China: New Engine of World Growth

China: New Engine of World Growth

Ross Garnaut
Ligang Song
Copyright Date: 2012
Published by: ANU Press
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  • Book Info
    China: New Engine of World Growth
    Book Description:

    Twenty-five years of reform have transformed China from a centrally planned and closed system to a predominantly market-driven and open economy. As a consequence, China is emerging as the new powerhouse for the world economy. China: new engine for world growth discusses the impact and significance of this transformation. It points out risks to the growth process and unfinished tasks of reform. It presents conclusions from recent research on growth, trade and investment, the financial sector, income and regional disparities, industrial location and private sector development. Ross Garnaut is a Professor of Economics in the Research School of Pacific and Asian Studies, and Chairman of the China Economy and Business Program at The Australian National University. He was Australia's Ambassador to China in the 1980s. Ligang Song is a Fellow in the Asia Pacific School of Economics and Government, and Director of the China Economy and Business Program at The Australian National University.

    eISBN: 978-1-922144-55-3
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
    (pp. vii-x)
    (pp. x-xii)
  5. BOXES
    (pp. xii-xii)
    (pp. xiii-xiii)
    (pp. xiii-xvi)
  8. Contributors
    (pp. xvii-xx)
  9. Macroeconomic performance and new challenges
    • 1 China: new engine of world growth
      (pp. 1-18)
      Ross Garnaut

      China is now the centre of attention for international business. For the main global producers of travel and financial services, resources, electronic products, aeroplanes and machines, the annual reports this year contain statements about the importance of the China market to growth.

      There is good reason for the focus on China. Since the eve of financial crisis in Korea and much of Southeast Asia in 1996, China has contributed one quarter of global growth in output and international trade. In the sluggish world economy since the Clinton-era boom in the United States ended in late 2000, China has contributed the...

    • 2 The impact of SARS
      (pp. 19-33)
      Jong-Wha Lee and Warwick J. McKibbin

      The outbreak of SARS (severe acute respiratory syndrome) has had an important impact on the People’s Republic of China (hereafter referred to as China). When the virus was at its most virulent, from November 2002 to July 2003, it had a direct impact on economic activity. But it has also had a more fundamental and long lasting impact on possible political and economic reforms in China.

      The first outbreak of SARS was in Guangdong Province, the source of annual cycles of disease for over a century. China has been criticised for its initial response, in which lack of transparency and...

    • 3 The travails of current macroeconomic and exchange rate management
      (pp. 34-63)
      Wing Thye Woo

      The quandary in macroeconomic management that the Chinese government is currently facing cannot be seen more clearly than in the following two newspaper headlines. On 18 August 2003, an article in Singapore’s Straits Times under the headline ‘Hu calls for more work creation as jobless rate rises’ reported that the Secretary-General of the Chinese Communist Party, Hu Jin Tao, had called for ‘stronger measures...[including] fiscal subsidies, tax incentives, insurance subsidies and credit opportunities’ to spur economic growth. On 19 August 2003, Hong Kong’s South China Morning Post carried an article with the headline ‘Investments soar amid reluctance to rein in...

    • 4 The changing pattern of economic growth
      (pp. 64-81)
      Yiping Huang

      Five years ago, when Zhu Rongji became premier, he launched a comprehensive and ambitious package of reforms, including improving the profitability of SOEs, reducing financial risks, and downsizing the government.

      Wen Jiabao’s first battle after becoming premier in early 2003 was to control the SARS epidemic. Now that the outbreak is effectively under control, the new government is likely to shift its focus to the reform agenda. The economic challenges facing the new government today are still similar to those of five years ago: loss-making SOEs, huge bad loans, rising unemployment rate, and so on.

      We should nonetheless not underestimate...

  10. Financial system reform:: an unfinished task
    • 5 Transforming the banking sector
      (pp. 82-93)
      Yiping Huang

      The health of the Chinese banking system has come under the spotlight since the beginning of the East Asian financial crisis in 1997. In early 1998, the People’s Bank of China (PBOC) estimated the average proportion of the non-performing loans (NPLs) at 24 per cent in the four major state-owned commercial banks (SOCBs)—the Bank of China (BOC), the Industrial and Commercial Bank of China (ICBC), the Construction Bank of China (CBC) and the Agricultural Bank of China (ABC).¹ This was much bigger than those of pre-crisis Thailand, South Korea, Indonesia and Malaysia (Huang and Yang 1998). But China maintained...

    • 6 Financial opening and economic growth: a quantitative assessment
      (pp. 94-110)
      Jordan Shan

      This chapter sheds further light on the much-debated question of whether financial development leads, in a Granger causality sense, to economic growth. This is an important question because it helps to evaluate the extent to which the financial deregulation that has occurred in many western countries has spurred economic growth. Further, it gives some guidance about whether financial sector development is necessary to increase growth rates in developing countries.

      These questions are particularly relevant in China, where swift change and reform in the financial sector—aimed at deregulating China’s financial system further and opening up the domestic financial market—has...

    • 7 Rural financial markets and institutions: new developments
      (pp. 111-130)
      Enjiang Cheng

      Continuous declines in the growth rate of farmers’ incomes and widening income gaps between urban and rural areas since the early 1990s have renewed interest in China’s agricultural and rural development. Rural fiscal and taxation policies, including the massive debts owed by the township and village administrations, and rural financial policies have topped the agenda for further rural economic reforms in 2003. The Central government has been urged to reduce the ever-increasing burdens on farmers through fiscal and taxation reforms and to provide more credit for rural development by introducing new reforms to rural financial institutions and markets.

      China’s rural...

  11. Foreign trade, trade policy and FDI
    • 8 Entry into the WTO: commitments and implementation
      (pp. 131-140)
      Geoff Raby

      Accession to the WTO is a major undertaking for any country. As with all treaties, countries must adjust domestic laws and regulations to bring themselves into conformity with their international obligations. In most cases, this is a difficult exercise involving complex political choices. As in the general case of trade liberalisation, over time all will benefit from the welfare gains from WTO membership, but in the short to medium term, income redistribution between groups in society is likely to take place. In other words, during the adjustment period, there will be winners and losers.

      Managing the political economy of this...

    • 9 WTO commitment: further marketisation and trade liberalisation
      (pp. 141-150)
      Jiadong Tong

      Since becoming a member of the World Trade Organization (WTO) in December 2001, China has been carrying out the commitments included in the ‘Protocol on the Accession of the People’s Republic of China’. This has required major steps on unification and transparency of its trade system, and expanding market access. China’s accession to the WTO has meant that rapid government reform has simplified rationalisation of government functions, liberalised trade and increased marketisation. Market forces have been increasingly important in resource allocation. Rapid development of the private economy is giving a new impetus to economic growth, but some difficulties concerning the...

    • 10 A changing role in world trade
      (pp. 151-175)
      Ligang Song and Sizhong Sun

      The rapid growth of foreign trade during the past quarter century has fundamentally changed China’s position in world trade. China is now a large, developing, and at the same time transitional, economy excelling in international economic activities through domestic reform and trade liberalisation. Relatively high export growth has been accompanied by a sustained process of GDP growth and rising per capita income at home. The combination of the size of the economy, sustained low production costs, and continued strong inflows of foreign direct investment means that China has had profound effects on regional and world production and consumption. China’s changing...

    • 11 China in the world economy: the FTA strategy
      (pp. 176-188)
      Christopher Findlay

      China made a huge international and domestic effort in multilateral trade liberalisation in the years leading up to its accession to the WTO in 2001. It is therefore at first surprising that China is now engaged in a vigorous strategy of using Free Trade Agreements. The sharp turnaround is in response to perceptions in the Chinese leadership that other Asia Pacific economies were moving away from most favoured nation commitments.

      At the end of 2001, China and ASEAN reached an agreement on a framework to establish a free trade area and have agreed on a tariff elimination program which includes...

  12. Sectoral impact and policy adjustment
    • 12 Location determinants and provincial distribution of FDI
      (pp. 189-216)
      Chen Chunlai

      Foreign direct investment into China has been one of the most important aspects of the overall economic reform program launched in China 25 years ago. The gradual but active liberalisation of the FDI regime and improvements in the investment environment greatly increased the confidence of foreign investors to do business in China. Consequently, FDI inflows into China increased rapidly after 1979 and particularly during the 1990s. In 2002, with its accession to the World Trade Organization (WTO), China surpassed the United States in becoming the largest FDI recipient in the world.

      The eastern provinces account for nearly 90 per cent...

    • 13 The impact of urbanisation on economic growth
      (pp. 217-230)
      Xiaolu Wang and Ronald Duncan

      With only 0.3 hectares of arable land per farmer, China’s agriculture has successfully fed its 1.2 billion people. Economic reform during the 1980s accelerated agricultural growth and lifted farmers’ incomes. Growth of farmers’ incomes was, however, far slower than the rapid growth of the whole economy and urban income growth, especially in the 1990s, which resulted in larger rural-urban income disparities. Meanwhile, the rural population and labour force continued to account for the major part of China’s total population and labour force, while the share of agricultural product in GDP fell.

      The agricultural sector (including farming, forestry, animal husbandry and...

    • 14 Trade reform, macroeconomic policy and sectoral labour movement
      (pp. 231-275)
      Jennifer Chang and Rod Tyers

      Although the Chinese economy continues to grow rapidly, since the late 1990s there has been evidence of a slow down in per capita rural income growth. One explanation for this is that the relocation of labour from agriculture to manufacturing and services, essential in any growing developing economy, has been retarded. This could be due to policy disincentives designed to control urban congestion, such as the household registration or hukou system (Ianchovichina and Martin 2002) or information asymmetries and transaction/infrastructural costs (Sicular and Zhao 2002). An alternative explanation is that comparatively poor performance in China’s rural sector is due to...

    • 15 Internet development
      (pp. 276-299)
      Fang-Fang Tang

      Internet use in mainland China has accelerated in recent years, reaching 68 million users by 30 June 2003,¹ in sharp contrast to the slowdown in some of the industrialised economies. The latest survey conducted in Taiwan (31 December 2002) shows that the internet penetration rate on the island has reached 38 per cent, or 8.6 million users. A similar survey conducted by the City University of Hong Kong at the end of 2002 indicates that internet users in the Hong Kong number 2.8 million or 45 per cent of the Hong Kong population aged from 6 to 84, according to...

  13. Income distribution and social security
    • 16 Accession to WTO and foreign pharmaceutical firms’ business opportunities
      (pp. 300-315)
      Yifeng Wu

      China is now one of the largest pharmaceuticals producers in the world. During the reform period in the late 1970s, when Chinese authorities began economic reforms, the Chinese pharmaceutical industry has grown rapidly. The ouput of chemical raw medicines rose from 40.7 thousand tonnes in 1978 to 762.2 thousand tonnes in 2001 (Figure 16.1). The output of lactams and vitamins accounts for about 30 per cent of the total world output. China has become the second largest producer of chemical raw medicines in the world. Over the same period, the ouput of traditional Chinese medicines increased sharply from 87 thousand...

    • 17 Political capital and wealth accumulation
      (pp. 316-329)
      Meng Xin

      The economic-well being of individuals during old age, unemployment and sickness is closely related to their private wealth, especially in an economy where government has little ability or desire to redistribute income or provide adequate social insurance. China is in the process of moving from state provision of all social welfare towards a new system that will rely heavily on individual’s responsibilities. In this new economic environment, the accumulation and distribution of personal wealth will play an important role. This study investigates changes in private wealth accumulation in urban China. In particular, we are interested in examining the effect of...

    • 18 Reforms and challenges of the social security system
      (pp. 330-355)
      Qun Shi

      The Chinese social security system is undergoing a series of reforms. These reforms are often the government’s short-term responses to imminent financial and social pressure. The long-term impacts, especially those on economic efficiency, are often ignored.

      The background of the Chinese social security system reform is unique. Like many other countries (mainly more advanced economies), China is facing an unprecedented demographic transition—an aging population. However, population aging in China is taking place at a much lower level of GDP per capita (Peterson 1999). In the meantime, China is undergoing transition to a market-oriented economy. This is a challenge for...

  14. Enterprise reform and regional development
    • 19 The National Social Security Fund
      (pp. 356-368)
      Tim Murton

      The establishment of the National Social Security Fund (NSSF) is a significant step for China in addressing the magnitude of its current pension problem, and in assisting the Chinese Government to service its pension liabilities. Moreover, it is an important indication of China’s desire to encourage the development of institutional investors. Despite this, the NSSF is still shrouded in some mystery. This chapter attempts to provide an insight into the management, funding and operation of the NSSF. The NSSF’s role in developing China’s fledgling funds management industry will also be considered.

      The NSSF, which was set up in the second...

    • 20 Building modern enterprises: challenges and requirements
      (pp. 369-385)
      Mei Wen

      The 14th congress of the Chinese Communist Party was held in October 1992. It was here that Deng Xiaoping officially declared that the aim of China’s economic reform was to establish a socialist market system, and since then, China’s state-owned enterprises (SOEs) have been reformed. With faster development of markets and the rapid growth of collectives and small private businesses, SOEs were further exposed to market competition in 1992 when dual track prices were merged with market prices.

      Different SOEs required different approaches to reform. A variety of contracts were introduced to provide incentives for managers to improve enterprise performance....

    • 21 Challenges facing small private enterprises
      (pp. 386-403)
      Kim Houghton and Ian Davies

      This chapter reports on the main findings from a survey of entrepreneurship and small private enterprises in Qingdao (Shandong Province) and Harbin (Heilongjiang Province). The survey¹ consisted of questionnaires distributed to existing small private enterprises (both Getihu and siying-qiye). Additional information (not reported on here) was obtained from unemployed and laid-off workers (xiagang) on issues relating to establishing and growing a small private enterprise.

      The two pilot cities were selected for the following reasons

      Harbin is a large inland capital city with a strong heavy industrial and engineering base and a large-scale state-owned sector which is undergoing major reform and...

    • 22 Industrial location and regional development
      (pp. 404-433)
      Jane Golley

      Rising regional inequality has become an undeniable aspect of China’s economic reform and development during the last 25 years. Throughout the 1990s and into the 2000s inter-provincial disparities in per capita income have continually increased. It is generally accepted that diverging rates of development in the coastal (or eastern) and interior (or central and western) provinces are a major source of these income disparities (Yang 1997; Démurger 2001; Yao and Zhang 2001; Bao et al. 2002). This divergence, in turn, stems largely from the regional pattern of China’s industrial development during the same period (Lyons 1991; Yao 1997; Mody and...

    • 23 Government transfer payments and regional development
      (pp. 434-457)
      Tingsong Jiang and Zhiyun Zhao

      Rapid economic change in China has been accompanied by worsening regional disparity. The income gap between China’s coastal and inland regions¹ has been widening since the economic reforms began in 1978 (Figure 23.1). Of the three regions, the Eastern coastal region (the richest region) experienced the fastest economic growth in the past two decades. Average per capita GDP in the Eastern region increased sevenfold, while per capita GDP in the Western region (the poorest region) increased less than fivefold. The gap in per capita GDP between the Eastern and Western regions increased from 380.6 yuan in 1978 to 3,354.9 yuan...

  15. China’s role in the world
    • 24 A new engine for pragmatism in the international security order?
      (pp. 458-480)
      Greg Austin

      In 2002 China appointed senior diplomat Wang Shijie as special envoy to the Middle East and in 2003 it approached NATO with a proposal for a formal relationship similar to that which Russia has with the Atlantic alliance.¹ In recent years China has gradually been resuming its economic aid programs to poorer developing countries at the same time as it has been intensifying its efforts to shape global arms control and proliferation regimes and expanding the reach of its defence diplomacy. China’s international security policy has gone global. Is this a gradual accretion of global interests following on the internationalisation...