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

1997-98The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

ISSN 1352-089X

December 22nd 1997 Contents

China

3 Basic data

4 Political background4 Historical background9 Constitution and institutions

11 Political forces15 International relations and defence

17 The economy17 Economic structure19 Economic policy28 Economic performance30 Regional trends

32 Resources32 Population34 Education34 Health35 Natural resources and the environment

36 Economic infrastructure36 Transport and communications37 Energy provision38 Financial services

39 Production39 Industry41 Mining and semi-processing42 Agriculture and forestry44 Construction

44 The external sector44 Merchandise trade50 Invisibles and the current account51 Capital flows and foreign debt53 Foreign reserves and the exchange rate

54 Appendices54 Sources of information55 Reference tables

1

EIU Country Profile 1997-98 © The Economist Intelligence Unit Limited 1997

Mongolia

66 Basic data

67 Political background67 Historical background68 Constitution and institutions68 Political forces69 International relations and defence

70 The economy70 Economic structure71 Economic policy72 Economic performance73 Regional trends

74 Resources74 Population75 Education75 Health76 Natural resources and the environment

76 Economic infrastructure76 Transport and communications77 Energy provision78 Financial services78 Other services

78 Production78 Industry79 Mining and semi-processing80 Agriculture and forestry80 Construction

81 The external sector81 Merchandise trade82 Invisibles and the current account83 Capital flows and foreign debt84 Foreign reserves and the exchange rate

85 Appendices85 Sources of information86 Reference tables

2


China

Basic data

Land area 9,561,000 sq km

Population 1,223.9m (end-1996 estimate)

Main towns Population in million, end-1996 estimates

Chongqing 15.3 Tianjin 8.9Shanghai 13.0 Shijiazhuang 8.5Beijing (Peking) 10.8 Wuhan 7.2Chengdu 9.8 Qingdao 6.9Harbin 9.1 Guangzhou (Canton) 6.6

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 and maxi-mum); coldest month, January, 1-8°C; driest month, December, 36 mm aver-age 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 tonne (approximately)1 picul or dan=50 kg 20 piculs=1 tonne1 mu=0.0667 hectare 15 mu=1 shang=1 hectare

Currency 1 yuan/renminbi (Y/Rmb)=10 jiao=100 fen. Average exchange rates in 1996:Rmb8.314:$1; Rmb12.98:£1; exchange rates on December 15th 1997:Rmb8.26:$1; Rmb13.57:£1

Fiscal year January-December

Time Zone I (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 1st, Chinese New Year (three days), May 1st, October 1st and 2nd

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 of the whole country, Qin Shi Huang Di, in 221 BC. TraditionalChinese historians described subsequent history as following a “dynasticcycle”. Over a period, sometimes lasting several hundred years (the dates of thelast dynasty, the Qing, were 1644-1911 and of its predecessor, the Ming, 1368-1644), a dynasty would expand, flourish, decline and finally lose power, oftenin an insurrection sparked by a discontented peasantry, or in a foreign inva-sion. Long periods of unity were interrupted several times by long periods ofdisunity. The last imperial dynasty, the Qing, was “foreign”, composed of aManchu nobility from the north-east, whose language and culture differedfrom that of the majority Han Chinese population. But like the Mongol Yuandynasty (1276-1368) before them, the Qing became assimilated. In 1911 thedynasty collapsed after a long period of decline. The empire was underminedby a moribund political and economic system, further weakened by long anddebilitating internal revolts and by the depredations of foreign powers seekingto 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 Yat-sen 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 of China proper in 1937. A second, uneasy, unitedfront, imposed on Chiang Kai-shek by his mutinous troops in December 1936,saw the CCP and the KMT combine to resist Japanese aggression. The Japanesesurrender in 1945, however, was followed by the eruption of full-scale civil warbetween the CCP and KMT in 1946. The KMT was divided and corrupt, itstroops ill-disciplined and its support base eroded by rampant inflation andcorruption. The US-backed KMT forces were routed with unexpected ease byarmies of the worse-equipped but well-disciplined CCP. In 1949 the KMT estab-lished a government-in-exile on the “unliberated” island province of Taiwan,

4 China: Historical background


and on October 1st Mao Zedong proclaimed the founding of the People’sRepublic of China, with Beijing as its capital.

Mao and internal partystruggles, 1949-76

The Long March generation of senior communists has played the major role innational politics, and the history of the period since 1949 has to a large extentbeen that of their personal battles for power, for the favour of Mao Zedong, andfor differing visions of socialism. The personality of Mao, who towered overhis colleagues and sought to gather absolute power into his own hands,weakened—some would argue fatally—the institutional basis of the party-state,because it precluded the establishment of a secure succession mechanism orconsensus-building system. The struggle was at its most intense during the

Important recent events

June 1989: The Tiananmen Square massacre in Beijing ofanti-government protesters.

November 1989: Deng Xiaoping retires from his post aschairman of the Central Military Commission.

January-February 1992: Deng goes on his “southerntour” to launch a new campaign for economic reform.

August 1992: The 14th Communist Party NationalCongress adopts a platform of “socialist market economy”.

March 1993: The National People’s Congress re-elects LiPeng as prime minister for five years; Jiang Zemin becomeshead of state as well as party leader.

May 1994: The US president, Bill Clinton, decides to renew,unconditionally, China’s most favoured nation (MFN) tradingrights and no longer to link their annual renewal to the issueof human rights.

February 1995: The president of the Philippines, FidelRamos, accuses China of stationing armed vessels in an areaoff the Spratly Islands in the South China Sea. Parts of thisarea are claimed by China, Taiwan, Vietnam, the Philippines,Malaysia and Brunei.

May 1995: China is outraged at the US decision to allowthe president of Taiwan, Lee Teng-hui, to make a private visitto Cornell University, from which he has a doctorate.Relations with the US and with Taiwan come under severestrain.

September 1995: The publication of a Proposal forFormulating the Ninth Five-Year Plan at the fifth plenarysession of the 14th Central Committee signals a renewedcommitment to gradual reform.

Early 1996: China’s truculence in the run-up to the firstever democratic elections in Taiwan, which includes theholding of military exercises using live ammunition, causeswidespread anxiety about China’s intentions. Jiang Zemincontinues to strengthen his hold on power by intensifying adrive against corruption and crime, and appointing hissupporters to key positions in the military.

December 1996: South Africa announces the intention toswitch recognition from Taiwan to China.

February 19th 1997: The death of Deng Xiaoping, aged92, is announced. His chosen successor, Jiang Zemin, stepssmoothly into greater prominence, a role confirmed as theyear progresses by his ability to promote his allies.

July 1st 1997: China resumes the exercise of sovereigntyover Hong Kong, which becomes a Special AdministrativeRegion (SAR) of China.

September 1997: The 15th Congress of the ChineseCommunist Party further consolidates the leadership aroundJiang Zemin. The two men considered to be least loyal tohim—Qiao Shi and Liu Huaqing—are disqualified frommembership of the Central Committee (and hence from thePolitburo Standing Committee) on grounds of age. Many ofthe new appointees are allies of Jiang Zemin and the newCentral Committee has a technocratic flavour in keepingwith the Jiang Zemin-Li Peng axis.

October 1997: Jiang Zemin makes the first visit to the USby a Chinese head of state since 1985. The improvement inbilateral relations which the visit signals is consolidated bythe release, on medical parole, of the dissident WeiJingsheng, who flies to the US in November. The wayappears clearer for substantive progress on China’s admissionto the WTO.

China: Historical background 5


Cultural Revolution of 1966-69, when Mao, seeing his own influence erodedafter the disastrous Great Leap Forward of 1958 and the consequent famine in1959-60, turned to the “masses” to overthrow his rivals in the party hierarchy,with the ideological pretext of pursuing his own millenarian brand of egalitar-ian socialism against the forces of pragmatism and revisionism. The chaos ofthe Cultural Revolution left the army for a while as the only viable politicalinstitution and Mao turned to the military to restore order in the early 1970s.After the death in 1976 of both Mao and his widely respected lieutenant, theprime minister, Zhou Enlai, senior military figures moved quickly to arrest themost prominent of Mao’s “leftist” colleagues, including his wife and the othermembers of the “Gang of Four”.

The 1980s: economic butnot political change

Mao’s designated successor, Hua Guofeng, presided over a period of normal-isation, 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 never took the top positions for himself. He sought to ensure the continu-ity of the reforms that he instituted by ruling through a succession of youngermen who shared his belief in the priority of economic advance over politicalpurity. But such was the damage done during the later Mao years to the institu-tions of party and state that Deng’s personal imprimatur was necessary to main-tain the pace of reform and secure the all-important acquiescence of the army.Political legitimacy in China depends on personal prestige and not on theholding of office, a state of affairs which Deng at first sought to alter and thenmade use of to pursue the politically conservative agenda of the elder groupamong whom he was paramount. Tensions between “reformers”, like Deng, and“conservatives” worried about the dilution of socialist orthodoxy brought bygreater economic liberalism have been a persistent feature of Chinese politicsand Deng’s personal intervention was at times necessary to push forward thereform process. One reason for Deng’s prestige, especially with the army, is thathe was never seen as anything other than orthodox politically. The harsh crack-down on dissidence after the Democracy Wall movement of late 1978 and early1979 had 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,demands which found an increasing echo among intellectuals, students and,dangerously, among urban workers. To the Chinese elite such demands spelledinevitable chaos and were, as such, tantamount to sedition. Deng Xiaoping’sfirst two chosen party leaders—Hu Yaobang in 1987 and Zhao Ziyang in1989—were ousted after large-scale street protests when mass, student-led dem-onstrations countrywide were ended only by the massacre of unarmed civiliansaround Tiananmen Square, Beijing, on June 4th 1989. As party leaders, the twomen had to take the blame for the failure of communist indoctrination.



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 communismin the Soviet Union and elsewhere in eastern Europe led to a rethink. The maindanger to the CCP’s rule, it was argued, was not the pressure for democratisationthat economic reform had brought, but rather that as a socialist regime it mightfail to achieve healthy and rapid economic growth. In 1992 Deng, then aged 88and in theory fully retired, re-emerged in a famous tour of the rapidly growingareas of the south to launch a new campaign—his last—for faster and boldereconomic reform. As in the mid-1980s, the stress in political rhetoric was nolonger on the importance of Marxist orthodoxy but on the need to achieve rapideconomic growth by whatever means seemed most appropriate.

Deng’s last appointed heir is Jiang Zemin, a former mayor of Shanghai, whohas proved rather more adept at projecting himself as primus inter pares than heseemed likely to do when first elevated in late 1989. By the time Deng turned92 in August 1996, Jiang combined the key roles of party leader, state presidentand chairman of the Central Military Commission. He consolidated his posi-tion at the 15th CCP Congress in September 1997.

The collective leadership:Jiang Zemin’s technocracy

Jiang now heads a collective leadership; at its apex are the prime minister, LiPeng (who is expected to become the chairman of the National People’sCongress (NPC) and of its Standing Committee in early 1998, to replace QiaoShi, ousted from the top leadership at the 15th Congress), and the senior deputyprime minister, Zhu Rongji. Zhu Rongji is the man most likely to succeed LiPeng, whose term as premier must end at the next plenum of the NPC.

The Politburo Standing Committee, PSC (new members in bold)

Jiang ZeminHu JintaoLi Peng Wei Jianxing

Zhu Rongji Li LanqingLi Ruihuan

The Politburo (excluding PSC members; listed by stroke order/number of surnames)

Ding Guan’gen (head of propaganda)

Tian Jiyun (vice-chair of the National People’s Congress)

Li Changchun (party secretary of Henan)

Li Tieying (minister of commission for restructuring theeconomy)

Wu Bangguo (vice-premier, responsible for SOEs)

Wu Guanzheng (party secretary of Shandong)

Chi Haotian (vice-chair of CMC and minister of defence)

Zhang Wannian (vice-chair of CMC)

Luo Gan (secretary-general of the State Council)

Jiang Chunyun (vice-premier, responsible for agriculture)

Jia Qinglin (party secretary of Beijing)

Qian Qichen (vice-premier, foreign minister)

Huang Ju (party secretary of Shanghai)

Wen Jiabao (secretary-general of Central Finance andEconomic Leading Group)

Xie Fei (party secretary of Guangdong)

China: Historical background 7


At the 15th Congress the two vacancies on the most important committee inthe country, the Politburo Standing Committee (PSC), left by the retirement ofQiao Shi and Admiral Liu Huaqing, were filled by two newcomers to the topechelon: Wei Jianxing (born 1931), and Li Lanqing (born 1932). Wei Jianxing,regarded as close to Qiao Shi, has headed the important Central Commissionfor Discipline Inspection since 1992 and took over as temporary party secretaryof Beijing in 1995, replacing the disgraced Chen Xitong. Li Lanqing, a vice-premier with experience in international affairs and education, took the seventhplace on the PSC. He is regarded as a reformist but lacks a broad power base.

Also on the key Standing Committee of the Politburo are Li Ruihuan, thechairman of the Chinese People’s Political Consultative Conference (CPPCC, apseudo-democratic advisory body which incorporates the few non-communistpolitical 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.

Over the last few 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 NPC he was able to secure the pro-motion to the rank of vice-premier of Wu Bangguo (formerly party secretary ofShanghai) and Jiang Chunyun (formerly party secretary of Shandong), andplaced them in charge of overseeing industry and agriculture respectively.There was some opposition, especially to the promotion of Jiang Chunyun,and there have been mutterings about Jiang Zemin’s “Shanghai clique”.

It has frequently been remarked that Jiang Zemin’s leadership is necessarilycollective, because he lacks the charisma and personal authority of the LongMarch generation of leaders. Because it is collective it is also consensus-drivenand therefore more dependent on the process of compromise than was the casewhen Deng Xiaoping acted as ultimate, behind-the-scenes arbiter. That said, asound consensus appears to exist behind the current, cautious but steady pol-icy of Jiang Zemin, which is technocratic in style. Jiang and his allies, notablyLi Peng and Zhu Rongji, appear to agree that the current socio-economic sys-tem is in need of reform rather than fundamental change and that the systemcan be made to function.

To the extent that a collective leadership involves the putting in place of aninstitutional rather than a purely personal base for the exercise of collectiveauthority, it must be seen as a step forward in the process of building theinstitutions needed to ensure stability. Even if the Chinese political systemcannot survive the reform process in the long run, there are signs that it ismaturing. Jiang Zemin may be China’s Brezhnev; China’s Gorbachev has yet toemerge.

Fighting corruption andlawlessness

This belief explains the long duration of the continuing campaign againstcorruption in the party and lawlessness in society that has dominated thepolitical atmosphere since 1995. Corruption is widely believed to run wide anddeep within the party, and the fact that only a few high level officials (mostnotably, the former secretary of the Beijing municipal Communist Partycommittee, Chen Xitong) have been exposed as corrupt tends to confirm the



cynicism with which much of the population regards the party and even theconduct of politics. Attempts are now being made to reinvigorate the CCP andto stiffen its ideological sinews by means of nationwide emulation campaignswhich, in the late 1990s after nearly 20 years of reform, have a curiouslyanachronistic 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.

Meanwhile, a group of people whose activities were attracting a good deal ofunfavourable comment—the families of the elder generation, known as“princelings” because of their privileged access to the economic opportunitiesoffered by the reform era—have some reason to be cautious now that DengXiaoping and most of the Long March generation have passed from the scene.The announcement that Chen Xitong, held under house arrest since 1995, wasdue to be tried for corruption came just before the 15th Congress and wasintended to serve as a reminder of the seriousness of the anti-corruption drive.Notable by their absence in elections to the Central Committee were severalprominent members of the families of elders, including Deng Xiaoping’s sonand daughter. The political careers of princelings may be blighted by the desireof the Jiang-led leadership to distance itself from charges of nepotism and todemonstrate that it will treat this aristocracy without fear or favour, but theireconomic privileges are not likely to be assailed.

The army: guarantor ofparty rule

The removal of Liu Huaqing from the PSC, which will lead in due course to hisstanding down from the Central Military Commission, is another sign of theextent of Jiang Zemin’s grip. His announcement at the 15th Congress that thearmed forces would be cut by another 500,000 confirmed the modernisingtrend among the military top brass, who would prefer to spend on equipmentand materiel rather than on excessive manpower.

Although the armed forces stand as guarantor to the party, there is still someunease about this role in the People’s Liberation Army (PLA), which is notentirely allayed by the removal of crowd-control responsibilities from the PLAto the People’s Armed Police (PAP), which has been greatly expanded since1989. Firing on unarmed civilians in 1989 was an unwelcome task and thearmy worries about its relative technological backwardness. Jiang Zemin doesnot and may never command the same degree of personal authority over themilitary as would a veteran of the liberation war. The relationship between theparty-state and the armed forces has therefore changed and will continue toevolve as the army becomes more streamlined and professional, but this pro-cess will be protracted.

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 and

China: Constitution and institutions 9


amended 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 four munici-palities. The provinces range from the most populous and crowded, Henan,with 94.3m people, to Qinghai, with just 5m. The most recent adjustment wasin March 1997, when the 30m-strong administrative areas of Chongqing, a cityof 15m plus surrounding districts and counties were hived off from Sichuan,previously the most populous province. In 1988 Hainan Island was separatedfrom Guangdong province on the south coast to become a separate province,as well as a Special Economic Zone (SEZ). Four other SEZs had been establishedin 1980 on the southern seaboard. The SEZs enjoy considerable financialautonomy and offer a more liberal climate for foreign investors, although theirrole was somewhat undercut by the opening in 1984 of 14 more “coastal cities”with similar incentives for foreign investment and, in the 1990s, a cut-throatcompetition for foreign investment by localities all over China, whether or notthey had been designated for the task by Beijing. Most have now created theirown Development Zones, replete with a range of investment incentives. Theso-called Autonomous Regions have no more autonomy than provinces. Thename, however, recognises the pre-revolutionary predominance of non-Hanethnic groups in Guangxi (Zhuang, an ethnic group in south-west China),Tibet, Xinjiang (Turkic, Uighur Muslims), Inner Mongolia (Mongols) andNingxia (Chinese, Hui Muslims). The municipalities of Beijing, Shanghai,Tianjin and Chongqing are provincial-level entities.

Sub-provincialadministration

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 1996 there were117 rural prefectures, 218 prefecture-level cities, 445 county-level cities and2,142 counties. There were 666 cities, including four municipalities with thestatus of provinces, and 717 districts, the urban administrative subdivision.

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,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 the

10 China: Constitution and institutions


Communist 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. There has been talk aboutextending direct elections to higher levels, but no action has been taken.

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 ofthe State 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 1997 the CCP had about 58m members, just over 4.7% of the population ofChina at the end of 1996. It was thus by some measure the world’s largestpolitical party, although the proportion of party members to total populationwas not large in comparison with the few other remaining socialist states. Aselsewhere, party membership is a benefit in material and professional life, andin some government bodies is in effect a prerequisite of advancement.

The Central Committee The CCP’s structure parallels, and supervises, that of government and legis-lature. Its main decisionmaking body is a Central Committee of, as of 1997,151 full members and 191 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 most recent Party Congress,the 15th, was held in September 1997. The next is not due until 2002. The CentralCommittee meets in plenary session about twice a year. In the interim most of itspower is vested in a Politburo of 15-20 members, currently 21.

The Standing Committee Uniquely, the CCP adds a further tier of centralised leadership, the PolitburoStanding Committee, of seven members, who are the most powerful people inthe country. Usually, the Politburo will include some people of purely partystanding and provincial- or municipal-level party secretaries. But it will alsoinclude the prime minister and his deputies, other key state councillors andrepresentatives of the Chinese military.

China: Political forces 11


Jiang Zemin’s Political Report to the 15th Congress

The speech which Jiang made at the opening of theCongress was divided into ten parts.I. Issues and prospects at a time when a new centuryis to beginConcludes that only the CCP, on the basis of its record as thesaviour of China, can lead the Chinese people through thechallenges ahead.

II. Work accomplished in the past five yearsHails the goals of speeding development, setting up a“socialist market economy” and establishing the “guidingrole of Deng Xiaoping Theory of building socialism withChinese characteristics”. Notes rapid growth, reduction ofpoverty, the resumption of sovereignty over Hong Kong,efforts to strengthen party-building. Notes problems,especially corruption.

III. The standing of Deng Xiaoping Theory in historyand its significance as a guideProposes that the CCP constitution enshrine Deng XiaopingTheory along with Marxism-Leninism and Mao ZedongThought as its “guide to action”, because it is DengXiaoping Theory which “integrates Marxism with thepractice of present-day China”.

IV. The basic line and programme for the primarystage of socialismRepeats the concept, formulated at the (1979) third plenum ofthe 11th CCP Central Committee, that China is in the “primarystage of socialism”, a stage it entered in the mid-1950s. This isa stage in which modernisation is the key goal and one whichwill take “at least a century” to complete. During this phase,“economic construction is the central task of the entire partyand the whole country”; preserving stability is also of keyimportance, including guarding against subversion by“international and domestic hostile forces”.

V. Economic structural reform and economicdevelopment strategyThis is broken down into eight headings.1) Ownership structureChina must develop diverse ownership “under the conditionthat public ownership remains the main component”. Thepublic sector includes the state-owned and collectivelyowned sectors, as well as their shares in the mixed-ownedsector. Overall, the dominant position of public ownership ismaintained so long as “public assets dominate in the totalassets in society and the state-owned sector controls thelife-blood of the national economy”. The state-owned sectormust dominate in “major industries and key areas”. This is

the guarantee of the “socialist nature” of China and iscompatible with “diverse forms of joint stock partnerships”.2) Reform of state-owned enterprises (SOEs)SOEs remain the “pillar” of the economy; large andmedium-sized SOEs will be converted into “standardcorporations”, their powers and responsibilities clearlydefined. They will operate independently. Most of the largeand medium-sized “backbone” enterprises will have “initiallyestablished a modern enterprise system” by the end of thecentury. Large enterprise groups that span regions andembody diverse forms of ownership will be established.Control over small SOEs will be relaxed and they will beencouraged to reorganise, merge, be sold off as necessary.Bankruptcy and lay-offs are recognised are “inevitable”. Asocial-security system will be established to underpin a moremobile and flexible labour market.3) Improving the distribution systemSome will become prosperous ahead of others, but“excessively high incomes”, especially if illegally come by,should be regulated. A balance of income distribution asbetween the state, enterprises and individuals, and centraland local government must be sought.4) Improving the functioning of the market andmacroeconomic controlsStressing the use of “economic and legal means” to maintainmacroeconomic balance and hold inflation in check. Themeans of supervision of the financial sector should be reformed.5) Agriculture must be developed and investment inthe rural sector increasedTownship enterprises should develop; the grain and cottonprocurement system should be reformed; pricing should berationalised and rural marketing and distribution reformed.Peasants’ autonomy and livelihood must be improved.Development of regional economies must be balanced, thestate according priority to central and western China.6) Science and technology must be developedThe need to improve research and to broaden and deepeneducation is stressed, along with environmental andpopulation issues.7) Opening to the outside worldThis well-established policy is restated.8) Improving living standards.

VI. Reform of the political structure and building ofdemocracy and the legal systemThis is defined as embracing the expansion of “socialistdemocracy”, perfecting the “socialist legal system” to “builda socialist country ruled by law”. This does not imply anychange to the “people’s democratic dictatorship”. The stressis on administration “according to law”. The role of the CCP

12 China: Political forces


The 15th Congress The 15th Quinquennial Congress of the CCP, the first since the death of DengXiaoping, was held in September 1997. As well as performing the task ofelecting the new Central Committee, the Congress approved the policy linehammered out in many meetings in advance and presented to the delegates byJiang Zemin. The centrepiece and backdrop was the decision to elevate DengXiaoping Theory to form part of the constitutional ideology of the CCP. Thisendows the leadership with the pragmatic ideology necessary to pursue reform,for example of the ownership of industrial assets, which might appear to runcounter to the notion that China is a socialist country.

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 still 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.

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 partyleader, 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.

in formulating and following the law is stressed.To this end, consultation is important, as is the expansion of“grass-roots democracy”, by which is meant elections atlocal level and popular participation in local government.The legal system needs to be strengthened and given teeth,so that rulers and ruled alike are answerable to the law“particularly leading cadres to prevent them from abusingtheir power”.

VII. We should build a socialist culture with ChinesecharacteristicsThe need to foster cultural development and openness and“firmly resist the corrosive influence of decadent ideologies”is stated. Under this heading, Jiang announced plans to cutthe size of the PLA by 500,000 over three years; the army“must subordinate itself to and serve the overall interests ofnational economic development”.

VIII. Promoting the peaceful reunification of themotherlandA renewed appeal is made to Taiwan on the basis of “onecountry, two systems”. “We shall not undertake to renounce

the use of force” in light of the “schemes of foreign forces tointerfere with China’s reunification and to bring about theindependence of Taiwan”.

IX. International situation and foreign policyAlthough the international environment is favourable, the“cold war mentality” still fosters “strengthening militaryalliance between various major military blocs”, wealth gapsare widening and “human rights and other issues are used tointerfere in the internal affairs of other countries”. Chinarenews its solidarity with developing countries, pledgespeaceful dispute settlement and forswears hegemonism.

X. The CCP that is facing towards the new centuryAs the “vanguard of the working class”, the CCP ’s historicclaim to rule China continues to be valid. Ideology, basedespecially on Deng Xiaoping Theory, needs to bestrengthened and democracy needs to be further developedfrom the grass roots upwards. Because “a fortress is mosteasily captured from within”, corruption must be wiped out,or “the party will lose the support and trust of the masses ofthe people”.

China: Political forces 13


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)—wasto demilitarise politics. Representation of the PLA in the top organs of state andparty has steadily diminished. Until the 14th Party Congress in 1992 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 army was reduced by about 25%, to 3 million. But after 1989 the army’spresence has once more been felt in the Politburo; there are reports that a numberof generals attend its meetings, albeit in a non-voting capacity. The increasedpoliticisation of the military can also be seen in the role that the PLA has played inthe conduct of foreign policy. As the self-appointed guardian of China’s sover-eignty, the PLA has exerted its influence across a broad spectrum of foreign policyareas, including the conduct of relations with Taiwan and Hong Kong.

A rapid-response elite The CCP Central Committee and the Central Military Commission (CMC) areunderstood to be restructuring elite PLA units to form rapid-response armedpolice entities under the direct command of the Armed Police Headquartersand the CMC. This would make them operable at Jiang’s behest and satisfy theprofessional army, which has never been comfortable with the domestic secu-rity role it was obliged to play during the 1989 protests, when units weredeployed against the civilian population. The new rapid-response organisationwill number a few hundred thousand personnel, bringing the PAP’s strength towell over 1m, more than one-third the size of the PLA.

The Central MilitaryCommission

Control over the army was vested in two parallel commissions, the StateCentral Military Commission and the Party Central Military Commission. Thebodies usually have identical membership, and the State Central MilitaryCommission is rarely reported as meeting, leaving no doubt as to the intendedtruth behind the oft-repeated maxim that “the party controls the gun”. Thechairmanships of the two commissions were the last posts Deng Xiaoping held,until November 1989, when he resigned the party post and announced hisintention to relinquish the state post at the subsequent National People’sCongress (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 is

14 China: Political forces


noteworthy, for example, that even before the CCP mobilised against studentprotesters in 1989 it had denounced as “counter-revolutionary” the inde-pendent trade unions which had sprung up during the protests. The CCPremains extremely nervous of any sign of worker organisation, mindful of therole of Solidarity 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 justa 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”. From 1972China found itself in de facto alliance with the US against perceived Sovietexpansionism. That epoch came to a definitive end in 1989, when relationswith the Soviet Union were normalised and the Tiananmen Square massacre inBeijing 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 US 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,the Beijing leadership has found eager help from the large community ofoverseas Chinese in Hong Kong, Taiwan, South-east Asia and even furtherafield. It has tried to stay on good terms with both North and South Korea.

During 1995-97 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 US in mid-1995 infuriated a Chineseleadership already seriously worried by his successful efforts to raise Taiwan’sinternational profile and thereby bolster its de facto independence. The processof negotiating practical trade, investment and communications links across theTaiwan Strait ground to a virtual standstill; relations reached a nadir during thecampaign for Taiwan’s first elected president, who was voted in in March 1996.China indulged in military manoeuvres which appeared to have the aim ofinfluencing the outcome of the elections by intimidating voters in Taiwan inthe hope that they would chose a less assertive president. This tactic havingfailed, relations have still not recovered, although there are signs that bothsides would like them to.

China: International relations and defence 15


China’s behaviour towards Taiwan demonstrates that China is adamant aboutwhat it considers to be an internal matter. The Chinese government seesTaiwan as an inalienable part of China and it is axiomatic that China is notanswerable in world forums for its conduct vis-à-vis Taiwan. The same is true,but more immediately so, of China’s attitude towards Hong Kong.

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 1997, for example, it has no aircraft carrier), the fact that it undoubtedlyintends to acquire such capacity is a matter of concern in the region.

During the development of the financial crises that have affected various coun-tries in Asia in 1997, China has been careful to project itself as a good neigh-bour willing to deploy resources to preserve regional economic stability. Tothat end, China has offered to contribute to the IMF-brokered rescue packageswhich have been assembled for Thailand and Indonesia.

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 rather readmitting—China was a founder member of the GeneralAgreement on Tariffs and Trade, GATT) China to the World Trade Organisation(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—is posi-tive proof of discrimination. Chinese leaders point to the very substantial liber-alisation of the import tariff regime—the unweighted average tariff rate has beenbrought down, from 43% in 1992 to 22-23% in 1996 and, further, to 17%, witha number of new cuts announced for October 1997—as well as other measuresthat have liberalised the economy as evidence for China’s good intentions tosupport its claim to join the WTO. Trade partners—chiefly the US, but backed byJapan and the EU—argue that the reforms have not gone far enough and thatthe sheer size of the Chinese economy gives China the potential to disruptworld trading patterns. Specific conditions should therefore be attached toChina’s entry, binding it to further measures. China argues that its still under-developed economy entitles it to join the WTO as a developing country, exemptfor the time being from some 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 separated 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.

16 China: International relations and defence


The priorities of themilitary have changed

Since 1950 China has been engaged in the war in Korea, on the North’s side,and in territorial disputes 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 US. China’s determination to acquirethe 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 lostabout 25% of its manpower, but the slimmed-down fighting force remains theworld’s largest standing army, with some 3m personnel.

The economy

Economic structure

Main economic indicators, 1996

Real GDP growth (%) 9.7

Consumer-price inflation (%) 8.3

Current-account balance ($ bn) 7.2

Foreign debt ($ bn) 116.3

Average exchange rate (Rmb:$) 8.314a

Population (m) 1,223.9b

a Period average. b End-period.

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

“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 460m is classified as rural, ie living in thecountryside, only 250m are farmers, according to the Chinese Academy of SocialSciences (CASS). With dependants, the true peasantry now numbers between480m and 530m. The “non-agricultural village population” includes more than120m employed in township and village enterprises (TVEs) and more than 80mwho have moved to the cities in search of work. They and their dependantsnumber about 400m, giving the lie to the notion that the majority of theChinese population is still made up of peasants. This process of industrialisingthe countryside is encouraged for many reasons: established urban centres arealready lacking in infrastructure; and the existing, already stretched, social-control system could not withstand a larger rural-urban migration. Nevertheless,such a migration is inevitable in the long run; jobs cannot be produced in the

China: Economic structure 17


rural areas in sufficient numbers to absorb the huge surplus labour force andensure continued rapid economic growth well into the next century.

The dominant role ofindustry

Economic growth has, for many years, been led on the supply side by increasesin industrial output. Even before Deng Xiaoping’s reforms, the Chinese eco-nomy 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, thereforms 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 1980sindustry’s contribution was again increasing year by year as parts of the coun-tryside industrialised. Meanwhile, services have been growing rapidly, as controlson the economy have been lowered and demand for personal services 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 (SOEs). Since then, much of theboom in manufacturing output has been produced by “collective” enterprises,under the aegis of local governments, TVEs or, increasingly, by private entre-preneurs or foreign investors either in wholly owned enterprises or in jointventures with Chinese interests. By the early 1990s the share of the state sectorin industrial output had shrunk to no more than half.

Comparative economic indicators, 1996($ bn unless otherwise indicated)

China India Russia Brazil Japan US

GDP 824 329 441 749 4,582 7,636

GDP per head ($) 680 350 2,980 5,750 36,410 28,790

Exports of goods 151 33 90 48 402 614

Imports of goods 132 39 67 53 309 803

Foreign trade (% of GDP)a 34.3 21.7 35.6 13.5 15.5 18.6

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

Sources: National sources; EIU.

Various problems surrounding the comparison of output levels between coun-tries mean that the comparative GDP figures in the table above should betreated with some caution. However, China is clearly a more open economythan its great neighbours, India and Russia, at least as measured by foreigntrade’s share of 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 of

18 China: Economic structure


wealth 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 was 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 done more than beginto threaten the vested interests of powerful constituencies. Most importantamong these are the 100m workers and party cadres in the traditional state-owned enterprises (SOEs), whose mounting financial losses are a source ofmacroeconomic instability.

Seeking means ofmacroeconomic control

The means to achieve the government’s goal of a “socialist market economy”have never been clearly spelled out. According to an important meeting of theCommunist Party’s Central Committee in November 1993, the “state sector” isto remain the backbone of the economy. However, the dynamism in the eco-nomy comes from the private, foreign-invested and “collective” sectors. Manyparts of the economy have slipped the leashes of central state control. Thegovernment’s dilemma is how to exercise macroeconomic control when, on theone hand, its fiscal and monetary policy levers remain deficient and, on the other,its formal power 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.

At end-1995 the draft Proposal for Formulating the Ninth Five-Year Plan (1996-2000) for National Economic and Social Development and the Long-Term Target forthe Year 2010 was presented to the Communist Party’s Central Committee. Asbefore, the aim is to move towards balanced growth, with a trickle-down effectfrom the rapidly advancing eastern seaboard into the interior. During the ninth-plan period and thereafter an attempt is being made to attract investment, fromforeign as well as domestic sources, into the interior of the country. Overallgrowth 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 (SEZs)in the south, offering tax and other incentives. Such privileges were later

China: Economic policy 19


extended across most of the country. By the 1990s, and especially after Deng’s“southern tour” in 1992, localities were competing with each other to offerforeign investors the most attractive terms. By the end of 1996 there were240,447 registered enterprises with foreign capital in China, with a totalpledged capital of $441.5bn, of which $289.9bn was provided by foreign part-ners. Between 1979 and 1996 a total of $174.9bn of FDI was actually put inplace. A total of 283,344 contracts were signed over the same period; the totalvalue of contracted foreign investment between 1979 and 1996 was $469.1bn.

The industrial reforms: a brief chronology

1979: Law on joint ventures; price liberalisation starts inagriculture.

1980: Fiscal autonomy to local governments; SpecialEconomic Zones (SEZs) created; private income taxintroduced.

1981: Individual enterprises encouraged in urban centres.

1982: Price liberalisation of industrial products starts; PatentLaw and Trademark Law enacted.

1983: State-owned enterprises (SOEs) begin to be taxedinstead of turning over profits; bank lending to SOEs beginsto replace allocations from budget; collective enterprises areencouraged; People’s Bank of China begins to assume someof the functions of a central bank.

1984: Fourteen coastal cities are opened;director-responsibility system and “above-plan” pricing andproduction autonomy introduced; township and villageenterprises (TVEs) created.

1986: Labour-contract system replaces virtual lifetimeemployment for urban new recruits.

1988: SOE contract responsibility system begins; on thebasis of negotiated multi-year contracts, managers’ (andsometimes workers’) rights of control and obligations to thestate are defined; Regulations on Private Enterprisespublished; Enterprise and Bankruptcy laws passed.

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

1990: Copyright Law enacted.

1991: Delegation of direct trade rights to (some) SOEs;beginning of pension and housing reform; encouragementof enterprise groups and corporatisation, whereby the state’sownership rights take the form of shares managed by State

Asset Administration Bureaux and State Asset InvestmentCompanies, and the firm has management autonomy.

1992: Deng Xiaoping’s southern tour; New OperatingMechanism and 14 Autonomous Rights to SOEs give SOEmanagers authority to “use and dispose of the propertyentrusted to them by the state for management andbusiness purposes”; phasing out of production targets andprice controls; Patent Law and Trademark Law revised.

1993: Principle of “socialist market economy” replaces“socialist commodity economy”; Decision of Third Plenumon establishing Modern Enterprise System; promulgation ofa 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 ofChina Law; Provisional Regulations Guiding ForeignInvestment; Insurance Law; move to a five-day week;legislation to regulate the securities and debt markets; draftof Ninth Five-Year Plan. Announcement of tariff reduction of30% for 4,000 of 6,000 lines; 179 non-tariff barriers (30% oftotal) to be replaced with tariffs.

1996: Programme of transforming 1,000 enterprises intofully autonomous corporations announced; smallerenterprises to be encouraged to merge; average unweightedtariff falls to less than 23%, with implementation ofreductions from April.

1997: Experimentation with different forms of ownership,including joint-stock shareholding, is declared to becompatible with socialism. It becomes clear that theauthorities are willing, indeed eager, to countenance themerger, closure and/or privatisation of thousands ofsmall-scale enterprises while ensuring the state’s majoritystake in larger enterprises and its total control of the around500 very largest, identified as key.

20 China: Economic policy


Of the total actually invested, $174.9bn, about 80% was committed to coastalareas and provinces, with Guangdong province alone accounting for 23% oftotal investment. Much the most important source of foreign funds was HongKong, with 58% of total investment.

In more recent years the volume of investment in Hong Kong 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 8.4% of the total, although because of therestrictions imposed by the Taiwan government most of that investment is alsorouted through Hong Kong. The share of “foreign” capital in China of overseasChinese origin is high—higher still if ethnic-Chinese investors from the US,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 (1979-96) the US was the third largestforeign investor—after Hong Kong (with 7.9% of the total) and Japan (with8%). These percentages, however, understate the importance of investment byindustrialised countries, which tends to be in higher value-added sectors in-volving a degree of badly needed technology transfer, rather than in thelabour-intensive processing and assembly operations favoured by investorsfrom Hong Kong and Taiwan, which have helped to fuel the boom in TVEoutput along the eastern seaboard.

The government has decided that it wishes to make level the playing fieldbetween domestic and foreign investment. Part of the motivation for this is afeeling that the economy has matured to the point where special incentives areno longer needed to attract foreign funds, which will seek entry to China be-cause of the lure of its vast market. There is also a pressing need to augment thefiscal position by being able to tax all enterprises at the same rate and a desire tobring an end to “round-tripping”, which refers to the practice of mainland-China-owned enterprises using their Hong Kong subsidiaries to invest in themainland in order to take advantage of incentives offered to “foreign” investors.Although the timing of the change has not been made clear and exceptions willalso be granted by the many authorities at lower levels with the power toapprove investment projects, “national treatment” is already being offered toforeign capital in Shenzhen. This will mean forfeiting tax privileges in exchangefor better access to the domestic market. But the slowdown in the rate of con-tracted investment that set in in 1996-97—when contracted investment fell by20% in 1996 and by 50% in the first half of 1997—has prompted the govern-ment to rethink this policy, or at least its timing. The removal of duty exemp-tions on capital goods imports for foreign-invested enterprises from April 1997is said to have deterred new commitments.

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 con-tinue to be a feature of the investment regime for some time. (Data on invest-ment in assets 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 offoreign trade was conducted at a lower rate closer to a true market price,available on a number of “swap” markets. Usually, there would be a thirdparallel-market rate as well, reflecting the demand for foreign exchange. At theend of 1993 the swap and official rates were merged and FECs abolished. Aprimitive interbank market was set up, although most traders still found them-selves having to use the swap markets. One effect of the reforms has been thesteady devaluation of the renminbi, although it remained stable for more thana year after central government intervention in July 1993. It fell fromRmb8:SDR1 at the end of 1993 to Rmb12.3:SDR1 at the end of 1994. During1995 the Chinese currency was stable against the SDR but appreciated in an-nual average terms against a weak US dollar. It then held firm against a strongdollar in 1996. The renminbi was devalued by 50% against the dollar inJanuary 1994, but the inflation differential has turned the modest appreciationagainst the dollar that took place in 1995 and its stability in 1996 into asignificant appreciation in real terms. This has been helpful in restrainingdomestic inflation but has damaged export competitiveness. Strong inflows offoreign exchange in the form of FDI and a continuing trade surplus havehelped to put upwards pressure on the currency. On December 1st 1996 theChinese government made formal the established de facto convertibility of thecurrency on current account by announcing conformity with the requirementsof Article VIII of the IMF. In mid-December 1997 the exchange rate wasRmb8.26:$1.

The heavy falls in the exchange rate of many Asian currencies against the USdollar since mid-1997 and the accompanying squeeze on domestic demand inthe beleaguered economies of South-east Asia, Korea and Japan have put re-newed pressure on China’s competitive position and there has been somelobbying for devaluation of the renminbi. However, the Chinese authoritiesare likely to resist this for the time being. Stability in the external sector isregarded as one of the key priorities in an economy where so much else is in astate of flux.

Fiscal challenges One of the consistent inflationary pressures has been a large and growingcentral-government budget deficit (see Reference table 1). In part, this has beenthe effect of the reforms themselves—the expense of subsidising both urbanconsumer prices and loss-making state enterprises—as well as an inadequatetax base 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, de-signed both to redress what was seen as an imbalance in favour of provincialgovernments, and to clarify and simplify a system of bewildering complexity.Revenue rose quite sharply in 1994-96, and the rise in expenditure was heldbelow that of revenue, reducing the growth of the deficit. But the true public-sector deficit is much higher than the 1% of GDP that the 1995 figures imply.



First, borrowing is taken as revenue. Second, many of the public sector’s finan-cial obligations are not fully recorded in the budget. One is military expend-iture. Another is the high—and, in 1996, rising—cost of policy lending tostate-owned enterprises (SOEs). This is done through the state-owned banks(rendering them chronically loss-making). The World Bank argues that moreaccurate representation of government activities is provided by the concept ofthe consolidated government deficit. This consists of the fiscal (ie budget)deficit plus the part of the People’s Bank of China (PBC, the central bank)lending to the financial system that finances the government-directed expend-iture of the SOEs. This lending, the World Bank argues, is a major source ofinflationary pressure. Defined as the sum of the budget deficit and the netpolicy lending of the central bank, the consolidated government deficit isestimated to amount to 5-6% of GDP. It has been kept high not just because ofthe need to make subsidised working capital loans to “priority” enterprises butalso by the need to sustain the large amount of investment that is channelledthrough loans to SOEs or used for rural or social-sector development. Much ofthis spending, it should be noted, is undertaken at the local level. In the fiveyears 1988-92, for example, an average 42.9% of the total fixed investment bycentral and local government was undertaken by central government, and57.1% was undertaken by local governments.

Summary of government finances(Rmb bn)

1993 1994 % change 1995 1996 % change

Total revenue 475.9 558.4 17.3 654.1 771.9 18.0 Taxes 447.5 524.0 17.1 605.6 691.6 14.2 of which: income & profit taxes 80.5 94.0 16.8 111.0 129.6 16.8 of which: enterprise income tax 67.9 70.9 4.4 83.3 92.7 11.3 personal income tax 0.0 0.0 0.0 36.7 0.0 0.0 agricultural income tax 12.6 23.1 83.3 27.7 36.9 33.2 Taxes on goods & services 287.8 346.5 20.4 399.0 461.8 15.7

Total expenditure 545.9 632.5 15.9 751.8 875.7 16.5 Current expenditure 424.3 538.4 26.9 624.0 734.1 17.6 of which: administration 53.6 72.9 36.0 87.2 105.5 21.0 education, science & health 95.8 127.8 33.4 146.6 170.5 16.3 defence 42.6 55.1 29.3 63.7 72.0 13.0 economic services 57.4 57.8 0.7 55.0 63.0 14.5 social welfare 29.9 31.4 5.0 36.4 44.1 21.2 subsidies 7.5 9.5 26.7 11.5 15.2 10.7 interest payments 9.7 16.7 72.2 35.6 48.9 37.4 Capital expenditure 121.6 94.1 –22.6 127.8 141.6 10.8

Balance –70.0 –74.1 5.9 –97.7 –103.8 6.2Source: World Bank, China 2020.

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 PBC has no effective



independence and is subject to the State Council (or cabinet); 60-80% of itslending is in the form of policy loans which are essentially government ex-penditure.

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 theputting together of sectoral and local needs. It is implemented, after beingapproved by the State Council, by means of credit ceilings set for the mainbanks (ceilings for non-bank financial institutions are part of an indicativecredit plan). These ceilings cover different kinds of credit and are also disaggre-gated by province, using estimated increases in bank deposits and the previousyear’s performance as guidelines. Provincial ceilings are not revealed by thecentre. The quotas are allocated by the head office of the PBC to the head officeof the relevant bank, leaving the PBC branch network in a supervisory role.Funds can be transferred by the PBC when provincial branches of the bankshave unused lending quotas, but not funds (banks can also seek funds in thegrowing interbank market).

Decentralisation—especially as manifested in the investment hunger of localgovernments—poor co-ordination 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 poorregulatory system have permitted the diversion of funds to unintended uses,and 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 changedinfrequently and—until inflation came down to low single-digit rates in1997—have generally been negative in real terms. Interest rates on depositshave been adjusted upwards several times to help combat disintermediationand interest rates were reduced twice in 1996 and once more in 1997 to stimu-late growth and to aid cash-starved SOEs. However, the state banks cannotafford to pay attractive interest rates to depositors when they cannot earnpositive interest spreads on their own assets. To prevent disintermediation,since March 1994 the central bank has been paying an inflation-rate subsidyon maturity on deposits of three years and above. The rate is fixed monthlyand has been set at zero with the successful squeezing out of inflation in 1997.Treasury bonds issued in 1994 and 1995 have also been paying positive realinterest rates and were easily disposed of as a result.

Monetary policy is heavily constrained. To curb excessive growth of liquidityand investment demand, it has been official policy to restrain the lending ofthe state banks as part of a 16-point programme to cool the economy—theso-called austerity programme introduced in 1993. This has been of limitedeffect. SOEs’ need for cheap working capital has not diminished and, indeed, insome cases has increased because of the chain of unpaid enterprise debts thathas built up. The state itself has continued to borrow from the central bank tofinance policy lending, creating further reserves. Thus liquidity has gone on



increasing. Money-supply growth (M2) has shown average growth of 39% in1992-96 and total loans outstanding grew by an annual average of 20% per yearin 1990-96 (see Reference table 3 for data on money supply and credit). Mean-while, a very large unofficial financial sector has emerged, where the rates ofinterest are truly those of the market, and this undermines attempts to curb thegrowth 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 PBC by means of a new law which aims to make thecentral bank more autonomous and curb its role in credit allocation;

• reorganising the branch network of the PBC along regional, not provincial,lines to decrease the susceptibility of the network to pressure from localgovernments;

• introducing a new payments system to reduce the number of settlementaccounts held by banks and make possible the closure of many PBC branchesbelow the county level;

• creating a national interbank market;

• clarifying the relationship between banks and non-bank financial institu-tions and reform of the supervision function;

• establishing policy banks to separate this kind of lending from commercialactivities;

• increasing the the use of the issue of government securities and creation of asecurities market across a range of maturities; and

• 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-sector fi-nances 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% to 10% in 1978;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 up of prices, however, the prices ofcertain key commodities—for example grain, coal, oil and rail freight—remainsubject to some regulation, generally only over the proportion of output that isstill covered by the planning mechanism. In these cases there is both an official



and a free-market price. In the case of grain this is partly because the historicallegacy of keeping the price paid by urban consumers low has meant carefulcontrol of the procurement price and a high degree of government subsidy.Procurement by the state still accounts for a significant part of the harvest,which is bought at contracted prices. In the case of key raw materials prices,continued price control has reflected a general scarcity, which has meant thatthe government has traditionally not only set prices but also overseen alloc-ation, favouring key SOEs.

A secular trend towards the decontrol of prices is now well established, althoughthere are still significant policy-induced distortions. Import prices are influencedby a tariff regime which keeps the prices of some imports artificially high toprotect domestic producers; these include potassium fertiliser, polystyrene andselected high-technology consumer products. Within agriculture, export pricesfor some commodities, notably maize and rice, are kept artificially low to benefitdomestic consumers. By the early 1990s the domestic price of wheat (bothplanned and free market) was close to import parity. The authorities have beenable in the case of certain commodities for which China is a price-maker on theinternational market (such as tungsten) to use taxes and licenses to help to raisethe export price relative to the domestic price and thereby to maximise theforeign exchange gained. When China becomes a member of the World TradeOrganisation (WTO) such policies will be more problematic.

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 ofwashed coal having been deregulated in January of that year. During the firsthalf of 1993 prices for crude oil and steel products were liberalised, the graincoupon system was abolished and grain prices were liberalised. In 1994 foodprices, under the influence of shortfalls and higher costs for farmers, rosesharply. The surge in prices at mid-year led the government to reintroducesubsidies, price controls and even rationing in some cities. There was a 24.1%rise in the national consumer price index in 1994; food prices rose by 31.8%. Arise in the grain procurement price in 1996 and 1997 was not fully passed onto consumers, and local governments have, since 1994, been responsible forpolicing price rises in their jurisdictions. Inflation, as officially measured, hasdwindled to low single figures as a result

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 planningmechanism under the supervision of the Ministry of Foreign Trade andEconomic Co-operation (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. After the decentralisation of the trade sys-tem in 1984, however, the plan for foreign trade became more export-driven,with imports being scaled in accordance with export earnings. Export targetswere split into a command and a guidance plan, with the command plan fixedquantitatively 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, and these were not centrally financed. Like ex-ports, products were divided into two categories, according to which FTCscould handle them. FTCs incurred losses under this system as they bore thedifference between domestic 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 which 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-tariff barriers include controls, canalisation, the trade plan, and the export andimport licensing system. Tariffs are not an important source of governmentrevenue, and a desire to join the WTO means that China is following a policyof progressive relaxation of trade barriers and lifting of tariffs.

In the early 1990s China’s average tariffs were among the world’s highest: theweighted average most favoured nation (MFN) tariffs were 30.6% in 1991-93.Under the reductions announced at the 1995 meeting of the Asia-PacificEconomic Co-operation forum the trade-weighted average tariff fell from28.1% to 19.8%, and it is set to fall to 16.6% under the latest offer to the WTO.The variability of the tariff regime is also being reduced, although effectiverates of protection in manufacturing are high and variable, and effective pro-tection will remain high in heavy industries.



Non-tariff barriers, meanwhile, are fairly extensive. Import licensing, forexample, covers more than 18% of imports, while state trading monopolies, dueto be lifted, cover 11%. Under its WTO offer China has agreed to eliminate mostnon-tariff barriers other than state trading, which will be phased out slowly.

The overall impact of the tariff and non-tariff barriers regime on the economyis to raise the price of final consumer goods relative to intermediates andthereby to afford a high degree of protection to domestic producers of con-sumer goods. This helps to reinforce distortions in the industrial sector. Theimpact of membership of the WTO will therefore be favourable to Chineseindustry.

Internal trade, discouraged by the autarkic policies encouraged in the pre-reform era—which led to a widely dispersed industrial development structurein which each province sought to produce as wide a range of goods aspossible—has been stimulated by reforms and the greater economic specialis-ation that has accompanied liberalisation. But some local governments seek—illegally—to erect internal trade barriers, both to collect taxes on cross-provin-cial trade and to 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 forprocessing 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 economicgrowth have been led, on the supply side, by huge increases in industrialproduction and, on the demand side, by a combination of rapid growth inpersonal consumption and consistently high rates of fixed investment. How-ever, the statistics should be treated with some caution. The Chinese mediathemselves have carried official complaints about the inaccuracy of the datathat make up the national growth figures. In particular, local officials andexecutives have been accused of inflating production figures in order to curryfavour with their superiors. It is also unclear whether the value figures pro-duced as evidence of “real” growth have been deflated in a rational or consis-tent way to take account of inflation. (See Reference table 4 for gross domesticproduct and gross national product.)

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,much of it destined for property development and manufacturing industry.

28 China: Economic performance


(For divisions of the national accounts by expenditure and output, see Refer-ence tables 5 and 6.) The boom in this sense differed from the two earlier peaksin China’s economic cycle since the reforms were launched in 1978. They wereled on the demand side by increases in consumption after the austerity of theCultural Revolution and by rapid rises in rural disposable income.

Gross domestic product(constant prices; % change)

Annual average1996 1991-96

Private consumption 6.5 9.9

Government consumption 6.8 11.0

Investment 13.7 18.1

Exports 2 13.1

Imports 3.0 15.7

Agriculture 5.1 4.6

Industry 12.3 17.5

Manufacturing 12 16.4

Services 8 9.4

GDP 9.7 12.1Sources: State Statistical Bureau, China Statistical Yearbook 1997; EIU.

Hence, as it became clear in mid-1993 that the economy was in danger ofseriously overheating, the rate of investment growth became a prime targetof government concern. The problem was exacerbated by the diverse sources offunds available to the localities. Senior officials in Guangdong, for example,noted that central-government austerity had little effect on them, since theyraised about one-third of their funds from their local tax base, one-third fromthe 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—periods of rapid growth accompanied by rising inflationary pressures and fol-lowed by sharp slowdowns in periods of retrenchment. There was much debateabout the sustainable rate of economic growth without unacceptable inflation.The Eighth Five-Year Plan, produced in 1991, and a Ten-Year DevelopmentStrategy produced in the same year estimated this at around 6%. Any faster, itwas argued, and the shortcomings of infrastructural development and of basicindustries, such as agriculture and energy, would lead to intolerable infla-tionary and social tensions. This strategy was abandoned in 1992 by DengXiaoping. Double-digit growth came to be seen as sustainable, desirable andeven essential in order to create the opportunities China’s massive populationwas coming to expect. Once again, however, when overheating became a seri-ous problem in 1993-95 the authorities decided that sustainable growth wouldbe in single digits, this time at 8-9%.

—inflation has beensuppressed—

Rapid growth (until 1996-97) has brought in its wake high rates of price infla-tion (see Reference table 7), although the overall retail-price index has tendedto understate the extent of inflation in urban areas, where it is most felt amongcivil servants and others on fixed salaries. In 1994 overall national retail-priceinflation was nearly 22%, a rate seen only briefly in 1988, when it provoked

China: Economic performance 29


panic buying and hoarding. The government was panicked into austerity meas-ures, most of which were still in effect in late 1996. They have been appliedwith varying 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 suppressinginvestment hunger and inflation. In 1994 some economists argued that livingstandards had kept pace with inflation. Others argued that this was true onlyin some areas, and that, in the countryside in particular, the benefits of theboom had been more or less totally eroded. In 1996 inflation was held down tosingle digits and it fell even further in 1997.

—and growth has slowed There has been, since mid-1993, a concerted effort to slow the pace of growth,especially of investment, by means of a tight credit policy, supplemented bythe imposition of price controls on food in the cities and towns. This, and anincreased reluctance by banks to fund the working capital and investment ofstate-owned enterprises unable to meet their debts, helped to slow the rate ofGDP growth to 9.7% in 1996, after an annual average of 12.1% in the five years1991-96. The slowdown has been led, in demand terms, by a sharp fall in therate of investment and, in supply terms, by a drop in the rate of growth ofindustry. There is, as of late 1997, some fear that the austerity drive has over-shot, despite two interest-rate cuts in mid-1996 and another one in mid-October 1997.

Inflation(% change)


Overall retail prices 6.1 12.1

Overall consumer prices 8.3 13.9

Urban consumer prices 8.8 14.9

Rural consumer prices 7.9 13.2

Farm products purchasing prices 4.2 15.4

Industrial products producer prices 6.2 10.5Source: 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, which 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

30 China: Regional trends


and Manchuria are also well placed to capitalise on growing links with Japanand South Korea. Taiwan’s growing investments in China have tended to beconcentrated in Guangdong and in Fujian, just over the Taiwan Strait. However,the interior provinces have been left behind. The hope that development in thecoastal areas would “trickle down” to the inland regions has not been entirelymisplaced. In particular, tens of millions of migrant workers send remittances backhome. But some official Chinese commentators have claimed that, in fact, capitalis being drained out of the poorer regions to invest in the coastal boom towns.

Gross domestic productBy region

1991-96 Per head1996 Annual average 1996

% of total % change (Rmb)

Guangdong 9.6 11.8 8,445

Jiangsu 8.9 13.0 6,820

Shandong 8.8 14.8 3,688

Sichuan 6.2 11.2 9,553

Zhejiang 6.1 25.9 7,664

Henan 5.5 27.9 5,329

Hebei 5.1 9.2 20,437

Liaoning 4.7 25.8 4,017

Shanghai 4.3 14.2 5,103

Hubei 4.4 18.3 4,117

Hunan 3.9 18.0 7,997

Fujian 3.9 17.6 6,441

Heilongjiang 3.6 18.5 3,854

Anhui 3.5 14.9 4,073

Guangxi 2.8 15.2 12,823

Beijing 2.4 13.4 3,701

Jiangxi 2.2 14.3 3,692

Yunnan 2.2 11.6 5,123

Jilin 2.0 18.3 4,198

Shanxi 1.9 16.3 3,320

Shaanxi 1.7 16.9 11,604

Tianjin 1.6 12.4 6,117

Inner Mongolia 1.5 9.3 5,397

Xinjiang 1.4 10.1 2,028

Guizhou 1.1 11.5 2,891

Gansu 1.1 10.1 5,336

Hainan 0.6 9.3 3,747

Qinghai 0.3 8.4 3,723

Ningxia 0.3 9.3 2,696

Tibet 0.0 11.6 5,520Source: State Statistical Bureau, China Statistical Yearbook 1997.

The central governmentstill shoulders a

considerable fiscal burden

The 1994 tax reforms represented an attempt by the central government tosecure some of the benefits of increased growth by redistributing tax receipts.For the first time, the finance minister’s budget speech in March included abreakdown of the division of revenue and expenditure between Beijing and theprovinces.

China: Regional trends 31


The figures show that the central government made a net transfer to theprovinces in 1994 of Rmb150.6bn ($17.5bn), rising to Rmb186.7bn in 1995and Rmb211.3bn in 1996. It also shouldered the entire budget deficit. Since itis not known what arrangements were previously applied, it is impossible tojudge how the centre’s relative position has changed. However, the figuresdemonstrate that the cost to the centre of subsidising the poorer provinces,which are largely in the interior, far outweighs the transfers from locally col-lected tax revenue in the surplus provinces of the coastal seaboard. At the time,it was reported that the intention was to increase the centre’s share of total taxrevenue from around 30% to around 60% over a period of years. In 1996 itsgross share of total revenue was 58%, up from the 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 1996 the popul-ation was estimated at 1.22bn and was growing at a rate of around 13m per yearin 1992-96. In 1980 a harsh one-child family policy was introduced, with theaim of limiting the population to 1.2bn by 2000. So unpopular was the policyin the countryside that it was relaxed in many areas to allow families whosefirst child was a girl a second chance. Chinese press reports now speak of aprobable population of between 1.30bn and 1.32bn 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 200m births in the 1980s. But the whole 1986-97 period is regarded as a“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 11m and 13m women per year have reached child-bearing age during this period.

Meanwhile, the total fertility rate for women, after declining quite sharplyfrom around 6 children per woman in the 1950s and 1960s to as low as2.2 children per woman in 1981 and 1985, is now fairly steady at 2.3-2.4children per woman. The birth rate fell from 37 per 1,000 population in 1952to 16.98 per 1,000 in 1996. The death rate fell from 17 per 1,000 in the earlyyears of the People’s Republic to 6.56 per 1,000 in 1996. It is this lag betweenthe sharp decrease in the mortality rate achieved under communist rule (al-though with an interruption in the famine years of the early 1960s, whenmany millions died of starvation) and the slower drop in the fertility rate thatleaves China with its enormous population problem today.

32 China: Population


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 689m at the end of1996, or a growth rate of 1.3%. Throughout the 1990s the labour force isexpected to grow by about 7m per year, presenting a formidable challenge topolicymakers.

But there are, in effect, tens of millions of additional new workers in thecountryside. Because large numbers of farm workers are underemployed formuch of the year, industrial growth also raises the expectations of potentialmigrants, who do not figure in the unemployment statistics. It is the pressureof the steady increase in the size of the workforce that, more than any othersingle factor, has dictated the strategy of pursuing high economic growthdespite the attendant 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 by ethnicHan Chinese, who made up 91.9% of the total. Ethnic minorities, which includethe Zhuang, Turkic groups, Tibetans, Mongols and several dozen others, hadbeen growing much faster than the Han population, with a 35.8% increase onfigures in 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 familypolicy. Tibetan and Mongol nomads, for example, are usually “allowed” threechildren and often disregard restrictions anyway. In 1991 the official pressbegan to hint at tougher birth-control rules for the minorities, a politicallyrisky move, especially in Tibet and in Uighur areas of Xinjiang, where anti-HanChinese sentiment runs high and large families are a cultural norm.

China: Population 33


Education

Although, to judge by the 1990 census, China had made considerable strides inreducing the number of illiterate people between 1980 and 1990—from 284mto 205m—the provision of basic education remains a problem. Many ruralschools are inadequately funded, relying on charges to the local families whosend their children there, and there is widespread truancy and absenteeism,despite a notional nine years of compulsory education. An even bigger problemis the very small percentage of people in higher education. In 1993 only 4% ofthe people in the relevant age group were enrolled in tertiary education, ac-cording to World Bank data.

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. It is also due to years of underfunding of theeducational system. Under Deng Xiaoping, the prejudice against intellectualactivity encouraged by Mao was reversed. Examination-based entrance systemswere reintroduced for universities and have become highly competitive. Morethan 100,000 students have attended courses abroad, in particular in the US.Tens of thousands have never returned. In secondary education, the trend inrecent years has been towards the development of vocational schools to preparestudents directly for their role in the workplace. In universities, however, the oldsystem of “job assignments” for graduates is breaking down, with universityleavers more often competing in the marketplace for work. Funding of educ-ation, especially in rural areas, remains a problem and there is an increasingincidence of children, especially girls, dropping out of primary schools.

Education(% of population over 6 years unless otherwise indicated; census results)

1982 1990

Educated to university level 0.7 1.6

Educated to senior middle level 7.5 9.0

Educated to junior middle level 20.0 26.5

Educated to primary level 39.9 42.3

Illiterate & semi-illiterate persons 31.9 20.6

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 ruralCo-operative 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 a big gap between thefacilities available in the big cities and those on offer in poorer rural areas. Nowthat the communes have disappeared the CMS has virtually broken down inmany rural areas, leaving the rural population to fend for itself. Only about10% of the rural population is now covered by community-financed health-care. Since 1985, according to a World Bank study, the fall in the rate of infant

34 China: Education


mortality and under-five mortality has levelled off, and the rate has shownsigns of rising. In 1991 it was about 45 per 1,000, compared with about 22 inSri 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 coveredby 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 1994 there were 1.57 doctors per1,000 people, up from 0.85 in 1970. There were 2.36 hospital beds per1,000 people in 1994, up from 1.33 in 1970 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 theUS and occupies similar latitudes. It is notable for the small proportion of landcultivated (15.9% in 1995), and the large share of this which is irrigated (25%),reflecting centuries of intensive land use. An estimated 152.4m ha were sownto crops in 1996, the area under crops having tended to fall since 1985. Irriga-tion efforts in arid western areas are failing to keep pace with the loss of arableland 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

• in the north, where the climate is cold and dry, and there is a one-cropwheat system.

Shortages of some keymaterials loom

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.

However, the rate of exploitation of some mineral resources is such that ashortfall looms. According to a report issued in October 1997 by the Ministryof Geology and Mineral Resources, demand for iron ore will reach 350m tonnesin 2000, against maximum domestic output of 230m-250m tonnes. Copperdemand is expected to reached 1.3m-1.5m tonnes by the same date, by whichtime production will not be more 500,000-600,000 tonnes. China already hasa minerals trade deficit of $10bn a year, and is the world’s second largestconsumer and third largest importer of minerals.

Attempts will be made to boost domestic output by attracting foreign invest-ment and technology to exploit the 1,100-plus locations where solid mineraldeposits have been found in the last five years, most of them in comparativelyinaccessible western China.

China: Natural resources and the environment 35


As with oil, China plans to seek minerals abroad. Several companies are to becreated to lead exploration efforts abroad, and co-operation with countries inAfrica, Latin America and Asia will be expanded.

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. Thebackbone of the system remains the railway, which in 1996 carried 36.6% ofcargo (by tonne-km) and 36.4% of passengers (by passenger-km). Some 46.9%of freight by volume on national (as opposed to local) railways was accountedfor by coal and coke, and 60% of total national coke and coal production wastransported by railway. The network is congested and overloaded for bothcargo and passengers, especially around the annual Chinese New Year holiday,after which tens of millions of migrant workers flock to the railway stations.New railways recently constructed include a 2,381-km north-south link bisect-ing the existing coastal route (via Shanghai) and the inland route, the Beijingto Kowloon line that crosses the Yangtze at Macheng, Hubei, and is expected tobring prosperity to the central inland provinces though which it runs. It wasbuilt in only three years and opened in 1997.

Roads The road network has also failed to keep pace with a rapid increase in thenumber of cars on the roads. By the end of 1996 China had 4.9m passengervehicles. The length of the highway network increased to 1,185m km in 1996,compared with 1,057m km in 1992.

Ports Similar problems affect ports, of which Shanghai remains the most important,accounting in 1995 for 20.7% of sea cargo handled. A new port is to be devel-oped south of Shanghai, and in 1994 a new container port was opened atShenzhen, the Special Economic Zone (SEZ) neighbouring Hong Kong.

Civil aviation Civil aviation is undergoing an extraordinary boom, expanding at a rate of 22%per year in terms of passenger-km in 1990-96. In 1988 the national flag carrier,CAAC, ceased to operate as an airline and became a regulatory authority. Thereare now about 30 Chinese airlines, including the international company, AirChina. The industry has been plagued by safety problems, and the governmentis encouraging airlines to merge and co-operate.

Telecommunications There is a parallel boom in telecommunications, although having a telephoneat home remains a privilege, enjoyed in 1996 by only one person in every four.But the number of subscribers to pagers and to mobile telephones is growingrapidly. In 1994 China launched its first commercial satellite, APSTAR 1,owned by a consortium of Chinese state enterprises and Thai, Hong Kong andSingaporean interests. Since 1984 China has launched satellites for foreignoperators.

36 China: Transport and communications


(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 it is a major contributor to air pollu-tion. 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 tonnes annually for some years. China is now a net importer of crude oil.Efforts since the early 1980s to develop a big offshore industry have yet to makean impact. Hopes now centre on supposedly vast oil reserves in the Tarim Basinin the far west. Developing them, and a system for transporting oil to the coast,remains a distant goal.

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, 1996(m tonnes oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Primary supplyProduction 159 18 681 52a 50 960Imports 38 0 2 0a 0 40Exports –24 –2 –17 –2a 0 –45Stock change 0 0 0 0 0 0Total 173 16 666 50a 50 955

17b 922

Processing & transformationLosses & transfers –189 –7 –254 –71 –1 –522Transformation output 150 6 0 92b 0 274Total –34 –1 254 21 –1 –248

Final consumptionTransport fuels 49 0 8 1b 0 58Industrial fuels 44 6 280 99b 2 381Residential etc 27 4 105 21b 47 204Non-energy uses 14 5 19 0 0 38Total 134 15 412 71b 49 681

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 there are a number of grandioseschemes to develop more, including the massive Three Gorges project, on which

China: Energy provision 37


work commenced in earnest in 1997. In addition, there are now two function-ing nuclear power plants, and plans to build several more. In many areas inrecent years energy shortages have been a major bottleneck to industrial growth.In mid-1994, for example, even the capital, Beijing, had to introduce electricityrationing, after a hot spell led to a surge in the use of air conditioners.

Financial services

Major restructuring ofthe banking system is

under way

In the context of China’s own savings-investment gap and of the problemsaffecting financial institutions across Asia, structural problems in the bankingsystem are the focus of much attention. The government has in the past fre-quently appeared to have lost its ability to control credit expansion. Within thestate banking system there was widespread disregard for loan ceilings set by thePeople’s Bank of China (PBC, the central bank), as well as a proliferation ofillegal 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 PBC, which still retained vestiges of themonopoly bank of a state socialist regime, into something closer to a monetaryauthority which controls the market but is no longer a frontline participant.Accompanying the attempt to transform the PBC into a kind of ChineseFederal Reserve, and making its operations much more transparent, will be arestructuring of the rest of the state-owned banking system. There are four“specialised” and eight “comprehensive” banks. They will eventually operatein a genuine commercial environment, while their policy lending (loans madeunder government instruction to “key” projects, unprofitable state-ownedenterprises and government itself) is hived off to new, purpose-formed institu-tions. At present such lending usually falls to the specialised banks(Agricultural, Industrial and Commercial, Construction, and Bank of China,which deals in foreign exchange). Now there is a new State Development Bank,a reorganised Agricultural Bank, and an export credit institution.

The separation of functions will not of itself reduce the budgetary burden onthe state banks. Nor will the PBC’s huge network of retail outlets be easilydispensed with. Moreover, the state-owned banking system is beset by non-performing loans to loss-making state enterprises. It is therefore easier to set upnew financial institutions, sometimes with foreign capital, than to transformthe operations of the state banks. Nevertheless, the introduction of positiverates of interest on deposits and some loans during 1995-96 is a step in theright direction, as is the widening of spreads which 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. Savings rates have been quite high,although a large proportion of domestic savings was lying idle, as “under-the-mattress money”. It was perceived that funding the deficits by printing moneywas a prime cause of the inflationary surge which began in 1993. In the past,however, 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.

38 China: Financial services


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, while shallow, have been extremely volatile and meas-ures were introduced in mid-1997 to try to dampen the market by forbiddingbanks from speculating or from lending for that purpose.

There are two categories of shares. “A” shares, denominated in renminbi, areopen only to Chinese investors. By the end of 1996 some 322 companies werelisted on the two exchanges and there were also 56 “B” shares, also denomi-nated in renminbi, but traded in US and Hong Kong dollars by foreigners. Bythe end of November 1997 a total of 39 China-incorporated enterprises werelisted on the Hong Kong Exchange. Several other Chinese stocks are listed inNew York and one in London.

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.)

Production

Industry

The industrial sector, 1996% of % change,

Rmb bn total year on year

State enterprises 2,836.1 28.5 –9.2

Collectives 3,923.3 39.4 16.7 of which: township enterprises 1,173.0 11.8 –1.7 village enterprises 1,590.0 16.0 34.2 co-operative enterprises 338.7 3.4 58.7

Private enterprises 1,542.0 15.5 30.4

Others 2,705.2 27.2 77.6

Gross output (current prices) 9,959.5 100.0 8.4Source: State Statistical Bureau, China Statistical Yearbook.

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 (TVEs). In effect, local agricultural surpluses were invested in manu-facturing, often in small, low-technology and labour-intensive processes. In

China: Industry 39


the 1990s, and especially since 1992, the sector called “private and other”,which includes the fast-growing foreign-invested enterprises (FIEs), has beenmaking a noticeable impact on production figures.

Industrial enterprises by ownership

1995 1996 % of % of’000 total ’000 total

Total 7,341.5 100.0 7,986.6 100.0 of which: state-owned 118.0 1.6 113.8 1.4 collectives 1,475.0 20.1 1,591.8 20.0 of which: township-owned 228.8 3.1 202.3 2.5 village-owned 689.9 9.4 678.4 8.5 co-operative enterprises 371.6 5.1 518.6 6.5 privately owned 5,688.2 77.5 6,210.7 77.8Source: State Statistical Bureau, China Statistical Yearbook.

Although, in absolute terms, the contribution of private and FIEs remainssmall, the proportion is growing rapidly. In 1996 FIEs contributed 6.7% ofnational gross output, those with funds from Hong Kong, Macau and Taiwancontributed a further 5.5%. “Private” ones contributed 15.5%, up from a com-bined share for the foreign-funded and private categories of 4.4% in 1990.State-owned industry, meanwhile, saw its share of total output fall from 54.6%in 1990 to 28.5% in 1996, while the proportion contributed by collectivelyowned enterprises grew from 35.6% to 39.4%.

Nevertheless, there were still 113,800 state-owned enterprises (SOEs) at the endof 1996, compared with 104,700 in 1991. In 1996 the number of individuallyowned enterprises had reached 5.7m, down from 8m, in 1994, but up on 1995.The majority of them were based in rural areas and the fall in their numberowed a lot to the difficult operating conditions. The number of collectiveenterprises reached 1.6m in 1996, 7.9% up on the level at the end of 1995.

Problems ofoverproduction persist

In terms of the structure of industrial output, the trend has been for a gradualshift away from the traditional dominance of heavy industrial products pro-duced by the state-owned sector towards light industry. The acute shortage ofconsumer goods at the end of the 1970s created enormous pent-up demand forboth domestic and imported goods. There has, however, been a continualproblem of overproduction in some sectors, notably of a number of basicconsumer durables such as refrigerators and washing machines. Demand forthese was high in the mid-1980s. Thereafter, a more sophisticated consumermarket preferred to pay for imported products, which were seen as being ofhigher quality. Stockpiles built up, and were a major factor in the mounting“triangular debt” between banks, enterprises and their suppliers which pre-occupied policymakers in 1991 and again in 1994-96.

In trying to control overproduction, the government also faced a dilemma. TheSOEs are quickest to respond to austerity measures such as credit controls, butthey are also the weakest sector of the industrial economy and most vulnerableto bankruptcy. A bankruptcy law introduced in 1988 has rarely been enforced,

40 China: Industry


because of the social consequences of unemployment in the cities. Time andagain since then senior government leaders have suggested that this was abullet they were about to bite. The state sector appeared to cry out for a dose ofthe “reform” meted out to much of the rest of the economy. Many SOEs,possibly at least half, are loss-making and subsidising them is a major compo-nent of the public-sector deficit. The economic system that has to be main-tained to protect them is a serious obstacle to the development of other partsof the economy and to some of Beijing’s most cherished international objec-tives, namely smooth trade relations with its major partners and admission tothe World Trade Organisation (WTO). However, each time the issue has risento the top of the agenda China’s leaders have shied away from it. There aremany powerful vested interests fighting for the protection of state-ownedindustries. More fundamentally, the social and political consequences of large-scale bankruptcies make market discipline hard to enforce. In the 1990s effortshave been made to develop a social-security system which would leave morepolitical room for manoeuvre. However, it will be years before state industriescan be replaced, not so much as productive forces, but as providers of housing,healthcare and many other basic welfare services. (Production statistics forlight and heavy 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 deathtraps.Industry ownership is mixed. State-run mines are responsible for nearly 60% 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 exploitation of some deposits.

Foreign involvement ingold production will be

allowed

Similar problems have dogged the gold industry. In late 1995—before thengold production figures were a state secret—Beijing claimed that China’s goldoutput ranked sixth in the world and revealed that total output that year hadbeen 105 tonnes, up 16% on 1994, which implies output of 90.5 tonnes in1994. Production in 1996 was around 117 tonnes.

Plans are in place to allow a floating gold price to stimulate production. Gold isofficially a state monopoly, but the gap between the state purchasing price andthe parallel-market price has led to widespread illegal mining. In 1994 Chinaannounced that it would in future allow foreign participation in gold mining.A gold-mining joint venture, involving a Canadian company, Asia MineralsCorporation, and the Shandong Zhaoyuan Gold Industry Group Company hasbeen formed. There is enormous potential consumer demand. In 1992 and1993 China imported more than 200 tonnes per year, almost 10% of worldproduction. But gold consumption per head is only around 0.2 g, comparedwith around 6-7 g per head in other Chinese societies such as Hong Kong andTaiwan. Total deposits are estimated at 4,500 tonnes.

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 and

China: Mining and semi-processing 41


polycrystalline 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 faced criticism a decade later 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 under-investment in the land, and hence of degradation. The government has tried toencourage a degree of recollectivisation, now known as scale-farming, in orderto counter these problems and encourage mechanisation.

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 isstill concern about the exploitation of farmers and the concomitant risk ofrural unrest. Besides “fees” charged for entertaining visiting inspection teamsor for investment in industrial enterprises, many farmers are still being chargedexorbitant prices for inputs such as fertiliser, seeds and pesticide. 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 tonnes. Strenuous efforts to improve matters broughtan increase to 466.6m tonnes in 1995 and, further, to a record 504.5m tonnesin 1996. The aim is to produce 500m tonnes per year regularly by 2000. (Foragricultural data see Reference tables 14-17.)

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.

42 China: Agriculture and forestry


Agriculture: raising grain output

The total output of grain in 1995 was 466.6m tonnes, up by 1.2% per year since1984 (compared with growth of 4.9% per year in 1979-84). It rose to a record504.5m tonnes in 1996, but may not have been sustained at this level in 1997.Non-grain food supply has risen faster than before. Grain demand per head will be400 kg in 2030, when the population peaks, up from 380 kg in 1995. Half will beused for staples and the rest as feedstock for protein.

In 2000 grain demand per head will be 385 kg, or 500m tonnes, and the populationwill be 1.3bn. Demand will rise by 1.4% per year. In 2010 grain demand per headwill be 390 kg, or 550m tonnes, and the population will be 1.4bn. Demand will riseby 1% per year. In 2030 grain demand per head will be 400 kg, or 640 tonnes, witha 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-sufficientin future. Net imports of about 25m tonnes in 2000, 27.5m tonnes in 2010 and32m tonnes in 2030 will be needed. Peak imports were 20.8m tonnes in 1995, upfrom 9m tonnes in 1994. The additional output needed of around 10m tonnes peryear could be achieved in the following ways.• Increase yields by an annual average of 1% in 1996-2010 and 0.7% in 2011-30,assuming land area sown is stable.• Extend sown area by reclamation of 14.7m ha out of 35m ha of waste; bring300,000 ha per year into cultivation.• Upgrade technology by raising the contribution of science and technology toagriculture.• Reduce losses from a rate of at least 10%, ie over 45m tonnes per year at present,by better planting, harvesting, transport and storage, and less waste along theretailing and processing chain.• Protect agricultural land.• Increase the irrigated area from 49.3m ha to 53.3m ha by 2000, 56.7m ha by 2010and 66.7m ha by 2030, accounting for 56%, 60% and 70% of the cultivated area.• Raise chemical fertiliser output from 24.5m tonnes at present so that China isbasically self-sufficient in nitrogenous fertiliser by 2000.• Increase central investment in agriculture, from 17% to more than 20% ofplanned capital investment.• Reform pricing and marketing of grain so that prices are primarily market-drivenbut subsidies are used for those on low incomes.

Deforestation has also been a factor in the flooding. With the emphasis, in MaoZedong’s words, on “taking grain as the key link”, many forests disappeared inthe 1960s. Tree-planting is now being actively encouraged. The area under foresthas expanded, but China still remains a timber-starved country and it is theworld’s second largest importer of logs. The problem has been made worse inrecent years by the construction boom among newly prosperous farmers in thecountryside, as well as by mass theft, forest fires and pests. The Chinese mediahave warned that in just a few years China may run out of trees to fell, and havefocused on the economic consequences of this, notably unemployment formillions of timber workers. But there is mounting concern, too, about theecological consequences.

China: Agriculture and forestry 43


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 difficulty in re-cent 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 then 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 risen by 76.8%. There were5,447 new projects in “fixed assets” sectors, a 20% increase on the year-earlierperiod. Much foreign investment, mainly from Hong Kong, was now alsogoing 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, andthere is now the prospect of serious overcapacity in major cities.

The external sector

Merchandise trade

Export growth has beenrapid—

Every year since 1978, with the exception of 1989 and 1996, China’s exportshave outpaced world export growth. Furthermore, every year, apart from 1983and 1984, the importance of manufactures has increased as a proportion ofmerchandise exports. China has more than doubled its share of total worldexports in that time. Since the late 1980s a rising share of China’s exports andimports has been accounted for by the re-export of processing facilities with

44 China: Construction


foreign investment; FIEs’ share of exports reached 41% of total exports andtheir share of imports, swollen by the reaction of importers to the removal oftariff exemptions as of April, reached 54.5% of the total. In 1994 export growthwas boosted by the effective devaluation of the renminbi at the beginning ofthe year. In 1995 exports were being overstated because of changes to thevalue-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 $148.8bn. This distorted the base for comparison during 1996, when dollarexports rose by only 1.5%. In 1997, despite difficult trading conditions in Asiaand stiff competition from exporters whose currencies slid heavily against theUS dollar, dollar exports were once again rising in the 20% range, as inventoriesbuilt up during 1996 were put on the market.

China’s competitive advantage as an exporter lies in its massive and cheaplabour force. Too often this has been wasted by low productivity and poor-quality work. However, this now appears to have been successfully overcomein some of the thousands of enterprises in Guangdong producing for exportunder the watchful eye of expatriate quality controllers who speak the samelanguage and offer personal examples of the benefits of economic efficiencyand the consequent 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 1996 textiles (including garments) accounted for 23% of Chineseexports. Pharmaceuticals have already shown impressive growth, because ofthe popularity of traditional Chinese medicines among overseas Chinese andthe wider availability of chemicals for Western medicines.

Imports are dominated bymanufactures—

Imports are dominated by manufactures. Their share of the total reached 82%in 1996, compared with 18.3% for primary products. However, the manufac-tures bill includes a high proportion of intermediates, notably chemicals andrelated products (13% of total imports in 1996), 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 the next five years. Butfood imports may well rise in years of bad harvest, even if the overall goal ofincreased grain production is met. The emphasis on the grain harvest is alsolikely to lead to greater imports of non-staple foods. Petroleum imports are likelyto rise sharply, as domestic production fails to keep pace with demand, and, inparticular, as new refining and petrochemicals capacity comes on stream. (Fordata on foreign trade by commodity, see Reference tables 18 and 19.)

China: Merchandise trade 45


Comparative economic indicators, 1996

0 100 200 300 400 500 600 700 800 900

China

South Korea

Taiwan

Indonesia

Thailand

Hong Kong

Malaysia

Singapore

Philippines

Vietnam

Mongolia (a)

Gross domestic product$ bn

(a) Less than $1bn. Sources: EIU estimates; national sources.

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Singapore

Hong Kong

Taiwan

South Korea

Malaysia

Thailand

Philippines

Indonesia

China

Mongolia

Vietnam

Gross domestic product per head$

Sources: EIU estimates; national sources.

0 2 4 6 8 10

China

Vietnam

Malaysia

Indonesia

South Korea

Singapore

Thailand

Taiwan

Philippines

Hong Kong

Mongolia

Gross domestic product% change, year on year


0 1 2 3 4 5 6 7 8 9 10

Mongolia

Philippines

China

Indonesia

Vietnam

Hong Kong

Thailand

South Korea

Malaysia

Taiwan

Singapore

Consumer prices% change, year on year


45.845.845.845.845.845.845.845.845.845.845.845.845.8

46


Merchandise trade($ bn)

1995 1996

Exports fob 148.8 151.1 Primary goods 21.5 21.9 of which: food & live animals 10.0 10.2 raw materials 4.4 4.0 mineral fuels 5.3 5.9 Manufactured goods 127.3 129.1 Chemicals 9.1 8.8 Light industriala 32.2 28.5 Machinery & transport equipment 31.4 35.3 Miscellaneous 54.5 56.4

Imports cif –132.1 –138.8 Primary goods 24.4 25.4 of which: food & live animals 6.1 5.7 raw materials 10.2 10.7 mineral fuels 5.1 6.9 Manufactured goods 107.7 113.4 Chemicals 17.3 18.1 Light industriala 28.8 31.4 Machinery & transport equipment 52.6 54.8 Miscellaneous 8.3 8.5

Trade balance 16.7 12.3 Primary goods –2.9 –3.5 Food & live animals 3.8 4.5 Raw materials –5.8 –6.7 Mineral fuels 0.2 –1.0 Manufactured goods 19.6 15.7 Chemicals –8.2 –9.2 Light industriala 3.5 –2.9 Machinery & transport equipment –21.2 –19.5 Miscellaneous 46.3 47.9

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 theUS remain fraught

Continued rapid growth in exports, however, relies on a hospitable inter-national environment and on continued reform of China’s foreign-tradesystem. The biggest question-mark over future export growth was removed in1994 when the US president, Bill Clinton, renewed China’s most favoured na-tion (MFN) trading status unconditionally, without making further annual re-newals conditional, as they had been in the past, on China’s human-rightspolicies. However, trade relations with the US remain fraught. The root of theproblem is China’s massive and growing bilateral trade surplus. This reached$33.7bn in the first ten months of 1996 on US figures (Chinese data for 1996show a smaller US deficit, of $10.62bn). In the short term, further export growthwill be constrained by tougher enforcement of quota restrictions on imports oftextiles and some other goods into both the US and European markets. The US,in particular, has found large-scale Chinese “cheating” on quotas through trans-shipment and relabelling in countries such as Honduras. In the long term,China’s relations with the US may benefit from the phasing out of the Multi-Fibre Arrangement (MFA) under the Uruguay Round of the GATT, although

48 China: Merchandise trade


China may face limited sanctions for its failure to protect intellectual propertyrights. The relationship is vital. The US probably takes as much as one-third ofChinese exports, a proportion disguised in Chinese figures by the large volumewhich is transshipped in Hong Kong, much of which appears in the US figuresas being of Chinese origin, thus adding the further irritant of wide discrepanciesbetween the totals quoted. Of key importance in the smoothing of trade rel-ations is a successful outcome to the protracted negotiations on the terms ofChina’s entry to the World Trade Organisation (WTO).

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 controlson imports by a tariff-based system, in which the exchange rate would alsoperform a significant regulatory function; it is a reform the government isnervous about pursuing. It fears that a lifting of absolute import quotas wouldbe followed by a flood of imports, as in 1985-86. There is also a worry about thedifficulty of collecting tariffs and the possibility of a new avenue of corruptionfor the officials involved. Given the degree of domestic protection throughquotas at the moment, tariffs would have to be set at unrealistically high levelsto achieve the same effect. There is also a great deal of opposition and passiveresistance to market-opening measures from bodies with entrenched interests,such as powerful ministries in Beijing, in domestic industries which could feelthe cold wind of free competition.

However, joining the body set up by the 1994 GATT agreement, the WTO, is aforeign-policy priority and the trade regime is being adjusted accordingly, mostrecently with the tariff reductions mentioned earlier.

Main trading partners1995 1996

% of % of$ bn total $ bn total

Exports to:Hong Kong 36.8 24.7 32.9 21.8Japan 28.5 19.1 30.9 20.5US 24.7 16.6 26.7 17.7South Korea 6.7 4.5 7.5 5.0Germany 5.7 3.8 5.8 3.8Singapore 3.5 2.4 3.7 2.4Netherlands 3.2 2.2 3.5 2.3UK 2.8 1.9 3.2 2.1Taiwan 3.1 2.1 2.8 1.9Russia 1.7 1.1 1.7 1.1

Imports from:Japan 29.0 22.0 29.2 21.0Taiwan 14.8 11.2 16.1 11.6US 16.1 12.2 16.1 11.6South Korea 10.3 7.8 12.5 9.0Hong Kong 8.6 6.5 7.8 5.6Germany 8.0 6.1 7.3 5.3Russia 3.8 2.9 5.1 3.7Singapore 3.4 2.6 3.6 2.6Australia 2.6 2.0 3.4 2.4Italy 3.1 2.4 3.2 2.3Source: State Statistical Bureau, China Statistical Yearbook.

China: Merchandise trade 49


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, when there was a rapid rise indomestic demand, has remained in surplus. This surplus is partly the result ofthe demand management of 1989-90, which slashed the import bill, and partlythe result of the surge in export-oriented manufacturing, often based on for-eign investment, that has occurred since 1992 along the eastern seaboard. Thetrade surplus has also been swollen by over-reporting of export values in orderto benefit from rebates on value-added tax (VAT). The incentive to over-reportexports has been reduced with the reduction of the rebate rates in 1995 andagain in January 1996. Meanwhile, with the announcement that tariff conces-sions on capital-goods imports of foreign-invested enterprises would be re-duced from April 1996, a surge in such imports took place in the first fewmonths of 1996, further muddying the 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.

Invisibles and the current account

The current account, 1996($ bn)

Merchandise trade balance 19.5

Net services balance –2.0

Net income balance –12.4

Net transfers 2.1

Current-account balance 7.2Source: IMF, International Financial Statistics.

In 1995 the current-account surplus fell from $6.9bn to only $1.6bn; it rose backup to $7.2bn in 1996 and is set to be at least twice that size in 1997, thanks toanother surge in export revenue. The surplus on the travel account is insufficientto pull overall services into surplus. In 1995 the income-account deficit soared asoutward payments of interest rose, and profits and dividends outflows were re-corded for the first time ever. This casts doubt upon the previous data for the 1990sand may lead to retroactive adjustments, perhaps reducing some of the large errorsand omissions that appear on the capital account (see Reference table 20).

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, however, has tended to be in deficit,a deficit that reached $10bn in 1996.

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 in 1994-97 will tend to boost invisibles income, but the invisibles account will continuein deficit.

50 China: Invisibles and the current account


Capital flows and foreign debt

China’s total foreign debt rose to $118.1bn in 1995, according to World Bankfigures, requiring debt service of $15.1bn, with a debt-service ratio of 9.9%.China has no difficulty in raising funds on the international capital marketsand 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, havebegun to slow, as evidenced by the 50% fall in commitments in the first half of1997, coming on top of a 20% drop in 1996. Actual inflows, meanwhile, arestill rising, reflecting previous large commitments. Much of the foreign invest-ment so far has been drawn by China’s comparatively cheap labour force andother low production costs. There are signs that rising costs are already deter-ring some investors from the prosperous southern provinces such asGuangdong. In less advanced provinces labour costs are lower, but the bureau-cratic and infrastructural hurdles may be much greater. Despite China’s com-mitment to the introduction of a level playing-field for domestic and foreigninvestment regimes, it seems certain that incentives will continue to be neededto attract foreign funds to the interior of the country for projects where pay-back periods will be long. In addition, China faces increasing competition fromother countries for investment directed at manufacturing for the US market.Membership of the WTO is vital to protect China’s competitiveness as aninvestment location for export into developed markets.

However, direct investment is being drawn by the prospect of China’s ownmarket and this will remain a powerful lure to multinationals. Some 200 of theworld’s top 500 companies are already present in China and more will surelyfollow. Most joint ventures are still required to export at least 80% of theiroutput, but an increasing number are now concentrating on the mouth-watering prospect of a genuine opening of the Chinese domestic market. Al-though China remains a very poor country in terms of GDP per head, even ona purchasing power parity (PPP) basis, the pockets of comparative prosperity inthe east are large enough in themselves to constitute a sizeable market.

One new feature of foreign investment in the late 1990s is 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 is limited, byand large, to the more prosperous south and south-eastern regions, it stillrepresents a new “middle class” numbering some tens of millions, with rapidlyrising purchasing power. The main shopping streets of cities such as Shanghaiand Guangzhou are coming to be occupied by shops owned or franchised bysome of the world’s leading fashion and other brand names. Moreover, theseare now beginning to spread inland.

China: Capital flows and foreign debt 51


Utilisation of foreign direct investment($ m)

Year Cumulative

1979-83 1,802 1,802

1984 1,258 3,060

1985 1,661 4,721

1986 1,874 6,595

1987 2,314 8,909

1988 3,194 12,103

1989 3,392 15,495

1990 3,487 18,982

1991 4,366 23,348

1992 11,007 34,355

1993 27,515 61,870

1994 33,767 95,637

1995 37,521 133,158

1996 41,726 174,884Source: 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 haveleft the country, mostly to be parked in Hong Kong, where mainland enter-prises are big investors in the local stock and property markets. A fair propor-tion of that money is then reinvested in China, ostensibly as foreigninvestment. The tax incentives available to foreigners are gradually beingwhittled away in favour of the notion of a level playing-field for domestic andforeign investors. However, the attraction of keeping money offshore is suchthat the practice is unlikely to disappear. Some estimates put the amount ofsuch “hot money” leaving China each year as high as $10bn-20bn. It thus hasa big impact on the capital account and helps explain some of the large figureswhich move about China’s national accounts, often identified merely as“errors and omissions”.

Foreign direct investment flows to China, by origin, 1985-96

Total ($ m) % share

Hong Kong & Macau 102,000 58.0

Taiwan 14,703 8.4

Japan 14,082 8.0

US 13,885 7.9

South Korea 4,334 2.5

UK 3,419 1.9

France 1,265 0.7

Italy 963 0.5

Total incl others 175,733 100.0Source: State Statistical Bureau, China Statistical Yearbook.

Hong Kong’s investmentimportance is overstated

As noted above, Hong Kong is still much the most important source of foreigninvestment, with 68% of the total (if Macau’s much smaller contribution isincluded); Taiwan with 8.3% was in second place. Hong Kong’s contribution is

52 China: Capital flows and foreign debt


inflated by some indirect investment from Taiwan routed through the terri-tory, as well as by “round-tripping”.

Foreign reserves and the exchange rate

China’s officially posted foreign-exchange reserves stood at $20.4bn 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, the foreign-trade bank, in itscalculations of the size of its reserves. These are now limited to the holdings ofthe People’s Bank of China (PBC, the central bank) itself. The reform is in linewith the attempts to turn the People’s Bank into a real central bank, and alsoto enhance the autonomy of state-owned enterprises (SOEs; the Bank ofChina’s “reserves” included its foreign-currency liabilities to SOEs). Foreign-exchange reserves rose healthily in 1994 as export growth picked up from thedisappointing slowdown in 1993. By end-1994 reserves (excluding gold) stoodat $52.9bn, and they continued to rise during 1995, reaching $75.4bn by theend of the year and soaring to $107bn by the end of 1996. During 1997 theycontinued to mount, reaching $132bn at the end of August. (For data onforeign reserves, see Reference table 24.)

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

Foreign exchange 105,029

SDRs 614

Reserve position in the IMF 1,396

Total reserves excl gold 107,039

Golda 637

Total reserves incl gold 107,676

Memorandum itemGold (m fine troy oz) 12.7

a National valuation.

Source: IMF, International Financial Statistics.

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 partthrough the demonstrated willingness of the PBC to intervene to maintain therenminbi at around Rmb8.7:$1, and in part by trade flows. Strong exportgrowth gave many traders access to foreign exchange. Many foreign investors,however, complained of considerable difficulty in securing access to hard cur-rencies. In 1995 the renminbi recovered against the dollar, ending the year atRmb8.32:$1. For the year as a whole the rate averaged Rmb8.35:$1. As dis-cussed above, the currency remained around Rmb8.3:$1 during 1996-97, 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 53


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 Co-operation and Development, Financial StatisticsMonthly

Organisation for Economic Co-operation and Development, Geographical Distribution of Financial Flows to Aid Recipients (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

54 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)

1992 1993 1994 1995 1996

Revenue 348.3 434.9 521.8 624.2 740.8 of which: tax 329.7 425.5 512.7 603.8 691.0 net subsidies to enterprisesa –38.5 –36.2 –36.6 –32.8 –33.7 borrowingb 67.0 73.9 117.5 155.0 196.7

Expenditure –374.2 –464.2 –579.3 –682.4 –793.8 of which: capital construction 55.6 59.2 64.0 78.9 90.7 defence 37.8 42.6 55.1 63.7 72.0 culture, health & education 79.3 95.8 127.8 146.7 170.4 administration 42.5 53.6 72.9 87.3 104.1 price subsidies 32.2 29.9 31.4 36.5 45.4

Debt serviceb 43.9 33.6 49.9 88.7 131.2

Balance –25.9 –29.3 –57.5 –58.2 –53.0

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.

Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 2

Investment in assets by source and purpose(Rmb bn)

1992 1993 1994 1995 1996

By source of fundsa

State budget 33.4 46.4 53.0 62.1 63.0Domestic loans 215.2 292.6 399.8 419.9 457.6Foreign investment 45.7 90.7 176.9 229.6 274.7Self-generated fundsb 491.2 816.1 1,153.1 1,340.9 1,502.1

By purposeConstruction 501.9 785.6 1,086.5 1,317.3 1,515.3Equipment 206.4 314.4 415.4 426.2 494.1Other 77.2 145.7 202.3 258.3 288.0Total investment 785.5 1,245.8 1,704.3 2,001.9 2,297.4

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


China: Reference tables 55


Reference table 3

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

1992 1993 1994 1995 1996

Currency in circulation 432.9 577.7 728.4 788.2 880.2

Demand deposits 669.1 969.3 1,239.0 1,520.2 1,971.3

Money (M1) incl others 1,171.4 1,676.1 2,154.0 2,559.7 2,851.5

M1 growth (%) 30.3 43.1 28.5 18.8 11.4

Quasi-money 1,261.3 1,797.9 2,538.0 3,514.7 4,758.0

Money (M2) 2,432.7 3,474.0 4,692.0 6,074.4 7,609.5

M2 growth (%) 30.8 42.8 35.1 29.5 25.3

Domestic credit 2,449.9 3,481.1 4,310.4 5,293.6 6,641.1 Claims on central government (net) 101.1 118.4 133.3 132.3 218.0 Claims on other domestic transactors 2,348.9 3,362.7 4,177.1 5,161.3 6,423.1

Net foreign assets of monetary authorities 168.5 222.3 506.5 638.5 921.3Sources: IMF, International Financial Statistics; People’s Bank of China, China Financial Outlook.

Reference table 4

Gross domestic product and gross national product(Rmb bn; at current prices)

1992 1993 1994 1995 1996

GDP (output basis) 2,663.8 3,463.4 4,675.9 5,847.8 6,859.4

GNP 2,665.2 3,456.1 4,667.0 5,749.5 6,756.0Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 5

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

1992 1993 1994 1995 1996

Primary industry 580.0 688.2 945.7 1,199.3 1,388.4

Secondary industry 1,170.0 1,642.9 2,237.2 2,853.8 3,361.3 of which: industry 1,028.5 1,414.4 1,936.0 2,471.8 2,908.3 construction 141.5 228.5 301.3 382.0 453.0

Tertiary industry 913.9 1,132.4 1,479.3 1,794.7 2,109.7 of which: transport, post & telecommunications 168.2 212.3 268.6 305.5 349.4 commerce 273.5 309.1 405.0 493.2 556.0Source: State Statistical Bureau, China Statistical Yearbook.

56 China: Reference tables


Reference table 6

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

1992 1993 1994 1995 1996

Private consumption 1,246.0 1,568.2 2,123.0 2,783.9 3,258.9

Public consumption 349.2 450.0 598.6 669.1 758.3

Fixed investment 831.7 1,298.0 1,685.6 2,030.0 2,333.6

Additions to stocks 131.9 201.8 240.4 357.7 353.1

Net exports 27.6 –68.0 63.4 99.9 145.9

GDPa 2,586.4 3,450.1 4,711.1 5,940.5 6,849.8

a Totals may not add due to rounding.


Reference table 7

Price indices(1978=100 unless otherwise indicated)

1992 1993 1994 1995 1996

Overall retail pricesa 225.2 254.9 310.2 356.1 377.8 % change 5.4 13.2 21.7 14.8 6.1

Overall consumer pricesb 181.7 208.4 258.6 302.8 327.9 % change 6.4 14.7 24.1 17.1 8.3

Urban consumer prices 253.4 294.2 367.8 429.6 467.4 % change 8.6 16.1 25.0 16.8 8.8

Rural consumer pricesb 176.8 201.0 248.0 291.4 314.4 % change 4.7 13.7 23.4 17.5 7.9

Farm products purchasing prices 277.5 314.7 440.3 527.9 550.1 % change 3.4 13.4 39.9 19.9 4.2

Industrial products producer prices 182.7 204.3 239.4 274.6 291.6 % change 3.1 11.8 17.2 14.7 6.2

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)

1992 1993 1994 1995 1996

Urban 3323.7 333.5 343.0 351.7 359.5

Rural 8848.0 851.7 855.5 859.5 864.4

Totala 1,171.7 1,185.2 1,198.5 1,211.2 1,223.9 Male 598.1 604.7 612.5 618.1 622.0 Female 573.6 580.5 586.0 593.1 601.9

a Totals may not add due to rounding.




Reference table 9

Labour force(m; year-end)

1992 1993 1994 1995 1996

Urban state-owned units 1108.9 109.2 112.1 112.6 112.4 of which: manufacturing 35.3 34.4 33.2 33.3 32.2 government agencies & social organisations 9.7 10.1 10.1 10.2 10.7

Collectives in towns 36.2 33.9 32.8 30.8 29.5 of which: manufacturing 17.5 16.0 15.2 14.2 13.5 trade & food services 8.0 7.4 7.2 6.9 6.7

Urban private enterprises 1.0 1.9 3.3 4.9 6.2

Self-employed in towns 7.4 9.3 12.3 15.6 17.1

Rural employed 4483.1 487.8 487.9 488.5 490.3 of which township & village industries 106.3 123.5 120.2 128.6 135.1

Total incl others 655.5 663.7 672.0 679.5 688.5 Primary industries 383.5 374.3 364.9 354.7 347.7 Secondary industries 142.3 148.7 152.5 156.3 161.8 Tertiary industries 129.8 140.7 154.6 168.5 179.0Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 10

Transport statistics

1992 1993 1994 1995 1996

RailwaysLength of track (’000 km) 53.6 53.8 54.0 54.6 56.7Passengers carried (bn passenger-km) 2315.2 348.3 363.6 354.6 332.5Freight traffic (bn tonne-km) 1,157.6 1,195.5 1,245.8 1,287.0 1,297.0

RoadsHighways (’000 km) 1,056.7 1,083.5 1,117.8 1,157.0 1,185.8Passengers carried (bn passenger-km) 319.3 370.1 422.0 460.3 490.9Freight traffic (bn ton-km) 375.5 407.1 448.6 469.5 501.1Passenger vehicles (’000) 2,261.6 2,859.8 3,497.4 4,179.0 4,880.2Freight trucks (’000) 4,414.5 5,010.0 5,603.3 5,854.3 5,750.3

WaterWaterway freight traffic (bn tonne-km) 1,325.6 1,386.1 1,568.7 1,755.2 1,786.3 of which: ocean shipping 903.4 913.4 n/a n/a n/aSource: State Statistical Bureau, China Statistical Yearbook.

Reference table 11

National energy statistics1992 1993 1994 1995 1996

Coal (m tonnes) 1,116 1,150 1,240 1,361 1,397

Crude oil (m tonnes) 142.1 145.2 146.1 150.0 157.3

Natural gas (bn cu metres) 15.8 16.8 17.6 17.9 20.1Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 12

Banking statistics: sources and uses of credit funds by state banks(Rmb bn unless otherwise indicated; year-end balances)

1992 1993 1994 1995 1996

Total funds 2,426.9 2,987.2 4,090.3 5,138.1 6,324.7

SourcesDeposits 1,889.1 2,323.0 2,933.1 3,878.3 4,959.3Liabilities to international financial institutions 23.6 21.7 21.7 38.2 29.5Bonds 16.3 9.9 82.5 166.4 246.5Currency in circulation 433.6 586.5 728.9 788.5 880.2Funds of banks 182.2 220.7 227.4 227.2 274.5Others –117.9 –174.6 96.7 39.5 –65.4

UsesLoans to industrial production enterprises 495.6 604.7 720.9 878.9 1,078.2Loans for industrial supply & marketing enterprises 81.9 97.4 101.7 106.3 111.8Loans to commercial enterprises 767.8 903.7 1,005.3 1,216.3 1,441.7Loans to construction enterprises 90.6 105.2 111.7 103.5 169.5Loans to individual proprietors 2.3 3.4 5.3 3.4 5.4Loans to urban collectives & households 114.4 136.5 114.2 106.6 120.0Loans to agriculture 144.9 172.0 155.4 192.2 236.8Loans for fixed assets 392.5 517.1 801.1 1,002.6 1,203.4Other loans 71.7 106.0 228.5 329.5 376.7Advances to the Treasury 124.1 158.2 168.7 158.2 158.2Foreign exchange 110.2 87.6 450.4 677.4 957.9Others 30.9 95.4 227.1 363.2 465.2Sources: State Statistical Bureau, China Statistical Yearbook; People’s Bank of China, China Financial Outlook.

Reference table 13

Industrial production(m units unless otherwise indicated)

1992 1993 1994 1995 1996

Light industrial productsBicycles 40.8 41.5 43.6 44.7 33.6Sewing machines 8.3 8.4 8.6 9.7 6.8Television sets 28.7 30.3 32.8 35.0 35.4 of which: colour television sets 13.3 14.4 16.9 20.6 25.4Wristwatches 86.6 192.9 477.8 481.9 479.8Cloth (bn metres) 19.1 20.3 21.1 26.0 20.9Refrigerators 4.9 6.0 7.7 9.2 9.8Washing machines 7.1 9.0 10.9 9.5 10.7

Heavy industrial productsCement (m tonnes) 308.2 367.9 421.2 475.6 491.2Rolled steel (m tonnes) 67.0 77.2 84.3 89.8 93.4Crude steel (m tonnes) 80.9 89.6 92.6 95.4 101.2Plastics (m tonnes) 3.3 3.6 4.0 5.2 5.8Machine tools (’000 units) 228.7 262.0 206.5 203.4 177.4Pig iron (m tonnes) 75.9 87.4 97.4 105.3 107.2Locomotives (units) 798 922 992 974 1,050Motor vehicles (’000 units) 1,066.7 1,298.5 1,366.9 1,452.7 1,475.2Tractors (’000 units) 57.0 37.7 46.7 63.3 83.7Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 14

Agricultural production(m tonnes unless otherwise indicated)

1992 1993 1994 1995 1996

Grain 442.7 456.5 445.1 466.6 504.5 of which: rice 186.2 177.5 175.9 185.2 195.1 wheat 101.6 106.4 99.3 102.2 110.6 corn 95.4 102.7 99.3 112.0 127.5

Cotton 4.5 3.7 4.3 4.8 4.2

Oil-bearing cropsa 16.4 18.0 19.9 22.5 22.1

Sugarcane 73.0 64.2 60.9 65.4 66.9

Sugarbeet 15.1 12.0 12.5 14.0 16.7

Tea (’000 tonnes) 559.8 599.9 588.5 588.6 593.4

Aquatic products 15.6 18.2 21.4 25.2 32.9

Meatb 34.3 38.4 45.0 52.6 59.2

Hogs (m head) 384.2 393.0 414.6 441.7 457.4

Sheep & goats (m head) 207.3 217.3 240.5 276.9 303.4

Cattle & other large animals (m head) 134.9 139.9 149.2 158.6 166.5

a Excluding soybeans. b Pork, beef and mutton.


Reference table 15

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

1992 1993 1994 1995 1996

Crop cultivation 55.5 54.6 53.8 54.3 53.7

Forestry 4.7 4.5 3.9 3.5 3.3

Animal husbandry 27.1 27.4 29.7 29.7 30.2

Fishery 6.8 8.0 8.2 8.4 8.6

Others 6.1 5.5 4.5 4.1 4.2Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 16

Total sown area, by crop(%)

1992 1993 1994 1995 1996

Grain crops 74.2 74.8 73.9 73.4 73.9 of which: rice 21.5 20.5 20.4 20.5 20.6 wheat 20.5 20.5 19.5 19.3 19.4 maize 14.1 14.0 14.3 15.2 16.1 tubers 6.1 6.2 6.3 6.4 6.4 soybeans 6.0 8.4 8.6 7.5 6.9

Industrial crops 16.3 14.5 n/a n/a n/a of which: cotton 4.6 3.4 3.7 3.6 3.1 oil-bearing crops 7.7 7.5 8.1 8.7 8.2 of which: rapeseed 4.0 3.6 3.9 4.6 4.4 peanuts 2.0 2.3 2.5 2.5 2.4 sugar 1.3 1.1 1.2 1.2 1.2 tobacco 1.4 1.4 1.0 1.0 1.2

Vegetables 4.7 5.5 6.0 6.3 6.9

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

Reference table 17

Miscellaneous agricultural statistics

1992 1993 1994 1995 1996

Grain yields (kg/ha) 4,342 4,557 4,500 4,659 4,894

Cotton yields (kg/ha) 660 750 785 879 890

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

Irrigated area (m ha) 485.9 487.3 487.6 492.8 503.8

Chemical fertiliser applied (m tonnes) 29.3 31.5 33.2 35.9 38.3

Chemical fertiliser produced (m tonnes) 20.5 19.6 22.7 25.5 28.1

Afforested area (m ha) 13.4 12.9 12.9 12.9 12.9

Grain imports (m tonnes) 11.8 7.5 9.2 20.8 12.2Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 18

Exports($ m; fob)

1992 1993 1994 1995 1996

Primary goods 17,004 16,666 19,708 21,485 21,925 Food & live animals etc 8,309 8,399 10,015 9,954 10,232 Beverages & tobacco 720 901 1,002 1,370 1,342 Non-edible raw materials 3,143 3,052 4,127 4,375 4,046 Mineral fuels, lubricants etc 4,693 4,109 4,069 5,332 5,929 Animal & vegetable oils, fats, waxes 139 205 495 454 376

Manufactured goods 67,936 75,078 101,298 127,295 129,141 Chemicals & related products 4,348 4,623 6,236 9,094 8,879 Light industrial products, rubber, minerals, iron etc 16,135 16,392 23,218 32,240 28,511 Machinery & transport equipment 13,219 15,282 21,895 31,407 35,313 Miscellaneous products 34,234 38,781 49,937 54,548 56,426 Products not classified elsewhere 0 0 12 6 12

Total 84,940 91,744 121,006 148,780 151,066Source: State Statistical Bureau, China Statistical Yearbook.

Reference table 19

Imports($ m; cif)

1992 1993 1994 1995 1996

Primary goods 13,255 14,210 16,486 24,417 25,440 Food & live animals etc 3,146 2,206 3,137 6,132 5,672 Beverages & tobacco 239 245 68 394 497 Non-edible raw materials 5,775 5,438 7,437 10,159 10,697 Mineral fuels, lubricants etc 3,570 5,819 4,035 5,127 6,877 Animal & vegetable oils, fats, waxes 525 502 1,809 2,605 1,697

Manufactured goods 67,330 89,749 99,128 107,667 113,398 Chemicals & related products 11,157 9,704 12,130 17,299 18,106 Light industrial products, rubber, minerals, iron etc 19,273 28,527 28,084 28,772 31,391 Machinery & transport equipment 31,312 45,023 51,467 52,642 54,771 Miscellaneous products 5,588 6,495 6,768 8,261 8,484 Products not classified elsewhere 0 0 679 693 646

Total 80,585 103,959 115,614 132,084 138,838Source: State Statistical Bureau, China Statistical Yearbook.



Reference table 20

Balance of payments, IMF estimates($ m)

1992 1993 1994 1995 1996

Goods: exports fob 69,568 75,659 102,561 128,110 151,077

Goods: imports fob –64,385 –86,313 –95,271 –110,060 –131,542

Trade balance 5,183 –10,654 7,290 18,050 19,535

Services: credit 9,249 11,193 16,620 19,130 20,601

Services: debit –9,434 –12,036 –16,299 –25,223 –22,585

Income: credit 5,595 4,390 5,737 5,191 7,318

Income: debit –5,347 –5,674 –6,775 –16,965 –19,755

Current transfers: credit 1,206 1,290 1,269 1,827 2,368

Current transfers: debit –51 –118 –934 –392 –239

Current-account balance 6,401 –11,609 6,908 1,618 7,243

Direct investment abroad –4,000 –4,400 –2,000 –2,000 –2,114

Direct investment in China 11,156 27,515 33,787 35,849 40,180

Portfolio investment assets –450 –597 –380 79 –628

Portfolio investment liabilities 393 3,646 3,923 710 2,372

Other investment assets –3,267 –2,114 –1,189 –1,081 –1,126

Other investment liabilities –4,082 –576 –1,496 5,116 1,282

Financial balance –250 23,474 32,645 38,673 39,966

Capital account nie credit 0 0 0 0 0

Capital account nie debit 0 0 0 0 0

Capital-account nie balance 0 0 0 0 0

Capital-account balance –250 23,474 32,645 38,673 39,966

Net errors & omissions –8,211 –10,096 –9,100 –17,823 –15,504

Overall balance –2,060 1,769 30,453 22,468 31,708

Financing (- indicates inflow)Movement of reserves 2,060 –1,769 –30,453 –22,468 –31,705Use of IMF credit & loans 0 0 0 0 0Source: IMF, International Financial Statistics.



Reference table 21

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

1991 1992 1993 1994 1995

Total external debt 60,259 72,428 85,928 100,457 118,090 Long-term debt 49,479 58,663 70,632 82,974 95,764 Short-term debt 10,780 13,765 15,296 17,483 22,325 of which: interest arrears on long-term debt 0 0 0 0 0 Use of IMF credit 0 0 0 0 0

Public & publicly guaranteed long-term debt 49,479 58,463 70,076 82,391 94,675 Official creditors 17,073 19,105 24,339 28,973 36,282 Multilateral 7,576 8,614 10,690 13,588 16,302 Bilateral 9,497 10,491 13,650 15,385 19,980 Private creditors 32,406 39,358 45,737 53,418 58,393 of which: banks 14,963 17,918 20,678 21,475 23,869 bonds 5,660 5,449 7,715 11,087 10,684 others 11,783 15,996 17,344 20,856 23,840

Total debt service paid 8,305 8,618 10,618 11,135 15,066 Principal 4,123 5,213 6,729 6,343 9,070 Interest 3,731 3,405 3,439 4,792 5,996 of which: short-term debt 754 697 809 948 1,340

Ratios (%)Total external debt/GNP 16.0 17.3 19.9 18.6 17.2Debt-service ratio, paida 11.9 10.2 11.1 8.9 9.9Short-term debt/total external debt 17.9 19.0 17.8 17.4 18.4Concessional long-term debt/ total long-term debt 17.9 15.8 15.7 15.9 14.7

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, Global Development Finance.

Reference table 22

Net official development assistancea

($ m)

1991 1992 1993 1994 1995

Bilateral OECD 1,252.5 2,077.3 2,239.8 2,393.9 2,531.2 of which: Japan 585.3 1,050.8 1,350.7 1,479.4 1,380.2 Germany 107.1 192.8 247.8 300.0 684.1 France 138.5 153.4 102.6 97.7 91.2 Austria 97.2 23.0 10.1 32.4 66.2

Multilateral 740.5 960.7 1,030.0 820.0 967.5 of which: IDA 610.0 789.9 865.1 671.0 798.2 UNDP 49.9 44.9 44.8 38.4 38.3 EU 26.8 31.3 19.5 14.1 32.7

Total incl others 1,998.7 3,049.6 3,271.2 3,232.0 3,534.3

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

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



Reference table 23

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

1992 1993 1994 1995 1996

Liabilities 49,012 49,151 56,464 67,061 79,644

Assets 42,676 49,163 59,952 57,428 66,687

Net position 6,336 –12 –3,488 9,633 12,959Source: Bank for International Settlements, International Banking and Financial Market Developments.

Reference table 24

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

1992 1993 1994 1995 1996

Foreign exchangea 19,443 21,199 51,620 73,579 105,029

SDRs 419 484 539 582 614

Reserve position in the IMF 758 704 755 1,216 1,396

Total reserves excl golda 20,620 22,387 52,914 75,377 107,039

Goldb 610 612 646 660 637

Total reserves incl gold 21,230 22,999 53,560 76,037 107,676

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 National valuation.


Reference table 25

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

1992 1993 1994 1995 1996

US$ 5.515 5.762 8.619 8.351 8.314

HK$ 0.712 0.744 1.115 1.080 1.075

¥ ’000 43.61 52.02 84.37 89.23 76.35

DM 3.542 3.488 5.319 5.827a 5.525a

a Cross-rate.

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



Mongolia

Basic data

Land area 1,566,500 sq km

Population 2.33m (January 1997)

Main towns Population (January 1997)

Ulaanbaatar 633,900Darkhan 91,400Erdenet 68,000

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 1996 (free-market rate): Tg548.4:$1. In earlyDecember 1997 the exchange rate was Tg784.8:$1

Fiscal year January-December

Time 8 hours ahead of GMT

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

66 Mongolia: Basic data


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, the Khalkh Mongols of Outer Mongolia declared independence in 1911.The country, established as a theocratic monarchy, enjoyed a brief period ofautonomy before it was occupied by Chinese troops and the White Russianarmies in 1919. In 1921 a second revolution, with the backing of the SovietUnion, expelled the intruders and put the Mongolian People’s Party—renamedthe Mongolian People’s Revolutionary Party (MPRP) in 1925—into power.When the monarch, a Living Buddha known as the Javzandamba Khutagt, diedin 1924 the country was renamed the Mongolian People’s Republic. The namelasted until 1992 when it was changed to Mongolia.

Soviet influencedominates for decades—

The MPRP ruled for almost 70 years with Soviet support, but Soviet protectionof Mongolia’s independence and economic assistance came at a high price. Inthe 1930s Mongolian society was shaken as Stalinist purges destroyed 750Buddhist monasteries and led to the death or disappearance of some 100,000people, including lamas and senior politicians. The head of state, KhorloogiinChoibalsan, was largely responsible for the purges, and conditions improvedafter his death in 1952. Mongolia became a full member of Comecon (Councilfor Mutual Economic Assistance, the communist states’ economic bloc) in1962, and after ousting his rivals Yumjaagiin Tsedenbal, Mr Choibalsan’sprotégé, pledged loyalty to the Soviet Union. Subsequently, the Mongolian-Chinese borders were policed by some 55,000 Soviet troops during the coldwar, and Soviet aid contributed substantially to the transformation ofMongolia’s social and economic life.

—before democracy takesroot

In 1984 Mr Tsedenbal was replaced by Jambyn Batmonkh, who faithfully cop-ied the late Soviet communist reforms (glasnost and perestroika) until demo-cratic forces toppled his government in 1990. In December 1989 theMongolian Democratic Association (MDA) was formed and began a series ofpublic demonstrations demanding a multiparty system, a permanent parlia-ment and a market economy. A hunger strike by 11 supporters of the MDA inMarch 1990 led to the resignation of the Politburo and Central Committee,and the MPRP renounced its constitutional right to rule.

A national election was held in July in which six parties participated. ThePeople’s Great Khural (national assembly) then elected Punsalmaagiin Ochirbatas the country’s first president and a 60-member Small Khural as an interimparliament, in which the MPRP had a 60% majority. A coalition governmentwas formed and the new parties had a large role in formulating legislation forthe reform 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 economy. 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.

Mongolia: Historical background 67


The MPRP wins theelection—

In the State Great Khural (the new parliament) 70 seats went to the MPRP,leaving the opposition, comprising members of the Mongolian NationalDemocratic Party (MNDP) and the Mongolian Social Democratic Party (MSDP),virtually powerless. A new government was formed under Puntsagiin Jasrai, aformer Politburo member. In 1994 the MPRP clashed with Mr Ochirbat whenhe blocked legislation he regarded as unconstitutional. As a result he lost theMPRP nomination in the June presidential election, but he went on to win asthe candidate of the opposition. There seemed little chance of the oppositioninfluencing legislation without proportional representation. The Democratsattacked the integrity and political record of senior government officials andmass demonstrations were organised. This resulted in an agreement betweenMr Ochirbat and leaders of the parliamentary parties for changes to the parlia-mentary and election laws.

—but is defeated by theDemocrats in 1996

In spite of the fact that parliament refused to sanction the agreement, theMPRP suffered a surprise defeat in the general election of June 1996 when theDemocratic Coalition, largely made up of the MNDP and the MSDP, took 50 ofthe 76 seats in the State Great Khural. The coalition formed a new governmentunder the leader of the MNDP, Mendsaikhany Enkhsaikhan, and a programmeof rapid economic reforms was announced.

The MPRP’s candidatewins the presidency

However, the coalition’s first year of office coincided with a period of economicinstability, for which the new government was blamed. In 1996 Mr Ochirbatlost the presidential election to the MPRP candidate, Natsagiin Bagabandi.

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 principlesuntil 1990. The fourth constitution came into force in February 1992 and isradically different. Under the new constitution, the head of state is the pres-ident, who is elected by the people, and a unicameral legislature of 76 membersis elected for a four-year term. The president heads the National Security Coun-cil and the armed forces, and appoints the head of the Supreme Court. The StateGreat Khural is the legislature and the organ of supreme state power. The pres-ident has the power to veto legislation but can be overruled by a two-thirdsmajority in the State Great Khural. The judiciary—which is headed by theSupreme Court—is independent of both the legislature and the president.

Political forces

Broad-based parties arecomplemented by more

focused groups—

The Mongolian People’s Revolutionary Party (MPRP) was founded in 1920, asthe Mongolian People’s Party, to promote national independence and socialreform. Communist in ideology, it determined the course of Mongolian societyfrom 1921 to 1990 and was the channel through which Soviet policies wereimplemented in Mongolia.

68 Mongolia: Constitution and institutions


In 1990 five democratic parties, each with a necessary minimum of 801 mem-bers, were legally registered; by 1995 there were 12 parties. The MPRP remainedthe largest, with 81,000 members, while the Mongolian National DemocraticParty (MNDP) had 40,000 and the Mongolian Social Democratic Party (MSDP)25,000. The non-parliamentary parties claim between 804 and 12,000 mem-bers. Some, including the parliamentary parties, are based on broad politicalideologies, while others, like the Green Party and the Religious Party, havenarrower platforms. Most claim to be democratic, including the MPRP, whichsays that it has renounced communism and accepts the need for constitutionaland economic reform. Members of the MPRP in the State Great Khural hold arange of views and do not necessarily vote in accordance with the views of theparty’s national executive.

—and mass political andunion movements

In addition to formal parties there are several mass political movements, thelargest being the Mongolian Democratic Association (MDA), which act as apressure group and occasionally holds public protests. Legal reforms have alsoallowed the traditional trade unions to negotiate with the government onworkers’ living standards, salaries, wages and pensions. Impatient with theslow pace of negotiations, a parallel group of free trade unions emerged in 1991and has been active in organising strikes and demonstrations.

In the realignment of new political forces women have lost considerableground as a power group because of the resurgence of patriarchal attitudes.Currently there are only seven women in the State Great Khural, and none atministerial level; and the number in local government is also much lower thanduring communist rule. However, some new women’s non-governmentalorganisations (NGOs), are gaining ground and working to improve the statusand 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.

International relations and defence

Traditional relations areshifting

In the 1980s Mongolia’s closest allies were the Comecon countries and otherrelationships were minimal. Mongolia joined the UN in 1961 but continuedconsistently to support Soviet foreign policy. A tense relationship existed withChina from the 1960s until 1987. During this period some 55,000 Soviet troopswere stationed in Mongolia.

Mongolia has sought to balance its relations with China and the Soviet Union.The de-escalation of tensions between the two regional powers, the withdrawalof Soviet troops from Mongolian territory, and the settlement of outstandingborder issues with Russia and China in 1994 have eased this task considerably,while the end of the cold war has helped to make recent reforms andmanpower cuts in the army more acceptable.

Mongolia: International relations and defence 69


Foreign policy is now determined by pragmatic economic interests. Accord-ingly, relations with the US, Japan, South Korea and the EU are prominent, andnew treaties and agreements have been negotiated with parts of the formerSoviet Union, notably Kazahkstan, and with India and other Asian countries.

The economy

Economic structure

Main economic indicators, 1996

Real GDP growth (%) 2.6

Consumer-price inflation (%) 45.8

Current-account balance ($ m) 38.9a

Exchange rate (Tg:$) 693.51b

Population (m) 2.35b

a 1995. b End-period.

Sources: Official figures; EIU; IMF, International Financial Statistics.

Until 1990 Mongolian economic development was directed by a series ofSoviet-style central plans. Since then, economic liberalisation has been accom-panied by a shift in trade away from the former Comecon centrally plannedeconomies, but Russia remains the most important trading partner.

Soviet aid boostedindustrial production—

Comecon aid focused on the industrial sector, and industrial productioncaught up with and then overtook agricultural output in the 1970s. In the late1980s industry was producing almost twice as much as agriculture in current-price terms mainly because the Erdenet Combine, which produces copper andmolybdenum, was in full production. On an output basis, agriculture ac-counted for only around 14-15% of current-price GDP in 1985-91.

—but agriculture hasregained importance

However, decollectivisation of livestock, price reforms and some liberalisationhave seen agriculture’s share of GDP rise in the 1990s, to around 30-37% ofGDP. Industry accounts for a similar proportion. (See Reference tables 4 and 5for data on GDP by expenditure and sector.)

Comparative economic indicators, 1996

Mongolia Thailand Malaysia Singapore Indonesia Vietnam

GDP ($ bn) 0.9 186.0 92.1 94.0 227.4 23.5

GDP per head ($) 414 3,095 4,346 30,900 1,155 311

Consumer-price inflation (%) 45.8 5.9 3.5 1.4 8.0 6.5

Current-account balance ($ bn) 0.4a –14.7 –4.7 14.3 –8.0 –3.2

Exports of goods ($ bn) 0.5a 77.2 77.2 126.0 50.1 7.3

Imports of goods ($ bn) 0.4a 73.3 73.3 123.7 44.4 11.1

Foreign trade (% of GDP)b 91.6a 163.3 163.3 265.5 41.4 78.4

a 1995. b Exports of goods plus imports of goods, divided by GDP.

Sources: National sources; IMF, International Financial Statistics; EIU.

70 Mongolia: Economic structure


Economic policy

The importance of Sovietand Chinese assistance

Soviet-influenced economic planning was introduced in 1948, but to littleeffect. The real impetus to development came in the 1950s, when Mongoliagained substantial aid from both the Soviet Union and China. This hastenedmodernisation, promoting the expansion of industry and infrastructure, andurbanisation. Collectivisation was completed in 1959, and expansion of theagricultural sector to feed the citizens of the new towns was a significantfeature of the 1960s. In the 1970s mining developed through joint ventureswith the Soviet Union, Czechoslovakia and Bulgaria.

Moves toward a marketeconomy

In the late 1980s Jambyn Batmonkh’s government restricted the role of centralplanning and gave state-owned enterprises (SOEs) and co-operatives more con-trol over production through flexible management and greater autonomy overtheir own finances. These reforms were not an attempt to change the systemdramatically but to make it more efficient. However, the democratic revolutionof 1990 brought new economic policies aimed at ending the command systemaltogether and replacing it with a market economy.

Recent reforms

1991: All citizens were given vouchers to the value of Tg10,000 to exchange forshares in both small businesses and larger enterprises. State farms and collectivesbegan to be dismantled, and livestock and other assets distributed to herdsmen andfarmers.1992: The Mongolian Stock Exchange opened.By 1995: All trade, catering and services had been privatised; 95% of livestock wasin private ownership; some housing is privatised. The government retained control ofthe mines and a majority ownership in telecommunications, large-scale transportand public utilities.August 1995: Secondary trading began on the Stock Exchange.1997: Mr Enkhsaikhan’s government published a new programme to privatise 60%of remaining state assets by 2000. Among the assets to be offered to Mongolian andforeign buyers are the coal mines, Erdenet, the Gobi Cashmere Co and the stateairline, MIAT. The government begins to dispose of its housing stock.

Privatisation, currency reforms and the removal of controls on prices, tariffsand wages are the main mechanisms guiding the transformation from a cen-trally planned to a market-driven economy. The reforms are being carried outwith the support of the World Bank, the IMF and the Asian Development Bank(ADB). In 1997 Mongolia launched a wide-ranging privatisation programme,which runs until 2000.

Turnover taxes used to bethe mainstay of

government finances—

The state budget covers the central and local government budgets. Theprincipal sources of income under central planning were turnover taxes, partic-ularly import differential taxes (a levy on the difference between import anddomestic wholesale prices), and profit and income tax on state and co-operative enterprises. Personal income tax was very low and contributed only1% of government revenue in the 1980s. Expenditure regularly exceeded

Mongolia: Economic policy 71


income, and the deficit hovered between Tg1.7bn and Tg2bn under the EighthFive-Year Plan (1986-90) and was covered by Soviet loans. (More detail ongovernment finances is given in Reference table 1.)

—but tax reform hasdiversified revenue

In 1991 the structure of state income was substantially altered by the intro-duction of customs duties and the implementation of a personal and companyincome-tax law. In January 1993 a new tax law came into force. It provided for17 state levies, including income tax, sales tax, profit tax, various forms oflicensing fees and seven local-government taxes. Private business regarded therates as punitive and the IMF criticised the fiscal system as distortionary.

A new law of 1997 is the basis of fiscal reform, with new income-tax rates, theabolition of most customs tariffs and a simplified business tax. The budgetremains in deficit, although this has narrowed since 1993, when the first ofthree IMF enhanced structural adjustment facility (ESAF) loans was granted.

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-supply growth (M2) has sincebeen rapid; it averaged 79% year-on-year growth in 1992-95. The state bank hasmade efforts to reduce this growth by introducing credit controls. This has hadsome success and the rate of M2 growth slowed to 17.2% in 1996. (See Refer-ence table 2 for data on the money 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.

According to Asian Development Bank (ADB) estimates, between 1980 and theend of that decade GDP grew at an average annual rate of 6.2%, the same rate asfor NMP growth, and its rate of growth fell more or less in step with the declinein foreign savings (namely CMEA aid flows). Investment fell steadily during theEighth Five-Year Plan (1986-90). Wages remained stable, as did prices.

The end of Comeconbrought economic collapse

The dissolution of Comecon left Mongolia 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 services vitalto its economy. As a result, 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 1991and by 11.6% in 1992. National sources give different historical GDP figurescompared with the IMF; they show that the economy contracted by 9.5% in1991, 9.2% in 1992 and 3% in 1993 (see Reference table 3). Industrial outputcontracted because of shortages of electricity, raw materials and spare parts,falling by 12.3% in 1991 and 14% in 1992. Output in other sectors followedsimilar trends.

72 Mongolia: Economic performance


Economic problems arenow easing—

The first real rate of growth, of 2.1%, was reported in 1994 and continued in1995, at 6.1%, as the trough of industrial decline passed. While a sustainedeconomic recovery is still a long way off, there are indications that in somesectors decline is being arrested. Liberalisation has boosted small-scale agricul-tural output; both agricultural and industrial growth have been positive since1994. Aid-assisted infrastructure projects have meant stronger growth in trans-port and communications in recent years. In 1997 the government inaugu-rated a new privatisation programme, which it is hoped will bringmuch-needed investment and new life into languishing industries. (See Refer-ence tables 9 and 10 for specific industrial production statistics.)

All fixed prices were removed in 1996, when fuel prices were also liberalised.This coincided with a period of falling prices for Mongolian exports on theworld market and a sharp fall in the dollar exchange rate. As a result, GNP fellback to 2.6% at the end of 1996 and the economic policies ofMr Enkhsaikhan’s government were subject to considerable criticism. How-ever, the situation had stabilised by the middle of 1997 and growth of 3% wasexpected by the IMF for 1997.

—although real incomeshave fallen since 1990—

The decline in GNP, the devaluation of the togrog and continued rapid popul-ation growth contributed to a fall in real incomes after 1990. The pay ofgovernment employees was raised in 1991 and 1993, with appropriate adjust-ments to pensions and other benefits. However, since 1991 income disparitieshave widened because of the emergence of a better-paid private sector. Incomesalso vary considerably between the urban and rural population, reflecting thefact that many herdsmen are now self-employed and subsist on their livestockproducts. By 1996 the average monthly earnings of an urban family wereTg40,000 ($89) and of a rural family Tg30,000. An estimated 36% of the popul-ation lives in poverty. (See Reference table 6 for price indices.)

—and price deregulationinitially brought high

inflation

Since January 1991 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 price controls. Heat, water and electricity tariffs also re-mained fixed. In 1992, after pressure from the IMF, controls were removed onmost remaining prices and utility rates. Price increases slowed considerably in1993, and the trend continued in 1994 and 1995, allowing average annualinflation to ease from 268.4% in 1993, to 87.6% in 1994, 60.5% in 1995 and45.8% in 1996.

Inflation slowed further in 1997. According to the Mongol Bank (the centralbank), consumer-price inflation rose by a cumulative 14.2% for the first tenmonths of the year (year-on-year figures were not available). The slowdownwas partly due to tax changes—in particular, the reduction or removal ofimport duties in April on many important staples such as flour and grain.

Regional trends

The Selenge-Tuul basin, in the Khangai-Khentii mountain complex, isMongolia’s most populous and productive region, and has received the bulk of

Mongolia: Regional trends 73


investment. Elsewhere, geographic and climatic conditions, distance and poorcommunications with the capital have severely limited economic prospects. Inthe south and east of the country is the Gobi desert; in the east, a high plateaustretching to the Chinese frontier. In the west of the country is the mountain-ous Altai region, bordered on the east side by a depression full of salt- andfreshwater lakes. An uneven distribution of water is a further constraint ongrowth, as is the susceptibility of some regions to drought or earthquakes.However, recent investments in regional energy, transport and mineral pro-jects are expected to bring improvements.

Resources

Population

Rapid population growth As a result of official policies, Mongolia’s population has doubled since 1960.The population growth rate remains quite rapid, at 1.3% in 1996, but densityis 1.5 people per sq km, one of the lowest in the world. The rural population iswidely scattered, while the urban population is concentrated in three centres,namely Ulaanbaatar, Darkhan and Erdenet, all located in a region that containsmost of the country’s investment. The population is very young; in 1996, 58%of the population was under the age of 24. (See Reference table 7 for historicalpopulation and labour data.)

Khalkh Mongols make up 85% of the population. The Kazaks are the largestminority group, although the size of the Kazak population fluctuates; since1991 more than 55,000 have migrated to Kazakhstan, although a substantialproportion is now returning.

Agricultural-sector jobsare dwindling

In 1960 herdsmen made up more than 60% of the workforce. Since then, directstate intervention (through investments and fixed prices) led to changes in thestructure of the economy and consequently in patterns of employment. Thetotal number employed in agriculture fell by one-third during the 1960s, andemployment in industry and the transport and construction sectors rose in the1980s. However, in the 1990s employment in agriculture rose once again,accounting to 45% of total employment in 1996, while industrial employmentaccounted for another 13%.

As a result, there has been a shift in the rural/urban population ratio. ByJanuary 1996, out of a total population of 2.3m, some 1.2m lived in towns and1.1m in rural areas. More than 25% of the entire population lives in Ulaan-baatar, and around 35% in Ulaanbaatar, Darkhan and Erdenet.

High unemployment The workforce fell slightly in 1996 to 1.1bn. Under central planning Mongoliahad virtually full employment, but unemployment is now a major problem. InJanuary 1997, 55,000 people were registered as unemployed. Parliament isconcerned that the true figure is a nearer 30% of the workforce. Work on aNational Programme of Employment Generation began in 1997.

74 Mongolia: Population


Population and health indicators, 1996(per ’000 population unless otherwise indicated)

Total population (m) 2.3a

Life expectancy (years) Male 60.0b

Female 62.5b

Crude birth rate 22.2

Crude death rate 7.5

Growth rate (%) 1.5a

Infant mortality (per ’000 live births) 40

Maternal mortality (total) 90

a January 1996. b 1993.

Sources: State Statistical Office, Mongolian Economy and Society in 1996; Asian Development Bank, Key Indicators of Developing Asian

and Pacific Countries, 1996.

Education

The education system isbeing revamped

Under communism, education was free. There was substantial investment ineducation and training in the 1980s, but the supply of buildings, equipmentand teachers did not keep pace with growing needs. From 1991 private schoolsbegan to appear, while government spending on education was cut. New educ-ation laws were passed in 1995 providing for free education in state schoolsfrom nursery to secondary level, and vocational and tertiary education is partlystate-funded. However, educational statistics are poor; one in five pupils dropsout of school. Teachers went on strike for better pay and conditions in 1995and university students demonstrated against increased fees in 1997. A restruc-turing programme is currently being implemented with a loan of $15.5m fromthe Asian Development Bank (ADB). The programme aims to rationalise man-power in the education sector and introduce new skills training.

Health

The healthcare system isunder strain

The network of healthcare services which was available without charge duringthe communist period is now severely constrained. The government intro-duced some charges in 1993. In 1994 a health-insurance law came into forceand 92.4% of the population is covered. Under this law, the old and the youngreceive all healthcare free, and herdsmen get a 50% reduction on those medicalservices which incur 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. By 1996 the infant mortality ratehad dropped to 40 per 1,000 live births, from 82 per 1,000 in 1980. Serioushealth problems are low birth weight, tuberculosis, sexually transmitted dis-eases and skin diseases.

Mongolia: Education 75


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 thedisposal 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 is more scarce toward the south.

Arable land is limited Some 80% of the land can be used for a range of agricultural activities but, of atotal 11.8m ha in agricultural use in 1995, only 1.3m ha was used for arable,mainly in the northern central region. Forests cover 15.2m ha. Much of theSiberian larch, cedar and pine stock is inaccessible, however. Trade with Russiain marmot, sable and fox furs virtually ceased after 1990. Game is exploited fordomestic consumption, and the depletion of the gazelle, saiga antelope andreindeer herds is now causing concern. Abundant fish stocks, however, havenot been much exploited commercially, as fish is not traditionally consumed.

Mongolia’s landscape and wildlife offer great potential for tourism. In spite ofpoor infrastructure, around 13,000 tourists visit the country each year.

Mongolia has considerable mineral wealth. In a survey conducted after thesecond world war, more than 80 minerals and 170 materials suitable for con-struction purposes were identified in 600 deposits. Coal reserves are estimatedat 100bn tonnes. In addition to coal, deposits of copper, molybdenum, fluor-spar, uranium, silver and gold are also mined. Deposits of oil in the south-eastand east are being explored.

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, andthis was deferred. It is due to be debated in parliament in 1998.

Economic infrastructure

Transport and communications

Before the 1990s most investment in transport has been in the region fromUlaanbaatar to the Russian border. Coal, minerals and most export goods arecarried on the 1,815-km Ulaanbaatar Railway, whose branch lines reachErdenet and the coal mines of Sharyn Gol, Baganuur and Nalaikh. An easternline links Choibalsan with the Trans-Siberian Railway. The absence of railwayselsewhere has constrained development. The improvement and developmentof transport infrastructure has been a government priority since 1993. Thiswork has been funded mainly by external sources and is concentrated in thecentral economic zone.

76 Mongolia: Natural resources and the environment


Railways The economic slowdown in the 1990s and changing patterns of trade, partic-ularly the redirection of transit goods through China using the port of Tianjin,has reduced the amount of freight carried by railway. In 1996 this dropped to7.5m tonnes, down from 14.5m tonnes in 1990. However, the rail system isbeing renovated with World Bank and Japanese aid.

Roads By the end of 1996 there were only 1,471 km of paved road, much of which wasin poor repair. However, in 1993 agreement was reached on the upgrading anddevelopment of the road network with external aid as a medium-term priority.This includes repairs to routes between Ulaanbaatar, Erdenet and Darkhan andthe construction of new roads between Ulaanbaatar and Dornod, and Nalaikhand Choir.

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 was completed inDecember 1996 and work is being carried out to improve provincial airports.(See Reference table 8 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; in addition, Ulaan-baatar and major industrial and most aimag centres now have automatic ex-changes. It is possible to make direct international calls to and fromUlaanbaatar, and many businesses have access to fax facilities. In 1996 the firstMongolian users were linked 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 Russian grid, supplies Mongolia’s main industrial region withelectricity and heat. The stations are wasteful and require extensive repair.Since 1990 cuts in the supply of electricity and heat, especially in the wintermonths, have been common, although emergency aid forestalled the collapseof the system. Development of energy infrastructure has been a governmentpriority since 1993. Repairs and refurbishment of the CES are under way. A gridlinked with Russia and serving the five western aimags has been partly com-pleted. Hydroelectric stations and renewable energy systems are beginning toreplace some of the small provincial diesel stations. Communities withoutelectricity still use wood or dried dung as fuel.

Commercial oilproduction begins

In the mid-1980s Mongolia began to survey oil deposits with the intention ofmeeting at least some of the country’s annual requirement of 800,000 tonnesof petroleum products through domestic production. Reserves have been esti-mated at more than 5bn barrels. A total of 21 areas are open to internationaltender, and three companies have contracts to explore for and exploit oil atZuunbayan and at Tamsag, in Dornod aimag. In 1997 a US company, SOCOInternational, made its first commercial oil extraction.

Mongolia: Energy provision 77


Energy balance, 1996(m tonnes oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Primary production 0.00 0.00 2.10 0.00 0.10 2.20

Imports 0.60 0.00 0.00 0.10 0.00 0.70

Exports 0.00 0.00 –0.10 0.00 0.00 –0.10

Primary supply 0.60 0.00 2.00 0.10a 0.10 2.80

Net transformationb –0.10 0.00 –0.70 0.10 0.00 –0.70

Final consumption 0.50 0.00 1.30 0.20c 0.10 2.10

a Expressed as input equivalents, on an assumed generating efficiency of 33%. b Losses andtransfers comprise inputs to transformation, plus energy industry fuel and losses. c Output basis.

Source: Energy Data Associates.

Financial services

A two-tier banking systemis introduced

In 1990 reform of Mongolia’s monolithic banking system began. In 1991 com-mercial functions were separated from the central bank, Mongol Bank, and twocommercial banks were created. In 1996 there were 13 commercial banks (in-cluding two foreign banks). According to the central bank, three banks wereliquidated or restructured, but three more were established.

Stricter control on creditis imposed

Lending by the commercial banks without guarantees and at very low rates ofinterest resulted in Tg70.7bn worth of debts by 1997. The IMF and the WorldBank are supporting restructuring of the sector. A new banking law came intoforce in 1996. Under this law two commercial banks whose combined debtsamounted to Tg23bn were closed. Non-performing loans were closed, and in1997 lending to the government by the central bank was reduced.

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.

Production

Industry

The collapse of Comeconhit many industries hard—

Before the collapse of the Soviet Union industrial development took placemainly in the northern central zone, which was supplied with water, fertileland and, most important, easy access to the Soviet Union via the railway. Most

78 Mongolia: Financial services


industries were state-owned or joint ventures with Comecon (Council forMutual Economic Assitance, the communist states’ economic bloc), especiallythe metallurgical industries. In the 1980s the energy, non-ferrous metals andtextiles industries, in particular, expanded rapidly, but with the collapse ofComecon support in 1990 there was a fall in production.

Industrial production(% change; constant 1995 prices)


Industrial output –2.5 –3.5Source: State Statistical Office of Mongolia, Mongolian Economy and Society in 1996.

—and private companieshave been unable 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.

In 1993 the government prioritised industry for export, as well as the develop-ment of small and medium-sized enterprises (SMEs), passing a new foreign-investment law to stimulate foreign investment in these sectors. Industrialoutput picked up in 1994 and 1995, showing positive growth rates, beforeoutput fell slightly again in 1996. The government still retains majority sharesin many industrial enterprises. However, these are to be disposed of in thesecond phase of privatisation in 1997-2000.

Mining and semi-processing

The government wants toincrease coal production

Mongolia has an estimated 100bn tonnes of coal reserves and 17 productivemines, 14 of which are open-cast. Because of the strategic importance of coal tothe economy it has received assistance from external aid agencies since 1991.Nevertheless, coal production fell from 8m tonnes in 1989 to 5.1m tonnes in1996, and the mines are locked in a debt chain with the power stations. Thegovernment plans to begin privatising the coal mines in 1998.

Copper exports remainimportant

The Erdenet Company, which produces copper concentrates and molybdenum,is jointly owned by Mongolian and Russian enterprises. Of its 8,000-strongworkforce, 1,000 are from the Commonwealth of Independent States (CIS), theonly substantial Russian community left in Mongolia. Erdenet and related pro-cessing concerns generate a majority of Mongolia’s export earnings. Russia andKazakhstan are the main customers; others include China and Japan.

Foreign investors havemoved into mining and

mineral processing

Other mining joint ventures in operation include six fluorspar mines atBornuur, worked by Mongolrostsvetmet with Russia, and the Mongol-Russian-American Mardai uranium mine in Dornod aimag. Gold production has risendramatically since 1993 as a result of the government’s gold programme. Thegovernment is confident that mining will solve many of its present economicdifficulties. Hence a new mining law was passed in mid-1997 to simplify the

Mongolia: Mining and semi-processing 79


procedure for mining exploration and to reduce licence fees. (See Referencetable 11 for statistics on minerals production.)

Agriculture and forestry

Privatisation of thecollectives began in 1991—

Privatisation of the negdels (collectives) which reared camels, horses, cattle,sheep and goats began in September 1991. Animals were leased to herdsmen,who were allowed to retain produce in excess of state requirements. Of theremaining negdel assets, about 30% were distributed to the herdsmen and 10%to local officials and workers, and the remaining 60% were formed into limitedcompanies. By the latter part of 1992 most procurement had ceased except formeat, which continued to be rationed. After further reorganisation a number oflarger privatised units were transformed into small co-operatives or companiesbased on family camps or groups of herdsmen who share local resources suchas pastures or water.

—but some herdsmen havereverted to a subsistence

economy

The national herd (comprising camels, horses, cattle, sheep and goats) rose by2.5% to 29.3m by the end of 1996. However, many herdsmen reverted to asubsistence economy, discouraged from selling livestock products by low dom-estic prices. As a result there was a continued slump in many industries basedon rural products. (For data on livestock numbers, see Reference table 13.)

Arable production fails tomeet requirements

The 55 state farms built with Comecon assistance were sold off in 1991 tocreate over 300 small farms. However, arable production fell because farmerswere unable to obtain loans to buy machinery, seeds and fertilisers, and lackedthe necessary management skills to operate the new enterprises. The area ofland under cultivation and yields per hectare decreased from year to year, andneither the declaration of 1993 as the Year of Food nor the 1994 food law hasbeen able to arrest the declines. The Asian Development Bank (ADB) is now inthe process of drawing up a new programme for agriculture with a view toproviding a range of project loans for regional agricultural development, man-agement, and storage and distribution. (See Reference table 12 for crop prod-uction data.)

Construction

Construction isexpanding—

The quality of construction in Mongolia is generally low, and the climatecauses rapid deterioration of buildings. Much work was carried out by Sovietand Mongolian construction teams in the 1970s and 1980s. In the 1990s theSoviet builders departed and the Mongolian teams were split up into smallerconstruction companies. However, the shortage of funds and building materi-als led to high rates of unemployment in the sector, and the many unfinishedand ownerless buildings were rapidly stripped for their materials. The com-mencement of projects financed with foreign aid is now helping to regeneratethe construction industry.

—and there is a shortageof accommodation

Construction of domestic accommodation has long failed to keep pace withthe growth of the urban population. In 1991 Ulaanbaatar City Council

80 Mongolia: Agriculture and forestry


favoured 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 by the withdrawal of Soviettroops and civilians. Former military structures, installations and domesticaccommodation were handed over to the Mongols. The resumption of con-struction activity has enabled some structures to be completed and occupiedfor business and living accommodation.

The external sector

Merchandise trade

Foreign trade, 1996($ m; customs basis)

Merchandise exports fob 422.9

Merchandise imports cif –438.3

Trade balance –15.4Source: State Statistical Office, Mongolian Economy and Society in 1996.

There has been some tradeliberalisation and

diversification—

During the 1970s and 1980s, almost all of Mongolia’s foreign trade was withComecon countries, of which the largest share with the Soviet Union. Thequality of manufactures was low because in the controlled market little incen-tive existed to improve standards, while the terms of trade broadly movedagainst Mongolia, yielding regular trade deficits. (Foreign trade data can befound in Reference table 14.)

There has been some trade liberalisation since the collapse of the Soviet Union.In 1991 the government replaced roubles with hard currency for trading—although a dearth of hard currency in Mongolia and among its traditionaltrading partners led to the continuation of barter agreements. In 1996 Mongoliajoined the World Trade Organisation (WTO), and it has been granted mostfavoured nation (MFN) status by the US. Efforts have been made to attractforeign investment into sectors with promising export potential, such as miner-als. In 1997 the government abolished all customs tariffs and excise tax onimported goods, except for alcohol, tobacco, oil products and motor vehicles.

—but the merchandisetrade balance has

returned to deficit

Mongolia had a merchandise trade surplus in 1993-95, according to IMF fig-ures. However, depressed industrial output and low world prices for the narrowrange of goods Mongolia exports resulted in a return to deficit in 1996. Bothexports and imports fell in the first eight months of 1997. Exports dropped by2.9% year on year, to $266.4m, and imports fell by 2.2%, to $265.4m. The fallin exports was due to a drop in exports of key commodities—copper concen-trates, molybdenum and cashmere. However, sluggish industrial growth de-pressed damned for imports.

Russia is still the mostimportant trading

partner—

Russia is still Mongolia’s biggest trading partner, accounting for 21.6% of ex-ports and 34.2% of imports in 1996 (although this is very much lower than inthe 1980s). Russia’s real share of trade may be even higher, since there is

Mongolia: Merchandise trade 81


considerable traffic across the Russian border. China’s share has risen, to acc-ount for 17.7% of exports and 14.6% of imports in 1996. Other important newtrading partners include Japan (which accounted for 17.5% of Mongolia’s im-ports in 1996), South Korea and the EU. Since 1990 the government has madeconsiderable efforts to encourage trade with new partners. (See Reference table15 for data on main trading partners.)

—and the export baseremains narrow

Part of the reason for the continued importance of trade with Russia is anagreement to exchange copper for oil. In 1996 mining products accounted for60% of exports and textiles for 23.5%. Cashmere is also an important exportcommodity. A temporary ban on the export of the raw product was imposed in1994, but it was lifted in 1996 after pressure from the IMF. Machinery andelectrical equipment and appliances accounted for 22% of imports in 1996,while mineral products accounted for another 20%. Many imports of inputsand equipment were bought with foreign aid.

Trade regulations

Mongolia is a member of the World Trade Organisation (WTO). Tariffs are harmonisedwith the International Convention on the Harmonised Commodity Description andCoding System. There has been some trade liberalisation since 1990. • In 1992 customs duty was levied on both imports and exports at a standard rateof 15%.• In 1994 duty on 33 items of staple foods and manufacturing inputs was reducedfrom 10% to zero. A 100% import duty was imposed on luxury items such asalcohol, and the export of a small number of commodities—including rare speciesand gold—was banned.• Import duty was abolished on all but a few items from May 1st 1997.

Invisibles and the current account

The current-account hasmoved into surplus

The current account was chronically in deficit during the 1980s, owing topersistent imbalances in Mongolia’s trade with the Comecon countries, al-though the latter were willing to provide low-cost financing to fill the gap.Since the reform programme got under way, and after the relationship withComecon broke down in 1990-91, imports fell more quickly than exports, andthe trade account moved into surplus in 1993, taking the current account intosurplus as well and allowing reserves to be rebuilt. However, the balance onincomes and services has remained in deficit. (For IMF balance-of-paymentsdata see Reference table 16.)

Current account, 1995($ m)

Merchandise balance 25.3

Services balance –38.1

Incomes balance –25.4

Current-account balance 38.9Source: IMF, International Financial Statistics.

82 Mongolia: Invisibles and the current account


Capital flows and foreign debt

Japan and the US havebecome significant aid

donors

As Comecon support dissolved, the Mongolian government began activelyseeking other sources of aid. Japan and the US were among the first suchdonors in 1990. For the period 1991-96 approximately $1.2bn of aid, in theform of loans, credit, grants-in-aid and technical assistance, was pledgedthrough donor conferences called at the initiative of the UN DevelopmentProgramme (UNDP), the Japanese government and the World Bank. Progresshas not always been smooth, however; in August 1992 the IMF briefly sus-pended its payments on the grounds that the Mongolian government had notfully complied with its agreement to remove price and income controls. In thefirst two years emergency aid predominated, giving way to more project aid forinfrastructure renovation and development, and short- and medium-term de-velopment in 1993-97. (See Reference table 17 for a breakdown of externaldebt; Reference table 18 for net offcial development assistance.)

More pledges at the 1997donor conference

A sixth meeting of the Mongolian Donor Group met in Tokyo on October 7th1997. Like its predecessors, it was hosted by the Japanese government and theWorld Bank. Six multilateral and over 20 bilateral donors attended. The partici-pants pledged $256m for 1998, 70% in the form of long-term soft loans and30% as grant aid. The total pledged was $40m more than had been expectedand in excess of the $212m pledged in 1996.

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. The 1993 law on foreigninvestment is intended to promote heavy industry and exports. It offers gener-ous tax concessions to projects concerned with fuel and energy, and miningand mineral processing; compensation if the government should confiscateland leased to foreign investors before an agreement expires; and additionalconcessions to firms exporting more than 50% of their products. To date, mostforeign joint ventures are small companies manufacturing garments and foodproducts, although the privatisation programme may attract larger investors.

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.

Mongolia: Capital flows and foreign debt 83


Total reserves (excluding gold) reached $16.3m at the end of 1992, as the tradedeficit sank. They rose steadily in 1993-95. In 1996 foreign-exchange reservesdipped to $107m, but gold purchases boosted the overall reserves level to$161m. (See Reference table 19 for foreign-reserves data.)

The 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-commercialrates were unified at Tg40:$1, and in May 1993 it was allowed to float andsettled at around Tg395:$1. 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. At thebeginning of January 1996 the official rate was Tg460:$1. The currency hadfallen to Tg693.15:$1 by the end of December 1996, and fell to Tg798.8:$1 inthe second quarter of 1997. The drop in the trade surplus in the first eightmonths of the year is likely to have been partly responsible. However, by late1997 the togrog had strengthened slightly, benefiting from increased goldpurchases. (See Reference table 20.)

84 Mongolia: Foreign reserves and the exchange rate


Appendices

Sources of information

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

State Statistical Office of Mongolia, Mongolian Economy and Society in 1996,Ulaanbaatar, 1997

International statisticalsources

IMF, International Financial Statistics, monthly

World Bank, Global Development Finance, 1996

World Bank, World Development Report (annual)

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

Ole Bruun and Ole Odgaard, Mongolia in Transition: Old Patterns, New Challenges, Curzon, Richmond, Surrey, 1996

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, DC, 1992

Mongolia: Sources of information 85


Reference tables

Reference table 1

Government finances(Tg m)

1992 1993 1994 1995 1996

Total revenue 11,916 54,843 86,131 144,623 159,154 Tax revenue 10,231 49,810 67,596 105,510 128,156 Income tax & capital gains tax 5,475 28,440 32,041 48,537 49,745 Social-security contributions – – 6,419 15,764 22,687 Taxes on property – 6 42 54 45 Domestic taxes on goods & services 3,121 14,140 19,529 28,107 36,257 Taxes on international trade & transactions 1,449 6,579 7,541 9,572 13,905 Other taxes 186 645 2,025 3,475 5,519 Non-tax revenue 1,059 2,006 14,598 30,174 24,647 Capital revenue 12 – 672 3,855 2,020 Grants 615 3,027 3,265 5,085 4,329

Total expenditure n/a 61,662 101,326 149,350 174,193 Goods & services n/a 28,860 53,675 74,144 92,351 of which: wages & salaries n/a 8,613 16,109 26,758 32,814 employer contributions n/a 874 2,395 n/a 5,919 Interest payments n/a 2,063 1,705 1,798 2,190 Transfers & subsidies n/a 10,631 19,296 25,565 33,613 Capital expenditure n/a 8,270 10,551 26,659 26,007 Foreign amortisation n/a 4,435 5,223 17,197 12,632 Lending minus repayments n/a 7,404 10,877 3,986 7,400Source: National Statistical Office, Mongolian Economy and Society in 1996.

Reference table 2

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

1992 1993 1994 1995 1996

Demand deposits 5,790 9,756 14,104 17,045 20,702

Money (M1) 7,641 18,547 33,050 42,637 60,838

M1 growth (%) 4.1 142.7 78.2 29.0 42.7

Quasi-money 5,412 24,216 43,906 59,408 58,757

Money (M2) 13,053 42,763 76,956 102,045 119,595

M2 growth (%) 31.6 227.6 80.0 32.6 17.2

Domestic credit 20,757 31,535 56,446 41,730 93,206Source: IMF, International Financial Statistics.

Reference table 3

Gross domestic product(Tg m unless otherwise indicated)

1992 1993 1994 1995 1996

At current prices 47,298 166,219 283,263 429,207 532,809

Per head (Tg) 21,725 74,830 125,393 187,108 228,605

At constant (1990) prices 8,392 n/a n/a n/a n/a

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

86 Mongolia: Reference tables


Reference table 4

Gross domestic product by sector(% real change)

1992 1993 1994 1995 1996

Agriculture –2.1 –2.7 2.7 4.2 3.8

Industry –9.7 –6.4 1.7 14.8 0.5

Construction –45.5 –16.2 10.5 10.6 5.4

Transport –16.8 –9.5 0.1 –2.1 10.8

Communications & trade –20.6 8.6 –7.8 1.2 10.7

Technical provision –22.7 5.3 0.0 0.1 2.8

Services 3.2 –4.2 4.3 0.5 4.0

Others 17.7 7.2 15.4 2.3 –5.8

GDP –9.5 –3.0 2.3 6.3 2.6Source: State Statistical Office, Mongolian Economy and Society in 1996.

Reference table 5

Gross domestic product by expenditure(% change)

1992 1993 1994 1995 1996

Consumption 76.1 87.6 88.7 78.2 79.9

Gross fixed-capital formation 29.3 27.7 24.8 26.4 22.4

Net exports –4.2 –5.1 –5.6 2.0 –2.2

Statistical discrepancy –1.2 –10.2 –7.9 –6.6 –0.1Source: State Statistical Office, Mongolian Economy and Society in 1996.

Reference table 6

Prices and earnings indices

1992 1993 1994 1995 1996

Consumer prices (Jan 1991=100) 363.7 1,339.8 2,513.2 4,033.3 5,882.3 % change n/a 268.4 87.6 60.5 45.8

Average earnings (1990=100) 348.7 n/a n/a n/a n/a % change 52.3 n/a n/a n/a n/aSource: IMF, International Financial Statistics.

Reference table 7

Population (’000 unless otherwise indicated)

1992 1993 1994 1995 1996

Urbana 1,235.6 1,251.3 1,229.2 1,222.2 1,222.8

Rurala 951.6 963.7 1,020.8 1,057.8 1,114.7

Labour forceb 1,059.9 1,080.9 1,089.3 1,103.1 1,124.3

Total (m)c 2.22 2.35 2.28 2.32 2.35

a January. b Annual average. c Year-end.

Source: State Statistical Office, Mongolian Economy and Society in 1996.

Mongolia: Reference tables 87


Reference table 8

Transport statistics1992 1993 1994 1995 1996

Freight traffic (m tonne-km) 3,321 2,805 2,283 2,437 2,685 Rail 2,756 2,531 2,132 2,280 2,529 Road 559 268 147 153 152 Air 5.4 5.8 4.9 4.5 4.3

Passenger traffic (m passenger-km) 1,957 1,573 1,677 1,424 1,541 Rail 630 583 790 680 733 Road 963 701 568 424 425 Air 364 290 320 320 383Source: State Statistical Office, Mongolian Economy and Society in 1996.

Reference table 9

Gross industrial product by sector(Tg m at current prices; % of total in brackets)

1992 1993 1994 1995 1996

Food 8,104 23,192 30,160 45,686 45,105(24.4) (13.7) (13.0) (14.2) (18.9)

Textiles 3,581 9,183 16,172 33,612 23,069(10.8) (5.4) (7.0) (10.4) (9.6)

Clothing 677 1,444 2,278 3,010 1,970(2.0) (0.9) (1.0) (0.9) (0.8)

Leather, fur & shoes 4,327 7,861 7,552 7,003 3,884(13.1) (4.7) (3.3) (2.2) (1.6)

Wood processing 1,062 2,083 3,156 3,954 2,674(3.2) (1.2) (1.4) (1.2) (1.1)

Construction materials 894 2,169 5,526 8,147 7,482(2.7) (1.3) (2.4) (2.5) (3.1)

Chemical industries 775 6,587 9,234 11,396 26,582(2.3) (3.9) (4.0) (3.5) (11.1)

Non-ferrous metals 5,895 78,723 87,065 142,778 64,477(17.8) (46.6) (37.6) (44.4) (26.9)

Metal industries 402 441 1,950 3,509 2,789(1.2) (0.3) (0.8) (1.1) (1.2)

Energy 4,443 26,050 33,576 42,948 35,580(13.4) (15.4) (14.5) (13.4) (14.9)

Fuel 1,304 9,425 12,607 13,761 16,543(3.9) (5.6) (5.4) (4.3) (6.9)

Total incl others 33,157 168,835 231,548 321,660 239,267(100.0) (100.0) (100.0) (100.0) (100.0)

Source: State Statistical Office, Mongolian Economy and Society in 1996.



Reference table 10

Output of selected industrial products

1992 1993 1994 1995 1996

Meat excl pork (’000 tonnes) 25.1 17.3 11.3 11.3 8.5

Sausage (tonnes) 3,360 1,245 1,065 639 674

Flour (’000 tonnes) 182 176 127 159 92

Bread (’000 tonnes) 61 46 34 37 30

Milk & milk products (m litres) 27.7 13.0 4.9 1.8 1.7

Alcohol (’000 litres) 6,770 5,251 3,626 3,663 3,584

Carpets (’000 sq metres) 1,037 1,000 682 596 666

Cashmere (tonnes) 98 122 232 421 517

Camel-wool blankets (’000 metres) 90.6 48.7 24.1 19.4 31.4

Scoured wool (’000 tonnes) 7.1 3.5 2.1 1.2 0.8

Leather footwear (’000 pairs) 2,245 1,031 407 246 87

Ceramic goods (’000) 3,337 1,790 1,582 689 151

Cement (’000 tonnes) 133 82 86 109 106

Doors & windows (’000 sq metres) 15.8 1.6 8.1 7.4 3.4

Electricity (m kwh) 2,929 2,132 2,123 2,053 2,047Source: State Statistical Office, Mongolian Economy and Society in 1996.

Reference table 11

Minerals production(’000 tonnes unless otherwise indicated)

1992 1993 1994 1995 1996

Coal 6,247 5,609 5,012 4,871 5,111

Copper 300 334 343 346 352

Molybdenum 3.5 4.4 4.4 3.9 4.7

Gold (kg) 624.5 n/a 1,790 4,504 5,242

Fluorspar 662 537 383 527 565Sources: National Statistical Office; State Statistical Office, Mongolian Economy and Society in 1996.

Reference table 12

Crop production(’000 tonnes)

1992 1993 1994 1995 1996

Cereals 494 480 331 261 220 of which: wheat 453 450 322 257 215

Potatoes 79 60 54 52 46

Vegetables 16 23 23 27 24

Fodder crops 138 112 29 19 19Source: State Statistical Office, Mongolian Economy and Society in 1996.



Reference table 13

Livestock numbers(’000 head)

1992 1993 1994 1995 1996

Camels 415 368 366 368 358

Horses 2,198 2,190 2,408 2,648 2,771

Cattle 2,819 2,731 3,005 3,317 3,476

Sheep 14,657 13,779 13,789 13,719 13,561

Goats 5,602 6,107 7,241 8,521 9,135

Total 25,694 25,174 26,808 28,572 29,300Sources: State Statistical Office, Mongolian Economy and Society in 1996; press reports.

Reference table 14

Foreign trade, national estimates($ m)

1992 1993 1994 1995 1996

Merchandise exports 388.4 382.6 356.1 473.3 422.9

Merchandise imports –418.3 –379.0 –258.4 –415.3 –438.3

Trade balance –29.9 3.6 97.7 58.0 –15.4Source: State Statistical Office, Mongolian Economy and Society in 1996.

Reference table 15

Main trading partners, 1996(%)

Exports to: % of total Imports from: % of total

Russia 20.6 Russia 34.2

China 17.7 Japan 17.5

Kazakhstan 12.8 China 14.6

South Korea 8.0 Germany 4.7Source: IMF, Direction of Trade Statistics.



Reference table 16

Balance of payments, IMF estimates($ m)

1992 1993 1994 1995

Goods: exports 355.8 365.8 367.0 451.0

Goods: imports –384.9 –344.5 –333.3 425.7

Trade balance –29.1 21.3 33.7 25.3

Services: credit 34.8 26.0 45.4 57.3

Services: debit –69.7 –66.9 –91.2 –95.4

Income: credit 0.2 0.8 3.2 3.0

Income: debit –27.1 –21.0 –22.5 –28.4

Current transfers: credit 38.7 66.7 77.8 77.1

Current transfers: debit –3.5 4.2 0.0 0.0

Current-account balance –55.7 31.1 46.4 38.9

Direct investment abroad 0.0 0.0 0.0 0.0

Direct investment in Mongolia 2.0 7.7 6.9 9.8

Portfolio investment assets 0.0 0.0 0.0 0.0

Portfolio investment liabilities 0.0 0.0 0.0 0.0

Other investment assets –64.0 –35.4 –51.0 –49.2

Other investment liabilities 18.0 15.9 5.1 22.5

Financial balance –44.0 –11.8 –39.0 –16.9

Capital account nie credit 0.0 0.0 0.0 0.0

Capital account nie debit 0.0 0.0 0.0 0.0

Capital-account nie balance 0.0 0.0 0.0 0.0

Errors & omissions 17.4 –4.8 –1.0 10.1

Overall balance –82.3 14.5 6.4 32.1

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

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



Reference table 17

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

1992 1993 1994 1995

Total external debt 350.2 373.6 447.2 512.4 Long-term debt 272.2 328.3 386.5 451.7 Short-term debt 59.2 13.7 5.5 13.7 of which: interest arrears on long-term debt 1.7 1.6 2.5 2.5 Use of IMF credit 18.9 31.6 55.3 47.0

Public & publicly guaranteed long-term debt 272.2 328.3 386.5 451.7 Official creditors 163.0 225.0 297.3 373.7 Multilateral 56.4 71.5 113.1 169.9 Bilateral 106.6 153.5 184.2 203.9 Private creditors 109.2 103.3 89.2 78.0 of which: banks 19.7 19.6 19.6 14.6 bonds 0.0 0.0 0.0 0.0

Total debt service paid 67.6 19.9 38.7 46.7 Principal 56.1 10.3 29.2 27.2 Interest 11.5 9.6 9.5 9.6 of which: short-term debt 0.7 2.3 0.5 0.4

Ratios (%)Total external debt/GNP 47.7 60.2 67.1 61.5Debt-service ratio, paida 17.3 5.1 9.3 9.1Short-term debt/total external debt 16.9 3.7 1.2 2.7Concessional long-term debt/ total long-term debt 42.9 52.6 58.3 67.4

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, Global Financial Statistics.

Reference table 18

Net official development assistance($ m)

1991 1992 1993 1994 1995

Bilateral 59.5 67.5 81.9 108.1 126.9 of which: Japan 48.7 43.7 57.5 71.1 99.9 Germany 6.1 17.5 10.9 11.0 11.8

Multilateral 10.0 55.4 44.1 76.0 80.9 of which: ADB 1.1 22.0 16.0 26.7 55.8 IDA 0.0 28.0 3.4 17.4 8.4 IMF 0.0 0.0 13.0 21.2 0.0

Total 69.5 122.9 126.0 184.1 207.8Source: OECD Development Assistance Committee, Geographical Distribution of Financial Flows to Aid Recipients.



Reference table 19

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

1992 1993 1994 1995 1996

Foreign exchange 16.33 59.70 78.49 114.50 107.00

SDRs 0.01 0.02 2.89 2.52 0.41

Reserve position in the IMF 0.01 0.01 0.01 0.01 0.01

Total reserves excl gold 16.35 59.74 81.38 117.02 107.41

Gold (national valuation) 24.2 5.31 11.00 34.50 53.60

Total reserves incl gold 40.55 65.05 92.39 151.53 161.01

Memorandum itemGold (m fine troy oz) 0.02 0.02 0.03 0.10 0.15Source: IMF, International Financial Statistics.

Reference table 20

Exchange ratesa

(Tg:$)

1992 1993 1994 1995 1996

End-period 105.07 396.51 414.09 473.62 693.51

Period average 42.56 n/a 412.72 448.61 548.40

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


Editors:All queries:

Ken Davies; Lucy ElkinTel: (44.171) 830 1007 Fax: (44.171) 830 1023



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