Abstract

Original calligraphy on the cover, by Jieyan Yin, represents the Chinese character for dragon.

Frontmatter Page

Original calligraphy on the cover, by Jieyan Yin, represents the Chinese character for dragon.

Copyright

© 2003 International Monetary Fund

Cover design: Lai Oy Louie

Typesetting: Choon Lee

Library of Congress Cataloging-in-Publication Data

China, competing in the global economy: edited by Wanda Tseng and Markus Rodlauer.

p. cm.

Includes bibliographical references.

ISBN 9781589061781

1. China—Economic policy—2000–. 2. China—China—Economic policy—1976–2000. 3. Competition, International.

I. Tseng, Wanda. II. Rodlauer, Markus.

HG427.95.C437 2002

338.951—dc21 2002038867

Price: $26.00

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Foreword

China’s economic performance in recent years has been impressive by most standards. The country was able to weather the storm of the Asian crisis relatively unscathed and has sustained rapid growth in the face of last year’s global downturn. These achievements have added to the visible success of economic transformation that two decades of market-oriented reforms have brought to China, including large gains in income per capita, the creation of a vibrant nonstate sector, and major inroads into poverty. One of the key driving forces of this growth and transformation has been the progressive opening up of the economy to foreign competition and investment, culminating in China’s recent accession to the World Trade Organization (WTO).

At the same time, analysts point to problems in state-owned banks and enterprises, medium-term fiscal pressures, growing unemployment and income disparities, and weak governance. How will China be able to compete successfully in the global economy with these problems weighing on its economy, especially as WTO accession has set the stage for a further and decisive round of opening up?

The key task facing policymakers in China today is thus to push ahead with the unfinished reform agenda, to ensure sustained rapid growth and social stability, and to prepare the economy for increased global competition resulting from WTO accession. This book looks at those challenges and China’s efforts to meet them, issues that have been at the center of the IMF staff’s work on China in recent years.

The book brings together material and analysis prepared during 2000–01 by IMF staff working on China under the direction of Wanda Tseng. The team of authors was led by Markus Rodlauer and David Robinson and included Thomas Dorsey, Jahangir Aziz, Paul Heytens, Christoph Duenwald, Paul Gruenwald, Thomas Richardson, Raju Singh, George Tsibouris, Harm Zebregs, James Daniel, Cem Karacadag, Nicolas Blancher, and Yongzheng Yang.

Yusuke Horiguchi

Director

Asia and Pacific Department

Acknowledgments

The authors acknowledge the valuable input and comments provided by many present and former colleagues at the IMF, including John Anderson, Ray Brooks, James Gordon, Aasim Husain, Russell Krelove, Bernard Laurens, Doug Laxton, Jun Ma, Ichiro Otani, and Sunil Sharma. Special thanks are due to Tarhan Feyzioğlu who saw to the completion of the book. The IMF staff’s work on China has also benefited greatly from collaboration with our colleagues at the World Bank, in particular Deepak Bhattasali and Albert Keidel. Jieyan Yin of the Bank of Communications in China provided the elegant calligraphic work for the cover of the book. Anna Maripuu and Bin Zhang provided excellent research assistance, and we are indebted to Pihuan Cormier, Abdul Majeed Mahar, and Lakshmi Sahasranam for assisting with numerous drafts. The authors are also grateful to Michael Treadway, who edited the book, and Gail Berre of the External Relations Department, who coordinated its production.

The opinions expressed here, as well as any errors, are the sole responsibility of the authors and do not necessarily reflect the views of the Chinese authorities, the Executive Directors of the IMF, or other members of the IMF staff.

Contents

  • Foreword

  • Acknowledgments

    • 1. Introduction and Overview

      • Markus Rodlauer and Paul Heytens

    • 2. How Fast Can China Grow?

      • Paul Heytens and Harm Zebregs

        • Appendix I: Data Sources and Description

        • Appendix II: Aggregate Production Functions and TFP Growth

        • Appendix III: Measuring the Progress of Structural Reform

    • 3. Provincial Growth Dynamics

      • Jahangir Aziz and Christoph Duenwald

    • 4. The Growth-Financial Development Nexus

      • Christoph Duenwald and Jahangir Aziz

    • 5. Foreign Direct Investment in China: Some Lessons for Other Countries

      • Wanda Tseng and Harm Zebregs

    • 6. Foreign Direct Investment and Output Growth

      • Harm Zebregs

    • 7. China and the Asian Crisis

      • Paul Gruenwald and Jahangir Aziz

    • 8. Medium-Term Fiscal Issues

      • James Daniel, Thomas Richardson, Raju Singh, and George Tsibouris

    • 9. State Enterprise Reforms

      • Paul Heytens

    • 10. Financial System Soundness and Reform

      • Cem Karacadag

    • 11. The Finances of China’s Enterprise Sector

      • Paul Heytens and Cem Karacadag

        • Appendix I: Data Sources

    • 12. The Impact of WTO Accession

      • Thomas Dorsey, David Robinson, Yongzheng Yang, and Harm Zebregs

    • 13. Exchange Rate Policy

      • Nicolas Blancher

  • Boxes

    • 5.1. China’s FDI Regime

    • 5.2. Open Economic Zones in China

    • 5.3. Tax Incentives for FDI

    • 7.1. Was China the First Domino?

    • 9.1. Premier Zhu’s SOE Revitalization Objective

    • 9.2. The Social Safety Net for Laid-Off SOE Workers

    • 9.3. Restructuring Programs in Selected Industries

    • 10.1. Operations of the Asset Management Companies

    • 12.1. Main Elements of China’s WTO Accession Agreement

    • 12.2. Financial Sector Components of China’s WTO Accession Agreement

    • 12.3. Market Views on Sectoral Winners and Losers

    • 12.4. Opening to Foreign Banks: Experience in Other Transition Economies

  • Figures

    • 2.1. Actual and Potential Output Growth and the Output Gap

    • 2.2. Potential Output Growth and the Output Gap: Estimates from a Translog Production Function

    • 2.3. Potential Output Growth and the Output Gap: Estimates from a Cobb-Douglas Production Function with Exogenous TFP Growth

    • 2.4. Potential Output Growth and the Output Gap: Estimates from a Cobb-Douglas Production Function with Endogenous TFP Growth

    • 3.1. Income Per Capita by Province

    • 3.2. Gaussian Kernels of Provincial Relative Income Distribution

    • 3.3. Examples of Distribution-Preserving Movements Within Gaussian Kernels

    • 3.4. Distribution Dynamics Across the Reform Period and in Subperiods

    • 3.5. Projected Distribution Dynamics on Current Trends

    • 3.6. Conditioned Distribution Dynamics Across the Reform Period and in Subperiods

    • 4.1. Financial Intermediation and Growth

    • 4.2. Growth and Financial Intermediation

    • 4.3. Financial Intermediation and SOE Concentration

    • 4.4. Profitability and Growth

    • 5.1. FDI Inflows

    • 5.2. FDI Inflows by Sector, 1998

    • 5.3. FDI Inflows by Region, 1983–98

    • 5.4. FDI by Type of Ownership Arrangement

    • 5.5. Transparency International Corruption Perceptions Index for Selected Countries, 2001

    • 6.1. Real GDP and the Stock of FDI

    • 6.2. TFP and the Stock of FDI

    • 6.3. Provincial FDI and TFP Growth

    • 7.1. Growth in GDP

    • 7.2. Current Account Balances

    • 7.3. Dollar Exchange Rates

    • 7.4. Growth in Trade

    • 7.5. Ratio of Short-Term Debt to Reserves

    • 7.6. Real Exchange Rates

    • 7.7. Growth in Real Domestic Credit

    • 7.8. Ratio of Trade to GDP

    • 7.9. Fiscal Balances

    • 7.10. Nominal Interest Rates

    • 8.1. State Budget

    • 10.1. Banking System Credit to the Private Sector and GDP per Capita in Developing Economies, 2000

    • 10.2. Change in Credit Growth from Previous Year

    • 10.3. Lending by the People’s Bank of China to the Financial System

    • 11.1. Ratio of Value Added to Fixed Assets of Industrial Enterprises

    • 13.1. Export Growth

    • 13.2. Bilateral and Effective Exchange Rates

    • 13.3. China’s Share of Foreign Import Markets

    • 13.4. Product Composition of Manufactured Exports

  • Tables

    • 2.1. Contributions to Output Growth

    • 2.2. Estimated Aggregate Production Function for the Chinese Economy

    • 2.3. Contributions to TFP Growth

    • 2.4. Contributions to Output Growth, Actual and Projected

    • 3.1. Real GDP per Capita Relative to Shanghai, by Province

    • 3.2. Selected Previously Reported Tests of Convergence for China’s Provinces

    • 3.3. Results of Provincial Growth Regressions

    • 4.1. Indicators of Financial Development in Selected Countries and Country Groups, 1993–2000

    • 4.2. Allocation of State Bank Credit

    • 4.3. Summary Financial and SOE Data by Province, 1988–97

    • 4.4. Results of Regressions of Output Growth on Financial Intermediation Measures

    • 4.5. Results of Regressions of Investment on Financial Intermediation Measures

    • 4.6. Results of Regressions of Productivity on Financial Intermediation Measures

    • 5.1. Alternative Measures of FDI Inflows

    • 5.2. Sources of FDI

    • 5.3. China and India: Selected Openness Indicators

    • 5.4. Infrastructure Indicators

    • 6.1. FDI and Growth of GDP by Province, 1990–97

    • 6.2. Estimation Results from Single-Equation Regressions

    • 6.3. Results of Regressions of Growth in Non-FFE Output on FFE Share of GDP, Using Provincial Data

    • 7.1. Selected Financial Indicators in Six East Asian Countries, 1996

    • 8.1. Official and IMF Measures of the Fiscal Deficit and the Debt Stock, 2001

    • 9.1. Capacity Utilization by Industry, 1995

    • 10.1. Financial System Assets by Type of Institution

    • 10.2. Assets and World Ranking of State Commercial Banks

    • 10.3. Selected Prudential Regulations

    • 10.4. Reported Nonperforming Loans at SCBs and Selected Other Financial Institutions

    • 10.5. Operations and Recoveries of Asset Management Companies, December 31, 2001

    • 11.1. Output, Employment, and Value Added of Industrial Enterprises by Ownership Type

    • 11.2. Net Fixed Assets of Industrial Enterprises by Ownership Type

    • 11.3. Ratio of Total Liabilities to Equity of Industrial Enterprises by Ownership Type

    • 11.4. Ratio of Operating Profits to Interest Expense of Industrial Enterprises by Ownership Type

    • 11.5. Operating Margins of Industrial Enterprises by Ownership Type

    • 11.6. Inventories, Receivables, and Fixed Assets of Listed Companies

    • 11.7. Leverage of Listed Companies Under Illustrative Scenarios

    • 11.8. Profitability of Listed Companies

    • 11.9. Liquidity of Listed Companies

    • 11.10. Interest Coverage and Implied Nonperforming Loans of Listed Companies

    • 11.11. Sources of Financial Data on Chinese Firms

    • 12.1. Economic Structure of Sectors Affected by WTO Accession, 1995

    • 12.2. Differences Between WTO Accession and Baseline Scenarios

    • 12.3. Estimates of the Domestic Macroeconomic Impact of China’s WTO Accession

    • 12.4. Projected Impact of China’s WTO Accession, 2006

    • 12.5. Projected Net Exports by Region and Product Type Following China’s WTO Accession, 2006

    • 12.6. Projected Change in Textile and Clothing Exports and Production Resulting from China’s WTO Accession, 2006

The following conventions are used in this volume:

… to indicate that data are not available or not applicable;

— to indicate that the figure is zero or less than half the final digit shown;

– between years or months (for example, 2001–02 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years or months (for example, 1991/92) to indicate a fiscal or financial year.

“Billion” means a thousand million; “trillion” means a thousand billion.

“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

Minor discrepancies between constituent figures and totals are due to rounding.