© 2004 International Monetary Fund
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Typesetting: Choon Lee
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Cataloging-in-Publication Data
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China’s growth and integration into the world economy: prospects and challenges/edited by Eswar Prasad; with contributions from Steven Barnett… [et al.]—Washington, D.C.: International Monetary Fund, 2004.
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p. cm. — (Occasional paper, 0251–6365; 232)
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Includes bibliographical references.
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ISBN 1-58906-258-2
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1. China—Foreign economic relations. 2. Prices—China. 3. Foreign exchange—China. 4. Banks and banking—China. 5. Labor market—China. I. Prasad, Eswar. II. Barnett, Steven (Steven Alan). III. Occasional paper (International Monetary Fund); no. 232.
HF1604.C45 2004
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Contents
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Preface
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Abbreviations and Acronyms
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I Overview
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Eswar Prasad and Thomas Rumbaugh
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Rapidly Expanding International Trade
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Price Dynamics
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Real Exchange Rate Fluctuations
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Fiscal Policy
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Banking System Reform
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Unemployment
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The Outlook
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II International Trade and the Challenges of WTO Accession
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Thomas Rumbaugh and Nicolas Blancher
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China’s Impact on Trade Patterns
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WTO Accession: Commitments, Opportunities, and Risks
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III Price Dynamics in China
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Tarhan Feyzioğlu
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Stylized Facts
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Key Sources of Price Changes
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Regression Results
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Appendix: Data Sources and Calculations
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IV Exchange Rate Dynamics
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Tao Wang
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Exchange Rate Developments: A Historical Overview
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Determinants of the Medium-Term Path of the Real Exchange Rate
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Sources of Real Exchange Rate Fluctuations
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V Medium-Term Fiscal Challenges
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Annalisa Fedelino and Raju Jan Singh
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Recent Fiscal Developments
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Medium-Term Challenges
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Conclusions
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VI Fiscal Federalism
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Annalisa Fedelino and Raju Jan Singh
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The 1994 Fiscal Reform
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Some Implications of the Current System
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Conclusions
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VII Banking Sector Developments
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Steven Barnett
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The Banking System Today
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Challenges and Risks
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Recent Reforms
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Conclusions
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VIII Labor Market Performance and Prospects
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Ray Brooks
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Trends in China’s Labor Market
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Labor Market Reforms
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Some Illustrative Projections
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The Road Ahead
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References
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Boxes
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1.1. China’s Approach to Economic Reform
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2.1. Selected Aspects of China’s WTO Accession
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2.2. The International Impact of China’s WTO Accession
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4.1. Identification of Shocks in a Structural VAR Model
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5.1. An Assessment of China’s State Equity Share in SOEs
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6.1. Intergovernmental Fiscal Relations and Market Reforms in China: A Review of the Literature
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6.2. Fiscal Risks of Local Governments: The 2002 Audit Report
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7.1. Developments in State Commercial Banks
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8.1. Steps Toward Labor Market Flexibility
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8.2. Hukou Reform
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Tables
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2.1. Market Share in Major Export Markets
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2.2. Sources of Imports
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2.3. Exports of Selected Economies to China
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2.4. Indicators of Export Dispersion
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2.5. Measures of Dispersion of Exports to the United States
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2.6. China’s Bilateral Trade Balances with Selected Economies
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2.7. Tariffs
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3.1. OLS Estimates of a Reduced-Form Inflation Equation
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4.1. Medium-Term Determinants of the Real Exchange Rate: Extended Relative PPP Method
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4.2. Measures of Underlying Current Account Balance and Norms
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5.1. Selected Countries: Comparison of Public Debt and Fiscal Positions, Average 2000–02
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5.2. State Budget Revenue
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5.3. State Budget Expenditure
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6.1. Per Capita Income Levels of Selected Provinces, 2002
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6.2 Differences in Revenue Performance by Province, 1995 and 2002
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6.3. Shares of Central and Local Governments in Selected Budgetary Expenditure, 2001
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6.4. Transfers from the Central to Local Governments
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7.1. Deposit Money Banks’ Market Shares
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7.2. Reported Nonperforming Loans
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8.1. Population, Labor Force, and Employment
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8.2. Employment by Enterprise Ownership
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8.3. Employment by Industry
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8.4. Selected Asian Economies: Labor Productivity, 2000
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8.5. Industrial Employment and Output
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8.6. Estimates of Elasticity of Nonagricultural Employment Growth to Output Growth
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8.7. Labor Force and Employment Projections
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8.8. Projections of Jobs for Migrants and Laid-Off Workers from SOEs
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Figures
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2.1. Growth in Trade
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2.2. China’s Trade with the Region
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2.3. Exports of Selected Economies
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2.4. Trade in Electronic Products: Monthly Imports of Electronic Components
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3.1. Real GDP Growth and CPI Inflation
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3.2. Inflation
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3.3. Components of CPI Inflation
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3.4. Alternative Measures of Inflation
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3.5. Variables Used in the Regression
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3.6. First-Round Impact of the Regression Variables on Inflation
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4.1. CPI-Based Real Effective Exchange Rate and Its Components
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4.2. Unit-Labor-Cost-Based Real Effective Exchange Rate and Its Components
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4.3. Proxies for Relative Export Prices
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4.4. Variables Used in the Estimation of the Medium-Term Exchange Rate
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4.5. Actual and Estimated CPI-Based REER
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4.6. Accumulated Impulse Response Functions for the Real Effective Exchange Rate
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4.7. Decomposition of Forecast Errors of Real Exchange Rate
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5.1. Revenue, Expenditure, and Fiscal Balance
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5.2. Government Debt and Its Composition
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6.1. Revenue Developments
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6.2. Central and Local Governments’ Budgetary Positions
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6.3. Extrabudgetary Funds
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7.1. Selected Economies: Ratio of Domestic Credit to GDP
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7.2. Financial Institutions’ Renminbi Loans
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8.1. Employment and GDP
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The following symbols have been used throughout this paper:
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… to indicate that data are not available;
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— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
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– between years or months (e.g., 2001–02 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
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/ between years (e.g., 2001/02) to indicate a fiscal (financial) year.
“n.a.” means not applicable.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
Preface
This Occasional Paper provides an overview of analytical work done by IMF staff as background for the 2002 and 2003 Article IV Consultations with the People’s Republic of China.
The authors would like to express their deep appreciation for the valuable guidance provided by Steven Dunaway, the IMF’s mission chief for China during this period. They also thank David Burton and Wanda Tseng for their encouragement and advice. The authors are grateful to the Chinese authorities for the information that they provided and for the extensive discussions and comments that helped sharpen the analysis and presentation in this paper. Ioana Hussiada provided research assistance for this project; Yuko Kobayashi and Carolina Klein handled the preparation of the manuscript; and Esha Ray of the External Relations Department coordinated production of the publication.
The opinions expressed in this paper are solely those of its authors and do not necessarily reflect the views of the International Monetary Fund, its Executive Directors, or the Chinese authorities.
Abbreviations and Acronyms
| ABC |
Agricultural Bank of China |
| ASEAN |
Association of South-East Asian Nations |
| ATC |
Agreement on Textiles and Clothing |
| BOC |
Bank of China |
| CARs |
Capital adequacy ratios |
| CBRC |
China Banking Regulatory Commission |
| CCB |
China Construction Bank |
| CNAO |
National Audit Office of the People’s Republic of China |
| CPI |
Consumer price index |
| EIT |
Enterprise income tax |
| EMBI |
JP Morgan Emerging Market Bond Index |
| EU |
European Union |
| FDI |
Foreign direct investment |
| FFEs |
Foreign-funded enterprises |
| GDP |
Gross domestic product |
| GTAP |
Global Trade Analysis Project |
| ICBC |
Industrial and Commercial Bank of China |
| ILO |
International Labor Organization |
| JSCBs |
Joint-stock commercial banks |
| MFN |
Most-favored-nation |
| MOLSS |
Ministry of Labor and Social Services |
| NBS |
National Bureau of Statistics |
| NEER |
Nominal effective exchange rate |
| NFA |
Net foreign assets |
| NIEs |
Newly industrialized economies |
| NPL |
Nonperforming loan |
| NTBs |
Nontariff barriers |
| OECD |
Organization for Economic Cooperation and Development |
| OLS |
Ordinary least squares |
| PBC |
People’s Bank of China |
| PPI |
Producer price index |
| PPP |
Purchasing power parity |
| RCCs |
Rural credit cooperatives |
| RECs |
Reemployment centers |
| REER |
Real effective exchange rate |
| RPI |
Retail price index |
| SCBs |
State-owned commercial banks |
| SITC |
Standard International Trade Classification |
| SOE |
State-owned enterprise |
| TRIMs |
Trade-Related Investment Measures |
| TRIPs |
Trade-Related Aspects of Intellectual Property Rights |
| TSA |
Treasury single account |
| TVEs |
Town and village enterprises |
| ULC |
Unit labor costs |
| UNCTAD |
United Nations Conference on Trade and Development |
| VAR |
Vector autoregression |
| VAT |
Value-added tax |
| WTO |
World Trade Organization |