign debt rose to $100.5bn in 1994, according to World Bankfigures, requiring debt service of $11.1bn, with a debt-service ratio of 8.9%.China has no difficulty in raising funds on the international capital markets,and can be expected to be a major borrower in the future. Nor will debt servicebe a serious constraint. (For data on debt, see Reference table 21; for data onaid, see Reference table 22; for information on BIS assets and liabilities, seeReference table 23.)

The capital accountdepends on direct

investment growth

The huge inflows of foreign capital witnessed in recent years, however, maybegin to show slower rates of growth. Much of the foreign investment so far hasbeen drawn by China’s comparatively cheap labour force and other low prod-uction costs. There are signs that rising costs are already deterring some invest-ors from the prosperous southern provinces such as Guangdong. In lessadvanced provinces costs are lower, but the bureaucratic and infrastructuralhurdles may be much greater. Despite China’s commitment to the introductionof a level playing field between domestic and foreign investment regimes, itseems certain that incentives will continue to be needed to attract foreign fundsto the interior of the country, to projects where payback periods will be long. Inaddition China faces increasing competition from other countries for invest-ment directed at manufacturing for the US market. Membership of the WTO isvital to protect China’s competitiveness as an investment location for exportinto developed markets.

However, ever more direct investment is now being drawn by the prospect ofChina’s own market. Most joint ventures are still required to export at least80% of their output, but an increasing number are now concentrating on themouth-watering prospect of a genuine opening of the Chinese domesticmarket. Although China remains a very poor country in terms of GDP perhead, even on a purchasing power parity (PPP) basis, the pockets of compar-ative prosperity in the East are large enough in themselves to constitute asizeable market.

52 China: Capital flows and foreign debt


Foreign investment commitments, 1979-93

$ bn % of total

By sourceHong Kong & Macau 150.9 68.0Taiwan 18.4 8.3USA 14.4 6.5Japan 8.9 4.0Singapore 4.8 2.2UK 3.0 1.4Thailand 2.1 0.9

By destinationGuangdong 74.7 33.7Jiangsu 19.8 8.9Shanghai 13.4 6.0Shandong 12.5 5.7Fujian 12.5 5.6Beijing 10.4 4.6Liaoning 7.7 3.5Total for coastal areas & provinces 179.9 81.9

Total contracted investment 221.9 100.0Source: Ministry of Foreign Trade and Economic Cooperation, reported in China Economic News.

One new feature of foreign investment in the 1990s was the growing impor-tance of the services sector. Foreign retailers, fast-food chains and other serviceindustries began to see a real market developing. Although this was limited, byand large, to the more prosperous south and south-eastern regions, it stillrepresented a new “middle class” numbering some tens of millions, with rap-idly rising purchasing power. The main shopping streets of cities such asShanghai and Guangzhou are becoming occupied by shops owned or fran-chised by some of the world’s leading fashion and other brand names.

Foreign investment used

$ bn No of projects

1979-83 1.8 1,392

1984 1.3 1,856

1985 1.7 3,073

1986 1.9 1,498

1987 2.2 2,233

1988 3.2 5,495

1989 3.4 5,778

1990 3.5 7,273

1991 4.3 12,978

1992 10.0 48,764

1993 27.5 83,437

1994 33.8 47,549

1995 37.5 37,011

Total 132.1 258,337Source: State Statistical Bureau, China Statistical Yearbook.

“Round-tripping” The capital account and foreign investment figures are muddied by the com-mon practice of round-tripping. Billions of dollars of Chinese money have left

China: Capital flows and foreign debt 53


the country, mostly to be parked in Hong Kong where mainland enterprises arebig investors in the local stock and property markets. A fair proportion of thatmoney is then reinvested in China, ostensibly as foreign investment. The taxincentives available to foreigners are gradually being whittled away in favour ofthe notion of a level playing-field between domestic and foreign investors.However, the attraction of keeping money offshore is such that the practice isunlikely to disappear. Some estimates put the amount of such “hot money”leaving China each year as high as $10bn-20bn. It thus has a big impact on thecapital account and helps explain some of the large figures which move aboutChina’s national accounts, often identified merely as errors and omissions.

Hong Kong’s investmentimportance is overstated

Figures produced by the Ministry of Foreign Trade and Economic Cooperationshowed that at the end of 1993 Hong Kong was still much the most importantsource of foreign investment, with 68% of the total (if Macau’s much smallercontribution is included); Taiwan with 8.3% was in second place; and HongKong’s contribution is inflated by some indirect investment from Taiwanrouted through the territory, as well as by round-tripping.

Foreign reserves and the exchange rate

China’s officially posted foreign exchange reserves stood at $20.8bn at the endof 1993, less than half the $46bn recorded in September 1992. Most of the fallwas attributable to a technical change. In 1993 China stopped including theforeign exchange holdings of the Bank of China in its calculations of the sizeof its reserves. These are now limited to the holdings of the People’s Bank ofChina itself. The reform is in line with the attempts to turn the People’s Bankinto a real central bank, and also to enhance the autonomy of state-ownedenterprises (SOEs; the Bank of China’s “reserves” included its foreign currencyliabilities to SOEs). Nevertheless, even from the smaller starting point, foreignexchange reserves seemed to have shrunk in 1993, before rising healthily in1994 as export growth picked up from the disappointing slowdown in 1993. Byend-1994 reserves (excluding gold) stood at $52.9bn, and they continued torise during 1995, reaching a reported $70bn by the end of the year and soaringto over $100bn by the end of 1996. (For data on foreign reserves, see Referencetable 24.)

Foreign reserves, Jul 1996($ m unless otherwise indicated; end-period)

Foreign exchange 89,693

SDRs 602

Reserve position in the IMF 1,419

Total reserves excl gold 91,713

Golda 3,671

Total reserves incl gold 95,385

Memorandum itemGold (m fine troy oz) 12.7

a Valued at 75% of the fourth-quarter average London price.

Source: IMF, International Financial Statistics.

54 China: Foreign reserves and the exchange rate


The renminbi’s slideappears to have stopped

Surprisingly, the renminbi, after sliding precipitously on the swap markets in1993, was strong throughout 1994, despite the high inflation rate. This wasexplained in part by its devaluation at the beginning of the year, in part throughthe demonstrated willingness of the People’s Bank of China to intervene tomaintain the renminbi at around Rmb8.7:$1, and in part by trade flows. Strongexport growth gave many traders access to foreign exchange. Many foreigninvestors, however, complained of considerable difficulty in securing access tohard currencies. In 1995 the renminbi recovered against the dollar, ending theyear at Rmb8.32:$1. For the year as a whole, the rate averaged Rmb8.35:$1. Asdiscussed above, the currency remained around Rmb8.33:$1 during 1996, incur-ring a real appreciation against the currencies of many trade partners. (Forhistorical data on exchange rates, see Reference table 25.)

China: Foreign reserves and the exchange rate 55


Appendices

Sources of information

National statistical sources BBC, Summary of World Broadcasts (daily and weekly), London

Beijing Review Press, Beijing Review (weekly), Beijing

China Daily, Beijing

Economic Information and Consultancy Co, China’s Customs Statistics (quarterly), Hong Kong

Economic Information and Consultancy Co, China Economic News (weekly),Hong Kong

Far Eastern Economic Review, China Trade Report (monthly), Hong Kong

Japan External Trade Organisation, China Newsletter (bi-monthly), Tokyo

State Statistical Bureau, China Statistical Yearbook (annual), Beijing

State Statistical Bureau, Monthly Bulletin of Statistics, Beijing

State Statistical Bureau, press releases published by Xinhua

US-China Business Council, The China Business Review (bi-monthly), Washington DC

US Department of Commerce, Doing Business with China, Washington DC

International statisticalsources

Bank for International Settlements, International Banking and Financial MarketDevelopments (quarterly)

IMF, International Financial Statistics (monthly)

Organisation for Economic Cooperation and Development, Financial StatisticsMonthly

Organisation for Economic Cooperation and Development, Geographical Distribution of Financial Flows to Developing Countries (annual)

UN, Monthly Bulletin of Statistics

UN, World Investment Report (annual)

World Bank, World Development Report (annual)

Select bibliography Geremie Barme and John Minford (eds), Seeds of Fire, Hong Kong, 1986

Jung Chang, Wild Swans, London, 1992

John Gittings, China Changes Face, London, 1989

Perry Link, Evening Chats in Beijing, New York, 1992

Harrison E Salisbury, The New Emperors, London, 1993

Vaclav Smil, China’s Environmental Crisis, New York, 1993

56 China: Sources of information


Jonathan D Spence, The Search for Modern China, London, 1990

Michael D Swaine, The military and political succession in China, Rand, 1993

Ezra E Vogel, One step ahead in China, Cambridge, Massachusetts, 1989

Reference tables

Reference table 1

Government finances(Rmb bn)

1991 1992 1993 1994 1995

Revenue 361.1 415.3 508.8 521.8 624.2 of which: tax 299.0 329.7 425.5 512.7 603.8 net subsidies to enterprisesa –43.6 –38.5 –36.2 –36.6 –32.8 borrowingb 46.1 67.0 73.9 117.5 155.0

Expenditure –381.4 –439,0 –528.7 –579.3 –682.4 of which: capital construction 74,0 76.5 90.1 64.0 78.9 defence 33.0 37.8 42.6 55.1 63.7 culture, health & education 70.8 79.3 95.8 127.8 146.7 administration 41.4 46.3 63.4 84.8 99.7 price subsidies 37.4 32.2 29.9 31.4 36.5

Debt serviceb 24.7 43.9 33.6 49.9 88.7

Balance –20.3 –23.7 –19.9 –57.5 –58.2

a The net of direct income from enterprises and subsidies to cover their losses. b It is Chinesepractice to include borrowing and the principal element of debt service in the budget. Themeasured deficits would be higher without these.


Reference table 2

Investment in assets by source and purpose(Rmb bn)

1991 1992 1993 1994 1995

By source of fundsa

State budget 37.3 33.4 46.4 53.0 62.1Domestic loans 129.2 215.2 292.6 399.8 419.9Foreign investment 31.6 45.7 90.7 176.9 229.6Self-generated fundsb 352.7 491.2 816.1 1,153.1 1,340.9

By purposeConstruction 359.4 501.9 785.6 1,086.5 1,317.3Equipment 143.5 206.4 314.4 415.4 426.2Other 47.9 77.2 145.7 202.3 258.3Total investment 550.9 785.5 1,245.8 1,704.3 2,001.9

a Figures grouped by sources of funds do not sum to total for 1994 and 1995. b Including others.


China: Reference tables 57


Reference table 3

Money supply and credit(Rmb bn unless otherwise indicated; end-period)

1991 1992 1993 1994 1995

Currency in circulation 317.4 432.9 577.7 728.4 788.2

Demand deposits 505.6 669.1 969.3 1,239.0 1,520.2

Money (M1) incl others 898.8 1,171.4 1,676.1 2,154.0 2,559.7

M1 growth (%) 28.2 30.3 43.1 28.5 18.8

Quasi-money 961.1 1,261.3 1,797.9 2,538.0 3,514.7

Money (M2) 1,859.9 2,432.7 3,474.0 4,692.0 6,074.4

M2 growth (%) 26.7 30.8 42.8 35.1 29.5

Domestic credit 2,002.7 2,449.9 3,481.1 4,310.4 5,293.6 Claims on central government (net) 58.2 101.1 118.4 133.3 132.3 Claims on other domestic transactors 1,944.5 2,348.9 3,362.7 4,177.1 5,161.3

Net foreign assets of monetary authorities 145.6 168.5 222.3 506.5 638.5Source: IMF, International Financial Statistics.

Reference table 4

Gross domestic product and alternative national account measures(Rmb bn; at current prices)

1991 1992 1993 1994 1995

Gross social product 4,414.2 5,584.2 n/a n/a n/a

National income 1,655.7 2,022.3 2,488.2 n/a n/a

Gross domestic product 2,161.8 2,663.8 3,463.4 4,662.2 5,826.1

Gross national product 2,166.3 2,665.2 3,456.1 4,653.3 5,727.7Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 5

Gross domestic product by sector(Rmb bn; current prices)

1991 1992 1993 1994 1995

Primary industry 528.9 580.0 688.2 945.8 1,199.3

Secondary industry 910.2 1,170.0 1,642.9 2,237.2 2,817.3 Industry 808.7 1,028.5 1,414.4 1,936.0 2,435.4 Construction 101.5 141.5 228.5 301.3 382.0

Tertiary industry 722.7 913.9 1,132.4 1,479.3 1,809.4 of which: transport, post & telecommunications 141.0 168.2 212.3 268.6 323.7 commerce 208.7 273.5 309.1 407.6 509.4Source: State Statistical Bureau, China Statistical Yearbook.

58 China: Reference tables


Reference table 6

Gross domestic product by expenditure(Rmb bn; current prices)

1991 1992 1993 1994 1995

Private consumption 1,031.6 1,246.0 1,568.2 2,123.0 2,783.9

Public consumption 283.0 349.2 450.0 598.6 712.3

Fixed investment 594.0 831.7 1,298.0 1,685.6 2,055.4

Additions to stocks 157.7 131.9 201.8 173.6 303.3

Net exports 61.8 27.6 –67.9 63.4 90.4

GDPa 2,161.8 2,663.8 3,463.4 4,662.2 5,826.1

a Includes statistical discrepancy.


Reference table 7

Price indices(1978=100 unless otherwise indicated)

1991 1992 1993 1994 1995

Overall retail pricesa 213.7 225.2 254.9 310.2 356.1 % change, year on year – 5.4 13.2 21.7 14.8

Overall consumer pricesb 170.8 181.7 208.4 258.6 302.8 % change, year on year – 6.4 14.7 24.1 17.1

Urban consumer prices 233.3 253.4 294.2 367.8 429.6 % change, year on year – 8.6 16.1 25.0 16.8 of which: food 259.9 287.7 335.2 449.8c 552.8c

% change, year on year – 10.7 16.5 34.2 22.9

Rural consumer pricesb 168.9 176.8 201.0 248.0 291.4 % change, year on year – 4.7 13.7 23.4 17.5

Farm products purchasing prices 268.4 277.5 314.7 440.3 527.9 % change, year on year – 3.4 13.4 39.9 19.9

Industrial products producer prices 177.2 182.7 204.3 239.4 274.6 % change, year on year – 3.1 11.8 17.2 14.7

a Includes prices of consumer goods and agricultural producer goods sold to farmers. b 1985=100, includes consumer goods and servicesconsidered necessities of daily life. c Derived from a separate index.

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

Reference table 8

Population(m; year-end)

1991 1992 1993 1994 1995

Urban 305.4 323.7 333.5 343.0 351.7

Rural 852.8 848 851.7 855.5 859.5

Total 1,158.2 1,171.7 1,185.2 1,198.5 1,211.2 Male 594.7 598.1 604.4 612.5 618.1 Female 563.6 573.6 580.7 586.0 593.1Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 9

Labour force(m; year-end)

1991 1992 1993 1994 1995

State-owned units 106.6 108.9 109.2 112.1 112.6 of which: manufacturing 34.8 35.3 34.4 33.2 33.3 government agencies & people’s organisations 9.5 9.7 10.1 10.1 10.2

Collectives in towns 36.3 36.2 33.9 32.8 30.8 of which: manufacturing 17.8 17.5 16 15.1 14.2 trade & food services 7.9 8.0 7.4 7.2 6.9

Self-employed in towns 7.6 8.4 11.2 15.6 8.8 of which: trade & food services 4.9 5.5 7.1 9.7 7.4

Rural collectives & self-employed 430.9 438.0 442.6 446.5 450.4

Total incl others 583.6 594.3 602.2 614.7 623.9 Primary industries 348.8 347.7 339.7 333.9 330.2 Secondary industries 124.7 129.2 135.2 139.6 143.2 Tertiary industries 110.1 117.4 127.4 141.2 150.6Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 10

Transport statistics

1991 1992 1993 1994 1995

RailwaysLength of track (’000 km) 53.4 53.6 53.8 54.0 54.6Passengers carried (bn person-km) 282.8 315.2 348.3 363.6 354.6Freight traffic (bn ton-km) 1,097.2 1,157.6 1,195.5 1,245.7 1,287.0

RoadsHighways (’000 km) 1,041.1 1,056.7 1,083.5 1,117.8 1,157.0Passengers carried (bn person-km) 287.2 319.3 370.1 422.0 460.3Freight traffic (bn ton-km) 342.8 375.5 407.1 448.6 469.5Passenger vehicles (’000) 1,852.4 2,261.6 2,859.8 3,497.4 4,179.0Freight trucks (’000) 3,986.2 4,414.5 5,010.0 5,600.8 5,854.3

WaterWaterway freight traffic (bn ton-km) 1,295.5 1,325.6 1,386.1 1,568.7 1,755.2 of which: ocean shipping 899.0 903.4 913.4 n/a n/aSource: State Statistical Bureau, China Statistical Yearbook.

Reference table 11

National energy statistics

1991 1992 1993 1994 1995

Coal (m tons) 1,087 1,116 1,141 1,240 1,361

Crude oil (m tons) 141 142 144 146 150

Natural gas (bn kwh) 16,073 15,788 16,765 n/a n/aSource: State Statistical Bureau, China Statistical Yearbook.



Reference table 12

Banking statistics(Rmb bn unless otherwise indicated)

1991 1992 1993 1994 1995

National banking sector credit funds 2,061.4 2,426.9 3,419.5 4,582.3 5,398.9

SourcesDeposits 1,486.4 1,889.1 2,323.0 2,932.8 3,878.3Bonds 13.4 16.3 9.9 7.4 166.4Currency in circulation 317.8 433.6 586.5 728.9 788.5Funds of banks 148.2 182.2 220.7 217.3 227.2Other 95.6 –94.3 279.4 695.9 338.4

UsesLoans to industrial production enterprises 423.6 495.6 604.7 720.9 878.9Loans for industrial supply & marketing 69.7 81.9 97.4 101.6 106.3Loans to commercial enterprises 669.1 767.8 903.7 1,005.0 1,216.3Loans to construction enterprises 71.5 90.6 105.2 111.7 103.5Loans to urban collectives & households 95.0 116.6 139.9 119.5 110.0Loans to agriculture 120.9 144.9 172.0 155.4 192.2Loans for fixed assets 304.4 392.5 517.1 717.3 1,002.6Other loans 50.1 71.7 106.0 228.5 329.5Government debts 106.8 124.1 158.2 168.7 158.2Foreign exchange 122.8 110.2 87.6 450.4 306.4Other 27.5 31.0 527.6 802.9 994.9

Rural credit cooperatives (no) 368,406 333,051 339,942 350,813 365,492

Rural credit cooperatives’ deposits 271.0 347.8 429.7 568.1 717.3Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 13

Industrial production(m units unless otherwise indicated)

1991 1992 1993 1994 1995

Light industrial productsBicycles 36.8 40.8 41.5 43.6 44.7Sewing machines 7.6 8.3 8.4 8.6 9.7Television sets 26.9 28.7 30.3 32.8 35.0Wristwatches 78.2 86.6 192.9 477.8 481.2Cloth (bn metres) 18.2 19.1 20.3 21.1 26.0Refrigerators 4.7 4.9 6.0 7.7 9.2Washing machines 6.9 7.1 9.0 10.9 9.5

Heavy industrial productsCement (m tons) 252.6 308.2 367.9 421.2 475.9Rolled steel (m tons) 56.4 67.0 77.2 84.3 898.0Crude steel (m tons) 71.0 80.9 89.6 92.6 95.4Plastics (m tons) 2.8 3.3 3.6 4.0 5.2Machine tools (’000 units) 163.9 228.7 262.0 206.2 89.8Pig iron (m tons) 67.7 75.9 87.4 97.4 105.3Locomotives (units) 706.0 798.0 922.0 992.0 974.0Motor vehicles (’000 units) 714.2 1,066.7 1,298.5 1,366.9 1,452.7Tractors (’000 units) 52.7 57.0 37.7 46.7 63.3Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 14

Agricultural production(m tons unless otherwise indicated)

1991 1992 1993 1994 1995

Grain 435.3 442.7 456.5 445.1 466.6

Cotton 5.7 4.5 3.7 4.3 4.8

Oil-bearing cropsa 16.4 16.4 18.0 19.9 22.5

Sugar cane 67.9 73.0 64.2 60.9 65.4

Sugar beet 16.3 15.1 12.0 12.5 14.0

Tea 0.5 0.6 0.6 0.6 0.6

Aquatic products 13.5 15.6 18.2 21.4 25.2

Meatb 31.4 34.3 38.4 45.0 52.6

Hogs (m head) 369.6 384.2 393.0 414.6 441.7

Sheep & goats (m head) 206.2 207.3 217.3 240.5 276.9

Cattle & other large animals (m head) 131.9 134.9 139.9 149.2 158.6

a Excluding soybeans. b Pork, beef and mutton.


Reference table 15

Gross agricultural output value, by sector(% of total; current prices)

1991 1992 1993 1994 1995

Crop cultivation 57.2 55.5 54.6 53.8 54.3

Forestry 4.5 4.7 4.5 3.9 3.5

Animal husbandry 26.5 27.1 27.4 29.7 29.7

Fishery 5.9 6.8 8.0 8.2 8.4

Other 6.0 6.1 5.5 4.5 4.1Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 16

Total sown area, by crop(%)

1991 1992 1993 1994 1995

Grain crops 75.1 74.2 74.8 73.9 73.4 of which: rice 21.9 21.5 20.5 20.4 20.5 wheat 20.8 20.5 20.5 19.5 19.3 maize 14.5 14.1 14.0 14.3 15.2 tubers 6.1 6.1 6.2 6.3 6.4 soybeans 4.7 4.8 8.4 8.6 7.5

Industrial crops 15.7 16.3 14.5 n/a n/a of which: cotton 4.4 4.6 3.4 3.7 3.6 oil-bearing crops 7.7 7.7 7.5 8.1 8.7 of which: rapeseed 4.1 4.0 3.6 3.9 4.6 peanuts 1.9 2.0 2.3 2.5 2.5 sugar 1.3 1.3 1.1 1.2 1.2 tobacco 1.0 1.4 1.4 1.0 1.0

Vegetables & melons 4.4 4.7 5.5 6.0 6.3

Green manure 2.9 2.8 0.0 n/a n/aSource: State Statistical Bureau, China Statistical Yearbook.

Reference table 17

Miscellaneous agricultural statistics

1991 1992 1993 1994 1995

Grain yields (kg/ha) 3,870 4,342 4,557 4,500 4659

Cotton yields (kg/ha) 870 660 750 785 879

Tractor-ploughed area (m ha) 50.2 51.5 n/a n/a n/a

Irrigated area (m ha) 478.2 485.9 487.3 487.6 492.8

Chemical fertiliser applied (m tons) 28.1 29.3 31.5 33.2 35.9

Chemical fertiliser produced (m tons) 19.8 20.5 19.6 22.7 25.6

Afforested area (m ha) 13.4 13.4 12.9 12.9 262.9

Grain imports (m tons) 13.5 11.8 7.5 9.2 20.8Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 18

Exports($ m; fob)

1991 1992 1993 1994 1995

Primary goods 16,145 17,004 16,666 19,708 21,487 Food & live animals etc 7,226 8,309 8,399 10,015 9,954 Beverages & tobacco 529 720 901 1,002 1,369 Non-edible raw materials 3,486 3,143 3,052 4,127 4,375 Mineral fuels, lubricants etc 4,754 4,693 4,109 4,069 5,335 Animal & vegetable oils, fats, waxes 150 170 205 495 454

Manufactured goods 55,698 67,936 75,078 101,298 127,283 Chemicals & related products 3,818 4,348 4,623 6,236 9,094 Light industrial products, rubber, minerals, iron etc 14,456 16,135 16,392 23,218 32,243 Machinery & transport equipment 7,149 13,219 15,282 21,895 31,391 Miscellaneous products 16,620 34,234 38,781 49,937 54,548 Products not classified elsewhere 13,655 0 0 12 7

Total 71,843 84,940 91,744 121,006 148,770Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 19

Imports($ m; cif)

1991 1992 1993 1994 1995

Primary goods 10,835 13,255 14,210 16,468 24,411 Food & live animals etc 2,799 3,146 2,206 3,137 6,131 Beverages & tobacco 200 239 245 68 394 Non-edible raw materials 5,003 5,775 5,438 7,437 10,158 Mineral fuels, lubricants etc 2,113 3,570 5,819 4,035 5,127 Animal & vegetable oils, fats, waxes 719 525 502 1,809 2,601

Manufactured goods 52,957 67,330 89,749 99,128 107,667 Chemicals & related products 9,277 11,157 9,704 12,130 17,300 Light industrial products, rubber, minerals, iron etc 10,493 19,273 28,527 28,084 28,772 Machinery & transport equipment 19,601 31,312 45,023 51,467 52,638 Miscellaneous products 2,439 5,588 6,495 6,768 8,264 Products not classified elsewhere 11,147 0 0 679 693

Total 63,791 80,585 103,959 115,614 132,078Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 20

Balance of payments, IMF estimates($ m)

1991 1992 1993 1994 1995

Goods: exports 58,919 69,568 75,659 102,561 128,110

Goods: imports –50,176 –64,385 –86,313 –95,271 –110,060

Trade balance 8,743 5,183 –10,654 7,290 18,050

Services: credit 6,905 9,189 11,146 16,503 19,130

Services: debit –4,121 –9,414 –12,014 –16,201 –25,223

Income: credit 3,793 5,655 4,437 5,854 5,191

Income: debit –2,879 –5,367 –5,696 –6,873 –16,965

Current transfers: credit 683 978 1182 874 1,827

Current transfers: debit –41 –36 –103 –915 –392

Current-account balance 13,083 6,188 –11,702 6,532 1,618

Direct investment abroad –913 –4,000 –4,400 –2,000 –2,000

Direct investment in China 4,366 11,156 27,515 33,787 35,849

Portfolio investment assets –330 –450 –597 –380 79

Portfolio investment liabilities 565 393 3,646 3,923 710

Other investment assets –156 –3,267 –2,114 –1,189 –87

Other investment liabilities 4,500 –4,082 –576 –1,496 4,122

Financial balance 8,032 –250 23,474 32,645 38,673

Capital account nie credit 207 228 108 395 0

Capital account nie debit –18 –15 –15 –19 0

Capital-account nie balance 189 213 93 376 0

Capital-account balance 8,221 –37 23,567 33,021 38,673

Net errors & omissions –6,767 –8,211 –10,096 –9,100 –17,822

Overall balance 14,537 –2,060 1,769 30,453 22,469

Financing (– indicates inflow)Movement of reserves –14,083 2,060 –1,769 –30,453 –22,469Use of IMF credit & loans –454 0 0 0 0Source: IMF, International Financial Statistics.



Reference table 21

External debt($ m unless otherwise indicated; debt stocks as at year-end)

1990 1991 1992 1993 1994

Total external debt 52,633 59,779 69,509 84,178 100,536 Long-term debt 45,397 49,479 58,663 70,632 85,137 Short-term debt 6,766 10,300 10,846 13,546 15,399 of which: interest arrears on long-term debt 0 0 0 0 0 Use of IMF credit 469 0 0 0 0

Public & publicly guaranteed long-term debt 45,397 49,479 58,463 70,076 84,554 Official creditors 14,514 17,073 19,105 24,339 28,973 Multilateral 6,111 7,576 8,614 10,690 13,588 Bilateral 8,402 9,497 10,491 13,650 15,385 Private creditors 30,884 32,406 39,358 45,737 55,581 of which: banks 14,512 14,963 17,913 20,678 22,723 bonds 5,426 5,660 5,449 7,715 11,087

Total debt service 6,969 8,258 8,618 10,168 11,135 Principal 3,827 4,574 5,213 6,729 6,343 Interest 3,142 3,684 3,405 3,439 4,792 of which: short-term debt 547 707 697 809 948

Ratios (%)Total external debt/GNP 14.9 15.8 16.6 19.6 19.3Debt-service ratioa 11.5 11.8 10.2 11.2 8.9Short-term debt/total external debt 12.9 17.2 15.6 16.1 15.3Concessional long-term debt/ total long-term debt 21.4 21.8 19.5 19.1 18.8Variable interest long-term debt/ total long-term debt 36.3 34.0 29.5 29.2 27.3

Note. Long-term debt is defined as having original maturity of more than one year.a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, World Debt Tables.



Reference table 22

Net official development assistancea

($ m)

1990 1991 1992 1993 1994

Bilateral OECD 1,511.7 1,252.5 2,077.3 2,239.8 2,387.5 of which: Japan 723.0 585.3 1,050.8 1,350.7 1,479.4 Germany 228.9 107.1 192.8 247.8 300.0 France 88.0 138.5 153.4 102.6 97.7 Austria 102.8 97.2 23.0 10.1 32.4

Arab countries –5.2 5.8 11.6 1.5 24.4

Multilateral 586.1 740.5 960.7 1,030.0 820.0 of which: IDA 505.0 610.0 789.9 865.1 671.0 UNDP 48.5 49.9 44.9 44.8 38.4 EC 51.5 26.8 31.3 19.5 14.1

Total 2,092.5 1,998.7 3,049.6 3,271.2 3,232.0

a Disbursements. Official development assistance is defined as grants and loans with at least a 25%grant element, provided by OECD and OPEC member countries and multilateral agencies, andadministered with the aim of promoting development and welfare.

Source: OECD Development Assistance Committee, Geographical Distribution of Financial Flows to Developing Countries.

Reference table 23

Position of China vis-à-vis BIS-reporting banks($ m; end-period)

1991 1992 1993 1994 1995

Assets 47,398 49,012 49,151 59,494 67,077

Liabilities –37,107 –42,676 –49,163 –59,952 –57,428

Net position 10,291 6,336 –12 –458 9,649Source: Bank for International Settlements, International Banking and Financial Market Developments.

Reference table 24

Foreign reserves($ m unless otherwise indicated; end-period)

1991 1992 1993 1994 1995

Foreign exchange 42,664 19,443 21,199 51,620 73,579

SDRs 577 419 484 539 582

Reserve position in the IMF 433 758 704 755 1,216

Total reserves excl gold 43,674 20,620 22,387 52,914 75,377

Goldb 3,429 3,221 3,563 3,665 3,671

Total reserves incl gold 47,103 23,841 25,950 56,579 79,048

Memorandum itemGold (m fine troy oz) 12.7 12.7 12.7 12.7 12.7

a From July 1992 foreign exchange holdings of the Bank of China are excluded. b Valued at 75% ofthe fourth-quarter average London price.




Reference table 25

Exchange rates(Rmb per unit of currency; annual averages)

1991 1992 1993 1994 1995

US$ 5.323 5.515 5.762 8.619 8.351

HK$ 0.685 0.712 0.744 1.115 1.080

¥ (’000) 39.52 43.61 52.02 84.37 89.23

DM 3.217 3.542 3.488 5.319 5.827a

a Cross-rate.




Mongolia

Basic data

Land area 1,566,500 sq km

Population 2.32 million (January 1996)

Main towns Population (January 1996)

Ulaanbaatar 548,400Darkhan 85,700Erdenet 56,100

Climate Continental with extremes of temperature

Weather in Ulaanbaatar(altitude 1,350 metres)

Rainy season, June-August; mean winter temperature, -20°C; mean summertemperature, 15°C but with wide daily fluctuations

Language Mongolian

Measures Metric system

Currency Togrog. Average exchange rate in 1995 (free-market rate): Tg448.6:$1. InDecember 1996 the exchange rate was Tg608:$1.

Fiscal year January-December

Time 8 hours ahead of GMT

Public holidays January 1, Mongolian Lunar New Year (variable—three days in January orFebruary), May 1, July 11-13, November 26

Mongolia: Basic data 69


Political background

Historical background

The origins of the state For two centuries before 1911, Mongolia (then known as Outer Mongolia) waspart of the Manchu (Qing) empire of China. Dissatisfied with economic condi-tions and afraid of losing national identity if they agreed to a programme ofreforms ordered by the Manchu government in Beijing in 1909, the KhalkhMongols of Outer Mongolia declared independence in 1911. The country, estab-lished as a theocratic monarchy, enjoyed a brief period of autonomy before itwas occupied by Chinese troops and the White Russian armies in 1919. In 1921a second revolution, with the backing of the Soviet Union, expelled the intrud-ers and put the Mongolian People’s Party—renamed the Mongolian People’sRevolutionary Party (MPRP) in 1925—into power. When the monarch, a LivingBuddha known as the Javzandamba Khutagt, died in 1924, the country becamea people’s republic and was renamed the Mongolian People’s Republic. Thename lasted until 1992 when it was changed to Mongolia.

The price of Soviet support The MPRP ruled for almost 70 years with Soviet support, but Soviet protectionof Mongolia’s independence and assistance in developing its state, economicand social institutions came at a high price. In the 1930s Mongolian societywas shaken as Stalinist purges destroyed 750 Buddhist monasteries and led tothe death or disappearance of some 100,000 people, including lamas and sen-ior politicians. The head of state, Khorloogiin Choibalsan, was largely respon-sible for the purges, and conditions improved after his death in 1952.Immediately following the Chinese revolution in 1949 good relations existedbetween China and Mongolia, and Mongolia received substantial amounts ofChinese aid. Relations later soured, however, and in the period from 1960 tothe early 1980s tensions between the two countries were high. Mongolia be-came a full member of Comecon (Council for Mutual Economic Assistance, thecommunist states’ economic bloc) in 1962, and after ousting his rivals,Mr Choibalsan’s protégé, Yumjaagiin Tsedenbal, pledged loyalty to the SovietUnion. Subsequently, the Mongolian-Chinese borders were policed by some55,000 Soviet troops during the cold war, and Soviet aid contributed substan-tially to the transformation of Mongolia’s social and economic life. In 1984Mr Tsedenbal was replaced by Jambyn Batmonkh, who faithfully copied thelate communist reforms (glasnost and perestroika) until democratic forcestoppled his government in 1990.

The move to a multipartysystem

In December 1989 the Mongolian Democratic Association (MDA) was formedand began a series of public demonstrations demanding a multiparty system, apermanent parliament and a market economy. A hunger strike by 11 supportersof the MDA in March 1990 led to the resignation of the Politburo and CentralCommittee, and the MPRP renounced its constitutional right to rule. A nationalelection was held in July in which six parties participated. The People’s GreatKhural (national assembly) then elected Punsalmaagiin Ochirbat as thecountry’s first president and a 60-member Small Khural as an interimparliament in which the MPRP had a 60% majority. A coalition government was

70 Mongolia: Historical background


formed, and the new parties had a large role in formulating legislation for thereform programme, including the drawing up of a new constitution and aprivatisation plan. Comecon, however, was dissolved during this same period,causing widespread disruption to the country’s economic life. Shortages of food,fuel, materials and parts, and rising unemployment were blamed on the newparties in the Small Khural, leading to their defeat in the 1992 elections.

In the State Great Khural (the new parliament), 70 seats went to the MPRPleaving the opposition, comprising members of the Mongolian NationalDemocratic Party (MNP) and the Mongolian Democratic Party (MSDP), virtuallypowerless. A new government was formed under Puntsagiin Jasrai, a formerPolitburo member. In 1994 the MPRP clashed with Mr Ochirbat when heblocked legislation he regarded as unconstitutional. As a result he lost the MPRPnomination in the June presidential election but went on to win as the candi-date of the opposition. There seemed little chance of the opposition influencinglegislation without proportional representation. The democrats attacked theintegrity and political record of senior government officials and mass demon-strations were organised. This resulted in an agreement between Mr Ochirbatand leaders of the parliamentary parties for changes to the parliamentary andelection laws. In spite of the fact that parliament refused to sanction the agree-ment, the MPRP suffered a surprise defeat in the general election of June 1996when a Democratic Coalition, largely made up of the MNDP and the MSDP,took 50 of the 76 seats in the State Great Khural. The coalition formed a newgovernment under the leader of the MNDP, Mendsaikhany Enkhsaikhan, for-merly head of chancery in the president’s office.

Constitution and institutions

The 1992 constitutiongives the elected president

an important role

Mongolia’s first three constitutions were modelled on existing Soviet constit-utions. The third was in 1960 after the collectivisation of the livestock-herdingeconomy had placed the MPRP in effective control of the country’s resources,and it allowed the party to run the state according to Marxist-Leninist prin-ciples until 1990. The fourth constitution came into force in February 1992 andis radically different. International legal specialists as well as the electorate werewidely consulted at the draft stage but the People’s Great Khural was respon-sible for the final version. Under the new constitution, the head of state is thepresident who is elected by the people, and there is a unicameral standinglegislature of 76 members elected for a four-year term. The president has thepower to veto legislation and he also heads the National Security Council andthe armed forces. Mr Ochirbat sees his presidential role as a guardian of theconstitution and a unifying force in the state and society.

Political forces

Broad-based parties arecomplemented by more

focused groups—

The MPRP was founded in 1920 as the Mongolian People’s Party, to promotenational independence and social reform. Communist in ideology, it deter-mined the course of Mongolian society from 1921 to 1990 and was the channelthrough which Soviet policies were implemented in Mongolia. In 1990 fivedemocratic parties, each with a necessary minimum of 801 members, were

Mongolia: Constitution and institutions 71


legally registered. More have been formed since then, some have merged, andby 1995 there were 12. The MPRP remains the largest with 81,000 memberswhile the MNDP has 40,000 and the MSDP 25,000. The non-parliamentaryparties claim between 804 and 12,000 members. Some, including the parlia-mentary parties, are based on broad political ideologies, while others like theGreen Party and the Religious Party have narrower platforms. Most claim to bedemocratic, including the MPRP, which says it has renounced communismand accepts the need for constitutional and economic reform. However, theinfluence of hardliners continues and has prompted an exodus of radicals andprogressives. Members of the MPRP in the State Great Khural hold a range ofviews and do not necessarily vote in accordance with the views of the party’snational executive.

—and mass politicalmovements

In addition to formal parties there are several mass political movements, thelargest being the Mongolian Democratic Association, which act as pressuregroups and occasionally hold public protests. Legal reforms have also allowedthe traditional trade unions to negotiate with the government on workers’living standards, salaries, wages and pensions. Impatient with the slow pace ofnegotiations, a parallel group of free trade unions emerged in 1991 and hasbeen active in organising strikes and demonstrations. In the realignment ofnew political forces, women have lost considerable ground as a power groupbecause of the resurgence of patriarchal attitudes. Currently there are onlyseven women in the State Great Khural, and none at ministerial level, and thenumber in local government is also much lower than during communist rule.However, some new women’s non-governmental organisations (NGOs), forexample Women and Justice, emerged in 1995 and are seeking to improve thestatus and conditions of women in social and political life.

Religious groups, in contrast, have gained ground. Since 1990 there has been aresurgence of Buddhism, visible in the opening of monasteries and religiousschools and the formation of organised groups among the secular faithful. In1993, however, the involvement of monasteries and other religious organis-ations in national politics was severely restricted when parliament enacted alaw on the state and religion. The tendency to limit political activity to thepoliticians and political parties is also apparent in the law on state servicewhich came into force in 1995. Since its effect is to forbid employees of thestate, local government and public organisations from involvement in NGOs,their future role in the development of Mongolia is unclear.

International relations and defence

Although Mongolia had formal diplomatic relations with almost 100 countriesin the 1980s, its closest allies were the Comecon countries and other rel-ationships were minimal. Mongolia joined the UN in 1961 but, rather thanestablish an independent stance, consistently supported Soviet foreign policy.A tense relationship existed with China from the 1960s until 1987. During thisperiod some 55,000 Soviet troops were stationed in Mongolia.

72 Mongolia: International relations and defence


Foreign policy is nowdriven by economic

interests

Foreign policy, which was previously driven by ideology, is now determined bypragmatic economic interests. Accordingly, relations with the USA, Japan,South Korea and the EU are prominent, and new treaties and agreements havebeen negotiated with parts of the former Soviet Union, notably Kazakstan, andwith India and other Asian countries. A constant goal of Mongolian foreignpolicy since 1921 has been the protection of the country’s national integrity,and towards this end Mongolia has sought to balance its relations with Chinaand the Soviet Union. The de-escalation of tensions between the two regionalpowers, the withdrawal of Soviet troops from Mongolian territory, and thesettlement of outstanding border issues with Russia and China in 1994 haveeased this task considerably, while the end of the cold war has helped to makerecent reforms and manpower cuts in the army more acceptable.

Military forces, mid-1996

Regular Conscriptsa

Army 4,500 11,500

Air force 1,500 500

Total 6,000 12,000

a Estimates.

Source: International Institute for Strategic Studies, The Military Balance 1996/97.

The economy

Economic structure

Main economic indicators, 1995

GDP growth (%) 6.1a

Consumer price inflation (%) 65.7a

Current-account balance ($ m) 31.1b

Exchange rate (Tg:$) 473.6c

Population (m; mid-year) 2.41

a EIU estimate. b 1993. c End-period.

Sources: EIU; IMF, International Financial Statistics.

While agriculture remains extremely important, industry (mainly extractive)accounts for a much larger share of NMP, at 34% in 1995 compared with 20.7%in 1991. The services sectors are very underdeveloped, and NMP per headremains extremely low.

Until 1990 Mongolian economic development was directed by a series of Soviet-style central plans. Economic liberalisation has been accompanied by a shift intrade away from the former Comecon centrally planned economies, but Russiaremains the most important trading partner. Exports remain dominated by rawmaterials, whereas petroleum products continue to account for a substantialproportion of imports.

Mongolia: Economic structure 73


Comparative economic indicators, 1995

Mongolia China India Russia Japan USA

GDP ($ bn) 1.1a 695.3 328.3 363.9 5,114 7,246

GDP per head ($) 300a 575 350 2,455 40,717 27,505

Manufacturing (% of GDP) 36.0 37.0 18.0 31.0 27.0 17.6

Agriculture (% of GDP) 21.0 21.0 30.0 7.0 2.0 1.7

Exports of goods ($ bn) 0.5 128.1 32.4 64.9 427.8 576.8

Imports of goods ($ bn) 0.4 110.1 39.4 42.3 296.7 749.8

Foreign trade (% of GDP)b 94.5 34.3 21.9 29.5 14.2 18.3

a 1994, World Bank estimates. b Exports of goods plus imports of goods, divided by GDP.

Sources: National sources; World Bank, World Development Report, 1996; EIU.

Economic policy

Early development— The Mongolian economy in 1921 was livestock-based. Goods and services notproduced nationally were obtained from China, and in the absence of cur-rency, trade was conducted through barter and credit. Early policies aimed todiversify the economy and create a state budget. By 1928 a bank had opened, anational currency, the tögrog, was in circulation, livestock was taxed and theSoviet Union had replaced China as the chief trading partner. The SovietUnion was chiefly interested in Mongolia as a supplier of raw materials for theSiberian industries and food for Siberian towns. The Soviet government advisedthat livestock should continue to provide the base of the economy and in 1930ordered the herds to be collectivised with the aim of increasing their numbers.The policy proved a disaster, and livestock was returned to private ownershipin 1932. Between 1932 and 1941 the number of livestock rose from 16 millionto 27 million. Large numbers of animals and animal products were sent to theSoviet Union to feed the Soviet people during the Second World War.

—and the importance ofSoviet and Chinese

assistance

Economic planning was introduced in 1948, but to little effect. The real impe-tus to development came in the 1950s when economic and technical aidprovided by newly liberated China was more than matched by Soviet assis-tance. Reinforcing the pattern of development heavily dependent on outsideassistance, Mongolia became a full member of Comecon in 1962 until thecollapse of the organisation in 1990. Competition between Mongolia’s twolarge neighbours hastened modernisation, promoting the expansion of ind-ustry and infrastructure, and urbanisation. Collectivisation was completed in1959, and expansion of the agricultural sector to feed the citizens of the newtowns was a significant feature of the 1960s. In the 1970s mining developedthrough joint ventures with the Soviet Union, Czechoslovakia and Bulgaria.

Industrial production wasdouble that of agriculture

by the late 1980s

As a member of Comecon, Mongolia’s economic policy gave priority to expan-sion of the livestock sector and creating an agro-industrial economy. To thisend, Comecon, but chiefly the Soviet Union, provided grants, loans, credit andtechnical assistance. The bulk of investment was in the industrial sector, whilethe livestock sector was expected to expand through improvements in organ-isation and management. Industrial production caught up with and then

74 Mongolia: Economic policy


overtook agricultural output in the 1970s. In the late 1980s industry was pro-ducing almost twice as much as agriculture in current price terms mainlybecause the Erdenet Combine, which produces copper and molybdenum, wasin full production by then. However, by the 1980s the Comecon economieswere stagnant. The Soviet Union introduced perestroika to remedy this, andMongolia was encouraged to do likewise.

More radical movestoward a market economy

Mr Batmonkh’s government restricted the role of central planning and gavestate enterprises and cooperatives more control over production through flex-ible management and greater autonomy over their own finances. While thesereforms were not an attempt to change the system dramatically but to make itmore efficient, the new economic policies introduced with the democraticrevolution of 1990 aimed at ending the command system altogether and re-placing it with a market economy.

The privatisation programme

The privatisation law of 1991 entitles all Mongolian citizens born before May 31, 1991,

to acquire state assets under a voucher system. Each received three vouchers worth

Tg1,000 apiece to exchange for small businesses sold at local auctions, and an add-

itional voucher worth Tg7,000 to acquire shares in larger enterprises offered on the

stock exchange (which opened in February 1992). By 1995 some 82% of the property

earmarked for privatisation had been disposed of, including 100% of trade, catering

and services, and 95% of livestock. Housing was privatised at the end of 1995 but the

private ownership of land has been deferred. The state still has shares in more than 150

enterprises, retaining control of the mines and a majority ownership in telecommun-

ications, large-scale transport and public utilities.

The first stage of privatisation created many small shareholders and non-viable enter-

prises, particularly in the countryside. In addition, the low value of the vouchers left the

state a majority shareholder in companies formed from state farms and industries. In

August 1995 secondary trading began on the stock exchange and is expected to

facilitate the restructuring of the privatised sector and the development of corporate

governance. Privatisation has necessitated much new legislation, including company

law, a new labour code, and tax and social security laws. Some public opposition to

privatisation remained evident in 1996 and the privatisation of the State department

store was called off.

Mongolia, previously isolated and protected from the world market, is nowbecoming more integrated. Privatisation of state assets and banking, currencyreforms and the removal of controls on prices, tariffs and wages are the mainmechanisms guiding its transformation from a centrally planned to a market-driven economy. The reforms are being carried out with the support of theWorld Bank, the IMF and the Asian Development Bank (ADB).

Turnover taxes used to bethe mainstay of

government finances—

The state budget covers the central and local government budgets. The principalsources of income under central planning were turnover taxes, particularly im-port differential taxes (a levy on the difference between import and domestic

Mongolia: Economic policy 75


wholesale prices), and profit and income tax on state and cooperative enter-prises. Personal income tax was very low and contributed only 1% of governmentrevenue in the 1980s. In the 1970s turnover tax contributed twice as much asprofit and income tax but the import price differential tax was adversely affectedby Comecon price reforms in 1986 so that the difference between revenue fromturnover taxes and that from income taxes began to narrow. Budget revenue rosefrom Tg4bn in 1980 to Tg6.5bn in 1990. Expenditure, however, regularly ex-ceeded income and the deficit hovered between Tg1.7bn and Tg2bn under theEighth Five-Year Plan (1986-90) and was covered by Soviet loans. (More detail ongovernment finances is given in Reference table 1.)

—but reforms haveincreased the importance

of other levies

In 1991 the structure of state income was substantially altered by the intro-duction of customs duty and the coming into force of a personal and companyincome tax law. Tax rates ranged between 1.25% and 46% for individuals and8% to 46% for businesses. The tax law which came into force in January 1993includes 17 state levies, including income tax, sales tax, profit tax, and variousforms of licensing fees, and seven local government taxes. In 1993 the budgetdeficit narrowed, but an IMF Enhanced Structural Adjustment Facility (ESAF)made possible a budget surplus of approximately 2% in 1994. A further loanwas granted in November 1995.

The state bank has triedto reduce money supply

growth

Until 1987 the money supply was tightly controlled by the government. Thatyear a law on state enterprises allowed for greater autonomy in finance andmade credit more widely available. Broad money growth has been rapid; it roseby 103% per year in the four years to the end of 1995. The state bank has madeefforts to reduce this growth by introducing credit controls and high interestrates to attract savings, especially long-term deposits and Treasury bills, butwith limited success. (See Reference tables 2 and 3 for historical data on themoney supply and credit.)

Economic performance

Differences between NMPand GDP/GNP

Under communism, Mongolian national accounts data were handled accord-ing to the material product system (MPS). Unlike the measures of GDP andGNP used in the UN system of national accounts, net material product (NMP)derived from the MPS excludes depreciation and “non-material services” suchas banking, insurance and government administration.

Strong growth in the1980s was followed by a

contraction in 1990-91

Officials from the international financial agencies were allowed to scrutinise datakept by the State Statistical Office, ministries and other institutions, enablingthem to make estimates of GDP and GNP from 1980 onwards. According to onesuch estimate by the ADB, between 1980 and the end of that decade GDP grewat an average annual rate of 6.2%, the same rate as for NMP growth, and its rateof growth fell more or less in step with the decline in foreign savings (namelyCMEA aid flows). Investment fell steadily during the Eighth Five-Year Plan(1986-90). Wages remained stable, as did prices. Thereafter NMP and GDP fellsharply. NMP contracted by 3.8% in 1990 and 23.6% in 1991, and GDP(according to IMF figures) declined by 2.5% in 1990, by 9.2% in 1991 and by11.6% in 1992. National sources give different historical GDP figures compared

76 Mongolia: Economic performance


with the IMF; they show that the economy contracted by 9.5% in 1991, 9.2% in1992 and 3% in 1993. (See Reference tables 4 and 5 for historical data on GDP).The first real growth of 2.1% was reported in 1994 and continued in 1995 at6.1%. as the trough of industrial decline passed.

The Comecon dissolutioncaused many difficulties—

Mongolia’s current economic difficulties are partly a result of its transitionfrom a planned to a market economy. The dissolution of Comecon, moreover,compounded Mongolia’s problems, leaving it with a Rb10bn debt, without theinvestments and subsidised deliveries of raw materials of earlier decades andwithout a ready alternative means of acquiring many products and servicesvital to its economy.

—but economic problemsare now easing

Industrial output has contracted since 1990 because of shortages of electricity,raw materials and spare parts, falling by 12.3% in 1991 and 14% in 1992.Output in other sectors followed similar trends. While a sustained economicrecovery is still a long way off, there are indications that in some sectors declineis being arrested. (See Reference tables 8 and 9 for specific industrial productionstatistics.) The limited data that have been released by the Mongol Bank (thecentral bank) support the view that the decline has slowed down considerably.In 1993, according to these estimates, GDP fell on average 1.3% and the infla-tion rate declined from 321% to 183% as the exchange rate remained steadyand prices and utility rates stabilised.

Real incomes have fallensince 1990—

The decline in GNP, the devaluation of the togrog and population growthcontributed to a fall in real incomes after 1990. Under the command system,wages and salaries barely changed from year to year. The pay of governmentemployees was raised in 1991 and 1993, with appropriate adjustments to pen-sions and other benefits. Since 1991 income disparities have widened becauseof the emergence of the private sector. Incomes also vary considerably betweenthe urban and rural population, reflecting the fact that many herdsmen arenow self-employed and subsist on their livestock products. By 1995 the averagemonthly earnings of an urban family was Tg40,000 ($89) and of a rural familyTg30,000. An estimated 36% of the population lives in poverty.

—and price deregulationhas allowed high inflation

Since January 1991, when the government doubled all incomes and personalsavings in the banks, the prices of various categories of goods have been succes-sively deregulated. By September of that year prices had risen by 35% and only17 items, ten of which were foodstuffs and the remainder manufactured items,were still subject to control. Heat, water and electricity tariffs also remainedfixed. In 1992, after pressure from the IMF, controls were removed on mostremaining prices and utility rates although energy prices were not liberaliseduntil 1996. Price increases slowed considerably in 1993. In spite of fluctuationsin food prices, the downwards trend continued in 1994 and 1995. (SeeReference table 6 for historical data on prices and wages.)

In 1993 the annual inflation rate came down from its highest level of 321% to183% and continued to fall to 53.1% in December 1995. Over the same periodthe exchange rate remained steady and prices and utility rates stabilised.

Mongolia: Economic performance 77


Regional trends

Mongolia’s most important geographic region is the fertile Selenge-Tuul basin,in the Khangai-Khentii mountain complex. Elsewhere, geographic or climaticconditions severely limit economic prospects. In the south and east of thecountry is the Gobi desert; in the east a high plateau stretching to the Chinesefrontier. In the west of the country is the mountainous Altai region, borderedon the east side by a depression full of salt- and fresh-water lakes. An unevendistribution of water is a further constraint on growth, as is the susceptibility ofsome regions to drought or earthquakes.

Resources

Population

As a result of pro-natal policies, Mongolia’s population has doubled in thethree decades since 1960. The present growth rate is about 1.6% per year;density is 1.5 persons per sq km, one of the lowest in the world. The ruralpopulation is widely scattered while the urban population is concentrated inthree centres, namely Ulaanbaatar, Darkhan and Erdenet, all located in aregion that contains most of the country’s investment. Since 1991 some 54,000Kazaks have migrated to Kazakstan and 12,000 have subsequently returned.The workforce is comparatively young and grows at a rate of 3.4% per year.Under central planning Mongolia had virtually full employment but, out of atotal workforce of about 1.1 million, 45,000 were registered as unemployed inJanuary 1996. A network of labour exchanges helps to find jobs and thegovernment introduced job-creation schemes under its Poverty AlleviationProgramme of 1994. Employment appears to have grown in 1995-96.

In 1960 Mongolia’s population was 1 million, and herdsmen made up morethan 60% of the workforce. Direct state intervention through a system ofplanned investments, targets and fixed prices and incomes led to changes inthe structure of the economy and consequently in patterns of employment.The total number employed in agriculture fell by one-third during the 1960s,while population growth contributed towards rises in employment in the educ-ation and health sectors. Employment in industry and the transport andconstruction sectors also rose in the 1980s. By 1980, 40% of the workforce wasemployed in the agricultural sector. In 1991 this ratio had dropped to 26%,while industrial employment rose from 16% to 21%. There has been consider-able change in the rural/urban population ratio, from 3:2 in 1960 to 4:3 in1989. By January 1996, of a total population of 2.32 million some 1.2 millionlived in towns and 1.11 million in rural areas. More than one-quarter of theentire population lives in Ulaanbaatar and approximately 35% in Ulaanbaatar,Darkhan and Erdenet.

78 Mongolia: Regional trends


Education

More than 40% of Mongolia’s population is of school age. Despite considerableinvestment in education and training in the 1980s, a shortage of buildings,equipment and teachers persists. Morale in the sector is low; one in five pupilsdrops out of school, and in 1995 many teachers went on strike for six monthsfor better pay and conditions. Reductions in government spending on educ-ation and the introduction of some charges have come at a time when thesystem is facing the additional burden of reorienting itself to train the youngfor life in a market-led system. New education laws were passed in 1995, pro-viding for free education in state schools from nursery to secondary level, andvocational and tertiary education is partly state-funded. Independent schoolsare regulated by the state. Further reforms are expected after an ADB review ofthe sector and allocation of a $5m soft loan.

Health

The network of healthcare services which was available without charge duringthe communist period is now severely constrained. The government reducedthe health budget by 10% in 1992 and introduced some charges in 1993. In1994 a health insurance law came into force and 92.4% of the population iscovered. Under this law the old and the young receive all healthcare free, andherdsmen get a 50% reduction on medical services incurring a charge.

Shortages of expensive, imported drugs, medical equipment and clean water,and a decline in levels of nutrition resulted in an increase in infant and mater-nal mortality and crude death rates between 1990 and 1992. The situation hassince improved as a consequence of the government’s Poverty AlleviationProgramme and external humanitarian aid. Other serious health problems arelow birth weight, tuberculosis and skin diseases. In 1996 there was an outbreakof cholera.

Population indicators, 1995(per ’000 population unless otherwise indicated)

Crude birth rate 23.7

Crude death rate 7.3

Growth rate (%) 1.36

Infant mortality (per ’000 live births) 4.4

Maternal mortality (per ’000 live births) 101

Life expectancy (years) Male 60.0a

Female 62.5a

a 1985-90 average.

Sources: Ministry of Health; Ministry of Population and Demography; State Statistical Office.

Natural resources and the environment

The 1924 constitution declared all land, forest, waters and mineral wealth theproperty of the people. Since collectivisation the use of the land has been at the

Mongolia: Education 79


disposal of the government. Mongolia comprises 1.6m sq km and includesmountain, forest, steppe and semi-desert regions. Camels, horses, cattle, sheepand goats are herded in various parts of the country, although the ranges theycan graze on are constrained by the severe climate and the availability of water,which decreases toward the south.

Arable land is limited Some 80% of the land can be used for a range of agricultural activities but only1.3m ha are arable, mainly in the northern central region. Forests account for15.2m ha. Much of the Siberian larch, cedar and pine stock is distant andinaccessible, however. Marmot, sable and fox furs have been traded with Russiafor more than a century, but trade virtually ceased after 1990. Game isexploited for domestic consumption, and the depletion of the gazelle, saigaantelope and reindeer herds is now causing concern. Abundant fish stocks,however, have not been much exploited commercially as fish is not tradition-ally consumed.

Mongolia’s landscape and wildlife offer great potential for tourism. In spite ofpoor infrastructure, 13,000 tourists visit the country each year. Mongolia hasconsiderable mineral wealth. In a survey conducted after the Second WorldWar, more than 80 minerals and 170 materials suitable for construction pur-poses were identified in 600 deposits. The country’s coal reserves are estimatedat 100bn tons. In addition to coal, deposits of copper, molybdenum, fluorspar,uranium, silver and gold are also mined. Significant oil deposits are believedto exist.

Land privatisation hasraised numerous questions

The 1992 constitution makes provision for the privatisation of land. This hasraised questions of appropriate forms of land tenure and land use for a widevariety of economic activities. A general land law was passed in 1994 but noagreement was reached on the question of land ownership by individuals andwas deferred. This is expected to be debated as a matter of urgency by theparliament elected in 1996.

Economic infrastructure

Transport and communications

Largely as a result of uneven investment and petrol rationing, traditional meansof transport, including horse, camel and animal cart, persist in Mongolia.Most investment in transport has been in the region from Ulaanbaatar to theRussian border, and future funding from external sources will be applied in thecentral economic zone. Coal, minerals and most export goods are carried on the1,815-km Ulaanbaatar Railway, whose branch lines reach Erdenet and the coalmines of Sharyn Gol, Baganuur and Nalaikh. An eastern line links Choibalsanwith the Trans-Siberian Railway. The absence of railways elsewhere has limiteddevelopment because heavy and bulky goods can only be distributed by road.

Railways In the 1980s the railway was reasonably cost-effective, and the volume offreight carried increased from 3.4bn ton-km to 6.3bn ton-km. However, this

80 Mongolia: Transport and communications


has since declined because of recession and changing patterns of trade, partic-ularly the redirection of transit goods through China using the port of Tianjin.The rail system is being renovated with World Bank and Japanese aid, andincludes the installation of lifting gear to speed up the change of carriagewheels at the Mongol-Chinese border, a procedure necessary because of differ-ences in the rail gauge between Mongolia and China.

Roads In 1990 there were only 1,243 km of paved road, many of which were in poorrepair. In 1993 agreement was reached on the upgrading and development ofthe road network with external aid as a medium-term priority. This includesrepairs to routes between Ulaanbaatar, Erdenet and Darkhan and the construc-tion of new roads between Ulaanbaatar and Dornod, and Nalaikh and Choir.By January 1996 there were 1,413 km of paved roads.

Air services Most internal long-distance travel is by air. Services operate to all aimags, butfacilities are minimal and a number of flights within aimags were discontinuedin 1994. A major refurbishment of Buyant Ukhaa airport in Ulaanbaatar is closeto completion. When this is completed large jets will be able to land there.Regular flights now link Mongolia with Moscow, Beijing, Hohehot (InnerMongolia), Irkutsk (Russia), Ulan Ude (Russia), Alma Ata (Kazakstan), Osaka,Tokyo and Seoul. Charter flights operate to Japan, South Korea, Hong Kong,Singapore and Turkey. (See Reference table 7 for data on transport.)

Telecommunications In the 1980s telecommunications linked Ulaanbaatar with all aimag centres,but the equipment was outdated and there were insufficient lines. Satellitesand new switching equipment were installed after 1990, and Ulaanbaatar, andmajor industrial and most aimag centres, now have automatic exchanges. It ispossible to make direct international calls to and from Ulaanbaatar, and manybusinesses have access to fax facilities. In 1996 the first Mongolian users werelinked to the Internet.

Energy provision

Coal-fired power stationsneed extensive repair

The Central Electricity System (CES), powered by five coal-fired power stationsand linked to the Soviet grid, supplies Mongolia’s main industrial region withelectricity and heat. The supply of generated electricity grew by 9% in the1980s. However, the stations are wasteful, cause pollution because of poorsiting and require extensive repair. Since 1990 cuts in the supply of electricityand heat, especially in the winter months, have been common. Emergency aidforestalled the collapse of the system. Repairs and refurbishment of the CES areunder way with Asian Development Bank (ADB) and World Bank loans. Thefirst stage of a grid to serve the five western aimags and link with Russia hasbeen completed, and the first hydroelectric station is being built on the RiverEg (Egiin gol) in Bulgan aimag. Elsewhere, small diesel stations and some windgenerators provide a partial service. Communities without electricity still usewood or dried dung as fuel.

Test drills raise hopes ofdomestic oil production

Oil production at Züünbayan in Dundgov’ aimag became uneconomic and wasshut down in 1969. In the mid-1980s Mongolia began to survey oil deposits

Mongolia: Energy provision 81


with the intention of meeting at least some of the country’s annual require-ment of 800,000 tons of petroleum products through domestic production.Reserves have been estimated at more than 5bn barrels. There are 21 areas opento international tender, and three companies have contracts to explore for andexploit oil in the east. In 1994 the Texas-based Snyder Oil Corporation (SOCO)began to drill at Züünbayan, and in 1995 an Australian company, Nescor,commenced drilling in Tamsag in Dornod aimag.

Energy balance, 1995(m tons oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Primary production 0.00 0.00 2.00 0.00 0.30 2.30

Imports 0.60 0.00 0.00 0.00 0.00 0.60

Exports 0.00 0.00 –0.10 0.00 0.00 –0.10

Primary supply 0.60 0.00 1.90 0.00 0.30 2.80

Net transformation –0.10 0.00 –0.80 –0.20 0.00 –0.70

Final consumption 0.50 0.00 1.10 –0.20a 0.30 2.10

a Output basis.

Source: Energy Data Associates.

Financial services

Recent changes to thebanking system

Reorganisation of Mongolia’s monolithic banking system began in 1990 withadvice from the IMF. The Mongol Bank functions as the central bank. It con-trols the money supply, the base rate and foreign reserves, and is the fiscalagent of the government. The president is responsible to the legislature. In1991 commercial functions were separated from the Mongol Bank, and twocommercial banks were created. In 1996 there were 13. The commercial bankshold the accounts of the various sectors and provide financial services.

Banks are now morecautious about extending

credit

Credit was strictly controlled under central planning; after early reforms, how-ever, loans were freely granted without guarantees and at very low rates ofinterest. Banks had bad debts of Tg900m at the end of 1991 as many borrowersdefaulted on payments. The central bank now penalises banks which breachthe credit ceiling. The IMF and the World Bank are supporting further bankreforms to control lending.

Other services

Water and sewage servicesare inadequate

Water and sewage services are uneven. Surface water is often polluted and forthis reason Ulaanbaatar’s drinking water has to be drawn from 60 km away.Around 40% of the urban population is served with both water and sewageservices, and in rural districts only 12% of the population has mains or stand-pipe water supplies. The water table in industrial areas has fallen recently.Water management and conservation plans are being drawn up to deal withthis, and there have been some improvements with foreign aid.

82 Mongolia: Financial services


Production

Industry

Collapse of Comecon hitmany industries hard

Under the command system, industrial development took place mainly in thenorthern central zone, which was supplied with water, fertile land and, mostimportant, easy access to the Soviet Union via the railway. Most industries werestate-owned or joint ventures with Comecon countries, especially the metallur-gical industries. In the 1980s the energy, non-ferrous metals and textiles indus-tries, in particular, expanded rapidly, but with the collapse of Comeconsupport in 1990 there was a fall in production.

Private companiesstruggle to maintain

production

In 1991 large industrial enterprises were divided into smaller units based onindividual factories and privatised as joint-stock companies. At the same timenew, smaller manufacturing companies were formed, many of them to produceconsumer goods for the domestic market. However, all industries were affectedby the breakdown of infrastructure, and the shortage of funds to replace out-dated technology and purchase raw materials. Some ceased production forperiods of time and others tried to find foreign partners. Although the priva-tised companies had better access to government investment and bank loansthan newly created industries, they still performed badly because they couldnot operate their mass-production lines at full capacity.

The fall in output hasbeen arrested

In 1993 the government prioritised industry for export, and the developmentof small and medium-sized enterprises (SMEs), and passed a new foreigninvestment law. By 1995 foreign investment had risen from $6m to $44m and150 requests for ventures had been approved. Although 40% of industry pro-duced nothing in 1994, and the food, leather and textiles industries in partic-ular were still lagging, by the end of the year industrial decline had beenarrested. The private sector is growing in confidence and self-reliance, and thegovernment is providing more institutional support through the Ministry ofTrade and Industry. It is likely that the disposal of state shares on the stockexchange in the second round of privatisation will lead to beneficial changes informs of ownership and the development of corporate governance. The privatesector produced Tg24.3bn ($5.4m) of goods in 1995.

Mining and semi-processing

The government wants toincrease coal production

Mongolia has an estimated 100bn tons of coal reserves and 17 productivemines, 14 of which are open-cast. Of the 7.2m tons of coal produced in 1990,65% was consumed by thermal power stations, and the two largest mines,Baganuur and Sharyn Gol, supply 70% of the requirements of the CentralElectricity System (CES). Because of the strategic importance of coal to theeconomy it has been a target for emergency aid and upgrading by external aidagencies since 1991, particularly by the Japanese government. Nevertheless,coal production fell from 8bn tons in 1989 to 5bn tons in 1995 and the minesare locked in a debt chain with the power stations.

Mongolia: Industry 83


The Erdenet Concern The Erdenet Concern, which produces copper concentrates and molybdenum,is jointly owned by Russia. Of its 8,000-strong workforce, 1,000 are from theCommonwealth of Independent States (CIS), the only substantial Russian com-munity left in Mongolia. Erdenet generates almost 70% of Mongolia’s exportearnings and is the country’s most profitable enterprise. Russia and Kazakstanare the main recipients, but China, Japan, South Korea, Finland and Germanyare also customers.

Favourable terms forinvestment in mining and

mineral processing

Other mining joint ventures in operation include six fluorspar mines at Bornuurworked by Mongolrostsvetmet (formerly Mongolsovtsvetmet), and the Mardaiuranium mine in Dornod aimag. Gold production has risen since 1993 as aresult of the government’s gold programme. A number of mines are beingexploited with foreign partners and the government is keen to attract moreforeign investment, although some secrecy about the programme is proving tobe a hindrance. The government is confident that mining will solve many of itspresent economic difficulties. (See Reference table 10 for statistics on mineralsproduction.)

Agriculture and forestry

Agriculture before reform In 1959-90 camels, horses, cattle, sheep and goats were reared on negdels(collectives), and until 1990 the number of livestock that individuals wereallowed to own was limited. Before privatisation, non-traditional livestocksuch as pigs and poultry were mainly reared on state farms. The state procuredmilk, meat, wool and skins from the negdels at fixed prices, for which herds-men received a wage.

Privatisation of thecollectives began in 1991—

Privatisation of the negdels began in September 1991. Animals were leased toherdsmen who were allowed to retain produce in excess of the state require-ment. Of the remaining negdel assets, about 30% were distributed to the herds-men and 10% to local officials and workers, and the remaining 60% formedinto limited companies. By the latter part of 1992 most procurement hadceased except for meat, which continued to be rationed. After further reorgan-isation a number of larger privatised units were transformed into small cooper-atives or companies based on family camps or groups of herdsmen who sharelocal resources such as pastures or water. By 1993 some 20 million head oflivestock were in private ownership.

—and some breeders havereverted to a subsistence

economy

The national herd rose to 28.6 million by the end of 1995 as many herdsmenreverted to a subsistence economy concerned only with accumulation anddomestic consumption. Many were discouraged from selling livestock productsto the home market by low purchases prices and the non-availability of con-sumer goods in the countryside. As a result there is a continued slump in manyindustries based on rural products. (For data on livestock numbers, see Refer-ence table 12.)

Arable production fails tomeet the country’s

requirements

The 55 state farms built with Comecon assistance were sold off in 1991 tocreate over 300 small farms. Arable production fell because farmers were unableto obtain loans to buy machinery, seeds and fertilisers, and they lacked the

84 Mongolia: Agriculture and forestry


necessary management skills to operate the new enterprises (see Referencetable 11 for crop production data). The area of land under cultivation andyields per hectare decreased from year to year, and neither the declaration of1993 as the Year of Food, nor the 1994 food law, has been able to arrest thedeclines. The Asian Development Bank (ADB) is now in the process of drawingup a new programme for agriculture with a view to providing a range of projectloans for regional agricultural development, management, and storage anddistribution.

Construction

Building work comes to ahalt

Construction quality in Mongolia is generally low, and the climate causes rapiddeterioration of buildings. Much work was carried out by Soviet and Mongolianconstruction teams in the 1970s and 1980s. In the 1990s the Soviet buildersdeparted and the Mongolian teams were split up into smaller constructioncompanies. However, the shortage of funds and building materials led to highrates of unemployment in the sector, and the many unfinished and ownerlessbuildings were rapidly stripped for their materials. The slowing down of therecession in 1994 and the commencement of projects financed with foreign aidare now helping to regenerate the construction industry.

There is a shortage ofbusiness and domestic

accommodation

Construction of domestic accommodation has long failed to keep pace withthe growth of the urban population. In 1991 Ulaanbaatar City Councilfavoured ger (tent) districts instead of high-rise estates, because they arecheaper to supply and to heat. Pressure on urban land from demand for dom-estic and business accommodation was eased somewhat by the withdrawal ofSoviet troops and civilians. Former military structures, installations and dom-estic accommodation, including the entire town of Choir, the centre ofGov’Sümber aimag, were handed over to the Mongols, although not all weresafe or appropriate for the new pattern of economic life of Mongolia. Theresumption of construction activity has enabled some structures to be com-pleted and occupied for business and living accommodation in 1995, but manysmall businesses in Ulaanbaatar are likely to continue in unsuitable premises,such as flats with poor service facilities, for some time to come.

The external sector

Merchandise trade

Foreign trade, 1995($ m; customs basis)

Merchandise exports fob 511.6

Merchandise imports cif –388.7

Trade balance 122.9Source: State Statistical Office.

Mongolia: Construction 85


Comecon links dominatedforeign trade in the 1970s

and 1980s

During the 1970s and 1980s, 97% of Mongolia’s foreign trade was withComecon countries, the largest share of which was with the Soviet Union.Transactions were carried out under five-year official agreements and annualprotocols, and payment was in transferable roubles through the InternationalBank for Economic Cooperation. Industrial goods, services and the compo-nents of turnkey projects accounted for a large proportion of imports between1970 and 1983, but a wide range of consumer goods including householditems, textiles and food were also imported, while copper, molybdenum, fluor-spar, coal and other minerals, livestock produce, and textiles and leather goodswere exported. Under Comecon’s trade regime, the quality of manufactureswas low because in the controlled market little incentive existed to improvestandards, while the terms of trade broadly moved against Mongolia, yieldingregular trade deficits. Bilateral agreements governed trade with countries suchas Yugoslavia, China and North Korea, while trade with the convertible areawas conducted directly in hard currency. (Foreign trade summary data can befound in Reference table 13.)

Russia is still the mostimportant trading partner

In 1983 the direction of trade altered. To counter a decline in its foreignreserves, Mongolia began to increase its exports to the convertible area, and,consequently, its share of trade with Comecon countries fell. Prompted by newforeign policy and the political changes of 1990, in 1991 the governmentreplaced roubles with hard currency for trading. A dearth of hard currency inMongolia and among its traditional trading partners, however, has led to barteragreements. Russia is still Mongolia’s biggest trading partner, but its share oftotal turnover fell from 77.8% in 1990 to 42.5% in 1994, while China’s sharerose from 2.1% to 19.3%. Other important new trading partners include Japan,the USA, South Korea and the EU. Since 1990 the government has made con-siderable efforts to encourage trade with these new partners. Mongolia joinedthe World Trade Organization (WTO, the successor to the GATT) in 1996 andhas been granted Most Favoured Nation status by the USA. The governmentexpects joint ventures in mineral production to improve export performancein the future. The attraction of foreign investment is a prominent aspect offoreign policy and a new law on foreign investment was passed in 1993. Newlegislation on customs, tax, excise and patents has also come into force. Im-ports, meanwhile, have been severely compressed by the recession and in 1995were less than one-quarter of their 1989 level. Exports have also fallen in USdollar terms, for the same reason.

Composition of importsand exports

Russia is still Mongolia’s chief trading partner, not least because of an agree-ment to exchange copper for oil. In 1994 mining products accounted for80% of exports. Some 20% of imports were consumer goods and the remaindersupplies and technical goods for industry, many of which were bought withforeign aid. Cashmere is also an important export commodity. A temporaryban on the export of the raw product was imposed in 1994 but it was lifted in1996 after pressure from the IMF.

86 Mongolia: Merchandise trade


Trade and investment regulations

Since 1992 customs duty has been levied on import and exports and the standard rate

in 1993 was 15%. In 1994 duty on 33 items of staple foods and manufacturing inputs

was reduced from 10% to zero. Luxury items such as alcohol carry 100% import duty,

foreign tourists face a levy on certain export items, and the export of a small number

of commodities, including rare species and gold, has been banned. There is consider-

able smuggling, particularly across the Russian border. Mongolia is a member of the

World Customs Organisation, and tariffs are harmonised with the International

Convention on the Harmonised Commodity Description and Coding System. Mongolia

is a member of the World Trade Organization (WTO).

Invisibles and the current account

A collapse in aid increasesthe current-account deficit

Although the current account was chronically in deficit during the 1980s, thewhole of the deficit was attributable to the persistent imbalances in Mongolia’strade with the Comecon countries, and the latter were willing to providelow-cost financing to fill the gap. Since the reform programme got under way,and after the relationship with Comecon broke down in 1990-91, imports fellmore quickly than exports, and the trade account moved into surplus in 1993,taking the current account into surplus as well. Before 1993, as Comecon aidalso dried up and was not fully replaced by assistance from other sources, theoverall balance of payments went into deficit, forcing a drawdown of reserves.The impact on reserves has been partly offset by the revaluation of Mongolia’sholdings of gold at international prices. After 1993 the current-account surpluswas sufficient to prevent an overall deficit and allowed reserves to be rebuilt.(For IMF balance-of-payments data see Reference table 14.)

Capital flows and foreign debt

Japan and the USA havebecome significant aid

donors

Although in 1986 Comecon promised Mongolia continuing development aidup to 2000, it became evident towards the end of the Eighth Five-Year Plan(1986-90) that the country would have to increase its self-reliance throughbetter management methods and improvements in production quality. Duringthis period, the UN Development Programme (UNDP) backed almost 24 pro-jects to this end. As Comecon support dissolved, the Mongolian governmentbegan actively seeking other sources of aid, and its decision to abandon com-munism increased the willingness of many OECD countries to provide aid.Japan and the USA were among the first such donors in 1990. From 1991-96approximately $1.2bn of aid, in the form of loans, credit, grants-in-aid ortechnical assistance, was pledged through donor conferences called at the in-itiative of the UNDP, the Japanese government and the World Bank. In August1992 the IMF briefly suspended its payments on the grounds that theMongolian government had not fully complied with its agreement to removeprice and income controls. In the first two years emergency aid predominated,giving way to more project aid for infrastructure renovation and development,and short- and medium-term development in 1993-97.

Mongolia: Invisibles and the current account 87


Foreign investmentlegislation

Three large joint ventures which were set up before 1980 are still operating inMongolia: Erdenet Copper and Molybdenum Combine, Mongolrostsvetmet(formerly Mongolsovsvetmet), and the Ulaanbaatar Railway, all in partnershipwith Russia. In 1990 a foreign investment law was passed which was meant toattract new investments from countries outside Comecon. While the law of-fered tax concessions to foreign partners, its terms were vague and inspiredlittle confidence that investments would be protected. Foreign investors, in-cluding international oil corporations, were also disappointed by Mongoliannegotiating methods and indecisiveness. The 1993 law on foreign investmentis intended to promote heavy industry and exports. It offers generous taxconcessions to projects concerned with fuel and energy, and mining and min-eral processing, promises compensation if the government should confiscateland leased to foreign investors before an agreement expires, and grants add-itional concessions to firms exporting more than 50% of their products. Mostjoint ventures are small companies manufacturing garments and food prod-ucts. The absence of official versions of Mongolian laws in languages thatpotential partners can understand is a drawback for further investment.

Foreign investmenta, 1994

No ofeconomic Investment

entities ($ ’000)

USA 8 30,231

China 55 3,490

South Korea 9 3,315

Russia 40 2,443

Japan 12 1,577

Hong Kong 6 1,418

UK 1 500

Yugoslavia 1 302

Germany 2 290

Czech Republic & Slovakia 1 125

Singapore 3 79

Belarus 1 50

Cyprus 1 50

Liechtenstein 1 20

Portugal 1 6.7

Sweden 1 1.5

Austria 1 0.8

Bahamas 1 0.5

Total 145 43,900

a Does not include Erdenet, Mongolrostsvetmet and the Ulaanbaatar Railway.

Sources: Mongol Messenger; Mongolian Chamber of Commerce.

88 Mongolia: Capital flows and foreign debt


Foreign reserves and the exchange rate

Speculation has helped toreduce reserves

Increased trading with the convertible area raised hard-currency reserves from$7.3m in 1983 to $260.1m in 1989. The value of gold reserves has also in-creased; $18.8m was held at the end of 1989, but after revaluation at worldprices this had risen to $54.8m by the end of 1990. Wider dealing in dollars,the lifting of restrictions on foreign travel and speculation in internationalcurrency markets have, however, consumed much of the new foreign ex-change. In 1991 senior banking officials, including the head of the state bank,speculated in international currency markets and lost $82.4m, forcing thecountry to borrow abroad using gold deposited in Western banks as security.Total reserves (excluding gold) reached $16.4m at the end of 1992, as the tradedeficit sank. They rose further to $81.4m in 1994, which was another year offalling imports, to provide nearly three months’ import cover, and reached$117m in 1995. (See Reference table 15 for foreign reserves data.)

Currency is not yetconvertible

Mongolia’s currency, the togrog, is not yet convertible. It was pegged to thetransferable rouble from 1973 to 1990 at different rates for commercial andnon-commercial transactions. Its value was artificially high at both rates. In1990 the government, after deciding that the togrog should eventually becomeconvertible, pegged it to the dollar at a rate of Tg5.63:$1. Since then it has beendevalued several times. In June 1991 the commercial and non-commercial rateswere unified at Tg40:$1 and in May 1993 it was allowed to float and settled ataround Tg395:$1. There was little difference between the official and blackmarket rates in 1994, but the central bank had to intervene briefly in early 1995to support the togrog. At the beginning of January 1996 the official rate wasTg460:$1. But the currency had fallen to Tg614.2:$1 by the end of December1996 (see Reference table 16). In 1994 parliament passed a law on hard currency,with the aim of restricting the outflow of hard currency from the country, butthis has had only a limited impact on stabilising the exchange rate.

Mongolia: Foreign reserves and the exchange rate 89


Appendices

Sources of information

National statistical sources State Statistical Office, National Economy of the MPR for 70 Years: AnniversaryStatistical Yearbook, Ulaanbaatar, 1991

International statisticalsources

World Development Report, World Bank

Select bibliography Asian Development Bank, Mongolia: A Centrally Planned Economy in Transition,Oxford University Press, New York, 1992

Keith Griffin, Poverty and the Transition to a Market Economy in Mongolia,Macmillan, London, 1995

Elizabeth Milne et al., The Mongolian People’s Republic: Towards a Market Economy, IMF, Washington DC, 1991

Mongol Messenger (weekly), Montsame, Ulaanbaatar

World Bank, Mongolia, Toward a Market Economy, Washington, 1992

Reference tables

Reference table 1Government finances(Tg m)

1991 1992 1993 1994 1995

Tax revenue 5,146 10,231 49,810 67,596 109,270 Income tax & capital gains tax 2,586 5,475 28,440 32,041 49,999 Social security contributions – – – 6,419 18,906 Taxes on payroll & manpower – – 6 42 44 Domestic taxes on goods & services 2,173 3,121 14,140 19,529 27,365 Taxes on international trade & transactions 295 1,449 6,579 7,541 9,631 Other taxes 93 186 645 2,025 3,325Non-tax revenue 909 1,059 2,006 14,598 18,243 Capital revenue 9.9 11.6 – 672 3,751 Grants 432 615 3,027 3,265 5,011Total revenue 6,497 11,916 54,843 86,131 136,274

Goods & services n/a n/a 28,860 53,675 75,084 of which: wages & salaries n/a n/a 8,613 16,109 25,543 employer contributions n/a n/a 874 2,395 7,161Interest payments n/a n/a 2,063 1,705 1,794Transfers & subsidies n/a n/a 10,631 19,296 28,659Capital expenditure n/a n/a 8,270 10,551 22,559Foreign amortisation n/a n/a 4,435 5,223 16,836Lending minus repayments n/a n/a 7,404 10,877 2,799Total expenditure n/a n/a 61,662 101,326 147,731Source: State Statistical Office.

90 Mongolia: Sources of information


Reference table 2

Money supply and credit(Tg m unless otherwise indicated; end-period)

1991 1992 1993 1994 1995

Currency in circulation 2,068 5,317 14,277 n/a n/a

Demand deposits 5,592 5,790 9,756 14,104 17,045

Money (M1) 7,660 11,106 24,033 43,422 54,576

M1 growth (%) n/a 45.0 116.4 80.7 25.7

Quasi-money 2,601 5,412 24,216 43,906 59,408

Money (M2) 10,261 16,518 48,249 87,328 113,984

M2 growth (%) n/a 61.0 192.1 81.0 30.5

Domestic credit 12,958 20,758 31,547 57,643 42,924 Claims on central government 103 1,628 –76 4,679 –19,798 Claims on state enterprises 9,501 11,789 16,938 12,193 10,883 Claims on private sector 3,354 7,341 14,684 40,770 51,839Source: IMF, International Financial Statistics.

Reference table 3

Distribution of credit by sector(% of total; year-end)

1989 1990

Short-term credit 73.3 71.9 Agriculture 13.0 10.9 Industry 7.0 5.8 Transport & communications 4.1 3.4 Construction 8.2 8.3 Trade 20.6 18.4 Warehousing 20.0 20.4 Others 0.4 4.7

Long-term credit 26.7 28.1 Agriculture 4.1 6.0 Light industry 8.1 4.5 Transport 5.6 5.2 Construction 5.8 5.3 Fuel & electricity 1.0 2.0 Others 1.9 5.1

Total credit 100.0 100.0Source: Mongol Bank, quoted in Asian Development Bank (ADB), Mongolia: A Centrally Planned Economy in Transition.

Reference table 4

Gross domestic product(Tg m unless otherwise indicated)

1989 1990 1991 1992 1993

At current prices 10,731 10,465 18,910 47,298 n/a

At constant (1990) prices 10,735 10,465 9,497 8,392 n/a

Real change (%) 4.2 –2.5 –9.2 –11.6 n/aSource: IMF, International Financial Statistics.

Mongolia: Sources of information 91


Reference table 5

Gross domestic product by sector(% annual real change)

1989 1990 1991

Agriculture 13.8 –2.0 –6.9

Industry 11.4 –0.3 –12.3

Construction 9.6 –25.1 –30.1

Transport –1.5 –9.1 –28.9

Communications 8.3 6.3 –0.4

Trade 9.3 –2.0 –49.8

Services 3.5 –6.1 1.5

NMP 9.7 –3.8 –23.6

GDP 4.2 –2.5 –16.5Source: ADB, Mongolia: A Centrally Planned Economy in Transition.

Reference table 6

Prices and earnings indices(period averages)

1990 1991 1992 1993 1994

Consumer prices (Jan 1991=100) n/a n/a 363.7 1,339.8 2,513.2

Average earnings (1990=100) 100.0 228.9 348.7 n/a n/aSource: IMF, International Financial Statistics.

Reference table 7

Transport statistics

1991 1992 1993 1994 1995

Freight traffic (m ton-km) 4,381 3,321 2,805 2,283 2,437 Rail 3,013 2,756 2,531 2,132 2,280 Road 1,363 559 268 147 153 Air 4 5 6 5 5

Passenger traffic (m passenger-km) 1,958 1,957 1,573 1,677 1,424 Rail 596 630 583 790 680 Road 913 963 701 568 423 Air 448 364 290 320 320Source: ADB, Mongolia: A Centrally Planned Economy in Transition.



Reference table 8

Industrial productiona

(Tg m)

1989 1990

Food 1,477 1,489

Textiles 949 980

Clothing 348 365

Leather & shoes 756 732

Wood processing 544 522

Construction materials 835 613

Chemical industries 327 350

Non-ferrous metals 902 853

Metal industries 281 194

Energy 920 966

Total incl others 7,875 7,705

a Gross output, selected industries.

Source: ADB, Mongolia: A Centrally Planned Economy in Transition.

Reference table 9

Output of selected industrial products

1990 1991 1992 1993 1994

Meat excl pork (’000 tons) 54,219 46,873 24,661 17,200 11,300

Sausage (tons) 5,522 5,825 3,360 1,245 1,065

Flour (’000 tons) 190 174 182 139 n/a

Bread (tons) 63,295 60,575 60,860 46,007 33,909

Milk & milk products (m litres) 60 51 27 13 5

Vodka (’000 litres) 6,438 6,769 6,687 5,251 3,626

Carpets (’000 sq metres) 1,971 1,400 1,037 1,000 681.5

Cashmere (tons) 240 191 98 122 232

Camel-wool blankets (’000 metres) 91 90 91 49 24

Scoured wool (tons) 9,734 7,197 7,057 3,466 2,063

Leather footwear (’000 pairs) 4,223 3,994 2,245 1,031 605

Ceramic goods (’000) 3,922 4,113 3,337 n/a n/a

Cement (’000 tons) 441 227 133 82 86

Doors & windows (’000 sq metres) 398 98 21 10 8

Electricity (m kwh) 2,814 2,550 2,358 2,132 2,123Source: State Statistical Office.



Reference table 10

Minerals production(’000 tons unless otherwise indicated)

1990 1991 1992 1993 1994

Coal 7,157 7,036 6,247 5,609 5,012

Copper 354 257 300 334 343

Molybdenum 4.42 3.72 3.50 4.37 4.40

Gold (kg) n/a n/a n/a 1,117 1,975

Fluorspar n/a n/a 662 537 383

Irona – – – – 1,575

a Not produced until 1994.

Source: State Statistical Office.

Reference table 11

Crop production(’000 tons)

1991 1992 1993 1994 1995

Cereals 595 440 480 331 261 of which: wheat 538 453 450 322 257

Potatoes 98 79 60 54 52

Vegetables 23 16 23 23 27

Fodder crops 213 138 112 29 19Source: State Statistical Office.

Reference table 12

Livestock numbers(’000 head)

1990 1991 1992 1993 1994

Camels 538 475 415 368 366

Horses 2,262 2,300 2,198 2,190 2,408

Cattle 2,849 2,800 2,814 2,730 3,004

Sheep 15,084 14,700 14,635 13,779 13,779

Goats 5,126 5,200 5,598 6,107 7,239

Total 25,857 24,000 25,660 25,148 26,797Sources: State Statistical Office; press reports.

Reference table 13

Foreign trade($ m)

1990 1991 1992 1993 1994

Merchandise exports fob 660.7 348.0 388.5 380.9 324.2

Merchandise imports cif –924.0 –360.9 –418.3 –361.5 –222.7

Trade balance –263.3 –12.9 –29.8 19.4 101.5Source: IMF, International Financial Statistics.



Reference table 14

Balance of payments, IMF estimates($ m)

1991 1992 1993 1994 1995

Goods: exports 346.5 355.8 365.8 367.0 451.0

Goods: imports –447.6 –384.9 –344.5 –333.3 425.7

Trade balance –101.1 –29.1 21.3 33.7 25.3

Services: credit 26.5 34.8 26.0 45.4 57.3

Services: debit –66.3 –69.7 –66.9 –91.2 –95.4

Income: credit 0.0 0.2 0.8 3.2 3.0

Income: debit –4.9 –27.1 –21.0 –22.5 –28.4

Current transfers: credit 41.6 38.7 66.7 77.8 77.1

Current transfers: debit 0.0 –3.5 4.2 n/a n/a

Current-account balance –104.2 –55.7 31.1 46.4 38.9

Direct investment abroad 0.0 0.0 0.0 n/a n/a

Direct investment in Mongolia 0.0 2.0 7.7 6.9 9.8

Portfolio investment assets 0.0 0.0 0.0 0.0 0.0

Portfolio investment liabilities 0.0 0.0 0.0 0.0 0.0

Other investment assets 0.0 –64.0 –35.4 –51.0 –49.2

Other investment liabilities 10.8 18.0 15.9 5.1 22.5

Financial balance 10.8 –44.0 –11.8 –39.0 –16.9

Capital account nie credit 0.0 0.0 0.0 n/a n/a

Capital account nie debit 0.0 0.0 0.0 n/a n/a

Capital-account nie balance 0.0 0.0 0.0 n/a n/a

Errors & omissions –36.4 17.4 –4.8 –1.0 10.1

Overall balance –129.8 –82.3 14.5 6.4 32.1

Memorandum itemTotal change in reserve assets (– indicates inflow) 129.8 82.3 –14.5 –6.4 –32.1

Financing (– indicates inflow)Movement of reserves 51.2 72.3 –23.5 –27.4 –22.6Use of IMF credit & loans 15.3 3.5 13.1 21.1 –9.5Exceptional financing 63.3 6.5 –4.1 n/a n/aSource: IMF, International Financial Statistics.

Reference table 15

Foreign reserves($ m unless otherwise indicated; end-period)

1991 1992 1993 1994 1995

Foreign exchange n/a 16.33 59.70 78.49 114.50

SDRs 0.04 0.01 0.03 2.89 2.52

Reserve position in the IMF 0.00 0.01 0.01 0.01 0.00

Total reserves excl gold n/a 16.35 59.74 81.39 117.03

Golda 37.80 5.07 5.62 8.64 28.90

Total reserves incl gold n/a 21.42 65.36 90.03 145.93

Memorandum itemGold (m fine troy oz) 0.14 0.02 0.02 0.03 0.10

a Valued at 75% of the fourth-quarter London price.




Reference table 16

Exchange ratesa

(Tg:$)

1991 1992 1993 1994 1995

End-period 39.40 105.07 396.51 414.09 473.62

Period average 9.52 42.56 n/a 412.72 448.61

a An official pegged rate was established against the dollar in July 1993. All exchange rates wereunified in May 1993.


Editors:All queries:

Georgina Wilde; Graham RichardsonTel: (44.171) 830 1007 Fax: (44.171) 830 1023



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