China
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
08 Sep 1997
eISBN:
9781451807738
Language:
English
Keywords:
ISCR; CR; exchange rate; broad money; retail price index; People's Bank of China; foreign direct investment; current account; narrow money; retained earnings; personal income; trade balance
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This paper describes economic developments in the People’s Republic of China during 1996–97. In 1996, the authorities succeeded in stabilizing growth at a high level while alleviating the inflation pressures that had characterized the 1993–94 boom. From an average rate of more than 13 percent in 1992–94, real GDP growth eased to 10.5 percent in 1995 and further to 9.7 percent in 1996, reflecting moderation in the aggregate demand components, notably fixed investment. The sectoral real GDP growth pattern in 1996 was broadly unchanged from the first half of the decade.

Abstract

This paper describes economic developments in the People’s Republic of China during 1996–97. In 1996, the authorities succeeded in stabilizing growth at a high level while alleviating the inflation pressures that had characterized the 1993–94 boom. From an average rate of more than 13 percent in 1992–94, real GDP growth eased to 10.5 percent in 1995 and further to 9.7 percent in 1996, reflecting moderation in the aggregate demand components, notably fixed investment. The sectoral real GDP growth pattern in 1996 was broadly unchanged from the first half of the decade.

I. Output and Price Developments

A. Introduction

1. In 1996 the authorities succeeded in stabilizing growth at a high level while alleviating the inflationary pressures which had characterized the 1993–94 boom. From an average rate of over 13 percent in 1992–94, real GDP growth eased to 10.5 percent in 1995 and further to 9.7 percent in 1996, reflecting moderation in the aggregate demand components, notably fixed investment. The sectoral real GDP growth pattern in 1996 was broadly unchanged from the first half of the decade, with continued moderate growth in agriculture and services and more rapid increases in industrial production (Table 1).

Table 1.

China: GDP by Sector, 1991–96

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Source: State Statistical Bureau (SSB), China: Statistical Yearbooks.

2. As in past years, the growth of value-added in the nonstate sector in 1996 was much higher than in state-owned enterprises (SOEs). Domestic collective and private industrial enterprises continued to record real growth rates in excess of 20 percent. Foreign-funded and Sino-foreign joint ventures showed similar growth rates, representing a moderation from the very rapid pace of previous years, which had reflected strong expansion of their productive capacity from a low base. Meanwhile, state-owned industry showed signs of weakness in 1995 and 1996, with declining profits, a rise in the number of loss-making enterprises, and sharp decreases in capacity utilization in a number of industries.2

B. Demand Developments

3. Demand developments in 1996 were characterized by continued but moderate restraint in fixed-asset investment and a further slowdown in nominal consumption (Table 2). Notwithstanding a further slowing in nominal terms, however, the growth of fixed-investment spending appears to have increased somewhat in real terms.3 A sharp slowing of nominal-consumption spending suggests that real-consumption growth declined slightly from 1995.4 Net exports as a share of GDP weakened in 1996,5 mainly as a result of the reduction in the value-added tax (VAT) rebate and continued real exchange rate appreciation. While complete firm-level reporting data are not yet available, staff estimates suggest a relatively sharp increase in stock accumulation in 1996 compared to the previous year.

Table 2.

China: GDP and Expenditure Components, 1991–96

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Sources: State Statistical Bureau; and staff estimates.

Goods and nonfactor services.

Staff estimates; the consumption and saving ratios are derived using the total investment ratio and net exports (for consumption) or the current account balance (for saving). As a result, consumption and saving include the statistical discrepancy between production-based and expenditure-based measures of gross domestic product.

Investment

4. As in previous years, policies affecting fixed investment—control of investment approvals and bank credit—remained at the core of macroeconomic policy. Notwithstanding continued moderately restrained policies, nominal fixed investment in 1996 decelerated somewhat less than nominal GDP, raising the fixed investment-to-GDP ratio slightly. In state-owned units, investment financing grew proportionally across most funding sources (Table 3). The majority of fixed-asset investment continued to be financed through retained earnings and local extrabudgetary operations.6

Table 3.

China: Investment in Fixed Assets by State-Owned Units, 1991–96

(In billions of yuan)

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Source: State Statistical Bureau.

As reported by the SSB; sum of components may not be equal to total due to rounding.

5. The composition of fixed investment by state-owned units (SOUs)7 in 1996 broadly reflected the priorities in the Ninth Five-Year Plan (1996–2000). SOU investment expenditure grew strongly in energy production and transportation (Table 4), while investment in nonenergy industrial sectors (and, particularly, in industries characterized by excess capacity, such as textiles and certain consumer goods industries) was scaled back. Real estate investment—which had been a source of demand pressure in previous years—picked up in 1996 after decelerating in the preceding two years (Table 5). Investment growth was concentrated in the coastal regions, particularly the Shanghai and Guangdong areas, while fixed investment spending in the central and western provinces declined (Table 6).

Table 4.

China: Capital Construction of State-Owned Units, 1991–96

(In billions of yuan)

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Sources: China Statistical Yearbook; China Monthly Statistics; and China Economic Developments.
Table 5.

China: Total Fixed-Asset Investment, 1991–96

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Sources: Data provided by the State Statistical Bureau; and staff estimates.
Table 6.

China: Investment by State-Owned Units by Region, 1991–96 1/

(In billions of yuan)

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Source: Data provided by the State Statistical Bureau.

Data not available for all areas. Total may not equal sum of areas.

6. Inventory accumulation is estimated to have increased in 1996, after relatively large increases in 1995. As in the previous year, the buildup was in part due to increased state grain purchases following a favorable harvest. In addition, there have been reports of rising inventories of consumer goods, especially in the textile, automobile, and consumer durables industries. These stocks are believed to reflect slower growth in export markets, overproduction in SOEs facing increased competition from nonstate and foreign-funded enterprises, as well as large capacity increases during the 1992–93 investment boom.8

Consumption

7. Nominal consumption expenditure (including public consumption) in 1996 is estimated to have decelerated more than the reduction in inflation, suggesting a slowdown in real terms compared to 1995. The rate of growth of consumption, however, was in line with nominal per capita incomes (Table 7), particularly in rural areas. Meanwhile, nominal retail sales continued to grow briskly (Table 8).

Table 7.

China: Annual Income and Expenditure in Urban and Rural Areas, 1991–96

(In yuan per person)

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Source: State Statistical Bureau.
Table 8.

China: Retail Sales, 1991–96

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Source: State Statistical Bureau.

Includes sales to nonagricultural residents; excludes market sales to rural residents; includes means of agricultural production before 1993.

With less than seven employees.

Domestic enterprises only.

Consists of: retail sales by farmers to nonagricultural residents; individual outlets with more than seven employees; shareholder enterprises; joint ventures; Hong Kong, Macao and Taiwan Province of China funded enterprises.

8. As shown in Table 7, urban residents recorded continued strong increases in food expenditure, as well as in spending on cultural activities and housing. Rural residents reported rising expenditure primarily in food and clothing.

C. Production Developments

Industry and construction

9. Growth in industrial value added slowed in 1996, continuing the moderation from the “overheated” rates in 1992–94;9 this occurred despite a slight acceleration of gross industrial production (Table 9). SOE industrial production continued to grow at a much slower pace than nonstate enterprises and the share of the state sector in industrial production declined further. There was a marked slowdown of production growth in private, foreign-funded and joint-venture enterprises, reflecting primarily a moderation after the very rapid increases from a low base at the beginning of the decade.

Table 9.

China: Industrial Production, 1991–96

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Source: Data provided by the Chinese authorities; and China Statistical Yearbook.

10. Production of many consumer goods such as bicycles, sewing machines, televisions and radios declined in 1996 (Table 9). In addition, due in part to cotton price increases and weak textile exports, cloth and yarn production decreased, as did output of chemical fibers. In addition, these sectors recorded substantial declines in capacity utilization, while overcapacity and growing stocks also affected motor vehicles production. Reflecting the investment priorities in the Ninth Five-Year Plan, strong production increases were recorded in chemical and petroleum products and high-technology products such as microprocessors.

11. Growth of real value added in the construction sector slowed substantially further from its highs in 1992, despite the relative recovery in real estate investment and in other investment categories.

Agriculture

12. Growth in real value added in agriculture picked up in 1996, exceeding the average rate of the first half of the decade. Contributing factors included a record grain harvest and a rise in the relative proportion of agricultural land, as well as procurement price increases in recent years. Meat and aquatic goods production recorded continued strong increases, while production of cotton and oil-bearing crops fell (Table 10).

Table 10.

China: Agricultural Output, 1991–96 1/

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Source: State Statistical Bureau.

Excluding village-run industries.

Grain equivalent (5 kg. of tubers equivalent to 1 kg. of grain).

Services

13. Value added in services continued its deceleration from the double-digit growth rates recorded in 1991 and 1992. Performance in services reflected the increasing importance of the relatively buoyant wholesale and retail trade sectors. Growth in transportation and communications declined vis-à-vis previous years.

D. Income Developments

14. In 1996, urban per capita income increased by 3.8 percent in real terms, outpaced by rural per capita net income, which grew by 9.0 percent (Table 7). As a result, the urban-rural income disparity narrowed for the first time in a decade. As a share of GDP, net personal income reached almost 50 percent in 1996, slightly higher than in 1995 and the highest level since 1991. After adjusting for general government revenues, net profits, interest and other income remained at roughly 40 percent of GDP. The saving rate from personal income of both urban and rural residents rose substantially in 1996, implying much higher saving rates from profit, interest and other income, of the order of 80 percent in 1995 and 1996.10

E. Labor Market Developments

15. The growth of the labor force in 1996 was dominated by increases in the urban labor force (Table 11). With regard to the composition of employment, there was continued movement out of agriculture into services in 1996, with more moderate employment growth in industry and construction. Employment in the services sector increased to one-fourth of the total, while that in industry and construction increased only slightly.11 Within the urban economy, employment in the state-owned sector remained broadly unchanged, with a continued flow into foreign-funded and private firms, and declines in collective employment.

Table 11.

China: Labor Force and Employment, 1991–96

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Sources: State Statistical Bureau, China Statistical Yearbook, issues for 1990–95; and staff estimates.

Economically active population 16 years and older, excluding students and home labor.

Urban labor force and rural labor force are derived from survey data; urban employment and unemployment data are derived from other sources, so they do not necessarily add up to the figure shown for the urban labor force.

Foreign-funded enterprises.

16. Registered urban unemployment continued to edge up in 1996, reaching 5.5 million—3 percent of the urban labor force. Unregistered unemployment is also estimated to have increased, as formal layoffs over the last few years amounted to nearly 10 million. The effects of layoffs on unemployment, however, have been moderated by success in reemployment efforts (primarily in the more dynamic coastal provinces), although many of the separated workers have not registered with local authorities.12 Unemployment data also do not include many migrants from rural areas in search of work (see below). Finally, there may be as many as 10 million or more workers still on enterprise books working reduced shifts, who are still receiving support or are working with wage payments in arrears.13

17. The authorities have taken steps to facilitate labor mobility, including the introduction of independent medical and unemployment insurance systems in some areas, the creation of retraining and reemployment centers in many cities, and the continued transfer of housing, education, and medical facilities from state enterprises to local governments.

18. Continued productivity increases in agriculture, together with the relatively limited supply of unutilized arable land, have resulted in a surplus rural labor force of 100–130 million.14 As much as ½–⅔ of this surplus is mobile, migrating from low-income to higher-income regions, particularly the larger cities.

F. Prices and Wages

19. Price developments in 1996 were favorable, with a further decline in inflation confirming the successful soft landing. The retail price index (RPI) rose by 6.1 percent in 1996, after increasing by 21.7 percent in 1994 and 14.8 percent in 1995 (Table 12). Both the food and nonfood components of the RPI decelerated in the past two years (Table 13).

Table 12.

China: Prices, 1991–96

(Average annual percent change, unless otherwise indicated)

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Sources: State Statistical Bureau; and Ministry of Internal Trade.

Change measured December on December.

Table 13.

China: Selected Inflation Measures, 1993–96

(Twelve-month percentage change)

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Sources: State Statistical Bureau; and staff estimates.

20. The decline in inflation mainly reflects the moderation of real GDP growth from the unsustainable rates in 1993 and 1994.15 In addition, a record grain harvest contributed to a substantial deceleration of food prices, which make up 40–50 percent of both the cost of living index16 and the RPI. After rising 24.7 percent in 1995, the food component of the RPI increased by 7.7 percent in 1996. The increase in the retail price of grain was only 7.5 percent in 1996, despite increases in grain procurement prices that averaged 42 percent nationwide.17

21. Substantial variation in inflation rates has persisted across regions and price categories. Prices rose faster in rural areas than in urban areas in 1996, and the regional components of the CPI showed substantial dispersion, ranging from a low of 3.9 percent (December-over-December) in the city of Shijiazhuang to a high of 12.4 percent in Guiyang. In addition, prices of service items rose considerably faster than goods prices. As a result, the CPI—which includes an estimated 10 percent share of service items—continued to rise faster than the RPI (Box 1). Some price categories accelerated in early 1996, notably fresh vegetables and aquatic products. Production materials inflation—which has diverged substantially from overall inflation since 1994—picked up temporarily in the first half of 1996.

Measuring inflation in China

A number of price indices are compiled by the State Statistical Bureau, the most important of which are the retail sales price index (RPI), the cost of living index—also referred to as the consumer price index (CPI)—and the CPI of residents in 35 major cities. These indices have shown broadly similar movements over the past few years, although the RPI measure of inflation generally has been lower, reflecting the exclusion of the relatively faster rising prices of services. The discrepancy measured in percentage points has been relatively constant over time (see chart). The category weights in the indices are not published, although it is estimated that food items make up about half of both the CPI and the RPI. The constituent subindices of the indices have diverged in the past, reflecting mostly the different behavior of food and nonfood prices.

  • The RPI includes prices of consumer goods sold at the retail level. In addition to the overall index, sub-indices for a number of food and nonfood categories for urban and rural areas are published monthly on a 12-month-change basis.

  • In contrast to the RPI—which reflects overall retail sales—the CPI reflects a typical consumption basket derived from a consumer survey, and includes service items. It is published monthly on a 12-month-change basis, nationwide and for rural and urban areas. Services are estimated to make up a relatively modest 10 percent of the index, reflecting the fact that many service items—such as housing and health care—are not marketed, but are provided through employees’ places of employment.

  • A subset of the nationwide CPI, the CPI of Residents in 35 Major Cities, is published monthly on a 12-month-change basis, including its constituent subindices by spending category and by city.

uA01fig01

China: Different measures of inflation

(12-month change in index; in percent)

Citation: IMF Staff Country Reports 1997, 071; 10.5089/9781451807738.002.A001

22. Although the majority of retail transactions are now conducted at market-determined prices (Box 2 and Table 14), the prices of some 30 items remain under local or central government control. A number of administered price adjustments were made in 1996, including in grain procurement and retail prices, crude oil and refined oil prices, fertilizer prices, and electricity rates. The locally administered rates for public transportation, housing, and water were also increased. Despite the further decline in inflation, the scope of price surveillance was expanded in 1996, with the government intensifying monitoring of price monopolies and excessive profit margins. In addition, a system was introduced under which local governments are responsible for adequate supplies and reasonable price developments in the local grains and vegetables markets, prompting the establishment of price regulation funds for these food items in some areas.

Table 14.

China: Proportion of Agricultural Output, Production Materials and Retail Sales Sold at Fixed, Guided and Market Prices, 1978–95

(In percent)

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Sources: China Price Yearbook, 1990; and data provided by the Chinese authorities.

23. Wage rises moderated in 1996 (Table 15). The average money wage in SOUs rose faster than in collectives and other forms of ownership, as wage reforms focusing on monetizing wages continued—the authorities estimate that 15–17 percent of remuneration in SOUs still consists of nonwage payments, such as subsidized housing, education, health care, and meals. Other reform measures have aimed at improving the wage-setting process and making remuneration more responsive to economic performance. Partly as a result of these efforts, 60 percent of enterprises now tie wages to some measure of economic performance, such as profits, taxes, working hours, and production volumes.

Table 15.

China: Average Money Wage of Formal Employees, 1991–96

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Sources: State Statistical Bureau (SSB), China: Statistical Yearbooks; and SSB, China: Latest Economic Indicators.

Proportion of Retail Sales at Administered and Market Prices

uA01fig02
Source: State Statistical Bureau.1 Includes fixed and guided prices.

II. Monetary and Financial Developments and Policies18

A. Introduction

24. During 1995–96, monetary and credit policies continued to be moderately restrained, contributing to the successful lowering of inflation without a sharp slowing in growth. The wide-ranging structural reform program introduced in 1993 was steadily implemented, with measures to strengthen the role of the central bank, further develop indirect instruments of monetary policy, and increase the market orientation of commercial banks and other financial institutions. The authorities have begun to pay increasing attention to the safety and soundness of the financial system.

B. Money and Credit Developments

25. Money and credit developments in 1995 and 1996 are to be viewed against the background of the authorities’ efforts to restore macroeconomic stability following the intense overheating and disorderly financial conditions of 1993. After some initial faltering, in late 1994 an “appropriately tight” monetary policy was adopted, the main objective of which was to lower inflation by reducing broad-money growth.

26. Broad-money growth slowed gradually, reflecting in part a reintermediation into the banking system of savings deposits which had fled the system during the period of overheating. The slowing was achieved despite a large increase in net foreign assets (NFA) of the banking system that to some extent blunted domestic credit restraint. Broad money growth, while still slightly more rapid than originally intended in 1995, was in line with the authorities’ objective of 25 percent in 1996 (Table 16).19 It remained rapid relative to growth in nominal income, however, with the decline in the income velocity of money in 1996 particularly sharp. While velocity declined by about 3½ percent a year on average (year-on-year basis) during 1985–95, it fell by 8½ percent in 1996. Monetary policy has been implemented against the background of relative stability in the nominal exchange rate of the renminbi (RMB).20

Table 16.

China: Banking Survey, 1993-96 1/

(In billions of yuan, end-of-period basis)

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Source: Data provided by the Chinese authorities.

Includes the operations of the People’s Bank of China, the deposit money banks, and other banks (or specific depository institutions). Data for March 1996 and later include, in addition, operations of two policy banks (the Export-Import Bank and the State Development Bank).

Owing to a break in the series in 1993, growth rates for that year are not available.