Back Matter

Back Matter

Author(s):
Michael Bell, Kalpana Kochhar, and Hoe Khor
Published Date:
June 1993
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    Appendix I Synopsis of Reform from 1978
    1978–831984–881989–PresentContinuing and Possible Future Action
    1. External Sector
    Exchange System
    Until 1981, several exchange rates were used for trade transactions between foreign trade corporations (FTCs) and domestic enterprises, depending on item traded.

    In January 1981, a single exchange rate was established for internal settlement of trade transactions (more depreciated than official rate).
    In 1984, exchange rate was unified.

    Dual exchange system reintroduced in 1986: official rate with de facto peg to U.S. dollar;

    more flexible rate determined on foreign exchange adjustment centers (FEACs) at which retention quotas are traded;

    FEAC premium was 53 percent at end-1987 and 80 percent at end-1988.
    Official rate devalued in December 1989 (21 percent) and in November 1990 (9 percent); from April 1991, more frequent small adjustments.

    By mid-1993 the real effective exchange rate (official) was 70 percent more depreciated than in 1980.

    FEAC premium 17 percent at end-1989, falling gradually to 8 percent at end-1991. Subsequently, premium increased to about 80 percent in 1993 (reflecting market forces).
    Eventual unification of the exchange rates. No timetable specified.
    Much experimentation with foreign exchange sharing. In 1984 arrangements between local and central governments were formalized. In 1985, some enterprises were given the right to retain a portion of foreign earnings.Further evolution of complex quota retention system based on location by province and by priority industry. Access to FEACs: initially restricted to foreign-funded enterprises, but in 1988 access was extended to all domestic enterprises with foreign earnings or retention quotas.System simplified in February 1991, with uniform retention except for mechanical and electrical products. Access gradually extended; by 1990 enterprises could acquire foreign currency for debt service. Individuals allowed to buy and sell at FEAC rates in 1991. Computerized trading introduced in national foreign exchange swap center in Beijing.Retention and trading of actual foreign exchange to be considered. No timetable specified. Progressive extension of access to the FEACs and integration of trading in all FEACs.
    Trade System
    Foreign trade originally conducted by 12 FTCs, each enjoying monopoly in a particular area, within mandatory trade plan. This system gradually replaced by decentralization, and diminishing role for trade plan. Experimentation with responsibility system for FTCs’ began.

    Subsidies on imports and exports.
    By mid-1 980s foreign trade largely conducted by about 700 FTCs mostly on an agency basis (FTC receives a fee for trading on behalf of domestic enterprises). In 1988, local branches of FTCs became independent and new ones established, bringing total number of FTCs to about 5,000.Export subsidies abolished in 1991. Rationalization of FTCs begun in 1989 reduces number to about 4,000. By end-1991, over 400 production enterprises could trade directly. Responsibility system extended to all FTCs in 1991.
    Trade licensing: both imports and exports covered by system introduced in 1980.Number of licensed imports increased from 45 to 53 in 1988.Exports subject to license steadily increased to 234 items in 1991. Proportion of trade covered by license (1991): exports—55 percent; imports—40 percent.Plans announced in 1992 to end two-thirds of import restrictions by 1995, with 16 products removed in 1993.
    Import tariffs progressively introduced.Exports: number of licensed items reduced from 221 to 159 in 1988, Import tariffs range from 3–150 percent. Periodic adjustments to contain import demand.Tariffs on 40 items reduced in 1991. Harmonized system effective 1992, with reduced duties on 225 items.
    II. Agriculture
    Production
    Experiments with responsibility system began in 1978. Household responsibility system (HRS) emerges as dominant form by 1983.Mandatory procurement replaced in 1985 by contracts with households at negotiated prices.Two-tier management system evolves in many localities: (1) continued HRS framework; and (2) centralized organizations (to provide better services). Some land reverts to the management of the collectives, which lease it out through bidding to maximize efficiency of utilization.Further evolution with goal of maximizing efficiency of land use.
    Prices and Subsidies
    Procurement takes place in three tiers; contract (quota), negotiated, and market.By 1987, market prices dominant at retail level except for some goods such as grain and oil supplied under urban ration.Support-pricing machinery invoked to guarantee farm incomes in light of large grain harvest. Other prices increased (e.g., cotton).
    Some agricultural inputs still supplied at plan or contract prices.

    Market prices apply to growing number of retail items; procurement prices increased; subsidies rise.
    Subsidies on essential foodstuffs continue to increase sharply.Large adjustment in urban prices of rationed goods (grain and oil) in May 1991 and April 1992. Rationing abandoned in 1993. Gradual strengthening of wholesale markets at national, provincial, and local levels. Grain reserves established to preserve price stability.National futures trading to be encouraged, to stimulate farmers’ supply direct to the market. Further reserves being established for price stability (e.g., in cotton, oils, sugar, wool, rubber).
    Food Security
    Private interprovincial trade in grain permitted; diminishing role for production targeting.To counteract stagnating grain output, some intervention increased: more procurement quotas, inputs tied to specified output, and state monopoly on foreign trade in grain. Grain imports required: national policy to achieve complete autarky.Some increase in interprovincial barriers during rectification program. From late 1991 these measures reversed for some agricultural products. Strong production increases in 1990–91 (partly owing to good weather). (Record crop in 1990 of 446 million tons.)Continued pursuit of complete autarky in grain production. Target of 500 million tons by 2000.
    III. Pricing Policy
    Enterprise Pricing
    Selected SOEs sell a portion of output at negotiated prices on experimental basis.Dual-track pricing introduced: (1) fixed prices corresponding to plan quotas; (2) guided prices in contracts with state purchasing agencies; (3) market prices for other sales.Dual-track prices of a large number of commodities were unified, and energy prices adjusted repeatedly.

    Ratio of producer goods under fixed/guided/market pricing is down to 45:19:36 in 1991,
    Gradual phasing out of the remaining dual-track prices. Timetable not precisely specified.
    Retail and Other Pricing
    Retail prices of most important consumer goods remain under state control.

    Some adjustments in administered prices.
    Dual-track pricing introduced for many goods. In practice, three tiers of price control exist: state-fixed prices; state-guided prices; market prices (in subtiers): prior approval, guided prices, unrestricted.

    By 1988, the three tiers are roughly in the ratio 30:25:45. Greater market pricing paralleled by the rise of individual and collective retailing (from 10 percent in 1978 to 53 percent in 1987). Efficiency undermined by interprovincial barriers to trade.
    Under rectification program price control tightened in 1988–89: (1) fixed and guided prices subject to central (State Council) approval; (2) 50 market prices brought under control.

    Relaxation in 1990 and 1991. Prices under State Council reduced to 5. Direct control on market prices eliminated by 1991. “Indirect” measures used to realize price targets: mainly management of inventories of essential commodities.

    Large increase in ration prices of grain and edible oil in May 1991 and April 1992, and adjustments to administered prices of goods and services. Rationing abandoned in 1993.

    Ratio of fixed/guided/market prices down to 28:17:53 by 1991. By early 1993, 90 percent of prices “market-determined.” Opening of national metals exchange and wholesale market for nonferrous metals.
    Gradual increase in proportion of commodities sold at market prices.

    Publication of “price law” to prevent speculation in a more market-oriented environment.





    Establishment of wholesale markets, including forward trading.
    IV. Enterprises
    Ownership Issues
    Widespread state ownership, particularly large and medium-sized enterprises. Variously answerable to central, provincial, municipal, or county authorities. Collectives and rural enterprises answer to their local government entity. Private enterprises are small and mainly in retail sector.

    Some joint-stock ownership mainly by one enterprise in another, from 1986. Foreign investment through fully owned enterprises and joint ventures.
    Securities exchanges open in Shanghai (1990) and Shenzhen (1991).

    By end 1991, 6,000 share-issuing companies exist nationwide, of which 69 are listed: 11 are publicly quoted in Shanghai, 6 in Shenzhen. From 1992. foreigners can purchase shares in Chinese enterprises.
    More widespread access to securities exchanges to be encouraged.



    Conglomerates of SOEs to be established to allow greater autonomy and efficiency. Experiments are under way in 100 of the 3,000 existing groups. Experiments with joint-stock companies and other forms of shareholding are under way.
    State-Owned Enterprises (SOEs)
    Experiments with income taxation to replace direct profit transfers to the budget.Contract responsibility system became formalized for large and medium-sized SOEs. These specify performance targets, supply quotas, and tax obligations.

    By 1988, 90 percent of SOEs covered by contracts. First generation of contracts cover three–five years from 1988.
    Second generation of contracts similar to first but shorter periods (one–two years) because of financial problems.

    Some experiments on new forms of contracting and taxation (see also item VII). Experiment involves 2,000 enterprises in 35 locations.
    Twenty measures to revitalize SOEs announced in 1991 being implemented. Increased autonomy of enterprise management, under the new Enterprise Law.
    Mandatory planning: proportion of output subject to quota declines substantially from the early 1980s. By 1987 about one-third of goods (based on retail sales value) sold under the plan, down from two-thirds in 1980. But many intermediate goods remained largely under direct control, most steel, coal, and almost all petroleum.“Mutual pledge” system established to protect key SOEs from effects of rectification program: in late 1989, 234 key enterprises received preferences in return for guaranteed sales to the state.Extent of mandatory planning to be reduced.
    Investment: Experimental approach to give SOEs greater autonomy in investment decisions, in line with greater profit retention.

    Market sanctions: enterprises largely immune from closure.
    Responsibility for financing investment largely shifted from the Government to the SOEs (in 1978, 60 percent government financed, in 1987, 20 percent). SOEs allowed access to bank credit and retained earnings. A bankruptcy law formulated in 1986.In 1989, under the rectification program, many projects were cancelled.

    Restrictions on investment eased during 1990 and 1991.

    Bankruptcy law became effective in 1988, but remained almost unused. After 1991, 3,000 inefficient enterprises were merged with others.




    Increases planned in key state construction projects. Intention to apply bankruptcy law more widely.
    Township and Village Enterprises (TVEs)
    Existing rural enterprises benefited from increased investment associated with rising agricultural income and availability of surplus labor.These enterprises designated as TVEs in 1984 being given concessional tax treatment and favorable access to credit.Credit restrictions under rectification program result in closures, a sharp drop in growth rate, and loss of employment. Credit restrictions eased in second half of 1990. TVE growth accelerates sharply.Further development of TVEs.
    Retail Trade
    Private traders began to be encouraged in small shops and restaurants.In 1984–85 about three-fourths of small commercial SOEs were contracted or leased to collectives or individuals.Some controls were reintroduced under the rectification program.Privately owned tertiary sector activities to be strongly supported.
    V. Wages and Employment
    Employment guaranteed in state-owned enterprises and government units.

    In 1978 bonuses reintroduced, capped at three months’ salary. Generally distributed on egalitarian basis, i.e., not based on individual performance.

    Wages thus include basic wage (centrally determined); component based on level and seniority in the enterprise; and bonuses determined by enterprises or at local level.

    Wages supplemented by welfare provision: food and rent subsidies; income in kind; other services (e.g., medical and education through the workplace).
    Since 1986, recruits to SOEs can be hired under labor contacts (1–10 years’ duration). Many exceptions. Cap on bonuses replaced by tax on excessive bonuses.In 1991, policy announced for next five years, under which uniform wage increases would be phased out. Government would control only the amount of the increase in the total wage bill.Cast-iron guarantees of jobs to be phased out by the year 2000. Nominal wages to be increased as various reforms implemented, including phasing out of food and rent subsidies. Eventual complete monetization of wages.
    VI. Housing
    Pre-1978 system basically unchanged. Housing supplied by municipalities or by work units, involving subeconomic pricing (rent covers one-fifth of operating costs); costs of subsidies and investment borne by enterprises and Government; nonmarket allocation of housing; no housing finance system.Experimental steps to raise rents (and wage supplements) in a few cities began in 1985.Focus shifted in 1989 to sale of publicly owned housing, but at steeply discounted prices. Urban rents raised 200-300 percent in early 1992.

    Experimental housing reform began in Shanghai in 1991. Major features: housing bonds issued to renters; raising rents to cover costs; continued link between workers’ housing and their work units.
    Over next ten years, gradual reform involving raising rents to cover costs; selling public housing to state employees (state maintains some equity in each house); promotion of financing schemes (including bonds, housing funds, and cooperatives).
    VII. Social Security
    Work units (enterprises and government agencies) responsible for most social security: pensions; job security (a proxy for unemployment benefits); welfare, often including medical and education.

    Coverage not universal: excludes individuals, contract workers, employees of TVEs, and other rural enterprises.
    Experimentation with pension pooling in a few regions began in 1986.By early 1990, pension pooling among enterprises in 2,200 cities had begun.

    Contributory pensions are under experimentation in five coastal cities.

    Experimental unemployment schemes under way in some localities to facilitate implementation of bankruptcy law.
    In the medium term: develop a national pension system, particularly for those not now covered; unemployment insurance to have wider coverage; refine medical care arrangements; comprehensive social security schemes in special economic zones.
    VIII. Fiscal Policy
    Resource Shoring (Center/Provincial Relations)
    Various forms of revenue sharing: local governments had responsibility for negotiating management contracts, including tax/profit arrangements with enterprises. Structure favored granting of tax incentives.Re venue-sharing contracts between central government and provinces started in 1987 or 1988 for three–four year periods. Typically, these involve an agreed base figure and annual rate of increase.New contracts due to start in 1991 under negotiation. Some experiments with clearer demarcation of center/local resources began in nine provinces in 1992.Clearer demarcation of center-local resource assignment to become universal.

    Strengthening central control over fiscal policy.
    Budget System/Presentation
    Consolidated budget; financing flows treated as revenue and expenditure items.No change in presentation. Rapid growth of extrabudgetary funds (includes enterprises’ retained earnings and government units).Two-tier system announced in 1991 separating current and capital accounts.Eventual presentation of budget according to international conventions.
    Taxation
    Enterprise taxation
    In 1983, taxation replaces profit transfers from enterprises to Government. Enterprises assume greater responsibility for own funding, own investment.From 1987, contract responsibility system applied to most medium-sized and large SOEs.

    Nominal tax payments specified (undermines 55 percent tax rate). Loan repayments are tax deductible. Adjustment tax and other levies imposed on above-contract profits.
    New generation of contracts resembles previous generation, but many enterprises seek shorter contracts. Experiments with new system to separate profit and tax: lower tax rates; loan repayments not deductible; contracting on after-tax profits.

    In 1989, extrabudgetary funds of enterprises subjected to 10 percent levy to preserve government revenue.
    Adoption of new tax system. Tax rate for large and medium-sized enterprises would be unified; contracting on after-tax profits; loan amortization nondeductible.
    Foreign-funded enterprises
    Wholly owned foreign enterprises taxed at 20–40 percent. Joint ventures taxed at 30 percent. Various incentives (tax holidays, etc.) for new enterprises.No significant changes. But local governments in SEZs and open coastal cities have considerable discretion in granting additional concessions.Two tax scales merged in 1991, effective 1992, with tax rate unified at 33 percent.Unification with domestic enterprise taxation.
    Taxes on goods and services
    Through 1983, indirect taxation of enterprises was conducted through a turnover tax, the consolidated industrial and commercial tax, applied to industrial production, some agricultural sales, imports, retailing, transport, communications, and services.In 1984 three separate indirect taxes were introduced. Tax rates often set in association with prices to equalize profits, resulting in a wide range of tax rates as follows (1988): value-added taxes—12 rates; product taxes—22 rates; business taxes—4 rates.Business tax rate change proposed in 1990 and 1991 for revenue purposes; not implemented. VAT extended to petrochemicals.VAT to be extended to all industries while simplifying and rationalizing the rate structure. Eventual uniform rate after price reform.
    Taxes on construction
    Tax (at 10 percent) on construction undertaken outside the state investment budget.In 1991, an investment orientation tax introduced. Variable rates reflect investment priorities.
    IX. Financial Sector
    Banking System
    Monobank system persists. Specialized banks continue to operate in sharply delineated fields.In 1984, commercial banking activities removed from People’s Bank of China, which becomes a central bank. Specialized banks are permitted to engage in commercial banking. In 1986, banks established at provincial level.

    In 1987, two “universal” banks permitted to compete with existing banks in all forms of business. Networks of urban and rural credit cooperatives supervised by the industrial and agricultural banks. From 1986, all banks allowed to engage in foreign transactions.
    Through 1988, a gradual erosion of the sharp demarcation among banks that began to transact outside their own specialization; enterprises allowed to work with more than one bank. Limited competition in interest rates.

    Under rectification program, specialization reasserted, and competition in interest rates reduced.

    Competition continued to take the form of the provision of services. Commercial banks expanded their foreign operations.
    Strengthening of macroeconomic and supervisory role of the People’s Bank as central bank. Reform of payments and clearing systems.

    Banking laws to be enacted.
    Nonbanking Institutions
    Trust and investment companies established for loan and equity financing of domestic enterprises; international companies to raise foreign funds.

    Insurance companies, leasing companies, and financial companies set up, many at provincial level or as part of enterprise groups. Rapid growth of TICs led to restriction of activities in 1988 to permit detailed examination of their operations.
    Activities resumed in 1989 with tighter supervision from People’s Bank.

    375 TICs in operation by end-1991, of which 120 authorized to conduct foreign transactions.
    Financial Markets
    From 1981 government securities issued through compulsory sales to enterprises and individuals (the former at low interest rates).

    Enterprises were permitted to issue bonds from 1985. High yields, especially in rural areas.

    Private enterprises permitted to issue shares from 1982. Shares do not convey ownership. Restrictions imposed in 1987.
    Some SOEs issue shares from 1985, which do not convey ownership rights. Some restrictions imposed in 1987. Earmarked bonds for key construction projects began in 1987.Restrictions placed on interest rates in interbank market (a margin around the People’s Bank overnight rate). Secondary markets for treasury bonds opened in major cities. After slow start, secondary market develops rapidly (computerized quotation and trading system established in 1990). Experiments with voluntary placement of government bonds begun in 1991.

    Securities markets open in Shanghai (December 1990) and Shenzhen (May 1991) (see item III).

    Experiments with auctioning land use rights accelerated in 1992.
    Continue extension of voluntary government bond placement. Development of interbank and money markets, and of new financial instruments.

    More extensive listing of enterprises on the securities markets and opening markets in other cities.

    Securities Law to be enacted.
    Monetary Policy
    Monetary policy centers on the credit plan, which is the financial counterpart of the physical plan.Credit plan remains central instrument of monetary policy.

    De facto decentralization since provincial branches of People’s Bank often acquiesce to credit priorities of the provinces.

    Reserve requirements introduced at high levels when the new banks were established in 1984. In 1985 they were lowered and unified.
    Re centralization of decision making to the headquarters of People’s Bank. Credit plan abruptly tightened in 1988 in the face of inflation, then relaxed to promote growth and protect SOEs.

    Some decentralization permitted to provincial branches in adjusting the allocation of plan during 1991.
    Introduction of open market operations initially through issuance of short-term bills.

    Gradual increase in autonomy of banks.
    Interest rates established by the People’s Bank.Banks permitted to adjust lending and deposit rates within margins specified by People’s Bank.Under rectification program, reserve requirements raised; then “excess reserve” requirements introduced in light of high liquidity and inflation threat.

    Under rectification program, interest rates raised sharply and interest rate competition largely eliminated.

    Through 1990 and 1991, interest rates were reduced in three steps. Interest rates increased in 1993.






    Gradual increase in reliance on interest rates, determined through market forces.
    Appendix II Performance of the Provinces: A Statistical Analysis

    Some Broad Hypotheses

    This appendix presents some statistical evidence bearing on a set of economic hypotheses relating to economic growth across a sample of 28 provinces, autonomous regions, and municipalities. Among the hypotheses investigated are

    • the share of state ownership in total production is negatively related to growth performance;

    • the degree of government intervention, such as control through production planning, price setting, and sales restrictions, is negatively correlated with provinces’ performance;

    • the central-provincial fiscal relation plays an important role: provinces with revenue-sharing schedules that mandate only small remittances to the center show stronger growth;

    • the degree of openness of a provincial economy to international trade will positively affect its growth;

    • foreign capital utilization will have a positive effect on growth;

    • a “catch-up” hypothesis: economies with lower initial levels of economic development should grow faster than those with a higher initial level.

    The hypotheses that are chosen all yield important policy implications for regional economic growth. It is also important that these hypotheses are testable with available data, but because of data limitations, the exercise is not exhaustive. The regression equation is estimated as follows (t-ratios are in parentheses):

    In the regression, the real annual average growth rate of per capita industrial output value during 1981–90 is chosen as the dependent variable, GR.110 ONS is the share of state-owned industrial output in total industrial output, LTI is the share of light industry’s output in total industrial output, SRR is the approximated share of revenue submitted to the center, FCR is the ratio of foreign capital actually utilized to total fixed assets investment, and PNI is the per capita income level in the initial year, 1981, Among the above variables, ONS and LTI are constructed by averaging 1980/81 and 1990 data; SRR and FCR are 1990 data because 1981 data are not available.

    The estimated results confirm a number of qualitative observations made in the main text. The model yielded an R2 of 0.86, implying a surprisingly high explanatory power compared with many cross-section studies on growth. All the explanatory variables have the expected signs and are all statistically significant except FCR (as measured by t-ratios).

    The negative coefficient of ONS verifies the hypothesis that higher shares of nonstate ownership promote growth. Although the coefficient of LTI is positive, it is only marginally significant—a result that could be improved by reducing the number of explanatory variables—since there is some evidence of collinearity between ONS and LTI— the correlation coefficient between the two is 0.55. This interpretation is consistent with the fact that slower-growing heavy industries (such as steel, concrete, coal mining, and electricity) are subject to tighter control of production, price setting, and investment approval than light industries. The hypothesis that provinces with favorable revenue-sharing schedules have a stronger potential for growth is also supported by the results, with the coefficient of SRR being significantly negative.

    The hypothesized positive effect of high “openness” on growth was not tested in the final form of the equation, because if both the export/GNP ratio and FCR are included in this model, a problem of multicollinearity would arise, leading to insignificant results for both variables. With a correlation coefficient between the two variables as high as 0.77, only one of the two variables is needed, and, statistically, the fourth and fifth hypotheses should be viewed as one. In a number of trials, FCR provided the better fit.

    In the full model, the coefficient on FCR had the correct sign but was not significant. To test whether this stemmed from the number of explanatory variables employed, a simpler specification yielded the following result:

    The coefficient on FCR became significant at the 1 percent confidence level. This result, to some extent, confirms the efficacy of China’s preferential policy for foreign investment and also supports extending the open-door policy to inland provinces.

    The final coefficient, for the initial level of per capita income, PNI, yielded more robust results in a log-linear specification. The coefficient is negative as the “catch-up” theory expected, a result that may arise from the more rigid industrial structures in the higher-income areas and the greater resistance to change in these more economically important centers.

    Impact of Center-Local Fiscal Relations on Guangdong’s Performance

    This section applies the estimated equation of growth determinants (see above) to calculate the effect on growth if Guangdong had been subjected to one of the most unfavorable revenue-sharing regimes—that between Zhejiang and the center.111 From 1983 to 1990, the approximate share of net transfers to the center in Guangdong’s budgetary revenue ranged from 0.037 to –0.150, whereas the share of Zhejiang ranged from 0.457 to 0.215. The differences between Guangdong and Zhejiang in their share of remittances were 0.49 and 0.37 in 1983 and 1990, respectively. Substituting 0.43, an average value of the difference, into the estimated equation (1), it was found that the difference in growth rates arising from the different shares of remittances was 0.59 percentage points. In other words, with Zhejiang’s fiscal regime, Guangdong would have had a growth rate of per capita national income that was 0.59 percentage point lower than the actual during 1981–90.

    However, this is only a static exercise, which assumes fixed revenue-sharing schedules over time. The conclusion drawn from this may overestimate the effect of fiscal relations on growth. By looking at the change in Guangdong and Zhejiang’s share of net transfers to the center, it is clear that although Zhejiang had a higher share of remittance than Guangdong over the whole interval, the share was sharply decreasing for Zhejiang but relatively stable for Guangdong. It suggests that over time there was some leveling out of the benefits arising from differences in fiscal transfers to the center.

    Role of Exports in Guangdong

    To identify the contribution, or relative importance, of the export sector and the nonexport sector to the high GDP growth rate of Guangdong’s economy, the following formula is proposed:

    where NEP is nonexport domestic output value, and EXP is the value of exports. In the empirical analysis, NEP is calculated by subtracting EXP from GDP.

    Consider two periods of production in the economy, t and t+1. Then the growth rate of GDP can be written as

    where αD = NEPt/GDPt the share of nonexport production in total GDP at t, αE = EXPt/GDPt, the share of exports in total GDP at t.

    The first term in equation (4) represents the contribution of growth of nonexport production to total GDP growth. It can be understood hypothetically as the growth rate of the economy in the absence of the export sector. The second term measures the contribution of the growth of the export sector to total GDP growth. Using this formula, we calculate the contribution of the export and nonexport sectors both in Guangdong and China as a whole.

    The results are shown in Table A1. Between 1978 and 1990, the annual average GDP growth rate in Guangdong was 12.4 percent, 3.6 percentage points higher than the national average. The contribution of export growth to total GDP growth in Guangdong is 37.4 percent, significantly higher than the national average of 19.9 percent. As a result, the part of GDP growth induced by domestic demand in Guangdong is 7.76 percent, only moderately higher than the national average of 7.02 percent. Of the 3.64 percentage point difference between Guangdong’s GDP growth and the national GDP growth rate, 2.90 percentage points (or 79.6 percent of the total difference) are explained by the difference in export growth, leaving only 0.74 percentage point (or 20.4 percent of the total difference) to be explained by the difference in nonexport production. This suggests that in the absence of a booming export sector, the actual growth rate in Guangdong would not have been significantly higher than the national average.

    Table A1.Decomposition of GDP Growth into Export and Nonexpert Growth in Guangdong, 1978–90(In percentages, unless otherwise specified)
    GuangdongAll China
    GDPEXPNEPGDPEXPNEP
    Total growth12.420.65.08.817.13.3
    Weight0.1260.8730.0450.955
    Share of contribution37.462.519.980.0
    Contribution to real annual growth4.67.81.77.0
    Sources: China Statistical Yearbook, 1991; and Guangdong Statistical Yearbook, 1990.
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      Tsui KaiYuen, “China’s Regional Inequality, 1952–1985,”Journal of Comparative Economics, Vol. 15 (March1991), pp. 121.

      WeiYuming, “Bringing the Role of the Coastal Cities into Full Display to Promote Economic and Technological Exchange with Foreign Countries,” in Guide to China’s Foreign Economic Relations and Trade: Cities Newly Opened to Foreign Investors, ed. by Policy Research Department, Ministry of Foreign Economic Relations and Trade (Hong Kong: Economic Information Agency, 1985), pp. 21012.

      Wong, Christine P.W., “Central-Local Relations in an Era of Fiscal Decline: The Paradox of Fiscal Decentralization in Post-Mao China,”China Quarterly, No. 128 (December1991), pp. 691715.

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      ZhouZhenping, and OuYang, “Hainan Establish Joint Office to Approve Foreign Invested Projects,” People’s Daily, May30, 1992.

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    Popularly referred to as the “gang of four.”

    Under Mao, the principal contradiction had been defined as the continuing struggle between classes, and hence the main task of the party was to continue the revolutionary struggle.

    The pragmatic approach embodies the principle of “seeking truth from facts” and has been described as “crossing the river by feeling the stones under the feet.”

    This perception of the relation between planning and the market is often described as the “bird in the cage” theory, which was propounded by party veteran Chen Yun. In this metaphor, the market is the bird and the plan is the cage. The cage can be enlarged to give greater freedom to the bird, but without the cage, the bird will fly away—which is analogous to disorder in the market.

    In this view, the relation between the state and the market is captured by the expression “the State controls the market, the market guides the enterprises.” For an elaboration of the theoretical framework, see Zhao Ziyang (1987).

    Collectives are basically communities at the level of the village or township or a neighborhood in an urban area.

    Section III elaborates on enterprise reforms to date.

    The total stock of debt in 1978 is estimated to have been 12 percent of exports (see Cheng (1982)).

    These figures should be treated with some caution as serious conceptual and practical problems exist in measuring savings in China.

    Feltenstein, Lebow, and van Wijnbergen (1990) find evidence for the existence of “forced” savings in China, whereas Qian (1988) concludes that the data do not reject the hypothesis that the high savings rates are the result of structural and behavioral shifts and do not represent involuntary saving.

    The process of opening up is described more fully in Section IV below.

    See Singh (1992) for a more detailed discussion of these problems.

    Investment by SOEs is further subdivided into capital construction—involving the construction of new facilities and the expansion of capacity; technical transformation and updating—aimed at modifying and upgrading existing facilities; and other investment, mainly oil and mineral exploration.

    Generally speaking, large infrastructure projects and major investments in key SOEs are approved and financed by the central government. Smaller infrastructure projects and investments by medium- and small-scale SOEs are authorized by provincial and local authorities. Finally, investments that are outside the plan are largely undertaken by the collective and the township and village enterprise (TVE) sector. The latter are financed mainly from bank loans and the retained earnings of enterprises.

    For more details, see Riskin (1987).

    In 1984, the initial contract period of five years was extended to 15 years for annual crops and to 50 years for tree crops. The transfer of land use rights was legalized in 1988 to encourage private farm investment.

    Another 30 million are reportedly employed by individual and small private businesses. By comparison, employment in the urban state-owned (including the government) and collective units are estimated to be about the same.

    Market prices are not entirely tree of official intervention, since there are three further groups of commodities. There is a small group of perhaps 20–30 items for which producers are obliged to report their intention to increase prices. A second group consists of items for which there is strong seasonal demand, and periodically price caps are imposed. Other commodities are tree of official intervention.

    For instance, in 1990, petroleum, coal, and gas prices were adjusted by 20, 45, and 65 percent, respectively, although they remained far below international levels.

    With the exception of the rectification program, when many controls were recentralized.

    At the same time, it introduced various forms of leasing arrangements for smaller enterprises, and to a very limited degree, the incorporation of joint-stock companies.

    Employment reform in China is often characterized as breaking the three irons, namely, the iron rice bowl (guaranteed employment, housing, and other benefits), the iron chair (job security), and the iron wage (wages that are not related to performance).

    It is estimated that over 400,000 workers have benefited from unemployment relief.

    In the past, this lack of a housing market was a major deterrent to potential migrants into any city. However, the situation has improved in recent years as farmers in the outskirts of the cities have constructed houses for rent to rural migrants.

    Although there are a number of variants, the typical contract between the province and the center is similar to that with the enterprises in the sense that revenue transfers are contracted according to revenue in a base year with annual increments agreed upon ex ante.

    About 5 percent of the total credit quotas of specialized banks are set aside for the provincial branches of the People’s Bank to allocate at their discretion.

    Most of the transactions are between branches of specialized banks and are arranged through a financial intermediary sponsored by the local branch of the People’s Bank.

    These shares did not convey any right of ownership but paid interest and a dividend.

    Under the old central planning system, the SOEs played a key role in extracting surplus from the economy for investment and for financing the budget. With the rapid growth of the nonstate sector, the tax base of the budget has shrunk because the nonstate sector is subject to lower taxes or tax exemptions. For an elaboration of this point, see McKinnon (1992).

    Enterprises with incomes below a certain level are subject to a lower rate of 24 percent, whereas enterprises located in the special economic zones will continue to pay a special rate of 15 percent.

    The authorities do not regard the conversion of state-owned enterprises into shareholding companies as “privatization,” which has the connotation of wholesale conversion of state-owned enterprises into private enterprises. Instead, they see this as a means of raising funds for restructuring and of introducing a more effective management system while retaining a significant ownership share and ultimate control over the companies.

    These are shareholding companies that issue shares to the general public and that may apply for listing on the two stock exchanges. In the restructuring, the proportion of the share belonging to the state, municipality, or township is determined by an appraisal company according to the net value of the asset in the enterprise accruing to the state, municipality, or township.

    These enterprises are mainly concentrated in the transportation and energy sectors.

    In late 1992, a Hong Kong investor paid $3 million to buy a 51 percent share in a state-owned textile factory in Wuhan. The factory was converted into a shareholding company, a new management was introduced, and more than half of the work force of 2,230 was retrenched. Also, a major company was recently established in Hong Kong that has bought into state-owned enterprises in several coastal cities with the aim of restructuring them into profitable enterprises. In Sichuan province, it was reported that 16 small to medium-sized SOEs would be auctioned off to foreign investors in 1993.

    Although the bankruptcy law was enacted in 1986, it was rarely applied in the early years because of strong resistance from the workers and the commitment of the authorities to guaranteed employment. However, in 1992–93, the law has been applied more frequently as the unemployment insurance scheme has developed and the attitude of the public has changed.

    In the rural sector, it is estimated that redundancy may be as high as one-fourth of an estimated labor force of 430 million.

    These policies are described in the Decision on Expediting the Development of the Tertiary Industry published on July 16, 1992.

    In Shanghai, it was reported that 976 SOEs employing 1.34 million workers or 78 percent of the city work force had adopted the labor contract system by end-1992.

    These funds are modeled on the Central Provident Fund of Singapore. In Shanghai, the contributions by both the employers and the employees are set at 5 percent of the wage bill.

    The main laws include (1) the Law on Land Administration enacted in June 1986 and amended in December 1988; (2) Provisional Regulations Concerning Sale and Use of State-Owned Land in Cities and Towns; and (3) Regulations for Implementation of the Land Administration Law promulgated by the State Council in February 1991. The Law on Land Administration states that all land belongs to either the state or the collectives, all land should be registered and recorded by local governments, which shall issue certificates for land use rights, the land use rights are transferable, and a leasehold system of land use rights shall be implemented.

    For transfers of land use rights in the secondary market, a progressive tax is imposed on the appreciation in their value. To prevent speculative transactions, transfers of land use rights are allowed only after 25 percent of the original investment has been fulfilled.

    The three main categories of policy-based lending are financing of state investment projects, credits for grain procurements, and trade credits for mandatory imports,

    An important issue to be dealt with is the restructuring of the balance sheets of the specialized banks to separate out nonper-forming loans that arose from policy-based lending in support of government policies, including those of local governments.

    The term “open economic zones” in this paper covers the many forms of areas and zones that are designed to promote foreign trade and investment in China. They include the special economic zones, open coastal cities, the delta areas, and the development zones opened in many inland and border cities since 1992.

    The guidance plans assign targets to provinces and FTCs for the values of exports and imports of a range of products (in some provinces the guidance was given de facto mandatory status by the local governments). In 1991. the guidance plan accounted for 15 percent and 20 percent of exports and imports, respectively.

    In 1991, licensing covered 55 percent of exports and 40 percent of imports.

    Dunng 1992, lengthy negotiations with the United States culminated in a memorandum of understanding that entailed a substantial liberalization of bilateral trade.

    The most substantial of these was on December 31, 1992, when customs tariffs were reduced by an average of 7.3 percentage points on 3,371 items representing 53 percent of dutiable items.

    One major purpose of the original arrangements was that they provided FFEs with a means to meet a prevailing exchange control requirement that they should maintain a balanced foreign exchange position.

    Since 1987, the exchange rate has been formally classified by the IMF as a more flexible arrangement (other managed float). See the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.

    The term “regional” is used to allude to the several tiers of public ownership and administration other than the central: provincial, municipal, county, township, and village. Most references in this paper relate to policies and developments at the provincial and municipal level.

    One major difference is that enterprises operating in SEZs are not obliged to export all of their output.

    Including the special economic zone of Hainan Island.

    Per capita national income in Guangdong was Y 313 in 1978, almost the country’s average of Y 315, whereas in Fujian it was only Y 233, ranking it twenty-fifth among the 29 provinces.

    Equity joint ventures are limited liability corporations in which Chinese and foreign partners invest and operate jointly, sharing the profits, losses, and risks. Contractual joint ventures may involve the foreign partner providing technology and a capital input, but with a predetermined schedule of return negotiated in advance. The Chinese partner usually provides land, materials, the work force, basic buildings, and services, and so forth.

    Domestic investment from other areas of China has also taken place in the SEZs.

    In certain cases some financing for such investment has come from policy-based lending, supported by credit from the central bank.

    This was the rate applied in Hong Kong at the lime the policy was formulated. It is also applied on domestic enterprises in SEZs. Elsewhere, domestic enterprises are subject to a 55 percent corporate income tax. However, in practice tax paid is based on negotiated tax contracts.

    Under certain conditions, goods manufactured in the SEZs can be sold in other areas of the country provided full payment of import duties and indirect taxes is made. Domestic enterprises operating in the SEZs need government approval to enjoy these advantages.

    However, according to the customs data (which may include exports originating in other parts of China), the value of their exports, including Hainan province, reached $9.6 billion in 1991 or 13.4 percent of China’s total.

    Considerable variation is found in the data derived from various sources on open economic zones. An extended time series of industrial output at constant prices is not available.

    A summary of incentives offered in selected countries appears in Table 11.

    The maximum area of land to be leased for development is 30 square kilometers at a time. The land use rights can be leased out, mortgaged, or used as equity contribution in setting up a joint venture.

    See SRI International Associates Program, China’s Regions Emerge (Beijing, September 1992), p. 13.

    From north to south, Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai. Ningbo. Wenzhou, Fuzhou, Guangzhou, Zhanjian, and Beihai.

    In 1984, this limit was set at $10 million for Dalian and $30 million for Tianjin and Shanghai.

    The statistics also refer to the total exports of each open coastal city, and not to that of the ETDZ, which could have witnessed a considerably higher growth rate.

    Currcntly the market is physically in the older western part of Shanghai, but the intention is to move it to Pudong.

    Enterprises in Hainan do not have to apply for tax exemptions once their projects have been approved, whereas in Pudong they must apply separately for tax-exempt status.

    Official estimates of GNP point to growth of about 14 percent in 1991 compared with 7.7 percent for China as a whole.

    Prices for land use rights were fixed by the Shanghai government: $900 a square meter for the first tract of land for nonindustrial use, but the price for industrial development was held to $100 a square meter. In both cases the term was for 50 years.

    Inland provinces are all provinces not considered coastal provinces. The coastal provinces are Liaoning, Tianjin, Hebei, Shandong, Jiangsu, Shanghai, Zhejiang, Fujian, Guangdong, Guangxi, and Hainan.

    The external trade of the inland provinces may be underestimated by the statistics, which tend to report transactions according to the location of foreign trading corporations that handle the trade rather than the producing enterprises that are often located in inland provinces.

    This rate is double that applied in SEZs and ETDZs, as well as on targeted projects in other parts of the 14 open coastal cities.

    Unlike the OEZs where the project approval limit was $30 million, the inland provincial authorities could approve projects only up to $5 million.

    The ten cities are Nanjing and Zhejian (Jiangsu province); Wuhu, Tanglin, Angin, and Maanshang (Anhui province); Jiujiang (Jiangxi province); Yueyan (Hunan province); Wuhan (Hubei province); and Chongqing (Sichuan province). The six zones are Shanghai-Nanjing zone, the Wuhan development zone, the Hunan-Hubei-Jiangxi zone, the Chongqing-Yichang zone, the Wujiang hydropower and mineral resource development zone, and the Panxi-Luipanshui comprehensive resource development zone.

    In addition, trade and other economic cooperation between China’s border provinces and Russia, Mongolia, Myanmar. India, and Viet Nam are being encouraged, and many administrative restrictions are being eliminated. Many provinces also announced their own plans to open more border cities.

    Estimates of newly opened development zones since the beginning of 1992 at and above county level reached 1,800, and the number of zones at all levels (including township and village) was as high as 9.000.

    As explained in Section II. the state sector consists of SOEs owned by the central and provincial authorities, whereas the nonstate sector comprises collectives, private enterprises, and foreign-funded enterprises.

    Defined as standard deviation/mean and designed to measure the extent of dispersion among observations in two or more series with different means. Low values reflect a less diverse or more homogeneous set of observations.

    A similar phenomenon can be observed in other nonstate industry. In 1991, the 12 coastal provinces and municipalities accounted for over 70 percent of total industrial output by domestic private enterprises and “other” (mainly foreign-funded) enterprises, while the 9 western provinces and autonomous regions accounted for only 8 percent.

    Ma and Kim (1992) compare the performance of the SOEs and TVEs using a Tornqvist-Theil TFP index (in which input shares are averaged by data at the beginning and end periods). Between 1978 and 1990, the TFP average annual growth rate of the TVEs was 9.1 percent, compared with 1.0 percent for the SOEs.

    The statistical analysis in this section is based largely on data for 1990, the most recent year for which comparable cross-province data are available. Subsequent developments and policy shifts are likely to have caused some, possibly major, changes in certain variables discussed here.

    Li, Li, and Ma (1989), Oksenberg and Tong (1991), and World Bank (1993b) have described in detail the evolution of China’s center-local fiscal relations since 1980.

    These contracts apply only to that part of revenue shared between the center and local governments. Three provinces (Shanghai, Heilongjiang, and Jiangsu) still provide the lion’s share of the budgetary surpluses. Guangdong is notable among the higher-income provinces in running a deficit.

    An example of this is provided by Hetian province, which in 1990 was contracted to transfer Y 1.4 billion to the center out of total collections of Y 8.4 billion. However, this amount was reduced by additional subsidies for enterprise losses (including foreign trading corporations) and grain, disaster relief, and additional capital construction. In the end, the central government transferred Y 0.4 billion to Henan (sec World Bank, 1993a).

    In addition, there are two comprehensive banks, an ever-increasing number of nonbank financial institutions, and a large network of” rural credit cooperatives (whose supervision is delegated to the Agricultural Bank of China) and urban credit cooperatives.

    See World Bank (1990b) for a more complete description of” the institutional characteristics of the Chinese banking system.

    The financial balance in Chart 4 is the difference between the absolute increase in deposits and credit expansion during the year. The exceptionally large surplus in Beijing indicates that many enterprises maintain funds in their headquarters.

    A more complete description of the evolution of China’s external trade system may be found in Lardy (1992) and Panagariya (1991).

    There are 13 provinces that have neither a coastline nor any border with neighboring countries.

    Jilin, Heilongjiang, Inner Mongolia, Xinjiang, Gansu, Tibet, Yunnan, and Guangxi. Although Liaoning borders the Democratic People’s Republic of Korea, since it has a longer coastal line than a border line, it is classified here as a coastal province.

    Perkins (1988) estimates that productivity growth accounted for over 40 percent of total growth in real net material product between 1977 and 1985, whereas growth in the labor force and in the capital stock accounted for the remainder.

    The output of TVEs was included in this aggregate until 1984.

    Lin (1992) examines the relative importance of various components of the reform on agricultural growth in China between 1978 and 1984. He finds that the dominant source of output growth was the shift from the production team system to the household responsibility system (HRS). Changes in procurement and market prices, as well as the improved availability of fertilizers and other inputs, also had a significant impact on output growth.

    The calculation of GNP in U.S. dollars is based on the official exchange rate.

    This index is defined as H= 100Xi2X where Xi = exports of ith commodity and X = total exports of China.

    Many enterprises belong to investors in Taiwan Province of China and other countries in Southeast Asia that are listed in Hong Kong.

    Exports have certainly been the main objective of China’s recent efforts to open its economy to the rest of the world.

    These ratios tend to overstate the degree of openness of the Chinese economy because they are based on the official exchange rate of the domestic currency.

    As an exception, Shanghai was authorized in 1992 to issue bonds for the specific purpose of developing the Pudong New Area.

    These local bonds have been in use for some years, albeit on a relatively limited level. They have sometimes been used to finance infrastructure. Many local enterprises have also issued their own bonds.

    This section draws on Khor (1991).

    In two of the cycles in which external imbalances were pronounced. China made use of IMF resources (first credit tranche stand-by arrangements in 1981 and 1986).

    The effectiveness of the credit plan, in its present form, has been greatly diminished by both the growing disintermediation and the rising amount of credit being created by NBFls outside the credit plan.

    Since industrial production deflators are not available at the provincial level, province-wise retail price indices are used to deflate nominal industrial growth rates.

    A variant of the regression equation above is used in estimating the impact of a change in the revenue-sharing schedule on Guangdong’s economic growth. The equation is

    GR=15.600.071ONS+11.43LTI1.383SRR2.262EXR2.658IMR+6.522FCR0.0022PNI(16.59)(2.72)(5.14)(2.30)(0.73)(0.69)(1.64)(2.78)

    R2=0.896,N=28,DF=21.

    In the regression, the annual average growth rate of per capita national income during 1981–90 is chosen as the dependent variable, GR. ONS is the share of state-owned industrial output in total industrial output, SRR is the approximate share of revenue submitted to the center, EXR is the ratio of exports to GNP, IMR is the ratio of imports to GNP, FCR is the ratio of foreign capital actually utilized to total fixed asset investment, and PNI is the per capita income level in the initial year, 1981.

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