Report No. 24169-CHA China Promoting Growth with Equity Country Economic Memorandum September 15, 2003 Poverty Reduction and Economic Management Unit East Asia and Pacific Region Document of the World Bank ACKNOWLEDGEMENTS The task manager and principal author of the report i s Hana Polackova Brixi. Substantive inputs were provided by Milan Brahmbhatt (on growth, poverty and inequality), Shaohua Chen (on inequality projections and poverty), Achim Fock, Scott Rozelle and Jikun Huang (on rural development), Louise Fox and Yaohui Zhao (on labor markets), Sudarshan Gooptu and Kong-Yam Tan (on macroeconomic developments), Athar Hussain (on social security), Elena Ianchovichina and William Martin (on trade), Gary Jefferson (on enterprise productivity), Pingyao Lai and Hamnann Hemmelrath Management Consultants (on technology transfer in China), Graham Smith (on transport), Colin Xu and Scott Wallenstein (on investment climate), Rong Wang (on education), and Yan Wang (on human capital development and inequality). Excellent research assistance was extended by Xiaofan Liu, Antonio Ollero, Ashok Dhareshwar, and Guangqin Luo who also helped compile the report. Valuable comments and advice were provided by many staff of the Chinese Ministry of Finance, Chinese Academy of Social Sciences, Development Research Center of State Council, World Bank and International Monetary Fund. Special acknowledgments belong to Shantong Li, Fan Zhai, Shixue Zhang, Raymond Brooks, Tamar Manuelyan Atinc, Eduardo Velez Bustillo, William Mako, Thomas Zearley, Martin Ravallion, David Dollar and the Subnational Regional Economics Thematic Group. Valuable cooperation was extended by the National Bureau of Statistics of China. Insightful and challenging comments from peer reviewers Yongding Yu, Chinese Academy of Social Sciences, Marcelo Giugale, World Bank, and Barry Naughton, University of California, San Diego, are appreciated. Essential advice and inputs were given by Deepak Bhattasali, Lead Economist, World Bank. Homi Kharas, Chief Economist and Sector Director, East Asia and Pacific Region, and Yukon Huang, Country Director for China, provided overall guidance. TABLE OF CONTENTS EXECUTIVE SUMMARY ...............................................................................................I 1. GROWTH, POVERTY AND INEQUALITY........................................................ 1 Two Decades of Unparalleled Growth ....................................................................... 1 Reforms and Growth................................................................................................... 3 Recent Economic Developments................................................................................. 4 Exceptional Anti-Poverty Performance...................................................................... 9 The Effect of Growth on Poverty Has Weakened and Inequalities Have Widened .. 11 2. FACING THE PROSPECT OF RISING INEQUALITY .................................. 16 Growth and Inequality: Some Projections................................................................ 16 Growth with Equity: A Role for Policy?................................................................... 20 3. DOMESTIC MARKET INTEGRATION AND FLEXIBILITY....................... 23 Market for goods and services.................................................................................. 24 Labor Markets........................................................................................................... 29 Financial Markets..................................................................................................... 32 Protecting the Losers of Domestic Market Integration ............................................ 35 4. CREATING CONDITIONS FOR EQUITABLE GROWTH............................ 37 Human Capital Development.................................................................................... 39 Technology Diffusion................................................................................................ 45 Development of Producer and Consumer Services .................................................. 49 Urbanization ............................................................................................................. 52 Farmers' Prospects................................................................................................... 53 Sequencing and Financing the Policy Package........................................................ 57 5. ADDRESSING THE RISKS.................................................................................. 61 Suitable Social Security ........................................................................................... 61 Financing the Delivery of Public Services................................................................ 68 Macroeconomic Stability .......................................................................................... 74 REFERENCES................................................................................................................ 81 STATISTICAL APPENDIX.......................................................................................... 87 EXECUTIVE SUMMARY INTRODUCTION lntemational experience suggests that the effect of globalization on economic growth, poverty and income distribution can vary significantly among countries, and that its impact depends crucially on national policies. Liberalization of trade and investment since the 1990s has brought high economic growth to China, and China has continued to lift people out of poverty. Inequalities, however, have deepened as the distribution of income and opportunities has shifted in favor of urban areas and coastal regions, leaving rural areas and less developed regions farther behind. Among workers, those with skills have seen their incomes grow much faster than others. This report assesses the possible pattems of inequality in China in thefuture, and outlines policy options that could help accomplish China's objective of growth with equity. Growth and inequality projections suggest that, if recent trends in widening rural- urban inequality and the disparate growth of per capita incomes across provinces continue, income inequality would rise sharply, bringing the Gini coefficient up to 47.4 by 2020 (compared to 43.7 in 1999), with essentially equal contributions to national inequality from the rural-urban and inter-provincial disparities. For sustaining growth, the report emphasizes the freer flow of resources and goods and services in the economy, to be achieved by domestic market integration and flexibility. The report suggests that the cost of market fragmentation and rigidities is high, and highlights measures to reduce local protectionism, facilitate rhigration, and commercialize the banking sector. To optimize the results of domestic market integration and promote growth with equity, the report proposes a package of policy actions that would promote new job opportunities, especially in the less developed regions, and raise retums on farm labor and land. Among these, the report highlights investing inpeople, promoting the diffusion of technology, facilitating urban agglomeration, expanding services and enhancing farmers' prospects. Finally, the report tackles the social, economic andfiscal risks that may threaten future growth and distributional performance. In particular, it suggests extending different types o f formal social security in both urban and rural areas, for fixing the inter- government fiscal system in order to facilitate the provision of public services, and for managing fiscal risk beyond the government budget and officially recognized debt. .. 11 POVERTY INEQUALITY IN A HISTORICAL AND PERSPECTIVE Large-scale poverty reduction has been one of China's greatest accomplishments during the post-1979 reform period. Amidst enormous structural transformations, which included shifts from central planning to markets, from agriculture to manufacturing and services, and from a closed to a globally-integrated economy, government reforms facilitated the lifting of about 400 million people out of poverty at the $1 a day expenditure level. Early reforms, particularly the establishment of household responsibility system and of township and village enterprises, accompanied by sharp increases in agricultural procurement prices, supported agricultural productivity and allowed farmers to exit from agriculture to pursue better paid off-farm jobs. Rural incomes increased rapidly and, during 1978-1984, the rural-urban income ratio rose from less than 40 percent to 55 percent. Further reforms benefited thepoor less effectively. Furthermore, undertaking such reforms without resolving other domestic market distortions contributed to widening inequalities across China. Price liberalization and trade expansion during 1985-1992 mainly boosted productivity in the industrial sector, and thus disproportionately elevated urban incomes (bringing the rural-urban divide back to its pre-1979 level). As foreign direct investment took off in the early 1990s, bringing technology and export competitiveness to China's coastal regions, the inland and western regions, disadvantaged by low agglomeration, scarce skills and expensive transport, fell behind. But, under increasing pressure from imports and changing demand patterns, township and village enterprises lost momentum. As a result, new off-farm job opportunities in the rural areas dried up and migration into urban occupations was not enough to reduce the number of farmers per cultivated land sufficiently to raise returns from farming. Although aided temporarily by increases in government procurement prices during 1994-96,farmers have seen their incomes lag further behind. The existing obstacles to human development and labor mobility have added to the economic and social cost of economic restructuring in both urban and rural areas. China's quarter-century record of dynamism ofsers great promise for thefiture. Continued economic growth i s likely to raise household incomes across the entire income distribution if energetic policy action complements economic forces. Such policy action could concentrate on three themes: Promoting domestic market integration and flexibility, improving conditions for growth in the less developed regions and localities, and addressing the risks to future growth and distributional performance in China. DOMESTIC MARKET INTEGRATIONAND FLEXIBILITY Thepace of overall economic growth in China will depend on the development of China's vast domestic market. By 2007, China's post-WTO accession share of the world exports may rise to about 7 percent (from 4.4 percent in 2001), but more than 70 percent of China's output will still be intended for the domestic market. Size, resulting from a population of 1.3 billion people and from a doubling of income every 9 years or so, i s ... 111 China's most significant source of competitive advantage and a magnet for domestic and foreign investment. A flexible and integrated domestic market is vital for broadening the basis of China's competitiveness and growth, and for structural adjustment in the Chinese economy. A flexible and integrated market for goods and services, along with flexible entry and exit of firms, allows more productive firms to expand and exploit economies of scale, facilitates diffusion of technology, and stimulates productivity improvements that enhance competitiveness of firms across the national economy. China's labor market, for example, has already seen that mobility across enterprises, sectors and geographical areas facilitates economic restructuring, mitigates its economic and social cost, and helps reduce rural-urban and regional inequalities. As productivity levels in agriculture lag behind industries and services, moving labor from farm to non-farm jobs i s vital for future growth. Since most productive non-farm jobs are presently created in agglomerated rather than remote rural areas, the current movement of labor from farm to non-farm jobs i s associated with rural-urban migration. As for China's banking system, with annual financial savings running at about 20 percent of GDP, it has an enormous capacity to support growth. Unobstructed by geographical, political, sectoral or administrative boundaries, China's financial market could contribute to sustained growth by promoting efficient resource allocation across the economy. Currently in China, many forms of local protectionism and market rigidities inhibit dynamic improvements that could promote national competitiveness and growth with equity. Local protectionism continues to be present in both coastal and interior provinces, greater inprovinces where local governments undertake more budget spending relative to GDP and where unemployment rates are higher. It i s prevalent in industries that are more labor intensive and that make a larger fiscal contribution to the local government budget, in high profit-margin manufacturing goods and raw materials in short supply. Labor markets across China are fragmented, showing wide wage dispersion across localities and across enterprise ownership categories. The financial market provides relatively inexpensive capital to state-owned enterprises but tends to turn away non-state firms. Moreover, the financial market i s fragmented across localities and sectors, and the profitability of financial investment i s lower than it would be in a commercially-oriented financial sector. Market rigidities and fragmentation tend to result from broader structural and institutional problems. Among local governments, protectionist incentives sometimes emerge from overlaps among the functions of local governments and enterprises, from close personnel connections between the local government and local enterprises, and sometimes also from the nature of the local development targets used by the central government. The ability of local governments to erect protectionist barriers mainly relates to the high level of autonomy that local governments are given in terms of market regulation and competition policy, and to the influence they are able to exert on the judicial system. In the labor market, the main direct obstacle to migration, the hukou (household registration) system, has been slowly easing. Less direct obstacles, including weak execution of land use rights inrural areas, shortage of low-income housing in urban iv areas, and a deep segmentation of the social security system, remain to be addressed. Fragmentation of the financial market mainly arises from direct and indirect government control over interest rates and resource allocation. As government has influence on personnel and operating decisions of state commercial banks, incentives to favor government-owned and government-associated credit applicants are strong. At the local level, lending and investment decisions of banks tend to be affected by local government priorities, usually to support the existing local enterprises. Effort to promote domestic market integration and flexibility could include the following policy measures: 0 Review the role of local governments, particularly their functions vis-&-vis local enterprises, financial institutions, and courts, and in the areas of market regulation and competition policy. In addition, consider innovative measures to make local governments accountable for their influence on the market. Complementing the legal context of China's WTO commitments, such measures could include local governance surveys collecting feedback from market agents. 0 Consider further institutional changes to facilitate labor mobility, building on the measures introduced since 2001 to reduce constraints on migration. Labor mobility across and within urban areas would benefit from centralizing the financing and provision of social security to the provincial level and from extending social security to the urban non-state sector, including both local residents and migrants. Conditions for rural-urban migration would improve with continuing reforms in land use rights to offer farmers a formal mechanism to sublease or quit their land plots with adequate compensation. Most importantly, perhaps, overall labor mobility would benefit from policies to promote the development of low-income housing in urban areas and urban peripheries, which would particularly benefit from the development of the urban land market. 0 Continue commercialization of the banking sector. Resource allocation through the banking system would improve with further reforms of bank governance structure, accounting and information systems and associated internal control and auditing regimes within the banks. To be effective, bank commercialization may require a greater role for the private sector in bank ownership and operation, more flexibility in interest rates, and improvements in corporate governance, accounting and information disclosure inthe enterprise sector. IMPROVINGCONDITIONSFOREQUITABLE GROWTH Policies to reduce inequality are compatible with the objective of promoting economic growth. Chinese economic strategy, specifically since the gth Five-Year Plan (1996-2000), has stressed balanced patterns of growth focused on rapid development of the lagging geographical regions of the country, with emphasis given to selected provinces in the interior and western parts of the country. With the appearance of rural distress during the 9th Plan period, renewed attention i s being given to developing specific policies and programs to narrow the rural-urban gap. In framing such strategies, it is important to recognize that there are bound to be leading and lagging sectors and V regions in a rapidly-growing economy, whatever its size and complexity. Differences in China result from differing endowments, geographical factors, and the effects of policies. The key issue going forward i s to design a set of strategies that would generate the requisite rates of economic growth while reducing, rather than widening, inequalities. Achieving a better distribution of incomes and opportunities - the essence of a xiaokang society - depends crucially on the creation of productive jobs, especially in the lagging regions, and on retums tofarm labor. With globalization, jobs can be sustained only in competitive areas of economic activity. Increased competition arising from the domestic market integration will not necessarily hurt lagging regions, which are at an earlier stage of industry and services sector development than others. Instead, the ability to source cheaper inputs from anywhere in China enhances the competitiveness of finished goods production in the lagging regions, boosting employment and growth. Without appropriate policy actions, however, such regions may suffer from the fact that competitiveness i s becoming increasingly based on technology, human capital, and business services. In rural areas, an increase in returns on farm labor depends mainly on reducing the currently highfarmer-per-land ratio. This has been happening with the move of labor out of agriculture. In addition, although with somewhat less dramatic effect, the consolidation of land and promoting environmental sustainability and market infrastructure will enhance returns to land and to farm-related activity. A policy package to promote conditions for equitable growth couldfocus onfive areas: investing in people, promoting the difision of technology, facilitating urban agglomeration, expanding services, and enhancing farmers' prospects. Such a package would broaden the agenda of the Tenth 5-Year Plan and help implement the guidance provided by the 16thParty Congress of the Chinese Communist Party in November 2002. Moreover, it emphasizes those aspects of economic policy that have been identified by the new Government since the last meeting of the National Peoples' Congress. In these ways, therefore, the recommended policies represent continuity with the general thrust of China's national economic policy, perhaps with greater emphasis on equity than has been articulatedinrecent policy documents. Human Capital Development Investment in health, education and other social services is crucial for achieving rapid, egicient, equitable and sustainable development in a competitive environment. Improved health contributes to learning and job productivity. Better public health i s correlated with greater investors as well as consumers confidence. For basic education, the importance in China today lies in the need not only to raise the level of technological inputs infarm and off-farm rural economic activity, but also to enable inhabitants of rural areas to pursue economic opportunities in an increasingly urbanizing and globalizing environment. In this respect, better health and basic education are core building blocks for a xiaokang society. Furthermore, knowledge and higher-level skills have become critical to achieving technology-led growth, increasingly the basis of sustainable economic development. The importance of secondary and tertiary education and life-long learning has risen as the relative demand for skills has grown, partly a result of rapid introduction of new technologies in China's industries. Faster growth in skilled labor in vi the context of free migration i s likely to assist in reducing inequalities as well as in boosting national welfare. Human capital development across China, however, faces two main challenges. First, education attainment andhealth indicators are significantly lower inpoor localities. Second, although a large proportion of public funds for education i s allocated at the tertiary level, the supply of tertiary education and life-long learning falls short of demand. Enhancing human capital development in poor localities would require equalizing the allocation of public funds on basic education and health across localities, introducing special programs to achieve national minimum standards, such as the nine-year compulsory education and basic immunization, and strengthening qualitative and outcome-oriented targets inthe delivery of social services. Intertiary education and training, private sector provision is likely to expand if the role of government changes from being the main provider of formal education to that of the architect and facilitator of an entire life-long learning system. The implementation of the 2002 Law on Promoting Private Education in China should remove any remaining discriminatory policies and integrate private schools into the formal system. To design and facilitate the entire system of formal education and life-long learning, the government could set up a transparent set of accreditations and certifications, establish standards, regulations and methods of ongoing monitoring and quality assurance, and establish a mechanism to share information on the demand and remuneration for different types of education and skills, and on the quality and performance of different educational providers. Local governments could also assist in facilitating an active role of employers and investors in the life- long learning system. Equity in access to education would be well served by a system of stipends and student loans. At the primary and secondary level, child-schooling stipend to the poorest families across China could be effective in reducing drop-outs and enhancing overall school attainment. For tertiary education, the preferred option may be student loans. Technology Diffusion Technology is an increasingly important driver of growth in China. Although integrating with the global economy, China i s yet to significantly exploit market ~ opportunities in middle- and high-tech products and services. As gaps in efficiency are large, the potential gains from catching up are significant. This suggests that relatively greater emphasis on technology and productivity, rather than merely higher capital investment, should be focused upon as the driver of future growth. Moreover, even sustained competitiveness in low-tech product markets requires new technologies, especially producer services such as marketing and financial management. This i s true also for the development of China's lagging regions. Although most jobs created in the lagging regions are likely to target low skilled labor, post-WTO accession competitiveness in the domestic and global markets will require a continuous upgrading of products, the absorption of newer technologies by firms, and the ability of the workforce to utilize such technologies as productively as in competitor firms. So far, vii however, most of the technology-led growth in China has concentrated in a relatively small geographical area of coastal cities. Broader technology diffusion has been held back by local protectionism, by localized shortages of skilled labor, and by weaknesses in the current technology-oriented policies. 0 The existing technology dissemination schemes need at least minimal financial support from their sponsoring agencies to thrive without deviating from their core tasks. Their core tasks need to be defined more sharply, especially with regard to sharing information about production technologies and management approaches emerging across sectors, and providing technical assistance to small and medium- sized enterprises. In agriculture, technology diffusion would benefit from streamlining the existing extension system and complementing it with more efficient information sharing devices. 0 To alleviate the problem of local shortages in skilled labor, as part of the agenda to develop, attract and retain skills in lagging regions, local governments may organize training and research centers in partnership with firms, and facilitate closer links between local firms and universities and other schools. 0 Overall, technology diffusion would benefit from competition policies that encourage competitive pricing, facilitate entry by new firms, andpressure producers to innovate and improve their productivity. Development of Producer and Consumer Services The expansion of services, their improved eflciency, and closer interaction between services and manufacturing can potentially make a significant contribution to China's future growth. Liberalization and opening to foreign entry in logistics and telecommunications will provide more economic opportunities across China, and i s likely to promote more equitable growth. Furthermore, the services sector i s the likely pillar for future job creation in China. On average, every year during 1990-2002, the services sector generated 7.6 millionjobs, compared to 1.6 millionjobs created inindustry and 1.7 million exits from agriculture. In the provinces included in the Western Region Development Strategy of the Government, the contribution of services to job creation was about 1.3 million a year, while employment in industries actually shrank (by 2 million in total). The 1990-2001 job creation in these provinces, however, was not sufficient to support effective transfer of labor out of farming, and agriculture provided at least 4 million new jobs. Services sector development suffers mainly from restrictions on services production and delivery. 0 The services sector and its contribution to job creation in the lagging regions are likely to grow with continuing reforms of the role of the government. Instead of serving as a provider, the government i s increasingly becoming regulator - by implementing relevant standards, leveling the playing field for enterprises of all types, and enhancing the local investment climate. This process needs to be accelerated. In financial services, international experience suggests that subsidized lending interventions are generally far less successful than self-sustainable outreach schemes. In China, progressive interest-rate liberalization would make ... V l l l microfinance, finance to small enterprises and financial services in underserved localities commercially viable. Availability of financial services to non-state firms will also depend on the development of accounting, auditing, legal and other business services, and on regulations and market infrastructure to improve information reliability and disclosure across the economy. Urbanization Agglomeration of people and resources contributes to economies of scale and economic eficiency. Given the economic advantages of agglomeration, most new productive jobs in services and manufacturing are likely to emerge in urban areas and urban peripheries. In the past 20 years, the majority of new non-farm jobs has been created in medium and small size cities, with the highest rate being in urban peripheries. Although the greatest benefits of agglomeration are seen when small and medium-sized cities expand, urbanization policy delivers best results if it encourages the development for all types of cities, rather than suppressing the growth of larger cities while promoting small and medium-sized cities and towns. The process of agglomeration i s effective, and its economic and social benefits sustained, if it occurs in harmony with the restructuring needs of the economy. 0 The benefits of agglomeration in China would expand with establishing sound markets for industrial land development and a favorable environment for low- income housing development. Commercial motives would encourage the desired pattern of land development and use, if complemented by stronger regulatory and supportive government policies. 0 The overall results of urbanization also depend on government policies to promote urban peripheries and the quality of urban life. Relocating from city centers, industries are likely to favor urban peripheries, which have the best potential for a synchronized development of new economic activities and housing. In this respect, local governments may need to play a more active role in the residential land market in urban peripheries to facilitate the needed supply of low-income housing. International experience suggests that this role may involve the provision of basic physical and social infrastructure and public services in locations that are near the points of economic activity and suitable for low-income housing. Public services, such as suitable public transport network, locally available basic schooling and environmental protection, would play a vital role in supporting the development of sound and integrated centers of economic activity and quality life. Farmers Prospects ' Raising income growth rates in poor rural areas will depend on the creation of of$arm jobs, but also on the performance of agriculture. In poorer provinces, rural enterprises are more scarce, rural households draw a higher share of their income from agriculture, agricultural output per farmer i s lower, and the gap in rural-urban rates of growth i s more prominent. Provinces that contain most of the rural poor appear to suffer from the combined effect of high dependence on agriculture, small land plots and low production inputs per unit of land. Within provinces, dependence on agriculture comes i x with remoteness. As the average land plot used for farming in China i s currently too small to allow for significant improvements in agricultural productivity, the reduction in the farmer-land ratio (by moving labor out of agriculture), accompanied by land consolidation, i s the single most important factor to boost farmers' incomes. Farmers, however, continue to face challenges in executing their land use rights as well as in dealing with environmental and food safety issues and in accessing market information and marketing services. There i s need for effective enforcement of farmers' land rights and of environmental laws and regulations at the local level. A formal enforcement mechanism could be set up to facilitate the sublease and transfer of land contracts, and the use agricultural land as collateral in credit transactions. Such a mechanism may be needed to effectively implement measures approved by the 2003 National People's Congress, including the proposed penalties on local officials who interfere with land rights. The effectiveness of environmental policies and laws can be supported by greater implementation authority of the State Environmental ProtectionAgency. 0 Inaddition, farmers wouldbenefit from greater assistanceinaccessing markets. The government has already announced plans to increase investment, set up market information system, promote standardization of agricultural products, and use China's WTO membership to further open foreign agricultural markets to China's products. Guidance on the priorities for the involvement of local governments in improving farmers' market access would best come from their constituencies, from the actual and potential users of services and from private businesses. ADDRESSINGTHE RISKSTO FUTURE GROWTH DISTRIBUTIONALPERFORMANCEIN AND CHINA China faces several risks in promoting growth with equity. Among these, the following deserve particular consideration. First, gaps in social security may erode risk- taking in an increasingly market-oriented society and could undermine social cohesion and public support for further reforms. Second, the delivery of public services i s inadequate in poor localities and could constrain future economic growth. Third, macroeconomic risks facing the government could escalate, raising uncertainty and exacerbating fiscal pressures. Providing SocialSecurity Most of China's poor and vulnerable fall through the gaps in existing social security schemes. As the spread of markets and globalization intensify structural changes and increase uncertainties as well as opportunities, social security i s gaining importance. Possible reforms could focus on the following policy actions. 0 Extend social security to the labor force in the urban non-state sector, including both local residents and migrants. This i s important on equity grounds since most new jobs have been generated in the urban non-state sector. Most vital i s the expansion of urban basic healthinsurance. X Centralize the financing and provision o f social security and protection to the provincial level. Provinces are better equipped than cities to pool risk and, with rules for the transfer of rights between provinces, make benefits portable, thus complementing the ongoing labor market reforms. Establish comprehensive income maintenance and basic insurance schemes in rural areas. Since poor households and individuals are distributed over the whole of rural China, the government may wish to consider an assistance scheme that would target poor people, rather than only poor geographical areas. Insurance against the financial costs of medical care to address catastrophic illness and injury i s particularly urgent, building on recent pilot schemes. Most countries at China's income level provide such insurance, ideally along with immunization and other basic preventive care, in the context of tax-funded universal basic health care with a strictly defined minimum benefit package. Eventually, these schemes may become a good basis for the needed removal of the existing rural-urban segmentation in China's social security system. Financing the Delivery of Public Services Thepresent inter-government finance system is not ensuring adequate delivery of public services in many localities across China. The central problem ininter-government finance and public service delivery i s the large gap between expenditure and revenue assignments at the local level. Expenditure responsibilities at the local levels are much greater than found in other countries. The delivery and financing of most core public services, including education, health care, social security and infrastructure are assigned to local governments. During the last decade in China, per-capita revenues and expenditures of local governments have varied greatly across provinces. Similarly large disparities have been present within provinces. China i s also unusual in not having a transfer system that provides for the expenditure needs of local governments. The current system of intergovernmental transfers, in spite of the large volume of flows (financing 46 and 48 percent of local expenditures in 2001 and 2002) i s poorly designed to support the financing of vital social services such as rural education and rural public health. Pushing down expenditure responsibilities to lower levels without providing adequate financial support has produced large and growing fiscal disparities that reinforce income disparities across regions. This i s just the opposite of the expected role of government - that of alleviating income inequalities and protecting the poor and vulnerable groups. The outcomes are regressive, where governments in poor regions are providing fewer and lower quality services and passing along a higher proportion of the costs to their constituents. 0 Ensuringadequate public service delivery across China may not be feasible without a comprehensive reform of the inter-government finance system. Such a reform would address expenditure and revenue assignments to all levels of government in an integrated way, rather than separately as in recent public finance reforms packages, and coordinate inter-government fiscal transfers accordingly. Further reforms in the assignment of government revenues can provide the central government with the resources to fund greater equalization transfers. Separately from reforms to boost the government's overall tax capacity, reforms in the tax x i sharing system can plausibly boost resources available for transfers as well as they can directly reduce the disparity in local government revenues. In this respect, the amounts allocated on tax rebates could be further reduced and the sharing of value added tax revenues could be further centralized. In promoting fiscal equity across local governments, complementary measures on the revenue side could include a limited discretion offered to local governments in setting local tax rates, possibly as part of the property tax, personal income tax or excise tax. Some centralization of the responsibilities for financing and delivery may enhance public service delivery. Moving the responsibility for the financing and provision of selected services from the village, township or county level to a higher level of government may benefit efficiency and administrative capacity as well as equity. The changes inexpenditure and revenue assignments should realign responsibilities with financial and institutional capacity at each level of government. Furthermore, greater autonomy of local governments, along with greater accountability, could enhance allocative and operational efficiency in their expenditures. To promote the alignment of incentives of local governments with the objective of growth with equity, the central government may want to correspondingly revise the targets and indicators used to evaluate local government performance. Governments at each level could make their decision making process more open and transparent and strengthen monitoring and audit functions. Greater autonomy on the revenue and expenditure sides, complemented by provisions to raise local government accountability, can be attractive to local governments, possibly making the whole reform package somewhat more politically acceptable. Maintaining Macroeconomic Stability International financial markets are signaling a renewed risk to China's macroeconomic stability. The perception of macroeconomic risk in China can be plausibly explained by the vulnerability of China's domestic financial sector and by the hidden obligations facing the government. Weaknesses in the financial sector arise mainly from non-performing loans in the banking system, and the potential need for fiscal intervention. This constitutes the core of the perceived government fiscal risks, along with implicit liabilities arising from the pension system and obligations facing local governments. Under favorable conditions, the total burden of government "hidden" obligations currently outstanding appears manageable. Less favorable macroeconomic conditions, however, could generate painful fiscal pressures. Most importantly, continuing accumulation of government obligations poses a major fiscal risk. Therefore, policy actions inthis respect are vital. In the banking system, an injection of new capital accompanied by structural and regulatory reforms may be needed. The experience of other countries suggests that recapitalization i s particularly effective if at least partly financed from private sources, through strategic investors, and accompanied by the transfer and development of new technologies and skills, and if underlying structural problems in enterprises are resolved. Reductions in the rate of non-performing loans on new lending and productivity improvements from reductions in operating cost are likely to come with greater commercial orientation in the financial institutions and with xii improved regulatory and supervisory systems. Attracting private capital into the financial sector would mean that more risks are assumed by those market participants willing and able to bear them, rather than by the government. There i s need to stabilize the current level of government obligations. Internationally, a combination of parametric changes (for example, raising the retirement age and lowering the benefits payable under the pay-as-you go schemes) have proven to be an effective way of reducing financing gaps. To limit fiscal risks arising from local government activities, a country-wide fiscal risk monitoring system could be established. International experience offers several good models for establishing local government fiscal risk monitoring systems at the central or subnational level. On the whole, the government will be able to reduce its vulnerability by establishing a comprehensive system to monitor all major sources of fiscal risk. Careful fiscal management across the entire portfolio of government direct and contingent, explicit and implicit, liabilities will ensure that future government deficits and debts remain at prudent levels and fiscal resources adequately support future needs for public services. As discussed inthis report, a strong combination of progressive policy, private initiative and public finance i s required to achieve the growth and equity objectives of axiaokang society. FOCUSINGTHEPRIORITIES ON China can achieve growth with equity if it follows correct policy priorities. The tasks of promoting domestic market integration and flexibility, improving conditions for equitable growth and addressing the main risks facing China imply some common policy priorities. These are centered around adequate delivery of core public services and indirect involvement of the government in the economy, and mainly include: 0 a comprehensive inter-government finance reform that would allow for adequate provision of basic education, health and social security, and reduce the incentives of local governments to be engaged in local protectionism 0 proper market regulation and competition policy, implemented uniformly across China, which would reduce the capacity of local governments to be engaged in local protectionism, facilitate technology diffusion, and support the development of the services sector 0 effective commercialization of the banking sector, supported by continued reforms in the enterprise sector, which would reduce financial sector vulnerability and government fiscal risk andfacilitate efficient allocation of capital 0 the development of urban land market and urban infrastructure to support low- income housing near points of economic activity in urban areas and urban peripheries, which would facilitate both migration and urban agglomeration 0 effective law enforcement that would allow farmers to better utilize their land use rights in the context of migration and land consolidation, offer farmers adequate environmental protection, and support greater autonomy and accountability of local governments. xiii Given various competing interests typicallyfacing govemment and given the complexities of structural and institutional reforms, these priorities may, at times, be difSlcult to implement. Although beneficial for the majority of China's population and for China's national competitiveness in a globalized economy, each of the policy priorities listed above i s likely to be resisted by some interest groups, and there will be many trade-offs that will have to be weighed. For example, reforms of the banking system will likely affect the flow of credit in a way that i s good for the long-term but may have adverse employment consequences in the short-term. Reforms in inter-governmental finance, pensions, the composition of public services, and macro-economic risk mitigation are specific areas where the costs and benefits to different groups will vary significantly. Moreover, policy-induced changes will occur within the broader context of major structural changes that are underway already, partly to accommodate the forces of globalization. It will be a task of enormous political will and strategy to navigate among sources of resistance and to mitigate the sharpest edges without undermining the objective of China's growth with equity. 1. GROWTH,POVERTYAND INEQUALITY 1.1 With a focus on growth, poverty and inequality, this chapter discusses recent economic performance in the context of rapid structural change. It testifies to the improvements inmacroeconomic management and policies that have taken place over the past decade, which has provided macroeconomic stability in the face of external and domestic economic shocks. China's recent performance i s even more remarkable in view of the complex structural reforms and market-oriented institutional development that was undertaken over the past decade. Increased international openness and domestic competition offer significant opportunities to China to cope with its economic challenges in the real and financial sectors. At the same time, the rapid movement away from a centrally planned system points to the need for strengthening institutions required for the efficient functioning of a market-based economy, including social security, to cushion the effects of the transition on vulnerable groups. Two Decades of UnparalleledGrowth 1.2 China has achieved remarkable economicprogress since 1979.Official statistics show that real GDP grew an average 9.4 percent a year in 1979-2002, exceeding 10 percent in the first halves of the 1980s and 1990s. The economy also experienced "overheating" in the past decade, with the GDP growth rate rising to 14.2 percent in 1992 and averaging 12 percent per year during the Sth Five-Year Plan period (1991-1995). The average growth rate was 8.3 percent during the 9th Plan and Figure 1.1Real GDP and Sectoral Growth, 1981-02 (%) 7.6 percent over the past five years (Figure 1.1). Between 25 I 1996 and 2002, China's GDP has grown from being about two-thirds the size of the rest of East Asia combined (excluding Japan) to 1.2 times. In 2003, in spite of the adverse effects of Severe Acute Respiratory Syndrome (SARS) and the slow growth of world trade, the Chinese economy i s 1981-1985 1986-1990 1991-1995 1996-2000 2001-2002 projected to grow at about 7 0PrimaryI0Tertiary-GDP Secondary percent, driven by the (annual base industrial and services sectors. Various analysts have Source: China Statistical Yearbook, various years and World Bank estimates 2 questioned whether growth was really as high as shown inthe official statistics. Whatever the outcome of this on-going discussion, the post-1979 growth performance has been associated with dramatic reductions in poverty - approaching 400 million people lifted out of poverty at the US$1 a day consumption level. There have been other observable improvements in the material conditions of the mass of the population as well (Figure 1.2). 1.3 This progress stands out against the backdrop of enormous structural transformations and extemal challenges. Structural transformations included shifts from central planning to markets, from agriculture to manufacturing and services, and from a closed to a globally-integrated economy. Structural changes in the economy are creating immense pressures for migration from rural areas to China's cities. Rapid demographic transition has changed the fertility and aging profiles to match those of the OECD countries, although at a much lower level of income. On top of this, external challenges were posed by the 1997-98 Asian Crisis and the 2000-2002 global economic slowdown. China's steady growth and macroeconomic performance contrasts with both the transition economies of Eastern Europe and former Soviet Union, which have shared the challenge of opening and reforming moribundcentrally plannedeconomies, and with the rest of the Asian region, which lost economic control as a result of weak corporate and financial sectors. Aided perhaps by real depreciation of the renminbi between 1993 and 1998, China's massive balance of payments deficit of 1993 (US$11.6 billion) was converted into a surplus. Notwithstanding the global slowdown, China has been able to solidify its strong external position - while maintaining a Figure 1.2 Living Conditions, 1985-2000 stable currency. More recently, the strong 120 - output performance and 100 - increasing openness of 01985 m1995 02000 the Chinese economy 80 - has supported the 60 recovery of the Asia - region. China' s 40 - imports from the region constitute two thirds of 20 - China's total imports, 0 - and have been growing ColorTVs- Washing Living Space ColorTVs - Washing Living Space rapidly. Rural Machines - -Rural Urban Machines - -Urban Rural Urban Note: Consumer durables per 100 households and net living space per capita index Source: China Staristical Yearbook, 2001 1 Nearly three quarters of China's imports arrive at zero, or close-to-zero duties, for export processing or as imports under preferences for foreign-invested firms. China's openness is also shown in the US$l50 billion of on-shore foreign currency deposits (the second largest after the United Kingdom), which links its monetary policy to developments in external financial markets, regardless of some controls on the capital account. 3 Reformsand Growth 1.4 Based on a wide variety of calculations, nearly a quarter to a third of China's post-1979 growth is estimated to have come from increases in organizational and production efficiency. Alternative estimates of the sources of growth suggest that technological advances sped up in the 1990swith the opening of the economy and inflow of foreign direct investment, raising the demand for skilled labor. Technological growth has averaged above 2 percent per year, which i s a strong performance by international standards. Factor accumulation, that is, the application of labor and capital in economic activities, however, have made the greatest contribution to output growth. For the future, most analysts expect changes in saving behavior and demographic conditions to reduce the contribution of factor accumulation to economic growth. Sustained growth will increasingly depend, therefore, on further increases in the efficiency of resource use in the Chinese economy. 1.5 The strong growth of 1979-84 was mainly a result of the shift of labor from agriculture to rural industry. The introduction of the household responsibility system, rising agricultural procurement prices, and freedom to sell output in excess of government quotas at market prices improved the rural-urban terms of trade by more than 40 percent. Real per-capita rural incomes increased on average by 15 percent a year, a pace unmatched before or since. Rising farm incomes Figure 1.3 Rural Labor andAgricultural Output, 1978-2002 allowed higher savings to finance new rural enterprises. The share of agriculture in total employment fell from 62 to 53 percent between 1978 and 1985 (Figure 1.3), while the share of township and village 4oo enterprises rose from 7 to 14 percent. The shift of labor from 2oo agriculture into rural industry experienced another surge in the first part of the 1990s but, 1978 later, growing financial ...-- 1982 1986 1990 1994 1998 2002 -Agricultural employment as % of total difficulties in the rural Apcultural output as % of GDP enterprise sector reduced the Source: china Statistical Yearbook scope for new off-farm job opportunities inrural areas. 1.6 During 1985-92, growth benefited from the improved efficiency of resource allocation. At an early stage in reforms, with prices of industrial goods gradually liberalized and with market transactions steadily expanding in the economy, the Chinese economy was opening to foreign trade and investment.2Price liberalization, greater use 2 The gradual process of foreign opening encompassed expanding the number of enterprises allowed to participate inforeign trade, replacing trade procurement targets by market based trade policy instruments such as tariffs, quotas and duty exemption schemes, gradually reducing trade barriers, and finally, 4 of markets for resource allocation and opening to foreign trade are all likely to have contributed to improving the efficiency of resource allocation, something that would be reflectedin higher productivity growth as measured. 1.7 In the early 1990s, as the economy further opened, technological progress accelerated. Annual gross foreign direct investment inflow jumped to reach 6 percent of GDP by 1994. Imports of capital equipment by foreign invested enterprises in 1987-95 exceeded those by domestic firms by more than two and a half times. Such imports are an important source of embodied technological progress, and exemplify the role of foreign invested enterprises as a major locus for the inflow of new technologies, scientific knowledge and modem management practices. The role of foreign direct investment in technological progress in China i s crucial, underscored b y the still underdeveloped potential of domestic research and development and innovation systems. Recent Economic Developments 1.8 Structural changes have intensijied and good growth perfomance has continued in recent years. Table 1.1 indicates some of the large shifts that have occurred in the generation of output and in the condition of the economy over a short span of ten years. The decline in agriculture's contribution to both output and employment has continued. The rate of increase in average labor productivity in agriculture has slowed, despite the withdrawal of about 22 million workers since 1992.3This observation captures a set of core transitional issues in the economy that accounts for low incomes in rural areas. It also explains the rationale for the far-sighted government policies that have been introduced to address land and labor market weaknesses, migration, urbanization, and the wide rural-urban income gap. At the same time, the dominant role of manufacturing in the economy (in output, exports, employment, and productivity) highlights the rapid modernization that has taken place over the same period. In this respect, the current structure of the Chinese economy i s notably different from that o f other countries at or about the $1,000 level of per capita annual i n ~ o m eAs . ~ seen in Figure 1.4, trade coefficients are exceptionally high for a country of this size. China i s expected to capture a 7-8 percent share of world exports by 2007. Increasingly, the impulse for investment i s coming from non-state sources (Figure 1.5), although since the Asian Crisis it has been supported by government spending associated with the macroeconomic stimulus program discussed below. increasingly using market mechanisms in foreign exchange allocation and moving from a dual to a unified exchange rate system in 1994. 3 Official labor data suggest that employment inagriculture mainly declined during 1992-96 and has remained steady since then. 4 Several methodological weaknesses make services undervalued in the Chinese national accounts. I t is often difficult to separate services from manufacturing data for China's vertically-integrated firms, there are gaps in coverage of important rapidly-growing and smaller-sized service producers, and accurate valuation of inputs and outputs inthe sector remains a challenge. 5 Table 1.1Selected Economic Transitions, 1993-2002 1993- 1996 1997 1998 1999 2000 2001 2002 95 a! Levels (US$ billions) GDP 700 816 898 946 991 1,081 1,175 1,237 International reserves 74 105 140 145 155 166 212 286 Net foreign assets of banks -3 -4 5 18 31 60 85 108 External debt b/ 118 129 147 144 152 146 170 169 Short-term 22 25 31 17 15 13 42 53 GNUcapita c/ 520 620 710 740 780 840 890 940 Output (% of GDP) Agriculture 20 20 19 19 18 16 16 15 Industry 48 50 50 49 49 51 50 52 Manufacturing 35 35 35 34 34 35 35 36 Expenditure (% of GDP) Fixed investment 36 34 34 35 36 37 38 42 Government and SOE 21 18 18 20 19 19 20 Exports d 22 21 23 22 22 26 26 30 Manufactures (% of goods) 84 85 87 89 90 90 90 91 Imports d 21 19 18 17 19 23 23 27 Employment (millions) 681 690 698 706 714 721 730 737 Agriculture (%) 49 47 46 46 46 46 44 43 Services (%) 23 26 26 27 27 28 28 29 Productivity (RMB/year) e/ Agriculture 1,651 1,863 1,946 2,024 2,085 2,193 2,284 2,405 Manufacturing 11,718 14,474 16,106 20,087 22,237 24,459 26,473 27,928 Source: National Bureau of Statistics, Peoule's Bank of China, State Administration for Foreign Exchange, and World Bank Note: a/ End of period data for levels, pehod averages for all other data. b/ Series revised in-2001, with short term debt presentedon "remaining maturity" basis. c/ Estimate based on World Bank Atlas methodology. d/ Goods and non-factor services. e/ Labor productivity - real value-addedper worker at 1990prices. Figure 1.4 Merchandise Trade, 1978-2002 Figure 1.5 Real GrowthinFixed Asset Investment, (% of GDP) 1991-2002 (%) w Other China 1997-2002 0 1991-96 Individuals 50I 40 Collective- 30 - owned 20 - SOEs 10 - Total I 0 10 20 30 40 Source: China Sfatisitical Yearbook, various years Source: China Statistical Yearbook,various years 6 1.9 China is providing an anchor for economic recovery in the East Asian region. Figure 1.6 compares the real GDP growth rates in the East Asian crisis countries (Le. Indonesia, South Korea, Malaysia, Philippines and Thailand), Japan and Singapore with that of China for the year 1998 after the crisis hit and the average growth rates for the post-crisis period 1999-2002. It highlights the contrast in the fortunes of these countries with that of China, which was relatively unscathed by this crisis. More recently, China's industrial output has grown by 12.6 percent in 2002, and by 16.9 percent in the first half of 2003. Meanwhile, China's external position remains favorable (Figure 1.7), benefiting from direct and indirect effects of the country's WTO membership. In 2002, exports made a strong comeback, rising by 22.4 percent, and with imports rising by 21.2 percent the trade surplus reached US$30.4 billion. China's main trading partners are in Asia, and exports from the non-Japan East Asian countries to China rose by 35 percent in 2002, contributing 37 percent of their total export growth. The importance of the China market for other East Asian economies has increased rapidly fromthe early 1990s onwards, from 8 percent of total exports of the major East Asian exporters in 1990 to 16 percent in 2002. Yet, concerns about the ability of countries to compete with China continue to exist, especially inthe Asian region. Such concerns reflect on the flood of Chinese merchandise to the Asian market, competition in third country markets, and the relocation of foreign direct investment to China. Foreign direct investment remains significant as investors seek to exploit the opportunities createdby China's entry into the WTO. Gross inflows of foreign direct investment exceeded US$52 billion (4.2 percent of GDP) in 2002 (Figure 1.8), makingChina the world's largest recipient of foreign direct in~estment.~ Providing a cushion against possible adverse developments, foreign reserves have grown further, reachingUS$346 billion inJune 2003. 1.10 Government demand management has been vital to the accomplishments on the macroeconomicfront. Since 1998, and again as a macroeconomic management objective of the lothPlan, the Government has targeted the support of domestic demand through interest rate cuts and increased public spending as well as raising productivity through continuing structural reforms. Proactive fiscal, quasi-fiscal and monetary policies have sought to counteract the negative demand effects of the ongoing restructuring in the enterprise and financial sectors, weak rural economy, and unpredictable external conditions (Table 1.2). The government maintained annual monetary growth at 14-15 percent during 1998-2001, and has accelerated monetary growth to 16.8 percent in 2002, and 20.8 percent in the first half of 2003. As part of the fiscal stimulus program, the government implemented investment projects in the amount of over RMB1.2 trillion (about 12 percent of 2002 GDP) over 1998-2002.6 Out of this amount, long-term treasury 5 B y 2002, China had approved well over two hundred thousand foreign-funded businesses, while cumulative actual and contracted foreign direct investment reached $447 billion and $828 billion respectively. On average about half of actual foreign direct investment has been directed towards using China as an export platform. By 2002, foreign invested enterprises delivered over one half of China's exports and over one quarter of China's industrial output. The share of foreign invested enterprises in the output of technology intensive sectors such as electronics, telecommunications, office equipment and measuring instruments exceeded 60 percent. 6 The fiscal stimulus program, implemented since 1998, aimed mainly at increasing domestic investment in infrastructure, environment and technology and, since 2000, in China's Western regions. In 7 bonds financed RMB660 billion and commercial banks and state-owned enterprises covered the rest via co-financing. Government expenditure increased from 14.0 percent of GDP in 1997 to 22.0 percent in 2002.7The fiscal deficit, estimated at 3.3 percent of GDP in2002, is being kept incheck by rapidly rising tax revenues -from 12.1percent of GDP in 1997 to 18.7 percent of GDP in2002. Figure 1.6 China's Macroeconomic Performance China relatively unscathed by the East Asian crisis.. . ... continues its rapid growth... East Asia Real GDP Growth Rate, 1998-2002 (% per year) China Real GDP Growth Rate,1996-2002 (% per year) a 10 6 1998 1999-2002Avg 4 8 2 0 6 -2 -4 4 6 2 8 -10 0 Source:World Bank Source: World Bank ... while deflationary pressures may be abating .,.fuelled partly by increasedpublic spending. China InflationRate, 1996-2002 (CPI, % per year) Budget Balance, 1996-2002 (% of GDP) and Real Exchange Rate (Index, 1995=100) lo T T 115 1996 1997 1998 1999 2000 2001 2002 Source:World Bank Source:WorldBank contrast to the earlier focus on infrastructure spending, the 2002 budget called for an increased emphasis on social welfare spending, including benefits for laid off workers, and support for rural incomes. 7 Unless noted otherwise, figures on government expenditures, revenues and deficit reported here follow the IMFdefinition. 8 Figure 1.7 China's External Position China's external position is holding up well... ...and international reservescontinue to rise. Exports and Imports, 1993-2002(US$ bn) and Gross Foreign ExchangeReserves (US$ bn) Trade Balance (% of GDP) 300- =Trade Balance (right scale) 250 - -Exports 200- - --Imports .- - 2.5 150 - 150 - 2 - 1.5 loo - 100 - 1 50 50- - 0.5 0 0 04 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 1593 15% 1995 1996 1997 1998 1599 2Mx) 2001 2@32 Source:WorldBank Source:World Bank 1.11 China is likely to sustain current growth levels over the Table 1.2 Contribution to Real GDP Growth, 1997-2002 (%) medium tenn. Both in the short and 1997 1998 1999 2000 2001 2002 medium terms, external demand TotalDomesticDemand 7.0 7.0 8.4 6.9 7.8 7.5 will continue to play an important Private Demand 3.4 3.6 5.5 6.7 4.7 3.7 roles8Global growth projected for GovernmentDemand 2.3 4.6 2.4 1.9 3.5 4.4 the short term is slowly recovering External Demand 1.8 0.8 -1.3 1.1 -0.3 0.5 (2.3 percent increase in GDP in Export 3.9 1.4 2.9 6.3 2.4 7.5 2003, compared to 1.7 percent in Import -2.1 -0.6 -4.3 -5.3 -2.7 -7.0 2002), possibly leading to a rate of Growth 8.8 7.8 7.1 8.0 7.5 8.0 growth of world trade of 6.5 Source:WorldBank staff estimates percent, or half the expansion of Note: Privatedemandincludesalsoinvestmentby collective-ownedenterprises. 2000. The Government i s relying Figure 1.8 Foreign Direct Investment Flows, 1993-2002 on domestic demand to support (US$ bn) China's growth. The effect of 120, SARS is judged to be temporary, although future economic effects LOO QFDlDisbursements will depend on the Government BFDIcomrments 80 maintaining its strong containment measures. Official projections for 60 2003 see output rising by 7 40 percent; analysts see output growth in the medium term settling at a 20 6.5-7 percent annual rate. 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2W2 Source:WorldBank 8 Since the third quarter of 2001, the net effect on demand of foreign purchases of China's exports and Chinese residents' purchases of imported goods has been positive, reversing the trend during 7 o f the 10previous quarters. 9 1.12 Over the long term, China's success will depend on addressing an array of difficult, interlinked structural and institutional issues. China's accession to the WTO i s expected to aid its growth prospects, mainly by raising the efficiency with which the economy uses its resources. In spite of the advances made, domestic markets for goods, services, labor and capital suffer from rigidities that create obstacles to agglomeration andfurther structural adjustments, retardingbroadly-based improvements inproductivity. State-owned enterprises, while contributing a decreasing share of total output, continue to dominate access to finance and local product markets, and burden banks with non- performing loans. Banks, in turn, require decisive actions to deal with their portfolios. Measures such as recapitalization, however, may have only a temporary effect if the incentives problems associated with state ownership in the banking and enterprise sectors remain unresolved. Government contingent liabilities emerging from the pension system, local governments, and the banking sector, along with the growing government debt, make the fiscal stimulus program untenable in the long term. But problems in the delivery of essential public services such as education, health and social security, associated mainly with weaknesses in the inter-government finance system but also in shortfalls in spending in some critical areas, pose another fiscal challenge. Addressing these needs while the stimulus component of government expenditures i s reduced will require major changes in the composition of public spending, and associated budget management reforms. Exceptional Anti-Poverty Performance 1.13 Large-scale poverty reduction has been one of China's greatest accomplishments during the reform period. Using the official poverty line, the number of poor people i s estimated to have fallen from about 200 million 1981 to 34 million in 1999. Alternatively, using the World Bank's $l/day income measure, the number of poor i s estimated to have dropped from about 490 million to 98 million over the same period (and further to 88 million by 2002), which corresponds to a decline in poverty incidence from 49 percent in 1981 to 7.8 percent in 1999 (and 6.9 percent in 2002). Finally, using the World Bank's $l/day consumption measure, the number of poor declined from 360 million in 1990 to 223 millionin 1999 (and 161million in 2002), which corresponds to a decline in poverty incidence from 31.5 in 1990 to 17.8 percent in 1999 (and 12.5 percent in 2002). Thus, by all measures, the decline in the number of poor has been dramatic. Figure 1.9 summarizes the main trends in national poverty (and inequality, which i s discussed below). Poverty dropped most in two main episodes, first in the early 1980s and then again in 1994-96. In both cases, poverty reduction was associated with improving rural -urban terms of trade (Figure 1.10). 1.14 Poverty dropped most significantly in the early 1980s,whenfast growth emerged from rural reforms. A strong growth in grain yields (5.7 percent per year) and in rural industries, accompanied by sharp increases in agricultural procurement prices, alongside with improvements in rural-urban terms of trade, raised rural incomes at 15 percent a 9 Only official data until 1999 are available publicly. The 2002 estimates are based on a World Bank methodology for estimating and projecting poverty rates using disaggregated national accounts and household survey information. 10 year in real terms (Figure 1.10). As poverty in China was essentially a rural phenomenon and rural poverty was widely dispersed in the early years of post-1979 reforms, rural income growth delivered nearly universal poverty reduction across China. Between 1981 and 1984, income poverty at the $l/day level fell from 49 to 24 percent and the rural- urbanincome ratio rose from about 40 to 55 percent. 1.15 Again at a time of high rural Figure 1.9 PovertyRate, Inequality and Growth 1981-2000 growth related to 60 - Average Per-capita GDP Growth govemment 1981-84 1985-89 1990-93 1994-96 1997-00 procurement reforms, 10.1% 7.2% 10.9% 8.9% 6.7% the second episode of 50 -. fast poverty reduction Gini Index (right scale) , Poverty Rate occurred during 40 I -. (left scale) *` \ I 1994-96. After a \ I period of reduced 30 -. growth and poverty reduction in the late I -- 35 1980s, when the 20 -. I I $l/day poverty rate I stagnated and in some 10 - -- 30 - m o d years even rose, poverty declined 0 1 25 ~ sharply again in 1981 1984 1989 1990 1993 1996 1998 2000 1994-96. During Source: NationalBureauof Statistics, World Bank and Chen and Wang (2001) those three years, Note: Poverty rate i s based on $l/day income using official household survey data. poverty incidence fell There i s abreak inpoverty data series in 1990. from 18 to 11percent, Figure 1.10Rural-UrbanIncomeRatio and Terms of Trade or, measured at the $l/day consumption line, from 25 to 17 1 6o T Rural-Urban Terms of Trade T 200 Rural-Urban Incom' percent. Increases in 55 agricultural prices and output in rural areas and the introduction of the"8-7 Plan" for poverty reduction (80 million people to be lifted out of poverty in 7 years) accounted for this reduction." Source: ChinaStatistical Yearbook, various years 10 The 8-7 Plan, launched by the government in 1994, provided tax reductions, financial grants and social-economic development projects to 592 designated "poor" rural counties. 11 1.16 Poverty reduction over the post-1979 reform period was successful also in terms of broader social development. By 2001, adult literacy rates had risen to 85 percent, and enrollment rates to 99 percent (net) in primary schools and to 89 percent and 44 percent (gross) in junior and senior secondary schools, respectively. During 1980-2001, the average years of schooling in the 15-64 year age group rose from 5 to 8 years. Interms of educational attainment, the share of population with primary schooling remained at about 35 percent, but the shares increased from 15 percent to 34 percent for those with junior secondary schooling and from 6 percent to 11percent for those with senior secondary and technical schooling. *'Major progress was also achieved in health, with China overhauling lower middle-income standards by 2001 (Table 1.3). Average life expectancy at birthreached 70 years, infant mortality declined to 3.1 percent, andunder-5 mortality fell to 3.9 percent. The share of one-year olds fully immunized against tuberculosis and measles reached 98 percent. Nearly 85 percent of the PO ulation has gainedaccess to essential drugs andless than 10percent are undernourished.19 Table 1.3 ProgressinHealth China East Asia and Lower middle- High income Pacific income countries countries 1980 2001 1980 2001 1980 2001 1980 2001 Life Expectancy at Birth (years) 67 70 64 69 65 69 74 78 Mortality Infant (per 1000 live births) 42 31 53 34 55 33 12 5 Mortality Under 5 (per 1000live births) 64 39 79 44 83 41 15 7 Source: World Healtlz Report and World Bank WorldDevelopment Indicators, various years TheEffectof GrowthonPovertyHasWeakenedandInequalitiesHaveWidened 1.17 The second half of 1990s revealed that economic growth alone is not sufficient to sustain the downward trend in poverty. During 1998-2000, while the economic growth continued at nearly 8 percent per year, poverty reduction appeared to have slowed (Table 1.4). The overall growth in rural income fell, in particular as the purchasing power of agricultural products declined (Tables 1.5-6 and Table 1.4 Recent Trends inPovertyReduction Figure 1.10). Moreover. Poverty headcount rate 1990 1992 1996 1998 1999 2000 growing " competitive at $I/day income pressures and financial National 23.1 21.6 10.6 7.9 7.8 8.8 difficulties in the rural Rural 31.0 30.0 14.9 11.4 11.2 13.7 entemrise sector curbed the Urban 0.9 0.0 0.2 0.0 0.25 0.3 growih of rural enterprises, Poverty headcount rate and the movement of labor at $I/day consumption out of agriculture National 32.9 30.2 17.4 17.8 17.8 16.1 Rural increasingly took the form 44.4 41.4 24.8 26.2 27.0 25.0 Urban of rural-urban migration. 1.0 0.8 0.4 1.0 0.5 0.5 Source: World Bank estimates basedon official household survey data available only until2000. 11 In2001, enrollment to tertiary schools was 13 percent (up from 2 percent in 1980) and 4 percent of the population had education college or above, up from less than 1percent in 1980. 12 UnitedNations (2002). 12 Table 1.5 Poverty Reductionand Rural-UrbanInequality, 1990-2002 (1990RMB) 1990 1993 1996 1999 2000 2001 2002 1991-93 1994-96 1997-02 Household Real Income Change (avg. annual, %) Rural 686 765 922 1,044 1,066 1,111 1,164 3.7 7.1 3.6 Urban 1,510 1,945 2,299 2,749 2,925 3,174 3,599 8.8 4.4 7.2 UrbadRural 2.2 2.5 2.5 2.6 2.7 2.9 3.1 4.4 -1.9 4.4 Household Consumption Spending Change (avg. annual, %) Rural 585 632 826 829 878 908 961 7.3 4.0 3.0 Urban 1,279 1,593 1,862 2,167 2,328 2,456 2,818 4.8 2.7 7.9 UrbadRural 2.2 2.5 2.3 2.6 2.7 2.7 2.9 I 4.3 -2.7 4.7 Source: ChinaStatistical Yearbook Table 1.6 Annual IncomeDistribution Across Rural Households, 1980-2002 (percent) 1980 1985 1990 1996 1998 1999 2000 2001 2002 Below RMB1000 98.4 97.8 82.3 18.0 12.7 13.0 14.2 13.2 12.0 RMB1000to 2000 2.1 15.7 43.6 39.5 38.1 35.8 34.3 33.1 RMB2000 to 3000 22.5 25.7 25.5 24.8 24.9 24.8 RMB3000to 4000 }1.6 }O.l }2.0 8.5 11.5 11.7 11.9 12.5 13.4 Above RMB4000 7.3 10.7 11.7 13.3 15.1 16.8 Source:National Bureau of Statistics 1.18 Poverty mainly remains a problem of people living in the rural areas, but the map of rural poverty has changed. Out of the 161million people estimated at or below the $1 a day consumption in 2002, some 99 percent lived in rural areas.13Rather than being uniformly spread across China, however, rural poverty started to concentrate in western provinces (Table 1.7 and 1.8) and in localities that lag behind in terms of growth, and are remote, poor in human and natural resources, or weakly linked to the rest of the economy. High proportion of the rural poor now live inmountain villages, some of them located in relatively well-off counties, and are disadvantaged by low educational and health status as well as by low (and sometimes even deteriorating) quality of land.14In addition, an increasing proportion of the poor are people with disabilities (who are estimated to account for 5 percent of the national population). 1.19 Slower poverty reduction has been accompanied by rising inequalities. The post- 1979 reform period witnessed two episodes of rising inequalities, both notable also for little progress in poverty reduction (Figure 1.9). The first occurred during 1985-93, in time of slower growth, when the rural-urban terms of trade declined as agricultural prices failed to keep up with larger increases inpartially-liberalized industrial product prices. 13 World Bank estimates. l4 The most remote mountain areas tend to be occupied by minorities, which represent a highly disproportionate share of the rural poor. World Bank (2001). 13 The increase in the Gini coefficient of inequality from about 20 in the Table 1.7 Rural Poverty by Province, 1999 (%) first half of 1980s to 42 in 1993 was Share of China's Provincial rate of rural poor rural poverty the fastest among all countries, Yunnan 9.4 8.1 although the 1993 level still left Guizhou 9.1 9.0 China around the middle of the Sichuan 7.4 3.4 distribution for inequality across Henan 6.8 2.9 countries. The second occurred Shanxi 6.4 8.0 Shaanxi 5.8 during 1997-2000, associated with 6.7 Gansu 4.7 7.0 the liberalization of some Hunan 4.6 3.0 agricultural trade and markets, Guangxi 4.5 3.6 declining international prices in Hebei 4.1 2.6 many commodities, including wheat, Jiangxi 4.0 3.7 Chongqing 3.8 soybeans, cotton and sugar, and a 5.3 Hubei 3.7 2.8 domestic surplus in grains. Xinjiang 3.7 7.7 Inequality widened and in 1999- Anhui 3.4 2.2 2000 the Gini index exceeded its Inner Mongolia 3.3 5.6 levels of 1993-95, with rural-urban Heilongjiang 3.0 4.3 Liaoning 2.9 inequality being the most prominent. 4.2 Jilin 2.4 4.8 As international prices of Shandong 2.1 1.1 agricultural commodities, including Qinghai 1.6 12.6 soybeans and wheat, broadly Tibet 1.1 20.6 stabilized since 2000, continued Ningxia 1.1 9.6 Zhejiang liberalization of agricultural 0.8 0.7 Jiangsu 0.6 0.4 production has been benefiting Fujian 0.3 0.3 Chinese farmers more recently. Guangdong 0.2 0.1 Beijing 0.1 0.6 1.20 During the post-1979 reform Hainan 0.1 0.6 period, inequalities have risen Tianjin 0.1 1.1 Shanghai 0.0 0.0 Y .. among provinces, between the rural Note: Based onNBS household survey and official poverty line. and urban areas, and within rural as National averagerate of rural poverty is 3.5 percent. well as within urban areas. Inter- Table 1.8 Rural and UrbanPoor by Region, 1999 (%) provincial inequalities have been driven b y rising disparities between Regions Share of China's Share of China's the coastal provinces and those in rural poor urban poor Western Provinces 46.6 23.0 the interior. The coast-interior Central Provinces 42.1 46.2 income disparities increased most Coastal Provinces 11.3 30.8 rapidly in the first half of the 1990s Note: Based on NBShousehold survey and official poverty line. (Figure 1.11, measured somewhat imprecisely by the standard deviation of log per-capita GDP) with the continued liberalization of economic policies and the beginning of the investment boom (domestic and foreign), which concentrated in the coastal region.l5 Reflecting the similar conditions of geography and policy, incomes have converged l5 By 2002, the coastal region received nearly 90 percent of foreign direct investment. Guangdong, Jiangsu, Fujian, Shandong and Shanghai alone absorbed 65 percent of foreign direct investment and accounted for 70 percent of China's exports, enjoyed the most rapid provincial growth rates and became a magnet for migrant workers from other provinces. 14 within the group of coastal Figure 1.11 Regional Income Disparities, 1978-2002 provinces and within the group of interior provinces. Most 0.68 1 recently, and specifically from the end of the 8th Plan period when greater attention has been given to the development of selected western provinces, the All Provinces overall provincial income disparities may have been - * * * C I C capped. l6 The Government's t I Western Region Development Strategy launched in 2000 Intra-coast (described in box 2.3), focuses a significant share o f public resources to the development Intra-Interior of the poorer provinces. The recent increases in per capita income growth rates in several Source: World Bank staff estimates western provinces, if associated with increased Figure 1.12 Decomposition of Income Inequality, 1990-1999 public spending, suggest that the Strategy could help reduce inequality. 1.21 The rise in the rural- urban income imbalance was sharpest in the late 1980s and early 1990s.Figure 1.12 shows the evolution of inequality using the Theil Index. 17 0.10 According to official data, a fall in rural incomes relative to 0.05 urban ones explained over one 0.00 third of total inequality in 1999 1990 1999 and over one third o f the rise in total inequality between 1990 Note: Interprovincial inequality in this figure i s the sum of intra-rual inter-provincial and and 1999. Perhaps uniquely in intra-urban interprovincial inequalities. The inter-provincial disparity related to the uneven level of urbanizationacross provinces is captured inthe rural-urban gap. the 1990s, related to enterprise Source: World Bank staff estimates restructuring and emerging 16 Analysis of regional and coast-interior disparities using household survey data broadly confirms the pattern found with provincial GDP data of a leveling out of disparities inthe second half of the 1990s. 17 The Theil Index allows to divide inequality into a number of components. The Theil index i s calculated as a weighted geometric average of the respective incomes relative to mean. The analysis underlying Figure 1.12 first splits inequality into rural and urban. Each of these i s divided into variation across provinces, and variation within provinces. 15 unemployment, the rise in intra-urban inequality contributed nearly one half to the increase in total inequality and, by 1999, intra-urban inequality accounted for nearly 30 percent of total inequality in China.l8 1.22 Notwithstanding improvements in both rural and urban areas, rural-urban Table 1.9 RecentTrend inHealthIndicators and coast-interior disparities in human Infant Mortality Under 5-Year Maternal development have widened. Schooling i s Mortality Mortality on average 2-3 years longer in urban areas Rural Urban Rural Urban Rural Urban compared to rural areas. In 2000, the 1991 58 17 71 21 100 46 enrollment rate in senior secondary 1992 53 18 66 21 98 43 1993 50 16 61 18 85 39 schools was 34 percent in Central and 1994 46 16 57 18 78 44 West China, compared to 50 percent in 1995 42 14 51 16 76 39 East China, with fewer qualified teachers 1997 38 13 49 16 80 38 in poorer localities. l9In health, the gap 1998 38 14 48 16 74 29 between rural and urban indicators has 1999 38 12 48 14 80 26 remained striking (Table 1.9). Moreover, 2000 37 12 46 14 70 29 the improvements in rural areas appear to Note: Infant mortality and under 5 year of age mortality rates are per 1000of live births. Maternalmortality rate is per 10,000 of live births. have slowed since the mid-1990s. Source: China Health Statistical Digest, 2001 1.23 While successfully integrating with the global economy, China now faces the challenge of integrating domestically and promoting growth with equity. Development experience from around the world suggests that interventionist policies have largely failed in accelerating growth in selected localities, except in brief spurts.2oThe benefits associated with such policies have seldom justified the costs. This i s as true for rapidly growing East Asian countries, like Japan, Korea and Thailand, as it i s for the slower growing regions o f southern Europe and northeast Brazil. Creating the conditions for growth with equity i s a long process and most interventionist policies tend to be slow to react to changing conditions. Instead, equitable growth has resulted largely from the removal of major distortions in the economy (namely macroeconomic imbalances and disincentives, rigidities in transferring land, labor and capital to alternative uses, and fragmentation of the domestic product market), from urbanization and from human capital development. In this respect, in addition to geographical or sectoral interventions, a broader package of policies that includes macroeconomic stability, adequate delivery of social security and other public services, human capital development, and functioning markets for capital, land, labor, and goods and services, i s central to future growth and distributional performance in China. 18 The rising urban poverty since mid-1990s prompted a number of Chinese organizations to calculate an urban poverty line in terms of expenditure needed for a socially acceptable subsistence.For the practical purposes of providing assistance to poor urban households, each city sets its own poverty line. On average, in2000, the poverty line was RMB1,800 for urban areas compared to FWB635 for rural areas. l9 Drop out rates were significantly higher in poor localities where tuition fees and the cost of textbooks appear to be the main cause. *' Common interventionist regional development strategies include investment incentives, employment subsidies, administrative controls, public investment in infrastructure, enterprise zones, export processing zones, and clusters. For analysis of their effectiveness, see Hon and Fallon (2001). 16 2. FACINGTHE PROSPECTOFRISINGINEQUALITY 2.1 China's quarter-century record of dynamism offers great promise for thefuture. Continued economic growth i s likely to raise householdincomes across the entire income distribution if energetic public action complements economic forces. The Government i s concerned, however, that economic gains will not only be distributed unequally, which i s natural in a country as vast and rapidly changing as China, but that current inequities will further expand unless some policies are adjusted to offset such a tendency. Subsequent chapters of this report present the policy options that could assist in meeting China's objective of growth with equity. This chapter provides a backdrop against which to evaluate such options. Growth and Inequality: Some Projections 2.2 Projecting future patterns of inequality in China is problematical. China's economy has undergone massive transformations, including the relative decline of agriculture and, more generally, of rural economic activity, shrinking contribution of public sector output and employment, rising global integration that has changed the structure of production and its regional concentration, and a sharply altered demographic profile that has loweredthe rate of growth of the population while, for the time being, has increased the share of those seeking jobs.21Equally, as the process o f globalization, restructuring and secular changes in the Figure2.1 IncomeInequality Projectionsfor China (Ginicoefficient) economy proceed, or even accelerate, large 1 z M a l a y s i a 1997 resource reallocations may be expected to *Philippines 2000 - occur over the next 45 decades. Tracing the 4 +USA1997 effects of the past Turkey2000 transformations i s complex, adding in the Balancedgrowth in tIndia1997 uncertainties associated householdincomes with future changes 35 makes projections a +Korea 1998 task difficulty. In particular, of unparalleled C-Indonesia2000 1990 1993 1996 1999 2002 2005 2010 2015 2020 30 there are Source: World Bank estimates andWorld Bank (2003). 21 The share of economically active persons in the population increased from 43.5 percent in 1980to 57.4 percent in2002. This trend i s being reversedby the aging of the population. 17 combinations of policies and instruments that will propel China towards the goal it has set - the establishment of an all-encompassing xiaokang society b y 2020 (see Box 2.1). It i s impractical, if not impossible, to examine each of these. Box 2.1 Towards a Xiuokang Society The 16* Congress o f the Communist Party of China reiterated the objective of establishing an all- encompassing xiaokang (comfortable, or well-off) society by 2020. The quadrupling of China's GDP from the level of RMB8.9 trillion (US$1.1 trillion) reached in 2000 has been established as a notional target. This implies an average growth rate of 7.2 percent per year, and an average income level of RMB25,OOO (US$3,000) in the final year, compared to RMB7,780 (US$940) today. Consequently, by 2020 the average standard of living in China i s expected to reach the level found today in the upper middle-income developing countries, as defined by the World Bank. China's population growth rate has been slowing, but total numbers are projectedto reach 1.47 billion in2020, compared to 1.29 billion now, which adds to the challenge. Moreover, the growth of the labor force i s expected to fall to near-zero by 2020, and turn negative thereafter, while the share of those aged 65 years and over will rise from today's 7.3 percent to 11.8 percent. Such an increase in the dependency ratio (the share of non-working population) underlines the need for a rapidincrease inproductivity among China's working population. But building a xiaokang society is considered to be much more than a rapid increase in average income. An official attempt in the mid-1990s to quantify different aspects of well-being identified, among others, the urban-rural income gap, availability of selected services such as primary health care and roads, and social indicators such as infant mortality, literacy and life span. In this sense, the measures of well-being contain elements that form the human development index of the United Nations Development Program, and now the Millennium Development Goals (MDG). B y the standards of the MDG, in terms of national averages China has reached the global benchmarks already, although there are wide variations among the different regions o f the country. The recent debates around the meaning of an all-encompassing xiaokang society and its utility as a national goal suggest that it i s even more inclusive than the concept of well-being that the international development community has attempted to capture through the MDG. Increasingly, the phrase "all-round way" has been appended to the concept of establishing a well-off society. It is believed that in addition to material gain, progress also depends on improvements in the rule o f law, civic life, physical and natural environment, and the quality of leisure. Above all, either explicitly or implicitly, a core component of movement towards xiaokang i s an increase in equity or fairness as a goal in itself, rather than merely as a condition to improve growth prospects or social stability. 2.3 Instead, this report adopts a simpler approach to such projections by focusing on a crucial set of outcomes, namely the implications of growth for equity. Figure 2.1 presents the results of an analysis that i s based on a simple framework developed in an earlier World Bank report (see Box 2.2).22 2.4 This framework illustrates several important points, although the projections should be interpreted only as broad descriptions of likely trends. First, if recent trends in rural-urban household-level inequality and the disparate growth of rural and urban household incomes across provinces continue, income inequality would rise sharply. The measured Gini coefficient would increase from 43.7 in 1999 to 47.4 in 2020. B y this measure inequality in China would approach inequality levels found in Malaysia in 1997. B y contrast, an alternative set of assumptions, namely the elimination of variations in provincial growth performance, with the income of households in all rural and urban 22 See World Bank (1997). 18 areas across provinces growing at the target 7.2 percent rate, would reduce the measured Ginicoefficient to 39.5 by 2020.23 Box 2.2 ProjectingInequality The simple projection framework uses household survey data (1999, the latest year for which data are available publicly) and assumptions regarding population and income growth in the rural and urban areas of each province to generatea measure of national income inequality for 2020, which i s the target year for achieving a xiaokang society. There are no behavioral relationships in this framework. The national population grows at a rate of 0.7 percent per year, while the urban population is assumed to grow along the 1995-200'1trend, reaching 65 percent of the total population in2020. There are two projections based on recent trends in average income growth of rural and urban areas in each province. Thus, regional growth disparities are maintained. The first of these projections assumes that rural-urban inequality in each province continues to widen at the same rate as ducing 1990-99. The second i s based on freezing inequality in each province at the 1999 level. In both projections, inequality within each rural and urban area i s assumed to remain unchanged. In addition, there are two projections based on a 7.2 percent growth in annual income in all areas, the implicit rate of growth implied by the 2020 target for establishing a xiaokung society. The first assumes that rural-urban inequality in each province will widen at the 1990-99 rate. The second that rural-urban inequality i s unchanged from the 1999 level. Again, inequality within each rural and urban area i s assumedto remain unchanged. Admittedly, the projection framework i s simple and makes strong assumptions. However, it i s useful to show the effects of recent historical trends, if continued, on the direction of income inequality inChina. 2.5 Perhaps more interesting are comparisons of the Theil index implied by these projections, which show the relative efSects of changes in inequality between households in rural and urban areas within provinces and those between the provinces themselves. The projections suggest that if rural-urban inequality remains unchanged, but average incomes in each province continue to grow as in the recent past, the Theil index reaches 38.6 in 2020, compared to 32.4 in 1999. Conversely, if rural-urban income inequality continues to widen at recent rates, but the disparity in provincial income growth i s eliminated, the effect on overall inequality i s almost the same, with the index rising to 39.1. For illustrative purposes, it i s worth noting that should rural-urban inequalities be frozen at the 1999 level and provincial income growth be equalized, the Theil index for 2020 i s projectedto fall to 26. 2.6 Scrutinizing the projections of the Theil index suggests that there could be two equally effective strategic approaches for managing overall inequality in China. One would focus on narrowing rural-urban inequality, possibly through migration and targeted programs. The other would rely on regional development policies, flexible markets, and intergovernmental fiscal relationships to reduce growth differentials among the provinces. A combination of such policies i s required for a balanced strategy to promote growth with equity. In fact, the Government i s operating along both axes, combining its targeted anti-poverty programs with a broader strategy of developing the lagging regions of the country (for example, the Western Region Development Strategy discussed in Box 2.3). Neither of the strategic approaches, however, should freeze the 23 In all scenarios, urbanization is projected to continue at its 1995-2001 rate and works in the direction of diminishing inequality. 19 labor force, capital, or other resources in their present activities or geographic areas. In contrast, as subsequent chapters discuss, incomes in lagging areas (rural areas within provinces or in lagging provinces themselves) are likely to growth both from the better utilization of resources within such areas and from the reallocation of resources to other, more productive areas (economic activities or localities). Box 2.3 China's WesternRegionDevelopmentStrategy The strategy aims at reducing the gap in income and social indicators between the coastal provinces and some Central and Western provinces. It covers the following 12 provinces: Chongqing, Gansu, Guangxi, Guizhou, Inner Mongolia, Ningxia, Qinghai, Shaanxi, Sichuan, Tibet, Xinjiang, and Yunnan. The strategy is meant to be different from the Third Front Strategy of the 1960-70s. The latter also focused on the Western Region but it was mainly a geo-political strategy aimed at dispersing industry away from the coastal belt. Since the Third Front enterprises were established on the basis of strategic instead of economic considerations, many of them became loss-making or non-viable when market- oriented reforms were deepened. The Western Region Development Strategy i s concerned less directly with the establishment of industrial enterprises and more with the creation of conditions for the proliferation of a wide range of economic activities that would survive in a market economy. The creation of such conditions includes investment in transport infrastructure and utilities services, protection and improvement o f the natural environment (including the conversion of marginal lands into forests and the management of water resources), investment in education and vocational training, and encouragement to foreign and domestic enterprises to invest in the region. Investment in transport, for example, i s designed so that its benefits accrue to a wide range of activities and localities. It has three objectives: improve access of inland localities in the South-West to sea ports, develop navigation on the Yangtze River, and revive the North-West as the land bridge linking China with Central Asia and beyond to Europe. Priorities identified under the strategy, however, are not always identical with those identified by individual local governments (for a province by province comparison see Hu,2001). Inassessingthe Western Region Development Strategy, it is important to distinguish between the aim to raise the local GDP relative to the national average, and the aim to raise the income of the poor in the locality. In specific contexts, the two aims may be inconsistent. Accelerating the development of a lagging locality may raise mean incomes without significantly benefiting the poor. Further, the aims of poverty relief and enhancing the income of the poor are not restricted to the lagging regions. The implication is that pro-poor development of lagging localities requires a policy package with a mix of instruments, some focused on the development of the locality and some narrowly focused on the promotion and protection of the poor. The conflation of regional development with the promotion and protection of the poor may lead to a choice of a defective policy package. The best regional policies may not be best for assisting the poor in the locality and, conversely, the best poverty alleviation policies may not be best for promoting regional development. 2.1 Policies to reduce inequality are often compatible with the objective of promoting economic growth. Recent Chinese economic strategy, specifically since the 9thFive-Year Plan (1996-2000), has stressed balanced patterns of growth focused on rapid development of the lagging geographical regions of the country, with emphasis given to selected provinces in the interior and western parts of the country. With the appearance of rural distress during the gth Plan period, renewed attention i s being given to developing specific policies and programs to narrow the rural-urban gap. In framing such strategies, it is important to recognize that there are bound to be leading and lagging sectors and regions in a rapidly-growing economy, whatever its size and complexity. Differences in China result from differing endowments, geographical factors, and the effects of policies. 20 The key issue going forward i s to design a set of strategies that would generate the requisite rates of economic growth while reducing, rather than widening, inequalities. Even under the condition that some regions of the country were to always grow faster than others, if the share of households that benefit from this regional growth keeps increasing, overall measured inequality in China will fall. Growth with Equity: A Role for Policy? 2.8 In spite of evidence from China's post-1979 experience, economic determinism (or, in its modern form, geographical findamentalism) has played an important role in debates on economic strategy in China. As described in the previous chapter, there are large regional differences inincome, human development, and social protection inChina. This can be seen at different levels: between urban and rural areas, among counties, prefectures, provinces, and sub-regions (Le., the standard 6-way classification into North, Northeast, East, Southeast, Southwest and Northwest), among the development belts (coastal, interior, western), or when comparing the coastal region to the rest of the country. Recent debates, although reviewing individual components of the desirable policies in extensive detail, could have examined more thoroughly the role of public policies in reducing such differences in a coordinated manner.24Available evidence on regional growth patterns suggests that the relative standing of different groups in China can change fairly rapidly and that geography, while important, i s not as deterministic as currently arguedin economic circles in China. 2.9 The growth processes and prospects of the lagging regions reflect both their endowments and geography. In terms of endowments (natural, human, financial and institutional), lagging regions show large differences. These differences are more evident, the greater the level of spatial disaggregation. As i s well known, endowments have a significant effect on prices, hence on incomes, and traditionally have been considered to be the main source o f comparative advantage. With respect to geography (the spatial relationship between productive resources, production centers and markets and the costs implied for organizing economic activity), with the exception of locations in the Northeast, lagging regions are generally characterized by smaller local markets and greater distances to trans-regional markets than the other regions. Table 2.1 presents an example of the problem of geography, using simplified costs for containerized garment exports from China to the United States. With the same input costs but a different transport burden, the maximum possible value added in an inlandcity such as Lanzhou i s only 60 percent of that in coastal Shanghai. The return to labor in the interior province can reach just 43 percent of that in the coastal area, and just 33 percent of the international wage. Since, as in most garments processing, inputs are imported, the cost of an overland access to the port from China's interior, which typically accounts for two- thirds of total transport cost, acts as a double-tax on inlandlocations. Even without large differences inendowments, geography can strongly affect wages and per capita incomes. 24 Bao et al's (2002) statistical analysis, for example, suggests that 60 percent or more of the variation in provincial growth rates during the post-1979 reform period can be explained by geographical variables such as elevation, distance from the province to the coast and the length of the province's coastline. The analysis i s unable, however, to separate policy and geography adequately in distinguishing between the relative performances of lagging and leading regions. 21 2.10 China's own experience, however, suggests that neither geography nor endowments are insurmountable constraints to growth. The experience of most countries suggests that offsetting the effects of endowments and geography requires a multi- pronged strategy. Political choices, public policy and historical developments can all have a critical endowments effects of impact on howand the Table 2.1 Geography and Returns to Labor geography play out. Policies Seattle Shanghai Lanzhou such as the Third Front industrial Labor 45 location strategy of the 1960s Capital 15 60 and 1970s, or the coastal region Total Value Added Inputtransport development strategy of the Inputcost 40 1980s and 1990s, have played a Outputtransport growth outcomes in the regions" significant " role in affecting OWutsalepnce C J ~ 100 Output transport 5 15 of China. As a result, there has Output sale price f.o.b, 95 85 been substantial change in the lnputtransport 5 15 ranking of China's provinces Inputcost 40 40 valueAdded 50 30 over a short period of two Capital 15 15 decades (shown in Table 2.2), Labor 35 15 and this i s likely to continue. Note: The output sale pricei s determined in the competitive US market. Table 2.2 Changes inRanks (per capita income, 1980-2002) Changein Rank I Improvement Deterioration ~~~~~~~~ 6- 15places Fujian(15), Henan (9) Tibet (13), Ningxia (12), Gansu (12), Qinghai (1l), Shanxi (9) Shangdong (8), Zhejiang (6), Hainan (6), 3 - 6places Chongqing (6), Hebei (4), Inner Mongolia (4), Heilongjiang (5), Liaoning (4), Shaanxi Xinjiang (4), Anhui (4) \JI 1-2places Hunan (2), Guangdong (2), Yunnan (2) Jilin (2), Sichuan (1) No change Beijing, Tianjin, Shanghai, Jiangsu, Jiangxi, Hubei, Guangxi, Guizhou 2.11 Currently in China, the task for economic policy is to enhance conditions for growth in the lagging groups and regions. Table 2.3 gives a sense of the locational priorities. The greatest concern exists about provinces in the right lower corner of the table, whose income level and growth rate are lower than the national average. With the exception of Hunan and Shanxi, the other provinces within this quadrant have been included in the Western Region Development Strategy. Inasmuch as the strategy envisions a reallocation of public spending towards lagging regions as well as the promotion of regional development b y other means, it recognizes the role that policy changes can play in promoting development. At the same time, as delineated in the Tenth Plan and other strategic documents of the Government, the Government recognizes that improved economic conditions in the lagging regions may sometimes require the movement of economic resources, especially labor, out of these areas. In fact it i s likely that in a dynamic economy with flexible markets resources will go to their point o f highest return, resulting in more equitable growth over time. Recent government policies 22 have been directed, where possible, at assisting such resource movements in parallel with in situ efforts to stimulate the development of lagging regions. An economic strategy that i s explicitly oriented toward growth with equity conforms to the general thrust of China's existing national development strategy. However, it needs clearer delineation and early implementation. Moreover, it may also require effective dealing with various interest groups that may lose out inthe process. Above median Median and below ~b~~~ Fujian, Guangdong, Hainan, 2 2 Hebei, Hubei, Jiangsu, Jilin, Anhui, Chongqing, Henan, Inner s3 p6" Shandong, Zhejiang (9) Mongolia, Jiangxi (5) 9 % kkdian Beijing, Heilongjiang, Liaoning, Gansu, Guangxi, Guizhou, Hunan, andbelow Shanghai, Tianjin, Xinjiang (6) Ningxia, Qinghai, Shaanxi, Shanxi, Sichuan. Tihe+. Y,,nnan I, ,, Source: National Bureau of Statistics 2.12 The remainder of this report describes the main actionable components of a strategy to promote growth with equity. They need to address three challenges. First,how to overcome the geographical disadvantage of lagging regions? The ongoing investments in transport infrastructure and liberalization in logistics, 25 by reducing the cost of business across China, work in this direction. Further policy actions may be needed to create a conducive environment for economic activities in which lagging regions could establish their competitiveness based on their lower cost of inputs. Second, how to manage endowments? To some extent, freer movement of people, goods, capital and ideas have already been working to make endowments a more dynamic factor of local development. Further policy measures could promote market integration and flexibility, boost the development of human capital, facilitate adoption o f suitable technologies, and improve the management of natural resources. Third, how to react to the challenges of rapid globalization? Policy actions could enhance the ability of the domestic market agents, including private businesses and farmers, to respond to changing market conditions. Overall, the effectiveness and sustainability of the results of development may depend on whether or not public action i s in harmony with private initiative and market forces. The report recognizes the challenges facing the government in navigating among the different interest groups that are the beneficiaries of the currently existing distortions in the market and governance. Addressing these challenges, however, will ultimately require a great political insight, enormous political will and skillful political maneuvering- matters that are outside the scope and grasp of this report. 25 Logistics include transport, storage and warehousing, distribution, inventory financing, packaging and courier services, system management, freight forwarding, and administration. The definition of logistics has been rapidly evolving over the last 30 years. Presently, logistics i s defined as that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related informationfrom the point of consumption in order to meet customers' requirement. 23 3. DOMESTICMARKET INTEGRATIONAND FLEXIBILITY 3.1 Thepace of overall economic growth in China will depend on the development of China's vast domestic market. China's external trade has grown by 13 percent a year since 1979 inreal terms. In 2002, its export-to-GDP ratio reached 26 percent of GDP, and the total trade-to-GDP ratio approached 50 percent. Interms of trade, China can hardly be compared to other "continental" economies. It has reached a level of global integration that i s more than twice as high as Brazil, India, or the United States. Projections of global trade from World Bank models suggest that China's post-WTO accession share of the world exports would rise from 4.4 percent in 2001 to about 7 percent b y 2007. Despite the extraordinary growth of exports, however, more than 70 percent of China's output will still be intended for the Box 3.1 The Implications of Market Integration: domestic market by 2007. International Experience Moreover, size, resulting from Experience of the United States in the late 19* and early 20" century and, to some extent, of Europe since the mid-20" a domestic market of 1.3 century suggests that domestic market integration has been billion people and a doubling associated with positive contribution to GDP growth and with of income every 9 years or so, modest income convergence in the long term. i s China's most significant The experience has confirmed that with market integration, source of scale economies, GDP growth mainly benefits from an improved allocation of hence competitive advantage, capital and labor and from productivity gains of greater and a magnet for domestic and agglomeration and regional specialization. Specifically, market integration has facilitated a shift from agriculture to foreign investment. manufacturing and to services, and reduced the effects of land quality and resource endowment on economic development 3.2 The development of and on income levels across localities. Inan integrated market, domestic markets is also vital with better transportation and communication network, relative for structural adjustment in the production costs rather than geography have increasingly Chinese economy. Most influenced decisions about location for manufacturing production and for those services not requiring proximity to significantly, mobility of customers. Manufacturing industries have become factors of production and geographically more concentrated, particularly in localities flexibility in the entry and exit with an easy access to large markets. of firms can facilitate and ease As for regional inequality, the evidence from the United States the pain of restructuring. A and Europe indicates that per capita incomes and output in more flexible and integrated poor states tend to grow faster than in rich states, with the rate of convergence of about 2 percent a year. domestic market i s likely to Critical in the process of regional convergence has been labor mobility, promote the flying geese especially migrationout from areas with more abundant labor. pattern of industrialization and Source: Kim (1997), Henrekson et a1 (1996), Amiti (1998), Barro and Sala i progressive technological Martin (1990 and 1991), and Park (2002) upgrading from eastern to central and western regions in 24 China, and hence broaden the basis of competitiveness and growth.26Similarly, the ongoing domestic structural adjustment i s more likely to deliver results that are viable in the long term if it occurs in an integrated domestic market in harmony with broader market forces. Box 3.1 illustrates international experience with the structural effects of domestic market i n t e g r a t i ~ nIn~some aspects, well functioning domestic markets can . ~ contribute to reversing the trend of risinginequalities and to continued poverty reduction. In the labor market, for example, rural-urban migration already allows some farming families to increase their incomes by family members taking jobs in urban areas. 3.3 Existing domestic barriers to the free flow of resources for production and of goods and servicesfor consumption constrain China's potential. Arguably, the formation of a few large regional markets should not be a source of concern if competition andtrade among such blocks are preserved and internal barriers within each are minimized. The size of each block i s likely to maintain the benefits that accrue from economies of scale, agglomeration of enterprises, and regional specialization. China's internal market, however, i s much more fragmented than this. Many forms of local protectionism and market rigidities reflecting broader structural and institutional problems, inhibit dynamic improvements that could promote growth with equity. 3.4 Under the WTO arrangements, China is committed to a free intemal market and to providing a central point where firms and individuals can notify the central govemment of problems they are experiencing at sub-national levels. If these are not resolved, China could find itself fighting, and losing, dispute settlement cases between itself and other WTO members over problems arising within provinces, prefectures or even lower-level administrative units. Therefore, local protectionism not only implies economic cost for China, its obvious manifestations are now becoming illegal and curbed through a body focusing on maintaining free trade. Market for goods and services 3.5 A flexible and integrated domestic market for goods and services promotes competition andproductivity. For a market to be competitive, entry and exit of firms need to be relatively free, barriers to the movement of productive resources, goods and services should be minimal, and prices should be set based on market signals. 28 26 A forthcoming study by the Development Research Center of the State Council and the World Bank identifies local fragmentation of markets in China as a major problem and a matter of strategic significance to break up local protectionism, establish a nationally integrated, competitive and ''standaradizedmarket system, in order to support growth and competitiveness. Regulatory instruments to promote market integration and flexibility include laws on the number of agents and freedom o f entry, such as licensing and regulatory procedure; laws on competitive behavior, such as regulations on monopolies and unfair trade practices; laws to safeguard and maintain competition, laws on exit, such as bankruptcy law; the system of contract law and contract enforcement, an independent judicial system, safeguards to producers (such as patent, trademark, copyright) and safeguards to consumers (such as advertising rules, consumer protection laws). 28 Empirical results suggest that lower barriers to entry and exit are associated with higher productivity, entrepreneurship and employment growth. These results are derived by Dollar at a1 (2002) and Hallward-Driemeier, Wallsten and Xu (2003) based on a enterprise-level dataset covering 1500 Chinese enterprises inten industries infive cities. 25 Competitive integrated markets enable efficient producers to expand their market share, better exploit economies of scale, and promote specialization. 3.6 Inter-provincial commerce and business in China sufSer from barriers. Recent empirical studies have employed four different approaches to measuring these barriers. Thefirst approach analyzes spatial disparity in prices and rates of returns. It shows that prices and rates of returns on capital and labor generally exhibit large differentials across l o c a l i t i e ~The~ second approach examines the trend and similarity in the production . ~ structure across different provinces, indicating that the production structure shows limited specialization across provinces. 30 The third focuses on the direct analysis of inter- provincial trade flows. This suggests that inter-provincial market transactions are depressed (Figure 3.1 illustrates the average shares o f provincial spending on goods supplied from other Chinese provinces compared to the shares spent on goods supplied from within the rovince or from foreign countries). And, the fourth Figure 3.1 Average Provincial Absorption of analyzes the correlation of business Goods, 1987-97 (% of Total) cycles among regions, illustrating that the business cycle of China's Western 8o 1 provinces i s different from that of coastal provinces, which i s more 60 01987 m1992 m1997 closely associated with the national growth cycle. 32 Although the studies on China sometimes disagree on the 40 trend in market fragmentation in the 1980s and 199Os, they generally agree 20 that the problem i s serious. Market fragmentation may also explain why competitiveness and productivity 0 levels within sectors in China vary Other provinces Foreign Local significantly across enterprises. Source: Poncet (2002b) 3.7 Barriers partly relate to China's large distances and mountainous terrain and to costly logistics. The problems of geography and topography are well known and a vast investment program in transport infrastructure (including the farm-to-market road network as well as highways, railways and inland waterways) has been aimed at overcoming the high cost associated with such barriers. As a result of the development of local and regional infrastructure, for example, prices for maize, soybeans and rice have 29 World Bank (1994) and Fan, Robinson and Zhang (2003). The extent o f market integration i s different for different commodities. For instance, Rozelle and Huang (2002) found that price differentials for maize, soybeans and rice are relatively limited across China. 30 Young (2000), Bai et a1(2002), ChenDongqi (2002), andNaughton (1999). 31 Poncet (2001a,b and 2002a,b). Measurement of inter-provincial barriers to trade, based on how much consumption of goods from other provinces deviates from consumption o f local goods, after accounting for the influence of relative prices, geographical distance and relative production levels, suggests that the average border effect among China's provinces was about 51 percent in 1997. This i s much higher than, for example, the 35 percent border effect estimated for trade between member countries of the European Union. 32 Xu andVoon (2002) 26 become more synchronized across China's local markets in recent years.33In logistics, the partial liberalization of transport, storage, distribution, warehousing, and other services i s expected to reduce the cost of conducting business across China. Presently, logistics could account for as much has 30-40 percent of the total cost of manufactured goods in China, compared to about 10 percent in Europe, 14 percent in Asia and 5-20 percent in the United States. Transport cost accounts for about a half of the total cost of logistics in China, compared to about one quarter of the total logistics cost in developed countries. The damage goods rate i s estimated at 5 percent in China compared to 1 percent indeveloped economies.34 3.8 Signifcant barriers to conducting trade and other business within China have been erected by local governments. Local protectionism continues to be present in both coastal and interior provinces, greater in provinces where local governments undertake more budget spending relative to GDP and where unemployment rates are higher. It i s prevalent in industries that are more labor intensive and that make a larger fiscal contribution to the local government budget, in high profit-margin manufactured goods (automobiles, tobacco products and and for raw materials in short supply (tobacco, cotton and a l ~ m i n u m )Anecdotal evidence suggests that protectionism also . ~ ~ affects the performance of farmers (Box 3.2). Obstacles erected by local governments take the form of access barriers (complete prohibition or quantitative restrictions, technical barriers, local content rules on inputs, fees Box 3.2 Local Barriers inthe SeedsMarket on goods produced outside the locality, and local Farmers sometimes face problems in obtaining seed. The preferences in government production and distribution of hybrid rice and maize i s often monopolized by county seed companies. These companies, procurement), outflow owned or supported by local governments, enjoy exclusive access barriers (a ban on outflow of to the local market. For example, in Dexing City o f Jiangxi commodities and fees Province, Dexing County Seed Company sells and distributes its imposed on external users) in seed to the local farmers through township seed stations. It has a the commodity markets and monopoly on seed supply and i s the only authorized source of hybrid rice seed in the whole area. The company, however, sells other barriers to doing only one variety each for early, middle, and late rice, giving business (preferentia1 farmers no choice about the rice variety to grow. Interviews with treatment of local enterprises farmers suggest that the varieties offered by the county seed in access to assets, such as company were not those most suitable in agronomic and land, and in the context of economic terms. market regulations and in Source: World Bankstaff field visits local courts). 3.9 Measures to reduce local protectionism need to separately address the main sources of motivation and the ability of local governments to engage in protectionism. 33 Rozelle and Huang (2002) 34 See Gibson (2001). For more on the potential role of logistics in promoting growth across China see Chapter 4. 35 After China's WTO accession, these manufacturing sectors are facing the strongest pressures to restructure, expand their scale of operations, and upgrade technology to be internationally competitive. 36 See Economic Intelligence Unit (2002), OECD (2002), Development Research Council (2002) and Poncet (2002a and 2002b). 21 Addressing these requires special consideration in further reforms of the inter- government finance system, in modifying the role and responsibilities of local governments in the economy, and in judicial reform. For instance, as the inter- government tax sharing system has reduced the weight placed on enterprise ownership and, since 2002, local governments no longer obtain the full amount of enterprise income tax collected from their own enterprises, the incentive to protect such enterprises may have weakened. The local economic base, however, remains the main source of local budget revenue, making protection of local enterprises financially attractive to local government officials. Protectionist incentives also emerge from the existing overlap among the functions of local governments and enterprises, from close personnel connections between the local government and local enterprises, and sometimes also from the nature of development targets imposed on local governments by the central government (including short-term targets for local investment, production and employment). As for the ability of local governments to erect protectionist barriers, this mainly relates to the high level of autonomy that local governments are given in terms of market regulation and competition policy and to the high level of influence enjoyed by local governments in the judicial system. Local governments, runlocal enterprises as well as have significant powers in regulating and intervening in the business operations of their competitors. In the local courts, local governments appoint and control the judiciary personnel. Under such circumstances, it i s difficult for a court to make an impartial judgment.37 3.10 In addition, the central govemment could adopt several innovative measures to make local govemments accountable for their influence on the market. Complementing the legal context of China's WTO commitments, such measures could include local governance surveys of firms, which could be conducted on a regular basis by the central government across localities. International experience in dealing with local protectionism suggests that legal and regulatory measures are viable only to the extent to which they are supported by an effective enforcement mechanism. Some countries have adopted comprehensive national agreements and monitoring and enforcement mechanisms, and succeeded in reducing protectionist actions in the domestic market. Box 3.3 provides an example from Canada. 37 The status of the head of the local court is lower than that of the head of local government. Restrictions onjudicial independence are particularly problematic after China's accession to the WTO. The WTO has a requirement that a Member's judicial review body should be independent of its administrative agencies. If the foreign parties do not believe the courts of China are impartial and fair, they would choose to approach the dispute settlement body in the WTO through their own governments. For analysis of China's current legal andjudicial problems vis-&vis WTO, see Feinerman (2003). 28 Box 3.3 AbolishingLocalTrade Barriers inCanada Untilrecently, Canada's local governments were often involvedinthe following protectionist practices: discriminatory practices (local governments required procurement tenders to have local presence, suppliers to have high levels of local content, and owners of certain assets such as landto have localresidence), practices increasing transaction cost (local governments applied their own requirements for corporate registration, for annual reports and for various licenses - such as required occupational and educational training for specific businesses), and inequitable application of administrative practices (local governments limited the dissemination of tender requests or the time frame for bid submission in government procurement process). As a result, while the real value of international trade expanded dramatically across Canada from 1990 to 1996 following the regional trading arrangements with the United States, inter-provincial trade remainedalmost flat. To correct the situation, the federal and provincial governments signed an Agreement on Internal Trade in 1995. Similar to the European Union's Single European Act, the Agreement set up general rules and specified particular barriers to be removed in 11 areas, including: government procurement, investment, labor mobility, consumer- related measures and standards, agricultural and food products, alcoholic beverages, natural resources processing, energy, communication, transportation, and environmental protection. To ensure adequate enforcement, the Agreement laid out dispute resolution procedures. The progress since the Agreement has came into force has been remarkable. Discriminatory practices concerning investment have been removed. A list o f remaining presence and residency requirements has been completed for further action. Residency requirements have been eliminated for employment, license applications, certification or registration. A gateway website, MARCAN, was launched to increase the transparency of public sector tender opportunities. Discriminatory practices such as local presence, local content requirement or local payment preferences have been removed. From 1995 to the beginning of 2002, a total of 129 complaints by individuals, corporate entities, or local governments against governments (either federal or other local) for formal dispute resolution. Among them, a total of 122 cases have been resolved or withdrawn by the complainants. In42% cases, the dispute resolution panels upheld the complainants' argument and found the defendant guilty. In such cases, corrective measures were ordered for implementation within 60 days. Noncompliance was punishedby bad publicity and retaliatory actions. Disputesby sector 1QProcurement HUpheld 1 Disputesby disposition ~ .Investment 5% 2Wb 1 OLabor WDenied ~ mobility Byo 5% I 0Food and 420,ONot subject to the AIT 7 agriculture .Alcoholic beverages 4 OWithdrawn by complainant or QTransportation inactive BPending I Note: The total number of cases i s 129 Source: IntemalTrade Secretariat of Canada, www.intersec.mb.ca/index he.htm, and Leidy (1998) 29 Labor Markets 3.11 As China integrates with the global economy, a flexible labor market will ofSer increasing economic and social benefits. Some of the benefits of labor transfer for economic restructuring have been seen already in China's post-1979 experience. Now, as before, productivity levels in agriculture lag behind industry and services. Infact, the gap has been expanding (Figures 3.2 and 3.3). Hence, boosting economic growth mainly entails moving labor from the farm to non-farm jobs. Since most productive non-farm jobs are presently created within agglomerations of different sizes rather than in geographically dispersed rural areas, the current movement of labor from farm to non- farm jobs is associated with rural-urban migration. And, Figure 3.2 Annual Level of Labor Productivity, 1979-2002 because one of the main (RMB/worker) constraints on further 7000 1 improvements in agricultural productivity and farmers' income i s the small size of agricultural land plots, freer rural-urban migration (if 3000 accompanied by land 2000 Real agricultural productivity consolidation) would also benefit overall agricultural performance and incomes of the remaining farmers. The positive contribution of migration to the returns on Figure 3.3 Annual Growth inLabor Productivity, 1979-2002 (%) farm labor i s evident when modeling the effects of I Realagricultural China's WTO accession. As Table 3.1 shows, free .. 15 migration significantly boosts I I farm wage. Greater 10 availability of migrants in 5 urban areas somewhat reduces non-farm skilled and 0 unskilled wages. In the -5 economy, this encourages substitution away from -10 capital to labor and hence -15 A should promote non-farm Source: China Statistical Yearbook, various years employment. 38 For those Note: Real value addedper workers at 1978 prices 38 Results are based on a general equilibrium (GTAP) model that reflects China's labor market characteristics as well as the profile of expected tariff reduction, removal of quotas and export subsidies, liberalization of the service sector, and restructuring of key sectors, such as the automobile sector. In the baseline, the model internalizes the existing obstacles to labor mobility as a friction between agricultural and non-agricultural employment and imperfect substitution of unskilled workers. The model further assumes full employment, perfect unskilled labor mobility within non-agricultural and within agricultural 30 poor concentrated in remote and disadvantaged localities and in those cities most negatively affectedb y restructuring, migration offers new economic opportunities. 3.12 Migration also supports the efficiency gains of agglomeration. Manufacturing and services are often more efficient when concentrated in dense business-industrial areas, such as cities and urban peripheries. International experience indicates that total factor productivity inmedium-size cities and towns rises by about 10% when their size doubles. B y international standards, medium-size cities and towns in China seem too small to effectively exploit urban scale economies and become competitive as national and international commercial centers. By boosting productivity, the expansion of towns and cities and the development of their peripheries are likely to benefit, on average, the current urban residents as well as rural migrants. Guangdong, from +2 v1 0.35 - e, percent to -11 percent in Liaoning and from +25 3 0.3 - S 'E percent to +46 percent in Eo,25 Zhejiang . 39 As for + enterprise ownership, state- ,: o,2 owned enterprises offer a .E$ o,15 . the other employers. wage premium comparedIn to cash, state-sector workers 5.-g o,l ~ , , , , , , , , , , , , , , , , , , , , , , , , , 31 for benefits, state-sector worker remuneration i s the highest among all low skill workers and second highest (after foreign and mixed funded enterprises) among high skill workers.40 On average, however, labor productivity in state-owned enterprises i s lower than in the private, mixed and foreign ownership enterprises. Thus, the premium paid in the state sector, contrasts with its weaker relative performance, but i s consistent with the general findings on the effects of local protectionism and of a bias in capital allocation (discussed below). 3.14 The well-known obstacle to migration, the hukou (household registration) system, has been slowly eased by local govemments. Until very recently, the hukou system of residential registration and the associated discrimination of migrants have been the most visible obstacles to migration, mainly rural-urban but also urban-urban labor flows. Not having local urban hukou, migrants were denied jobs that were formally or informally reserved for local urban residents, and faced discriminatory pricing of education and other public services. Since 2001, a number of local governments have taken important initiatives towards making the treatment of migrants on par with local residents. Since mid-2002, these initiatives have been publicly encouraged by the central government. Officially, the ban on hiringmigrants to certain urbanindustries andjobs has been lifted. Migrants with a job are becoming entitled to local residence permits and to basic public services. Extra school fees earlier collected from migrant children have become illegal. 3.15 Less direct obstacles to migration remain to be addressed. In rural areas, the execution of land use rights has been weak, making it difficult for households to either maintain or monetize their land use rights when migrating. In urban areas, in spite of rapid residential development, low income housing needed by the bulk of the reallocating labor, remains scarce. This partly reflects the existing shortages and problems in the urban land markets. With land being scarce in China and the scope for developing new areas of cultivated land nearly exhausted, urban development ultimately reduces the area of cultivated land. This gives rise to difficult trade-offs in urban expansion and in the spatial restructuring of the Chinese economy. These trade-offs are sometimes aggravated by the fact that industrial land i s not priced and allocated through a competitive process in land markets but, rather, industrial land development is monopolized by local government^.^^ For various reasons, including the tax system, towns and townships tend to subsidize the cost of industrial land but charge high prices for housing and commercial use. As a result, land in the residential market becomes too costly for the development of low-income housing. 3.16 Labor mobility is also complicated by the remaining problems in the provision and portability of social The social security system and public services provision are geographically segmented to the extent that portability of benefits has been 40 Based on survey data from six provinces (Zhao, 2002). Overall, reported wage and income data suffer from problems of random inclusion of non-cash income as part of salary and of an unknown markup for benefits. 41 Allocating 25% of land supply, as in Shanghai and Guangdong, for non-revenue producing uses such as government facilities is not unreasonable. However, keeping two-thirds of available land out of the market, as inthe case o f Henan Province, may hamper the development of a functioning land market. 42 The portability of benefits and social security more broadly are addressed inChapter 5. 32 technically impossible. Moreover, changing a job even within a single urban area sometimes implies a loss of benefits and accumulated rights and a challenge to find other, affordable housing. This i s because many non-state enterprises fail to participate in the mandatory health insurance and pension schemes, and housing, although no longer directly provided by employers, tends to be tied to employment. 3.17 Creating a more unifed and flexible labor market will entail not just removing controls on labor movement, but also building a whole series of complementary institutions and markets tofacilitate such movement. International evidence suggests that policies need to ensure equal access to job opportunities and public services, strengthen safety nets for those most negatively affected and vulnerable, promote the development of skills demanded by the evolving production process, facilitate labor market information flows, and motivate the private sector to supply low-cost housing. In China, labor mobility across and within urban areas would benefit from centralizing the financing and provision of social security to the provincial level and from extending social security to the urban non-state sector, including both local residents and migrants. Conditions for rural - urban migration would improve with continuing reforms in land use rights to offer farmers a formal mechanism to sublease or quit their land plot with adequate compensation. Most importantly, perhaps, overall labor mobility would benefit from policies to promote the development of low-income housing in urban areas and urban peripheries. Such policies relate to specific issues in the urban land market, urban infrastructure and public services, as well as to broader questions of urbanization. The set of policies identified in this paragraph i s discussed in Chapters 4 and 5. FinancialMarkets 3.18 A flexible financial market promotes eflicient resource allocation across the economy and contributes to sustained growth. China's financial system has been providing sound facilities for savings in both rural and urban areas. With annual savings within the banking system reaching about 20 percent of GDP (up from negligible levels before 1978), the financial system has an enormous capacity to support growth. Unobstructed by geographical, political, sectoral or administrative boundaries, capital would flow to points of higher returns at each risk level. This would support entrepreneurship and expanding firms, facilitate economic restructuring, and thus contribute to sustained growth. In the banking sector, emphasis on efficient resource allocation would also contribute to the quality of bank asset portfolios and thus reduce financial sector vulnerability and the associated fiscal risk ultimately facing the government (discussed in Chapter 5). 3.19 Currently, thefinancial sector in China provides relatively inexpensive capital to a limited pool of applicants. The banking sector mainly serves state-owned and state- affiliated enterprises. Less directly, it also serves local governments (for instance, by lending to special purpose companies set up by local governments to finance development projects and to cover occasional shortfalls in local revenues relative to expenditures). In addition, state banks play an important role in absorbing new government debt issues. However, many creditworthy firms that are not owned or sponsored by governments or government officials have difficulty accessing formal 33 finance. Would-be issuers of equities and corporate bonds are sometimes blocked from access to listing, mainly due to non-transparent accounting and reporting practices and concerns about profitability, but also due to concerns about the likely effect of an increased supply of securities on overall share prices and bond yields. Partly because of segmentation and partly because of underdevelopment, small firms and dynamic firms with long-term potential in an increasingly technologically-driven economy are not valued accurately by financial institutions and lack access to risk financing. 3.20 Thefinancial market isfragmented also across localities and sectors. Profit rates and returns to capital differ widely across localities. Yet, across provinces in China, the level of investment i s associated strongly with each province's level of savings. After controlling for the provincial rate of investment, volumes of financial intermediation appear negatively associated with provincial growth and ositively associated with the size of the state-owned-enterprise sector in provinces. 4p Within provinces, although returns on capital in the rural economy have exceeded those in the urban economy, the financial sector tends to divert resources from the rural to the urban economy.44Inter- regional merger and acquisition activities are highly localized and constrained by local governments. Similarly, local governments restrict capital outflows from local enterprises and the local investment activities of outsiders. 3.21 Marketfragmentation mainly arisesfrom government control over interest rates and resource allocation. All financial institutions in China are owned directly or indirectly by different levels of government, and securities markets are monopolized by the public sector.45Government caps on interest rates makes lending rates artificially low, which in turn creates excess demand for credit and rent seeking, in which projects that contribute to local government revenue or favored clients are given priority. Directed credit to state-owned enterprises has reportedly been nearly eliminated, but incentives to avoid bankruptcies (and their consequences for banks' financial statements) and other non-commercial considerations continue to play a role in lending decisions. Given the strong influence of the government on personnel and operating decisions of state commercial banks, incentives to favor government-owned and government-associated credit applicants are strong. At the local level, lending and investment decisions of banks tend to be affected b y local government priorities, usually to support the existing local enterprises. The result i s that the efficiency of investment i s lower than it would be in a 43 On the spatial characteristics of investment in China, see Boyreau-Debray and Wei (2002) and Boyreau-Debray (2002). Canada, Germany, Japan, the US and UK, which have internally integrated capital markets, show much lower saving-investment correlation across the regions. See Bayoumi and Rose (1993), Iwamoto and van Wincoop (2000),Sinn (1992), Thomas (1993), and Yamori (1995). 44 Jefferson and Singh (1999), for instance, estimated pre-tax return on capital for rural industry 25 percent higher than inthe state-owned urban sector. 45 Corporate bonds account for 1percent of the total bonds outstanding, government bonds account for 73 percent, and bonds issued by two state-owned non-deposit-taking policy banks account for 26 percent. In the equity markets, over 90 percent of the nearly 1200 listed companies are state-owned and local government enterprises. About two thirds or shares are ineligible for trading. 34 commercially-oriented financial sector, which negatively affects the creation of productive jobs and economic 3.22 Integration and flexibility in the securities market will improve with expanding access by non-state firms (as issuers) and by individuals and non-state firms (as final investors). A high-level policy decision would help to enable non-state banks to access the corporate bond market. Subsequently, the approval process for the public issuance of corporate debt would benefit from streamlining. With respect to the demand for securities, there i s a need to review the legislative, regulatory and operational structures that surround the institutional investment sector to determine what improvements will promote demand for securities issued by creditworthy non-state firms. 3.23 Domestic financial market integration and flexibility in China will improve with continuing commercialization of the banking sector. The central government has been taking steps toward commercializing the four state commercial banks.47It i s becoming clear, however, that putting the state banks on a commercial footing will be a long-term process, intensive in institutional improvement and capacity building. Bank commercialization may require a fundamental redesign and professionalization of their governance structure. Particularly, it may require eliminating possible ambiguities in the objectives and performance measures of bank managers, which in turn may not be possible without a greater role for the private sector in bank ownership and operation. State commercial banks could be incorporated as commercial banks.48Furthermore, bank commercialization can hardly be effective without freer interest rates and without uniform accounting and information systems and associated internal control and auditing regimes within the banks. Consistent with bank commercialization, bank supervision should focus on quality of governance arrangements and internal governance infrastructure (internal controls, internal and external auditing and risk management systems). Successful bank commercialization will also require improvements in corporate governance, accounting and information disclosure in the enterprise sector. In a commercial environment, more non-state firms and fewer existing state-owned enterprises are likely to be viewed as acceptable credit risks. Ultimately, this will improve capital allocation in China and contribute to China's growth performance. It 46 Empirical evidence suggests that credit extended by state-owned banks i s negatively associated with local economic growth and that the system of financial intermediation in China vastly misallocates financial resources. Boyreau-Debray (2002) 47 In 1993, the State Council established the state policy banks to conduct policy lending, and eliminated explicit requirements for directed credit from the state commercial banks. In 1998, state commercial banks were ordered to reduce their shares of non-performing loans as well as their staff and branches. Boards of supervisors have been established to supplement state commercial banks' internal control and audit mechanisms. Since 2001, state commercial banks may be corporatized, creating a distinct legal entity with a shareholding structure and a board of directors, their ownership may be diversified beyond the central government. 48 As complementary measures, it would be practical to reconfigure the existing state commercial banks into a larger number of smaller, more manageable banks, to redesign the ownership and governance functions applicable to the banks, to restructure the banks and to establish and enforce individual performance targets for each bank. The measure of commercial performance in the near term would be a simple target, such as return on assets, before more appropriate targets such as a specific return on equity or dividend yield become practical. 35 may, however, negatively affect employment in state-owned enterprises, and thus add pressures on the social security system and local government budgets inthe process. Protecting the Losersof Domestic Market Integration 3.24 The cost of market fragmentation and rigidities is high. When market fragmentation obstructs efficient allocation of labor and capital in the economy and limits competition in favor of the state sector, it inhibits more productive firms in expanding their market share, in building economies of scale and, possibly, in strengthening their international competitive advantage. Protection of the less productive firms i s likely to reduce the speed of technological upgrading and long-term viability of the ongoing structural changes in the economy. The social cost of market fragmentation i s also significant especially as it reduces the ability o f China's rural population to take full part inthe country's economic opportunities. 3.25 Addressing the rigidities and fragmentation of the domestic markets will be a time-consuming process. This chapter indicated that dealing with the underlying causes of market fragmentation and rigidities may imply a wide range of structural and institutional reforms. Improvements may be required in many areas, including market regulations and local governance, urban landmarkets and infrastructure, the enforcement of rural land use rights, and accounting, information disclosure and governance in the financial and enterprise sectors. Experience of China as well as other countries suggests that institutional reforms take time to design and capacity to implement. Institutional capacity, and particularly human capacity, i s essential in the process. Many institutional reform initiatives around the world have failed because too few people had the enthusiasm, understanding and skills necessary to carry out implementation. 3.26 Domestic market integration, while overall positive for the Chinese economy and society, will have its losers. Domestic marketintegration will improve the transmission of the opportunities and competitive pressures from globalization across China's economy. Inlocalities riddledwith unproductive enterprises, a suddenremoval of local protectionist policies and of bank favoritism may have a temporary or permanent effect on employment. Similarly, in the Western regions, a significant drop in the cost of transport and other logistics, while opening new economic opportunities for those local firms that are internationally competitive, may cause distress in those less so. Migration, while overall contributing to the reversal o f rising inequalities and to poverty reduction, may depress wages and contribute to unemployment in some urban areas. The potential losers of market integration and flexibility, namely some state owned enterprises, local governments and urban residents may oppose the measures identifiedin this chapter. 3.27 The number of losers will be lower if the process of domestic market integration occurs in the context of sustained economic growth and stronger social protection. Economic growth, driven my the more productive forces of the economy, i s needed to generate productive jobs. Furthermore, by positively contributing to government finances, sustained growth will also generate resources that could be used to facilitate the revitalization of depressed localities, ensure adequate delivery of public services and promote equity. 36 3.28 To optimize the results of domestic market integration and promote growth with equity, a broader policy package of accompanying policies could consist of measures to generate new job opportunities, particularly in the less developed and negatively aJScected localities, and to raise rates of retums on farm labor and land. More specifically, as discussed in the next chapter, given the current stage of China's development and remaining structural problems, it would be beneficial to enhance the conditions for human capital development, technology diffusion, urbanization and services sector development, and farmers' capacity. 3.29 In addition, the govemment may need to consider policies to address directly the main risks of domestic market integration. Individuals and localities on the losing end of domestic market integration will depend on public services, particularly social security. Because both provision and financing of public services, including social security, i s highly decentralized, adequate provision of public services will depend on the soundness of the inter-government finance system. Bank commercialization, while ultimately reducing financial sector vulnerability, will first expose the financial gap generated by non-performing loans. That may give rise to macroeconomic vulnerability and negatively affect public finances. Chapter 5 will discuss these risks. 3.30 Only a well balanced strategy can deliver results that are socially sustainable as well as economically favorable. Moreover, only a well balanced strategy would align the interests of local governments with those of the central government and thus reduce the transaction cost of developing and preserving an integrated and flexible domestic market. 37 4. CREATING CONDITIONSFOREQUITABLE GROWTH 4.1 Theprevious chapter discussed the necessityfor reducing barriers to thefree flow of investment, labor, and products. It noted that this would be a time-consuming process, and one that may initially increase income inequality before helping to reduce it. In this chapter we draw upon international experience to examine the type of policy package that could assist in sustaining high growth over the medium- and long-term, while promoting equity. Inthe specific conditions facing China today, the package identifies five nodes for concerted policy action: investing in people, promoting the difSusion of technology, facilitating urban agglomeration, expanding services, and rising farmers ' income. Each of these areas for focus has been highlighted in the Government's own strategy documents, such as the Tenth 5-Year Plan, and among the announced priorities of the new Government established in 2003. Therefore, the adoption of a policy package along these lines does not represent a break with the general thrust of China's development policy. This chapter emphasizes those aspects of the package that would be of particular importance to generating a better distribution of incomes and opportunities - the essence of axiaokang society. 4.2 If further increases in inequalities in China are to be curtailed, per capita incomes need to grow in a more equitable manner across rural and urban areas and across lagging and leading regions. There i s some recent evidence of a growth spurt in several lagging provinces, resulting partly from central government spending initiatives and partly from improvements in communications and a reduction in local protectionism. As Figure 4.1 shows, some lagging provinces, including Qinghai, Ningxia, Shaanxi, and Gansu, have experienced above average growth levels in urban areas. Other lagging provinces, including Sichuan, Chongqing, Qinghai, Xinjiang, Yunnan, and Tibet delivered above average growth rates in the rural areas. Overall, with the exception of Jilin, agricultural growth has been reviving since 2000, restoring positive income growth in rural areas. In dealing with rural urban inequality, the current revival in agriculture, however, appears insufficient to buildupon - compared to the type of success seen in the 1980s with the growth of town and village enterprises (Figure 4.2). Continued liberalization of trade, while having overall positive effects on the economy, cannot be expected to contribute by itself to higher growth in the lagging regions and rural areas without a more supportive government policy environment. 38 Figure 4.1 Annual Average Per Capita Income Growthby Province, 1998-2002 (%) l21 Urban per capita income Ruralper capita income Source: Householdsurvey data, National Burau of Statistics Note: Data for Tibet cover only years 1999-2002. Figure 4.2 Annual Average Per Capita Income Growth, 1981-2002 (%) QUrban Rural 81-85 86-90 91-95 96-00 01-02 Source: Household survey data, NationalBureau of Statistics (various years) 4.3 Until resource flows begin to play a stronger equilibrating role across China, more equitable growth across it's regions depends crucially on a faster rate of job creation in the industry and services sectors of the lagging regions than seen so far. In net terms, of the over 100 millionjobs createdin services and industries in China during 1990-2001, only about 14 million were in the lagging regions. The entire net increase in the lagging regions occurred in the services sector, while employment in industries declined by about 2 million (some of which may have been offset by the net absorption of labor in agriculture, where employment increasedby 4 million during 1990-2001). With globalization, jobs can be sustained only in competitive areas of economic activity. Domestic market integration, discussed in the previous chapter, will promote the competitiveness of the lagging regions. It provides an opportunity for economies of scale and, as it facilitates competition in markets for inputs and outputs, it further improves efficiency. It i s not evident that increased competition arising from the domestic market integration will necessarily hurt lagging regions, which are at an earlier stage of industry and services sector development than others. Instead, as demonstrated increasingly by 39 manufactures in Chongqing and Sichuan and, to a lesser degree in Hunan and Sha'anxi, the ability to source cheaper inputs from anywhere in China enhances the competitiveness of finished goods production in the lagging regions, boosting employment and growth. Without appropriate policy actions, however, lagging regions may suffer from the fact that competitiveness i s becoming increasingly based on technology, human capital, andbusiness services. 4.4 Equity in household income between rural and urban areas will be difJicult to achieve without raising rates of returns onfarm labor and land. An increase inreturns on farm labor depends mainly on reducing the currently high farmer-land ratio. This has been happening with the move of labor out of agriculture. In addition, although with somewhat less dramatic effect, the consolidation of land and promotion of environmental sustainability and market infrastructure will enhance returns to land and to farm-related activity. The key drivers, focus agenda and policy implications for generating a better distribution of incomes and opportunities across China are discussed below. HumanCapitalDevelopment 4.5 Countries cannot be competitive in today's global economy without good human capital. Investment in health, education, training and other social services i s crucial for achieving rapid, efficient, equitable and sustainable development. Improved health contributes to learning andjob productivity. Health and nutrition are key for attendance in schools and for the capacity of individuals to learn and develop skills. Better public health unlocks resources that would otherwise be spent on treating illness and i s correlated with smaller production losses caused by worker illness and with greater investor as well as consumer confidence. China's own recent experience with SARS suggests that a local public health problem could pose risks for economic development and well-being in the entire country, and even beyond. Unwavering attention to public health throughout the national governance system has proven necessary to maintain the country's good economic performance and access to the international marketplace and foreign i n ~ e s t m e n t . ~ ~ 4.6 For basic education, the need today in China is not only to raise the level of technological inputs in farm and ofjc-farm rural economic activity, but also to enable inhabitants of rural areas to pursue economic opportunities in an increasingly urbanized environment. Investment in human capital determines the entire working life. An important feature of investment in formal education i s that much of it precedes entry into the labor market and additional educational investment following entry in the labor market i s for most individuals relatively small. Moreover, learning through work experience crucially depends on educational attainment prior to entering the labor force. Empirical evidence in China suggests that investment in education and public health 49 The macroeconomic effects of illness are substantial. The potential income loss from illness in developing countries has been estimated at 2.1 to 6.5 percent o f annual GDP, and at below 2 percent of GDP in the United States. In China, the direct negative economic effect of the SARS outbreak alone has been estimated at 0.5 to 1percent of 2003 GDP. 40 tends to be very effective in reducing rural poverty. j0In this respect, health and basic education are core buildingblocks for a xiaokang society. 4.7 Furthermore, knowledge and higher-level skills have become critical to achieving technology-led growth, increasingly the basis of Figure 4.3 Returns to Schooling, 1988-1999 (percent) sustainable economic development.j1Partly a result f 80% 7 of rapid introduction of new 70% - technologies in China's 60% - industries, relative demand for 50% - skilled labor has grown. The 40% - growing demand for skilled 30% - labor, coupled with the effects of wage liberalization, has been 20% - raising returns on tertiary and 10%- senior secondary education 0% r (Figure 4.3). High returns on g f g g f f $ E L g g f skills are not unique to the Marginal Rateof Returnto Schoolin +University most developed localities, +Post-SecondaryTechnical andCollege Comparedtohmary Education Com aredto PrimaryEducation Senior SecondaryComparedtoKrimary Education skills may command an even +Junior SecondarvComnaredto PrimarvEducation higher premium where they are Source: Park, et al. (2003) Note: InChina,primaryeducationincludesgrades 1-6,junior secondary very scarce, such as in lagging grades 7-9 andsenior secondary grades 10-12. Junior secondary andsenior areas (Table 4.1). secondary are bothconsideredsecondary education. 4.8 Faster growth in skilled labor is likely to deliver distributional as well as productivity gains. China's WTO accession i s raising the pressures to keep up with new knowledge and to promote restructuring and technological upgrading to maintain and enhance competitiveness. Rapid introduction of new technologies puts a premium on education and skills to effectively use, adapt and create knowledge. As for the distributional impact, if a faster growth in skilled labor i s occurring in the context of free migration, it i s likely to assist in reducing inequalities as well as in boosting national welfare. Table 4.2 indicates that, jointly, a faster growth in skilled labor and free migration can effectively lift farm wages.j2 From the perspective of national welfare, the gains would more than outweigh the losses. 50 Fan at a1(2002) 51 Secondary and higher schooling can be vital for the diffusion of technology (Barro (1999). Across regions, Xu (2000) implies that a locality needs to reach a minimumhuman capital threshold level in order to benefit from technology transfer and diffusion. 52 The GTAP model described in Chapter 3 is used here to assess the distributional impact of different labor market characteristics. The baseline (identical to the baseline reported in Chapter 3) reflects the current estimate of growth in skilled labor of 4.15 percent annually. The two scenarios raise this level by 20 percent to an annual growth of 5.0 percent, starting in 2001. The model assumes a constant population growth of 0.8 percent annually. The two scenarios correspondingly adjust the annual growth in low skill labor from 1.3 percent to 1.1percent. Compared to the baseline and the first scenario, the second scenario adds the assumption of no barriers to migration. In the results of all scenarios, return to capital, which equals the rental price of capital divided by the price of capital goods, remains roughly equal. 41 4.9 The key channels supporting the growth of skilled labor are secondary and tertiary education. Increasingly, it i s also the process of life-long learning that allows for constant updating, absorbing and applying new knowledge and skills. Table 4.1 Compensationand benefitsfor Chinese nationals,2002 (annual gross average, `000RMB) Guaranteed pay Guaranteed pay Guaranteed pay Add-on costs lagging areas Position Beijing Shanghai other cities for all positions General Manager 470 490 460 Hardship allowance 20% of pay Financial Controller 340 300 Sales Manager 350 330 325 300 Housing and transportation HR Director 450 400 12 yearly flights to home city Marketing Manager 230 200 Not a375licable Social insurance contributions Note: Other cities are other than Beijing, Shanghaiand Guangzhou. Source: Haarmann Hemmelrath Management Consultants' compensation database Table 4.2 The ExpectedEffectof China'sWTO Accession onRealFactorPrices,2001-2007 (%) Baseline Faster growth Faster growth of skilled of skilled labor labor and free migration Farm unskilled wage -0.7 1.6 19.4 Rental price of land -5.5 -6.4 -10.5 Nonfarm unskilled wage 1.2 2.7 -2.5 Skilled labor wage 0.8 -6.3 -8.7 Rental price of capital 1.3 0.9 -1.8 Price of capital goods -0.9 -1.1 -3.9 Migration (million) a 6 10 32 National welfare (US$, billion) 10 10 11 Notes: Number of people expected to move from farm to non-farmjobs. Change innational welfare expressed in 1997 US dollars. a Source: Ianchovichina and Martin (2002) 4.10 Education attainment and health indicators are significantly lower in poor localities. According to the United Nations Human Development Index (HDI),China no longer has any province in the "low development" category.53However, HDIindicators across China differ widely, from levels similar to Vietnam and Indonesia (with HDI0.68) inthe poorer, predominantlyrural provinces (such as Gansu, Guizhou, Tibet, Qinghai and Yunnan, with HDI0.59-0.67) to levels similar to Hong Kong, Korea and Singapore (with HDIabout 0.88) in wealthier, more urbanized provinces (such as Beijing, Guangdong, Jiangsu, Shanghai, Tianjin and Zhejiang, with HDI0.80-0.89). Current enrollment rates injunior secondary education vary from 49 percent in Tibet, and about 60-70 percent in Guangxi, Guizhou, Hainan, Heilongjiang, Ningxia, Yunnan and Qinghai, to about 99 percent in Beijing, Shanghai, Tianjin, and Zhejiang. Enrollment rates in senior secondary education vary from under 30 percent in Anhui, Henan, Inner Mongolia and Yunnan, to 96 percent in Beijing. Drop out rates, up to 35 percent in the secondary schools of poorer localities, further exacerbate the disparity in educational attainment. In the lagging provinces, only 70 percent of students had completed the 9-year universal compulsory education curriculum by 2000 (a priority target rolled out by the government in 1986), compared to 100 percent in East China. The average length of schooling in rural areas 53 The cutoff for low development i s at HDIlevel of 0.50. Provincial HDIindicators are explained in UNDP(2002). 42 was about 6 years. Life expectancy at birth varies from about 65 years in Guizhou, Tibet and Yunnan, to 76-79 years in Beijing, Jiangsu, Shanghai and Tianjin. Infant, under-5- year and maternal mortality rates are on average three times higher in rural compared to urban areas. The spread of tuberculosis and other preventable diseases i s of great concern in a number of poor localities. Although questions remain about the accuracy of the province-level social indictors, they are broadly substantiated by information collected through individual project interventions, and indicative of the disparities that exist. Comparatively low educational attainment and poorer health status among children in backward localities may in time act as an impediment to local economic competitiveness, to the quality of local governance (particularly, if future local civil servants lack adequate training), and to rural-urban migration. Thus, they may become a major impediment to reversing the trend of rising spatial inequalities. 4.11 Disparity in human development indicators reflects both the lack of capacity and skewed incentive structurefor local governments. Inpoor localities, the cost of education and health services relative to current income levels i s very high - while government financial contribution appears unusually low. The financing and delivery of human capital development i s largely the responsibility of local governments. Poorer local governments and communities, however, often lack the resources needed to deliver adequate basic education and health services and to achieve even the priority targets set by the central government. Out of the 500 counties that had not achieved the goal of universal compulsory education by 2001, most are poor, often in mountainous andremote localities. The central government has been raising its financial support for the implementation of universal compulsory education. But the average per student government expenditure has remained relatively low in poor provinces (in 2001, for junior secondary schooling RMB196 and RMB219 in Guizhou and Qinghai, respectively, compared to the national average of RMB403, and for primary schooling RMB76 and RMB112 in Guizhou and Gansu, respectively, compared to the national average of RMB218).54In the health sector, nearly two thirds of government financing i s allocated to urban areas and thus available to only about one third of China's population. The World Health Report 2000 ranked China 6lStout of 191 countries in overall quality of health, but 18Sthin fairness of government financial contribution on health. As a result of the remaining inequalities in government financing, households in poor localities face relatively high education fees (such as fees for textbooks and school attendance) and medical out of pocket expenses. Programs to assist poor households in covering these fees and expenses have inadequate reach, and are nearly non-existent in poor rural localities. Targets set by the central government to evaluate local government performance place greatest weight on local economic growth and physical capital investment, rather than human capital development. Similarly, probably to the detriment of the level and quality of education and health services provided, government targets mainly track quantitative and input-based, rather than qualitative and outcome-oriented indicators. ~~ 54 Xu Jianchen, Fuwei (2002). InChina, 56 percent of total spending on education is financed from public sources and 44 percent from private sources. This ratio i s similar to that of Chile and Korea. In OECD countries, on average 88 percent comes from public sources and 12percent from private sources. 43 4.12 Although a large proportion of public funds for education is allocated at the tertiary level, the supply of tertiary education and life-long learning falls far short of demand. The insufficient supply of tertiary and life-long learning country-wide may explain some of the brain drain from the lagging regions to the coastal centers.55Dealing with this problem may require a broader set of measures, including those to improve the local business climate and the quality of urban life in the lagging regions. As for the existing supply constraint in tertiary education, the number of public colleges and universities and the allocation of public funds can hardly be seen as the main reason. The current ratios of about 10:2:1in government per-student spending on tertiary-secondary- primary education, respectively, are already high compared to other countries (Figure 4.4). Since the demand for tertiary education in China i s very strong and most of the returns on tertiary education directly accrue to the individual as opposed to the society at large, tertiary education could generally be provided on a fee basis, with fees set at levels that cover cost. Special loan schemes for poor students could serve equity purposes. Life- long learning, including training and various other programs of continuous updating of knowledge and skills, i s similar to tertiary education insofar as the benefits accrue to the individual and employer, and rise with economic restructuring and technological upgrading. Legally, the supply of tertiary education and life-long Figure 4.4 Government Spending on Education learning i s no longer constrained by per Student, 1990s (% of GNP per capita) discrimination against private 70 schools and providers and against the degrees and certificates they grant. 60 The Law on Promoting Private Q Primary NSecondary 0Tertiary Education in China, passed in 50 n December 2002, strengthened the 40 status of private education and clarified the functions of the 30 government vis-a-vis educational 20 institutions. To support the quality as well as rapid development of private 10 education, the law i s expected to be complemented by rules, procedures 0 and institutions to provide some China Korea Chile Mexico USA level of management, quality Source: Wang (2002) assurance and accountability. 4.13 Ensuring adequate financing for and attention to the quality of primary and secondary education and basic health services across China would imply several broader areas of reforms. Since the provision and financing of education and health services are highly decentralized in China, it may not be possible to achieve greater equity in human 55 For example, out of the best graduates of secondary schools in Inner Mongolia admitted to universities and colleges in the coastal provinces in the 199Os, only 10 percent have returned upon graduation. Nearly one half o f college graduates from Ningxia, Qinghai, Shanxi, Inner Mongolia, Heilongjiang, Jiangxi and Hunan who graduated from public universities in year 2000 have not returned to their home provinces. See Quat a1(2001). 44 capital development without reconsidering the entire system of inter-government finance. The allocation of public funds on education and health needs to be reasonably equitable across localities. In addition, special programs may be needed to broaden the achievement of national minimum standards, such as nine-year compulsory education and basic immunization, across China. Starting 2003, rural residents of lagging regions can access a RMBlO per capita annual subsidy from the government to support health insurance schemes, which are a step in the right direction. Even in this progressive program, however, further steps may be needed since poor local governments and families may not be able to afford the requiredmatching funds. Incentives with respect to the quality o f social services can be improved by strengthening qualitative and outcome- oriented targets (such as career placements of school graduates and monitoring the local burden o f diseases), facilitating training for providers, and monitoring results in the education and health systems. More broadly, the extent of improvement in local human capital indicators i s potentially an incentive-compatible yardstick for the performance evaluation and promotion prospects of local government officials. Box 4.1 Private InitiativeinTraining Aero-Engine Maintenance Training Center in Guanghan - The Aero-Engine Maintenance Training Center was established in 1997 by ajoint venture and the Civil Aviation Administration of China. The foreign investors contributed about US$17 million in providing 6 engines, tooling equipment and 2 full-time expatriate trainers for 5 years each, and helped design the training courses. The Chinese partner offered new training facilities, integrated with an existing aviation training center and the Civil Aviation Flight College in Guanghan, and financed 15 Chinese staff. Inestablishing the training center, the joint venture had several clear incentives that reflected both its business strategy and government policies. First, China will soon become its second biggest market for aero-engines after the United States. Second, following several plane crashes in the early 199Os, the Chinese government raised maintenance standards and pressed on suppliers to assist in needed training. Third, training programs organized earlier in the United States and France had been attended by senior aviation officials rather than professionals in need of the technical skills. And, fourth, by investing in the center, the joint venture satisfied its "off-set obligation" which required it to purchase goods worth US$250 from Chinese sub-contractors for every US$lOO worth of own products sold inChina. 4.14 In tertiary education and training, private sector provision is likely to expand if the role of govemment changesfrom being the main provider of formal education to that of the architect and facilitator of an entire life-long leaming system. For institutions of tertiary education, important steps include proper implementation of the 2002 Law on Promoting Private Education in China to remove any remaining discriminatory policies and to integrate private schools into the formal system. To design and facilitate the entire system o f formal education and life-long learning, the government could set up a transparent set of accreditations and certifications, establish standards, regulations and methods of ongoing monitoring and quality assurance, and establish a mechanism to share information on the demand and remuneration for different types of education and skills, and on the quality and performance of different educational providers.56In a less formal way, local governments could also assist in facilitating an active role of employers and investors inthe life-long learning system (Box 4.1 gives an example). 56 World Bank (2001). 45 4.15 Equity in access to education would be well sewed through a system of stipends and student loans. At the primary and secondary level, child-schooling stipend (transfer payment linked to continued enrollment) to the poorest families across China could be effective in reducing drop-outs and enhancing overall school attainment as it has been in Mexico and other countries (Box 4.2). For tertiary education, the preferred option may be student loans with repayment schedules adjustable according to the debtor's post- graduation income. Box 4.2 Educating the Poor: The Case of Korea and Mexico During 1960~-1970s,Korea expanded its basic education rapidly, raising the supply of skilled workers in line with the demands of its integration with the global economy. Over two thirds of government expenditure on education concentrated on primary and secondary schooling. As a result, during 1960 to 2000, the mean number of years of schooling more than doubled. The distribution o f education in Korea has been very equitable, more equitable than the distribution of income. In 1960, when Korea's per capita income was the same as China today, Korea's education Gini coefficient was 0.55, lower than that of China in 1975. In2000, Korea's education Gini declined to 0.21 (income Gini was 0.34), much below China's education Gini of 0.40 in 2000. One hypothesis i s that equitable access to education, ensured a sufficient supply o f skilled workers and thus averted excessive skill-based divergence in incomes. In this respect, Korea's experience with the distributional effects of globalization stands incontrast to that of Mexico. InMexico, unequal access to education emerged as a main cause of high income inequality (Gini at 0.57 inthe early 1990s).Reforms to correct education inequality included an increase ingovernment spending on education from 4.7% to 6.1% of GDP during 1992-2000,expanding the share of financing allocated to basic schooling, strengthening the role of the central government in ensuring adequate financing and quality control, and introducing an integrated family support program for education, health and nutrition (PROGRESA) that links income transfers for poor households to preventive health care and continued school enrollment. The reforms have delivered encouraging results. For example, drop-out and repeater rates inprimary schools have declined by nearly a half over the 1990s. Technology Diffusion 4.16 For China, technology is an increasingly important driver of future Integrating with the global economy, China competes in high-, middle- and low-tech activities. It i s increasingly dominating the market in traded low-tech products. Middle- and high-tech products and services, however, offer market opportunities that China i s yet to fully exploit. As gaps in efficiency are large, gains from catching up are significant. This suggests that relatively greater emphasis on technology rather than merely higher capital investment can effectively drive future growth. Moreover, even sustained 57 For analysis, see Yusuf and Evenett (2002) and Yusuf (2003). Technology includes process technologies (promoting productive efficiency and/or improved product quality), product technologies (delivering new products) and transaction technologies (facilitating co-ordination, information sharing and exchanges between economic agents). Technology transfer includes new physical technologies embedded in products and machines, new processes transferred when people learn how to use new machines, knowledge passed through new processes, plans, or blueprints, and knowledge and information transferred from consultants, managers, and other types o f technical training. Technology transfer occurs when a firm imports equipment, hires consultants or new employees with specialized knowledge, and interacts with suppliers and customers. 46 competitiveness in low-tech product markets may require better business services, such as marketing and financial management. The quality of such services, based on appropriate technology, will play an important role in China. The relative underdevelopment of China's services industry makes it more likely that large manufacturing and services sector productivity payoffs can come from technology improvements in services, especially in the producer services sub-sector. This i s true also for China's lagging regions. Although most jobs created in the lagging regions are likely to target low skilled labor, the competitiveness of firms may ultimately depend on the ability of local services to bring products up to the domestic and international market standards. 4.17 In recent years, China's technology-led growth has concentrated in coastal areas. '*Geographically, the spill-over of industrial as well as civilian technology developed domestically or transferred through foreign direct investment has not penetrated from the coast to the hinterland (Figure 4.5 and Box 4.3).59 Similarly, creation of domestic technology has been concentrated in East China, and its diffusion has been geographically constrained. Partly as a result, total factor productivity growth and new product sales differed sharply across regions Figure 4.5 FDI Inflows into China by Regions, 1983-2002(1995 US$, bn) (Figure 4.6 and Box so 4.4). Agriculture was an 45 exception in this 40 0EastRegion 0CentralRegion respect. During the 3s 0WestRegion 1980s and early 1990s, 30 technology was driving 2s significant increases in 20 agricultural productivity 1s (particularly in rice, 10 wheat and maize). But S this trend has slowed in 0 h recent years. 58 Compared to East China, growth in West and Central China was more capital-intensive, with capital per worker in enterprises rising faster than inEast China. See Jefferson and Jian (2002). 59 Research suggests that technology transfer via foreign direct investment under spillovers mainly happens vertically - through local suppliers (Saggi, 2002). The export processing regime, attracting a large share of foreign direct investment, has inhibited the creation of vertical links. East China firms report that on averageover 50 percent of their suppliers are located in the same city, and most suppliers are located in the same region (based on a survey of about 1000firms in Steinfeld, 2001). 47 Box 4.3 Foreign Direct Investment and Technology Diffusion The Case of Suzhou - Inthe 1990s, inJiangsu province, Suzhou emerged as a rising star, attracting foreign direct investment. It became known for a market-friendly local government that supported technology transfer through contract-based production of parts and components for Shanghai's enterprises. B y 2000, Suzhou had attracted over $20 billion of actual foreign direct investment. Throughout the second half of the 1990s, foreign capital contributed one half of the total cumulative fixed asset investment. In 2000, the share of foreign-funded enterprises reached 40% in Suzhou's total industrial output (80% of the output of electronics and telecommunications), 40% in urban employment, over 30% fiscal revenues, and nearly 80% in exports. Among foreign-funded firms, in 2000, wholly foreign owned enterprises accounted for two-thirds and joint ventures for most of the rest. Geographically, within Suzhou municipality, foreign direct investment concentrated inspecial development zones. A survey conducted for this report suggests that technology transfer through foreign direct investment in Suzhou has been massive. Foreign-funded enterprises have been benefiting from imports of more advanced technology through their foreign investors and producing internationally competitive products. Technology diffusion to other domestic firms, however, has been limited. Among over 7000 foreign- funded enterprises, less than 100 have signed contracts with domestic firms to share technology. Contracting out by foreign-funded enterprises has remained mainly within vicinity of Suzhou and has focused on low-tech inputs, such as raw materials and simple parts and components. Surveyed foreign- funded companies indicated that the main obstacle to greater technology diffusion i s a shortage of qualified technical staff and skilled workers indomestic companies. About one thirdof the surveyed firms have been conducting significant research and development, but few have had any technical cooperation with domestic firms or research institutions and universities. None of the surveyed companies have had any direct contact with enterprises or institutions located inCentral or West China. Figure 4.6 The Regional Distribution of Growth inTotal Factor Productivity and New Product Sales (%) 8 14 7 OTFP West l2 saleskales West 6 10 5 8 saleskales East 4 6 3 4 2 2 1 0 0 -2 1995 2000 annual growth -4 Source: Jefferson and Jian (2002) Note: Based on NBS data from 22,000 large and medium-size industrialenterprisesacross China. .4.18 Broader technology difSusionhas been held back by local protectionism, localized shortages of skilled labor, and weaknesses in technology-oriented policies.6o As the previous chapter discussed, local protectionism limits economies of scale and competition, and so reduces both the capability and incentives of producers to upgrade their technologies. Local shortages of skilled labor further reduce the ability of firms to introduce new technologies. Nor is technology upgrading across China promoted by 60 World Bank (2001a) 48 technical regulations and standards, which are often set and implemented locally or, if promoted by a central Box 4.4 Trends inTotal Factor Productivity agency, implemented in an uneven China's enterprise data of 1995-2000suggest that: manner. China's science and East China firms exhibit twice as high TFP growth compared to Central and West China firms, whether technology infrastructure i s stronger controlled for ownership or not in basic research than in technology TFP growth has been converging within regions and diffusion. The existing engineering diverging across regions research centers, launchedin 1991 to TFP grows fastest in foreign-funded firms and demonstrate technology, and about twice faster in non-state enterprises compared to productivity centers, launched in state-owned enterprises without ajoint venture The introduction of non-state assets inrestructuring 1993 to disseminate technology state-owned enterprises i s correlated with higher growth information and provide consulting, intotal factor productivity training, innovation and marketing Firms with high levels and growth rates of TFP support to small and medium-sized exhibit higher wages and higher wage growth, but not enterprises, depend to a great extent larger workforces or more rapid workforce growth than on self-financing. Often, in search of firms with lower TFP levels and growth rates Domestic (particularly state-owned) enterprises are revenues, they have ,deviated from vulnerable to "market stealing" by foreign funded firms, their main tasks. Although but are able to narrow their productivity gap within 5 successful in the past, the system of years - particularly in apparel, chemicals, machinery, research and technology diffusion in plastics, textiles and transportation, inEast China. agriculture has become too Source: Jefferson andJian (2002) cumbersome to serve the changing - - needs of farmers inthe market economy.61 4.19 The diffusion of technology can be facilitated by strengthening dissemination schemes, competition policy and by fostering links between industry and education in the lagging regions. In agriculture, technology diffusion would benefit from streamlining the existing extension system and complementing it with more efficient information sharing devices. In recent years, useful knowledge sharing has been facilitated, for instance, by Farmers' Professional Associations that have sprung up in counties across China. For other sectors, the existing technology dissemination schemes require at least minimal financial support from their sponsoring agencies (which i s a common practice in the industrial countries), so that they can thrive without deviating from their core tasks. There is, at the same time, a need for defining the core tasks more sharply, especially with regard to sharinginformation about production technologies and management approaches emerging across sectors, demonstrating technology, pilot testing and providing technical assistance to small andmedium-sized enterprises. To ease local shortages in skilled labor, as part of the plan to develop, attract and retain skills in lagging regions, local governments may organize training and research centers in a partnership with firms, and facilitate closer links between local firms, universities and schools. Such links may encourage schools to undertake more research relevant to local industries, and also encourage students to establish possibly long-lasting relationships with local firms. More 61 The extension system i s credited with major contributions to China's agricultural growth. The system, however, has become costly and inefficient with its six-level network (national, provincial, prefectural, county, township and village), 675,000 extension workers and 500,000 farmer technicians. 49 broadly, in the context of promoting domestic market integration and flexibility, discussed in the previous chapter, technology diffusion will particularly benefit from competition policies to encourage competitive pricing, facilitate entry b y new firms, and pressure producers to innovate and improve their productivity. Development of Producer and Consumer Services 4.20 The expansion of services, their improved eficiency, and closer interaction between services and manufacturing can potentially make a significant contribution to China's future growth. The rapid growth of the Chinese economy has been intensifying demands on the services sector. 62 At about 30 percent, the share o f services in GDP in China i s low in relation to the rising domestic demand and to comparable countries.63 Efficiency levels of the services sector seem to lag far behind those of the industrial countries. Many services are unavailable, except at prohibitive cost, the quality of services i s variable, and the interaction between services and manufacturing remains weak. This i s generally undermining the vital role of services in promoting firm competitiveness. In the transport sector, for instance, the networks are overloaded and strugglingto keep pace with the rapidly rising tonnage to be moved. Transport and other logistics services are underdeveloped and costly, which works as a double-tax on farmers and firms located in inland provinces - raising the cost of their inputs shipped from elsewhere and reducing profits on their outputs shipped to the market (which i s illustrated inChapter 2). Logistics andother producer services also tendto bemonopolizedby state- owned enterprises who favor larger clients at the expense of small and medium size enterprises. Financial services are not accessible to many non-state firms and farmers, which constrains possible improvements in their technologies and productivity. This, in turn, makes it difficult for firms and farmers to establish and maintain their competitiveness at a time of trade liberalization. 4.21 The services sector is the likely pillar forfuture job creation in China. Compared to industry, services generate larger numbers of jobs with smaller amounts of capital investment. On average, during 1990-2002, the services sector generated 7.6 millionjobs each year, compared to 1.6 million jobs created in industry and 1.7 million exits from agri~ulture.~~ In the lagging provinces, the contribution of services to job creation was about 1.3 million a year, while employment in industry actually shrank (by 2 million in total). The 1990-2001 job creation in these provinces, was not sufficient to support Consumer services are provided to individuals and households for final consumption. Producer services are intermediate inputs that become embodied in the production of other goods and services. This section does not address core public services, such as social security, education and health care, which are covered elsewhere in the report. 63 In reality, the output of China's services sector is probably somewhat higher than the officially reported figure. This i s because the production-based method of national accounts identifies sectors as "goods producing" or "services producing". For many producers of goods, however, a sizeable portion of their value added comes from their own marketing, distribution, sales and other service-type activities. In high-income countries, services account for nearly two-thirds of the total output; in middle-income countries for about one half of output. Generally, as per capita incomes rise, demand for (a wider range of better quality) services tends to grow faster than demand for goods. Similarly, demand for services rises with urbanization. In addition, in China, the pressure on the services sector to develop is also growing as state-owned enterprises are restructured and reduce their services function vis-&vis employees. 64 National Bureau o f Statistics, based on census data. 50 effective transfer of labor out of farming, and agriculture provided at least 4 million more jobs during that period. Since the creation of alternative productive jobs i s the main enabling factor for the transfer of labor out of farming, the sustained expansion of the services sector i s needed also to facilitate further exits from agriculture. Moreover, the expansion of services facilitates urbanization which, in turn, further expands demand for services. 4.22 Services sector development sufsers mainly from restrictions on services production and delivery. Compared to the emerging market countries in Asia, the production and delivery of services in China remain among the most restricted and regulated. Many producer services, such as banking, insurance, telecommunications, transport and logistics, are managed and controlled by the government. For consumer services, the main constraint i s the lingering bias against private ~ w n e r s h i pIn ~ . ~most consumer and producer services, international experience suggests that the state i s not an effective producer. Recent experience with regulatory reform in OECD countries shows that liberalization andprivate sector development inthe services sector has brought about significant productivity gains, cost reductions and output growth. 4.23 Liberalization and opening to foreign entry in logistics and telecommunications will promote more equitable growth across China. China i s currently undertaking the most radical services reform ever negotiated in the WTO.66 The implementation of China's WTO commitments, involving the abolition of many existing regulatory restrictions, i s expected to contribute to moving transport and other logistics service industries away from monopolistic state enterprises toward market-responsive private firms. This i s expected to expand the capacity and range of available services, improve their quality and reduce cost. In some segments, notably long-distance trucking, these developments will directly benefit centers of economic activity more distant from the coast, boosting their ability to trade and compete both domestically and internationally. The development in other segments of the services sector, however, will depend on further reforms and investments outside the WTO framework to achieve a better balance of demand and supply. Railways, for instance, suffer from serious shortage of capacity and make shipments wait or seek other modes of transport. Half of the railway freight business i s government-supported coal traffic, while more profitable inland transport of containers i s jammed. Improvement depends on solving the outstanding questions about flexibility inpricing and about investments needed to ease capacity bottlenecks. 65 This bias takes several forms, including a large number of permissions required to set up a private unit, illegal or irregular exactions applied by local officials, and limited access to credit. Any bias against private ownership ultimately works against services. This i s because public ownership favors larger units, which are not always effective inthe production of services. This is linked to the fact that the economies of scale are not as important in many branches of services as they are in industry. Particularly in consumer services, including local passenger transport, tourism and hotels, on average units engaged in the provision of services are smaller than those in industry. The cost of monitoring and control, however, i s related inversely to the number of units. 66 In cross-border trade, consumption abroad and establishment trade, China has made more commitments in more service sectors than the industrial countries, other developing countries, or countries recently acceding to the WTO. For discussion of some of the reforms and their effects on less-developed localities inChina see Bhattasali, Li,Martin (2003). 51 4.24 Financial services will contribute to promoting growth opportunities in China's lagging regions if liberalization is accompanied by reforms. The problem of insufficient access to formal finance by non-state firms and in the rural areas was discussed in Chapter 3. This problem will not be solved by foreign entry except for the more developed localities where foreign entrants are likely to concentrate. Commercialization of the state commercial banks in a more liberal interest rate environment, discussed in Chapter 3, will likely to alleviate the problem in rural areas and for small enterprises. But in the current environment, the state commercial banks have been massively reducing their presence in the less profitable localities and market segments. Government- subsidized rural credit cooperatives, which account for more than three quarters of rural credit, are mostly in difficult financial positions and fall short of meeting the needs.67 International experience suggests that publicly funded subsidized lending interventions are generally far less successful than self-sustainable outreach schemes. But rural finance, microfinance to poor households and financial services for small enterprises are commercially unsustainable under the current interest rate cap.68Furthermore, providing financial services i s generally difficult, especially in the small and medium enterprises segment, as little credible information on enterprise performance and credit risk i s available in China. As for farmers, their access to credit i s severely constrained also by the ineligibility of their land rights to serve as a collateral. 4.25 Financial services are likely to better develop and assist in revitalizing lagging regions if exposed to market environment. Interest-rate liberalization would make microfinance, finance to small enterprises and financial services in underserved localities commercially viable. This may be complemented by government efforts to mitigate the cost and risk characteristics of rural finance. As for any financial support to rural finance, international experience suggests that the cost of subsidies and the outreach to target customers should be measured. In this regard, the government may wish to evaluate the existing credit lines extended through the rural credit cooperatives. In the enterprise sector, government may facilitate the orientation of more banks to the small business market and support the adoption of efficient small business lending technologies. Availability of financial services to non-state firms will also depend on the development of accounting, auditing, legal and other business services, and on regulations and market infrastructure to improve information reliability and disclosure across the economy. Complementary reforms to enhance market integration and the local investment climate will improve the conditions for services sector de~elopment.~~ 67 The system o f rural credit cooperatives contains of 400,000 units owned by the central bank. Given their high share of non-performing loans, many Rural Credit Cooperatives have negative equity. They appear poorly managed and inefficient in credit allocation. OECD (2002) suggests that a large proportion of credit provided by rural credit cooperatives benefits applicants supported by local governments. 68 In rural areas, high rates of poverty, low population densities, isolation, highly covariant risks, limited opportunities for risk diversification, seasonal variations in the demand for financial services, and absence of traditional collateral, raise the transaction costs and riskexposure of financial institutions. 69 International experience suggests that differences in investment climate contribute to the differences in growth rates across domestic localities and regions as well as across countries. Investment climate i s generally understood as having three components: (a) macro, country-level issues concerning economic stability (based on macroeconomic, fiscal, monetary and exchange rate policies), political 52 Urbanization 4.26 Empirical evidence suggests that agglomeration of people and resources contributes to optimizing economies of scale and to economic efficiency. Production and distribution of manufacturing and services are often more efficient when concentrated in dense business-industrial areas, such as urban locations and urban peripheries. A recent study of output per worker in over 200 prefecture level Chinese cities in 1990-97 suggests that labor productivity in the majority of prefecture level cities could be at least 20 percent higher if cities expanded to their optimum size, allowing for economies of scale in production and distribution. The study suggests that doubling the size of rural townships in China could raise labor productivity inlocal enterprises by 20 percent.70 4.27 Given the economic advantages of agglomeration, most new productive jobs in services and manufacturing are likely to emerge in urban areas and urban peripheries. The previous chapter discussed the relative importance of the movement of labor out of agriculture, rural-urban migration and agglomeration in China. Urbanization potentially contributes to the creation of productive jobs and enterprise development. This i s especially relevant to those lagging regions in which low population densities make it unlikely that a strategy that disperses production to the countryside (e.g., the model of township and village enterprises, which was implemented mainly in the coastal areas) i s plausible. In the past 20 years, the majority of new non-farm jobs has been created in mediumand small size cities, with the highest rate being inurbanperipherie~.~~ 4.28 Urbanization policy is most effective in the creation of productive jobs and viable firms when it takes theform of market-based development of cities. Although the greatest benefits of agglomeration are seen when small and medium-sized cities expand, a number of recent studies on China reached the conclusion that urbanization policy delivers best results if it encourages the development of all types of cities, rather than suppressing the growth of larger cities while promoting small and medium-sized cities and towns. The process of agglomeration i s effective, and its economic and social benefits sustained, if it occurs in harmony with the restructuring needs of the economy. If it is, urbanization facilitates specialization and the establishment of local comparative advantages and competitiveness that i s sustainable. The government can bolster enterprise development andjob creation in urban economies by promoting flexible entry, exit and relocation of firms, politically unconstrained mergers and acquisitions, continued vertical stability and national policy toward foreign trade and investment; (b) efficacy of the regulatory framework for firms, including the issues of entry and exit, labor relations and flexibility in labor use, efficiency and transparency of financing and taxation, and efficiency of regulations concerning the environment, safety, health, and other legitimate public interests; and (c) the quality and quantity of available physical and financial infrastructure, such as power, transport, telecommunications, and banking and finance, and the endowment of skills and technology. 70 Au and Henderson (2002). Economies of scale outweigh the negative implications of agglomeration up to a point, after which growing congestion and other diseconomies tend to hurt productivity. 71 Townships belonging to some 200 prefecture-levelmunicipalities include less than half of China's rural population, but they host about twice as many non-farm jobs as other, more remote rural areas, and also are creating jobs twice as fast as the latter. Since 1995, the number of non-farm jobs created in urban peripheries (which are often officially classified as rural areas) has exceeded those inthe city proper. 53 disintegration of state-owned enterprises, and the development of small enterprises, especially in the services sector. 4.29 Moreover, the land market can play an important role. The benefits of agglomeration in China would expand with establishing sound markets for industrial land development and a favorable environment for low-income housing de~elopment.~~While government would continue to regulate the amount of land to be converted for urban development, along with enforcing certain environmental and social standards, industrial land development would be most efficient if driven by commercial incentives. The government would be able to facilitate locational adjustments driven by commercial considerations by promoting standard model leases, clear rules governing exchange and sublease of plots without involving the government, land prices set through competitive and transparent auctions, conversion of land use rights to land leases, and marked-to- market fees for occupied land. 4.30 The overall results of urbanization may depend on government policies to promote the development of urban peripheries and quality of urban life. Industries are likely to favor urban peripheries, which offer the best potential for the synchronized development of new economic activities and housing. In this respect, local governments may need to play a more active role in the residential land market in urban peripheries to facilitate the needed supply of low-income housing. International experience suggests that this role may involve the provision of basic physical and social infrastructure and public services in locations that are near the points of economic activity and suitable for low-income housing. Public services, such as a public transport network, locally available basic schooling and environmental protection, would play a vital role in supporting the development of sound and integrated centers of economic activity and quality life. For lagging regions, improvements in the quality of urban infrastructure, services and environment would also make it easier to attract and retain skilled labor. The ability to retain skilled labor in lagging regions would, in turn, facilitate private and foreign investment and technology diffusion to benefit the creation of productive jobs. Market- based development of cities, supported by enabling public policies, may thus be instrumental inbreaking the circle of dependence and inrevitalizing the lagging regions. Farmers'Prospects 4.31 Raising income growth rates in poor rural areas will depend on the creation of of-farm jobs, but also on performance in agriculture. In poorer provinces, rural enterprises are more scarce, rural households draw a higher share of their income from agriculture, agricultural output per farmer i s lower, and the gap in rural-urban rates of growth i s more prominent. Provinces that contain most of the rural poor appear to suffer from the combined effect of high dependence on agriculture, small land plots and low production inputs per unit of land (Table 4.3). Within provinces, dependence on agriculture comes with remoteness. Availability of off farm work and possibilities to commute or migrate depend on proximity to a large urban center (Figure 4.7). 12 Chapter 3 illustrates the problems of the urban land market. 54 Table 4.3 Poor and Non-poor Households' Dependence on Agriculture by Region, 1998 Non-poor Poor Average Average Region IRegionI1 Region I11 RegionIV Agricultural income (including forestry) (%) 49.6 68.3 49.5 70.1 69.8 84.8 of which from crop production (%) 45.0 58.4 47.0 57.5 60.0 78.3 Income from other household business (%) 26.7 18.1 24.0 16.2 17.7 8.4 Other income (%) 23.7 13.6 26.5 13.7 12.5 6.8 Land per capita (mu) 2.1 1.6 0.7 1.3 1.6 5.9 Grain yield per mu(kg/mu) 347 165 400 268 181 147 Grainproduction per capita (kg) 714 406 266 353 295 865 Production inputs per capita (RMB) 668 289 259 316 274 572 Production inputs per mu(RMB) 318 181 370 243 171 97 Source: China Rural Poverty Monitoring Report, 2000, NationalBureau of Statistics, Rural Social Economic Survey Team Note: 1) Region IEconomically developed with limited poverty, less than 5% of Chinese poor. Provinces: Shanghai, Beijing, Tianjin, Zhejiang, Jiangsu, Fujian,and Guangdong. Region 11: Large areas of shallow poverty, home to 55% all poor. Provinces: Hebei, Shanxi, Liaoning, Anhui, Jiangxi, Shangdong, Henan, Hubei, Hunan, Guangxi, Hainan, Chongqing, and Sichuan. Region 111: Areas of concentrated and extreme poverty, home to 35% of the total poor. Provinces: Guizhou, Yunnan, Shaanxi, Gansu, Qinghai, Ningxia, and Xinjiang. Region IV: Cold area with limited poverty, home to 6 4 % of the total poor population. Provinces: Inner Mongolia, Jilin and Heilongjiang. 2) 1 mu= 666.67 square meters 4.32 The average land plot usedfor farming in China is currently too small to allow for significant improvements in agricultural productivity.l3The scope for further increases in returns to land via crop diversification, improved farm management, and on- farm capital and other improvements i s relatively limited without consolidation of land plots. Hence, a reduction in farmer per land ratio that i s achieved by moving labor out of agriculture, accompanied by land consolidation, i s the single most important factor to boost the income of farmers. Moreover, in the context of continued agricultural trade liberalization, labor i s likely to move out of agriculture in localities with soil and water suppliestoo poor to support competitive prod~ction.'~ 4.33 While having the right to consolidate land, the ability of farmers to do so often remains limited. China's 1998 Land Management Law and 2002 Rural Land Contracting Law confirmed a 30-year land lease term, gave individual farmers a standardized landuse contract (stipulating clear rights for sublease, transfer and exchange of land) and attempted to limit the power of village committees to redistribute land. The existing laws grant farm households the right to sublease and transfer their land contracts, provided that land use i s limited to agricultural purposes. In practice, however, subleasing remains informal, with user rights generally exchanged between friends and trusted neighbors on an annual basis and without legally enforceable contracts and any clear pricing mechanism. Land law and policy have yet to offer clear signals on land use markets, hence currently provide inadequate security to either sub-lessors or sub-lessees. Since 73 According to the China Statistical Yearbook(2002), the average farm was 0.5 hectare in2001. 74 Exposed to the constraints of land quality and water scarcity, for example, farmers in the North may find it difficult to further raise productivity and cut the cost of maize production, or to find other profitable crops. Domestic maize prices are nearly one third above the international level. In addition, as it i s produced in North China and consumed by the expanding livestock population in South China, maize i s costly to trade domestically. For the South, it turns out to be less expensive to transport maize from a foreign producer through a near-by port than to have it shipped from the domestic producers in the North. 55 local courts are sometimes unduly influenced by local governments, enforcement of land rights is often subject to local government priorities. While there are differences across localities, land rights are difficult to monetize and land consolidation i s lagging behind the pace o f migration.75 Figure4.1 Ruralemploymentanddistancefromurbancenters Full-time employment in agriculture (%) Employed as migrants (%) 0 6 0.6 0 5 0 4 0.4 0 3 0 3 0 2 0 2 0 1 0 1 0 0 7(MOS! 6 5 4 3(CIOsetO ~ ( M o s ~ 6 5 4 3(ClOSBfO remote) core) remote) care) Employmentin small enterprises (%) Employment in large enterprises (%) 0 6 0.5 - 0.5 1 0 4 - 0 4 0.3 - 0 3 0 2 0 2 0 1 0 1 0 0 7 (Most 6 5 4 3 (Cioseto 7(MoS 6 5 4 B(ClOset0 remote) core) remote) core) Source: Mohatrapa (2002) Note: The distance from urban center i s shown as a core-periphery zone, which is 1-3 for the villages inthe immediate vicinity (suburb) of one of China's seven major metropolitan areas and 7 for those most remote (Skinner, 1994). 4.34 Farmers alsoface constraints in the nature of their physical environment, market infrastructure andfinance. Rural infrastructure has seen major improvement over the past decades - particularly in transport, irrigation, and flood control, making a clear contribution to the prospects of farmers (Box 4.5). Local governments are now involving the private sector in financing and operating rural infrastructure that essentially yield private benefits, such as irrigation and drainage. Examples include the self-financed irrigation and drainage districts emerging in China. However, complementary reforms in related service industries, such as local trucking, are lagging behind the pace of capital investment in infrastructure. On the financial side, the burden imposed on farmers in the form of various fees b y local governments will be gradually alleviated by the rural fee 75 Being unable to obtain adequate compensation for transfer or sublease of their land use rights, most migrants leave some family members behind to continue cultivate the family land plot. Reported cases of local officials confiscating land from farmers and shirking compensation to farmers for land development suggest that a new law, although a critically important achievement, is not sufficient without an adequateenforcement mechanism. See Ho (2001). 56 reform that has been piloted in Anhui and elsewhere. This important reform, however, still needs to be accompanied by improvements in access to credit in rural areas, since farmers seem unable to fully finance the needed technology upgrading from their retained earnings. As for the physical environment, land degradation - namely water erosion and desertification - ineffective management of water and ollution can hurt the livelihood, and not just the market performance, of many farmers.7 Environmental issues have been 9 on the top of the govemment policy agenda. The implementation of environmental policies and laws, however, could be strengthened at the local level. Market infrastructure i s constraining farmers in localities where market information i s scarce, marketing and promotion services not available, sanitary and phyto-sanitary regulations not effective, or pesticide regulations and management deficient. As food safety standards in developed countries have been gradually rising, quality problems make it difficult for products like fruit and vegetables, in which China appears to have comparative advantage, to access international markets. Box 4.5 RuralRoads and Farmers'ProspectsinHenan Rural roads and transport services have been associated with improvement in farmers' prospects. Inthe late 1990s, Henan province, like many others, invested into building rural roads in low income counties to better integrate localrural economies with outside markets and to improve access of rural residents to education, health and other services. During 1996-99, with the new roads in place, these counties saw their agricultural production reach outside markets and grow by 35 percent, with the production of medical herbs, mushrooms and chestnuts rising by 80 to 320 percent. Facilitated by the new transport network, off-farm employment surged in services (with employment in services rising by one third, mainly in logistics, commerce and tourism), in mining (granite and marble doubled their output during 1996-99), and inthe processing industries. Newjob opportunities have emerged and clustered intowns and townships. This was supported by urbanization and new bus transport links facilitated commuting and migration. Closer contacts with the outside world brought information, knowledge and ideas, which contributed to enhancing crop selection and technologies, supported entrepreneurship, and further boosted migration. Partly as an indirect effect of the new road network, income per capita increased by 30 percent and the number of poor dropped by over 40 percent in the affected counties. Through the positive income effect as well as directly, the new roads have been associated with higher enrollment and completion rates at local schools (numbers of students in senior and junior high schools rose by over 30 and 20 percent respectively, and villages in Qinba Mountain Areas reported enrollment rates rising from about 40 to 90 percent). The social impact of these road investments has been positive also because these investments were closely coordinated with other developmental policies, including investments to improve access to safe water, electricity, and telephones. Source: Highway BureauinHenanCommunicationDepartment,Zhengzhou, Henan 4.35 In assistingfarmers, the govemment may wish to pursue effective enforcement of farmers7 land rights and of environmental law and regulations at the local level. A formal enforcement mechanism could be set up to facilitate the sublease and transfer of land contracts, and the use agricultural land as collateral. Such a mechanism may be needed to effectively implement measures approved by the 2003 National People's Congress, including the proposed penalties on local officials who interfere with land rights formulated by the 1998 and 2002 laws. As for environment, the power of '' The area of land affected by water erosion has expanded by about 2 percent annually since the mid-1970s. Desertification affects about 262 million ha of land, that i s more than a quarter o f China's total land area. Both problems are reported as accelerating. During 1987-97, about 0.8m ha of cultivated land was lost to floods, erosion, and desertification (another lmha disappeared due to construction). 57 environmental policies and laws can possibly be supported by greater implementation authority of the State Environmental Protection Agency and a requirement to promote sustainable development also at the Ministry of Agriculture. Attention to sustainable development along with proper investments can yield good returns on incremental agricultural production as well as improve the environment (Box 4.6). Box 4.6 Loess PlateauWatershedRehabilitationProject The Loess Plateau Watershed Rehabilitation Project (partly financed by the World Bank, implemented during 1994-2001in nine tributary watersheds of the Yellow River in the Loess Plateau) combined sustainable soil and water conservation with gains in agricultural production and farm incomes. To replace crops on sloped land, the project built terraces that create high-yielding, level farmland for field crops and orchards. On slopes of more than 20 degrees and wastelands, the project planted trees, shrubs, and grasses to reduce soil loss and to produce fuel, timber and fodder. Further, the project introduced a ban on grazing, which has been a main cause of environmental degradation in the Loess Plateau. As a result, farmers of the Loess Plateau have seen their productivity and incomes rise, crops varieties increase, local environmental conditions improve (particularly, drought damage drop), and conditions created for sustainable soil and water conservation. Moreover, by reducing erosion, these activities have also reduced sediment flows into the Yellow River, and thus brought about environmental improvements and economic benefits downstream. 4.36 In addition, farmers would benefit from assistance in accessing markets. To complement the ongoing program of improving farm-to-market transport network, local governments may need to pay more attention to logistics services. Selling off state-owned trucking firms and enabling small firms to enter the trucking business, for instance, may be needed to open adequate transport possibilities for farmers to supply the local as well as more distant markets. As for market infrastructure, the government has already announced plans to increase investment, set up a market information system, promote standardization of agricultural products, and use China's WTO membership to further open foreign agricultural markets to China's (and other developing countries') products. Domestically, this will require improvements in regulations and supervision by the central government as well as investment, technology and expertise in the entire production and marketing chain at the local level. Overall, guidance on the priorities for the involvement of local governments in improving farmers' market access is likely to be most effective if it comes from their constituencies (through a transparent process of planning and budgeting), from the actual and potential users of services and from private businesses (through public hearings). Sequencing and Financing the Policy Package 4.37 The efsort to promote high growth with equity in China is likely to be efsective if the government focuses on the delivery of core public services, while being only indirectly involved in the economy.The desired role of government i s that of a facilitator rather than a provider of jobs and economic activity, the guardian of market rather than a protector of the public sector, a force to empower rather than thwart economic agents and individuals, and a provider of core public services and public goods rather than enterprise subsidies and credit. Such a change in the government role i s underway at the central level and i s gradually, in the form of pilots and experiments, reaching the local levels. 58 Table 4.4 Policies to Support Growth with Equity Key Drivers FocusAgenda Policy Implications Ensure financing and promote quality of primary and secondary education and basic health services S-M Human capital Expandprivate sector provision of tertiary education and life- long learning M Support equityin access to education through stipends and student loans M Technology Implement competition policy S-M Refocus and support technology dissemination schemes M Lagging Promote links between industries and the education system M regions Productivejobs Emphasize market-based development of cities S-M Urbanization Establish sound urban land markets S-M Facilitate the development of urbaninfrastructure and social services M - L Reduce the role of state inthe production and distribution of services S-M Services Focus on regulations to promote relevant standards and competition S-M Returns Strengthen enforcement of landuse rights S-M Farmers' Strengthen enforcement of environmental laws and regulations areas on farm labor and land prospects S-M Improve rural market infrastructure M-L Note: S-Mis short- to medium-term, Mis mediumterm, and M-Lis medium-to long-term 4.38 The speed and sequencing of policy implementation depends upon the available institutional capacities and finance. The changing role of government has wide-ranging implications for the country's institutional frameworks, which will require time and resources to implement. Table 4.4 summarizes the policies discussed in this chapter and suggests their feasible timing. In the short- to medium-term, government could focus on ensuring financing and enhancing quality of primary and secondary education and basic health services in the lagging regions, on implementing effective competition policy (in the context of promoting market integration and flexibility discussed in the previous chapter), on promoting relevant standards and competition in services and reducing the role of state in services production and distribution, on emphasizing market-based development of cities and establishing sound urban land markets, and on strengthening the enforcement of farmers' land rights and of environmental laws and regulations. Expanding private sector provision of higher education and training, supporting equity in access to education through stipends and student loans, building linkages between the education system and industries, and refocusing technology dissemination schemes in the lagging regions may take a longer time to implement. Finally, as a long-term process to support some of the institutional changes, government would assist in the development of urban infrastructure and services and inimproving rural market infrastructure. 59 * 4.39 Furthermore, effective implementation of the policy package will also require the government to maneuver among many competing interests and interest groups. The richer, urban segments of the population may not support greater financing for rural basic education and health care. Local governments as well as current state monopolies are likely to be against an open, rule-based market competition. State-owned enterprises and local governments are likely to oppose a greater role for the private sector in bank ownership and operation. Those presently influencing the allocation of urban land and firms benefiting from subsidies on industrial urban land development are likely to resist greater transparency and efficiency of urban land market. Local governments along with polluting enterprises may also resist changes toward a more effective enforcement of national environmental and land-use laws. 4.40 The evolving role of government would mainly affect the composition rather than necessarily the aggregate amounts of govemment expenditure. The government i s currently using a budgetary package that includes fiscal stimulus to promote the development of lagging regions. Spendingincreases on primary and secondary education and basic health services are expected and fully justifiable. Such increases, however, will have to be accommodated within the existing fiscal constraints. 4.41 The government's current fiscal position offers only limited room for continuing fiscal expansion. First, with a growing government debt to GDP ratio, the future growth in expenditures needs to be constrained below the growth in revenues. Without major reforms in tax policy and tax administration, revenues may be expected to grow at 7-9 percent annually in real terms. If GDP rises at the target rate of about 7-7.2 percent, by this rule government spending as a share of GDP may increase by about 0.1percentage point annually. This, however, would be insufficient even to cover the projectedincreases in interest paymentson government debt (Table 4.5). Second, the current fiscal stimulus and policies of a fiscal nature in the past have in part relied on financing through the banking and enterprise systems. This has generated a stock of government obligations of an implicit or contingent nature that are not officially considered govemment debt but, in due time, are likely to negatively affect the fiscal position.77In fact, it i s important to minimize the use off-budget funding and any further increases in the government's hidden obligations in order to maintain fiscal stability in the future. Hence, the main challenge for the government would be to continue adjusting the composition of its expenditure, moving away from providing enterprise subsidies, credit and jobs, and toward delivering core public services and public goods without increasing aggregate expenditure as a share of GDP. 77 Government faces direct and contingent liabilities, each of which can be either explicit (which are legally binding, basedon laws or contracts) or implicit (which are basedon the expected crisis management or political pressure or on the moral responsibility of the government to act). Direct liabilities are certain to realize. The realization of contingent liabilities depends on the occurrence of particular events. Most direct explicit obligations of the central government are reported as government debt. Among the direct implicit obligations of the central government, the largest are future obligations under the public pension system and the future cost associated with current public investment programs. The central government's contingent explicit liabilities include various state guarantees and state-guaranteed insurance programs. Its contingent implicit liabilities are numerous, the largest being the potential fiscal cost of reforming the banking system. Since direct implicit and contingent explicit and implicit liabilities remain unreported, and often even unrecorded, they may be considered "hidden". Chapter 5 discusses some of these obligations. 60 Table 4.5 FiscalProjections (% of GDP) 2002 2003 2004 2005 2006 2007 Fiscal revenues 18.7 18.8 19.1 19.3 19.4 19.6 Fiscal expenditures 22.0 22.2 22.3 22.4 22.5 22.6 out of which interest payment 0.8 0.8 1.o 1.2 1.5 1.5 Fiscal balance -3.3 -3.4 -3.2 -3.1 -3.1 -3.0 Government debt 26.3 27.4 28.3 29.1 29.5 29.7 Source: World Bank projections based on official figures available inJune 2003 and IMFdefinition Note: 1/Excluding government off-budget activities andpossible negative effects of existing fiscal risks. 21Projections are generatedin a standardmacroeconomic consistency model of the World Bank. 4.42 The ability and capacity of the govemment to filly find the achievement of its objectives would rise with continued refoms in tax policy and tax administration. The government was able to raise the share of its revenues in GDP from 12.1percent in 1997 to 14.3 percent in 1999 and further to 18.7 percent in 2002. While this impressive rate of growth i s unlikely to be sustained, the prospects for reasonable growth in revenues are good with continued reforms in tax policy and tax administration. In tax policy, the government has been launching initiatives to further broaden the tax base, revise tax incentives, and enhance the efficiency of the tax system. Along these lines, it has outlined comprehensive reforms of the personal, enterprise income and value added taxes, among others. In tax administration, modernization has been rapid since 2000, including the introduction of unified tax payment procedures and massive computerization. Continuing development o f the tax administration information system and simplification of procedures for tax payers would support not only further improvements in the efficiency of revenue collection but also the technical feasibility of implementing some of the desirable tax policy reforms. 61 5. ADDRESSING THE RISKS 5.1 The discussion in the previous chapters suggested several strategies to achieve sustained growth with equity, but also revealed some sources of risk. Chapter 3 indicated that policies to promote domestic market integration and flexibility, while facilitating further economic restructuring and sustained economic growth in China, will have a differential impact on localities and individuals, including adverse effects in some cases. This will generate demands for mitigation measures and public services, especially social security. Given the high degree of decentralization in China, such demands will place heavy burdens on local governments in poor localities, posing a challenge to the existing system of inter-government finance system. Chapter 4 reinforced the nature of this challenge, showing that the policy package to ensure continued growth with equity in China will imply further changes in the role of government, particularly at the local level. Tailoring fiscal interventibns to match the new roles, while addressing fiscal pressures beyondthe officially defined government budget and debt, will be a challenging task over the next few years. Furthermore, a number of political challenges will arise as reforms in inter-governmental finance, pensions, the composition of public services, and macro- economic risk mitigation are specific areas where the costs and benefits to different groups will vary significantly. Moreover, policy-induced changes will occur within the broader context of major structural changes that are underway already, partly to accommodate the forces of globalization. Suitable Social Security 78 5.2 Theformal system of social security in China continues to adjust to the kinds of social risks emanatingfrom the expanding role of marketforces in the economy. A strong social security system i s an essential component of a market-based economy, not least because it promotes the kinds of risk-taking behavior that yield highpayoffs in economic growth and innovation. The system in China (summarized in Tables 5.1 and 5.2) covers only a small part of the population, leaving most of the population unprotected. It i s segmented along the lines of rural-urban household registration. It excludes the rural labor force, farmers as well as off-farm workers and most of the migrant labor force. Financing and management i s decentralized down to the level of counties, townships and villages. Such decentralization sometimes fragments the policy response to poverty. It also inhibitslabor mobility, which i s generally an effective householdresponse to shocks. 78 In this chapter, social security stands for all contributory and non-contributory schemes that provide income or close substitutes for income to households (Tables 5.1 and 5.2 provide an overview). 62 Table 5.1 Contributory Social Security Schemes Scheme Coverage I Benefits Financing Administering Agency Social Insurance Inprinciple, Old-agepension Employerand Municipal Labor and Datesback to the mandatory for the Disability benefit employee SocialBureausunderthe 1950s whole urbanlabor Unemployment contributions supervisionof Provincial Extensively force Insurance Residualfinancing Bureausandthe Ministry modified inthe Inreality3 from city and of Labor andSocial 1990s 58% of the urban Medicalcare insurance higher government Security labor force Matemity benefit tiers Ruralpension Contributionfrom CountyCivil Affairs schemes but not contribution scheme participants BureausandVillage Institutedin 1991 mandatory Variable acrosslocalities Residualfinancing Councilsunder the from villages and supervisionof Provincial other tiers of rural Bureausandthe Ministry population basic subsistence government of Civil Affairs Rural Cooperative Recommended Usuallycoversbasic Contributionfrom County Civil Affairs and Medical Insurance butnot medicaltreatment only schemeparticipants Public HealthBureaus and Datesback to the mandatory andrequiresco-payment Residualfinancing Village Councilsunderthe 1970s Covers less than Variable fromvillages and supervisionof Provincial Promotedin recent 20% ofthe n~ral localities,programsnot other tiers of rural Bureausandthe Ministry years population standardized government of Civil Affairs Table 5.2 Non-Contributory Social Security Schemes: Social Assistance or Social Safety Net Scheme Coverage Benefits Financing Administering Agency Support Programfor Laid-off Regular Basic living allowance, 70 Joint financing Enterprises Employees (xiagang) employeesof to 80% of the local from enterprises, under the Formalizedin 1997 state andurban minimum wage Unemployment supervisionof Dueto be phasedout in2003 collective Subsidizedmedicalcare InsuranceFund, Municipal Labor No new beneficiaries from the enterpriseslaid- Subsidizedparticipationin city andhigher andSocial beginningof 2001 off for economic government tiers Security Bureau reasons re-trainingprograms Help withjob placement anddonations Minimum Living Standard Inprinciple, all Subsistenceallowanceless Joint financingby Municipal Civil Scheme urbanresidents, than the unemployment the central and Affairs Bureaus Since 1998, in all cities excludingrural insurancebenefit territorial Some ruralareas havea migrants Variablefee exemptionsor governments parallelscheme reductions for health, educationandrentheating Means-testedtop-upbenefit to the local threshold Workfarerequirement for those able to work Supportfor Poor Rural Designated Variablebenefitpackage Joint financingby CountyCivil Localities localities the central and Affairs Bureaus A rangeof programsoperated Localities temtorial by various govemmenttiers affectedby governments naturaldisasters Local Rural Support Schemes Those regarded Variablebenefit package Financedby CountyCivil for Poor Households as poor by the Sometimesincludes villages or Affairs Bureaus Long history Localstandard- medicalfinancial assistance townshipsand andVillage The nature of the scheme often the lowest Means-tested donations Councils tends to vary widely across 5-10% localities 63 Urban Social Security 5.3 The urban social security system has traditionally targeted employees of state and urban collective enterprise^.^^ With the extension of formal social insurance to the whole of the urban labor force in 1998, the division between the state sector and the non-state sector employees has been officially abolished, but still survives in practice as small private firms are reluctant to join. 5.4 Social insurance schemes sufSerfrom financing weaknesses. First, social insurance contributions are collected separately for each of the five schemes and often separately from enterprise taxes. This lowers the compliance rate and introduces a variation in the compliance rates between schemes. Second, in many urban areas, the combined contribution to social insurance may be too high, possibly inducing non-compliance and also impeding the extension of coverage.81Third, although social insurance i s based on regulations issued by the State Council or the Ministry of Labor and Social Security, its financing i s decentralized to the city level. Apart from a few very large ones, cities are too small to provide sufficient risk pooling to ensure sustainability. As a result, the balance between contributions and expenditure, overall financial capacity, and the contribution rate and benefits under social insurance schemes vary widely across localities, even within the same province (Box 5.1). As yet, there i s no settled procedure for portability of benefits across cities. 5.5 The Minimum Living Standard Scheme, is an adequate social safety net for the eligible urban population, but it too has restricted coverage driven in part by decentralized financing.82 First, like social insurance, by design the Minimum Living Standard Scheme does not apply to migrants, even those living and working in the locality on a long-term basis. Second, the scheme does not help in covering medical costs. This i s a major deficiency in that the cost of treating illness or injury i s a major cause of poverty. In practice, many cities offer exemptions and reductions on the cost of health, education, rental and heating services, but the practice i s not standardized. Third, as inthe case of urban social insurance, there i s as yet no settled procedure for the sharing '' 79 Under the "iron rice bowl" approach inthe 1960s, these programs were administered and financed by individual enterprises. Faced with a dramatic worsening o f their financial position inrecent years, many state enterprises have faced problems with their social security obligations, causing delays inthe payment of ensions andthe re-imbursement of health care expenses, or outright default insome cases. The government has already considered a proposal to transform disparate contributions into one composite social security tax, which would be collected together with other taxes. This proposal has been piloted in Liaoning province, which allows cities to collect social insurance contributions jointly with enterprise taxes. 81 In some cities, the total social insurance contribution rate can be as high as 38 to 40 percent of the payroll. Out of this amount, about one third belongs to medical insurance,unemployment and maternity benefit and disability compensation, and two thirds to old-age pension. Pensions have been financed by employers either individually or by local pension pools. Recently, the liabilities of the old system have been transferred to the budgets of individual cities when these became responsible for pensions. As a result, in some cities, employer contribution towards old-age pension alone is as much as 30 percent of the payroll, compared to the limit of 20 percent specified by the State Council. 82 The number of recipients of benefits under the MinimumLiving Standard Schemehas grown from 1.84m in 1998 to 20.6m in 2002. It is estimated to grow further to some 27-28m over the next few years, without taking into account migrants. 64 of cost between ovemment tiers, which causes variations in the operation of the scheme across localities.f Not all low income households receive coverage. 3 Box 5.1 Advantages and Disadvantages of Decentralization of Social Safety Net Schemes Decentralization allows flexibility in accordance with local variations and gives local governments freedom to take initiative. In some cases local government initiatives have been scaled up as national policies. For example, the MinimumLiving Standard Assistance Scheme for urban areas, now a nation-wide scheme, was first pioneered in a few coastal cities. A uniform system for all of China runs the risk of being inadequate in some while superfluous inother local conditions. But municipalities and the individual tiers at which rural social security schemes are organized are inmany instances too small to provide sufficient risk pooling to maintain the financial integrity of schemes. Decentralization in China i s also associated with variations in standards of provision that may go beyond the socially acceptable differences. Such variations may also impede the transferability of social security entitlements (such as old-age pensions) and thus impede labor mobility. Presently, arrangements for the transferability of benefits between cities, even inthe same province, are either non-existent or rudimentary. Decentralization has an additional effect on accentuating disparities. Localities with higher poverty or a higher percentage of the needy in the population tend also to have more strained public finances, and thus are forced to reduce coverage or benefit levels. The pilot program to improve the urban social security system, currently implemented in Liaoning province, recognizes the problems created by decentralization. One of its aims i s to move the provision and financing of social insurance from the municipal to the provincial level, and to improve and standardize administration. Rural Schemes 5.6 Social security schemes available in rural areas are sparse, highly variable across rural counties, and geared largely to relieving severe poverty. The rural social security system consists of two contributory schemes (rural pension scheme and rural cooperative medical insurance), and two non-contributory schemes (special assistance to counties officially designated as "poor" by the central and provincial governments, and the Local Rural Support Schemes for Poor Households). Social insurance schemes do not apply to township and village enterprises, which in 2002 employed 133 million people (compared to 72 million in the urban state sector). 5.7 Locally-organized andfinanced partial old-age pensions and cooperative medical insurance cover less than 10percent and 20percent of the rural population, respectively, and are highly variable among localities in their coverage and benefits. The vast majority of the rural population obtains medical care only on the basis of fee for service, with fees so high as to be impoverishing or unaffordable for a representative rural family. Problems related to the investment choices of rural social insurance schemes suggest that covered individuals face the risk of future default on benefits. Similarly, the Local Rural Support Schemes for Poor Households (such as the "Five Guarantees", which cover small groups such as the elderly without family support) are restricted and variable in coverage. 5.8 A major gap in China's rural anti-poverty policy is the absence of an eflective system for dealing with household and individual poverty in the midst of relative 83 In 2002, under the scheme, the central government contributed RMB4.6bn via transfers and local governments paid out RMB6.7bn. 65 prosperity. The focus on assistance to "poor counties" rather than on poor households addressesthose causes of poverty that are particular to the whole locality, such as poverty of natural resources. But many causes of poverty are particular to individuals and households rather than the whole locality and, as a result, about one half o f rural poor live outside the "poor counties", distributed over the whole of rural China. 5.9 The traditional pillars of rural social security, that is land plot and family, are gradually becoming less efective. 84 The cultivation of individual land plots has been instrumental in reducing the incidence of rural poverty, especially when combined with income diversification opportunities in rural enterprise. But by themselves they have not been sufficient to prevent poverty, not even extreme poverty. Low returns to farm labor over the past decade have implied that most poor households are those that rely on agriculture as their sole source of income. Moreover, as the liberalization of trade in agricultural commodities exposes Chinese farmers to international prices, it generates volatility inreturns and thus reduces the social security value of land. This impact may be significant especially for those farmers and localities that are unable to adjust their cropping pattern adequately. Priorities in Social Security Reform 5.10 Social assistance schemes in urban and rural areas should not narrowlyfocus on families and persons below the poverty line; they should complement social insurance programs to aid people in coping with risk of poverty. Box 5.2 Vulnerability to Poverty According to household data, Poverty i s not a static phenomenon, most people are not permanently poverty rates in both rural poor. I t i s a dynamic process with households continuously moving in and urban areas are highly and out of poverty. Empirical research suggests that, in China, a sensitive to comparatively household's average wealth i s an important determinant of both small shifts in the poverty transient and chronic poverty. For chronic poverty, additional line. Among rural residents, determinants include education levels and health status. The main determinant of transient poverty (vulnerability to poverty) is exposure to presently, 10 percent live uninsured income risk. While China's strategy to develop poor regions below the official poverty i s possibly good at addressing chronic poverty, it may not help in line but an additional 15 reducing vulnerability to poverty. To reduce vulnerability, other policy percent live just above the instruments may be more effective, including seasonal public works, official poverty line and credit schemes, and insurance programs such as health insurance or coverage for weather risk. below the US$1 a day consumption line. In urban Likewise, research suggests that with poverty incidence of around 10- 20% (for example in Sichuan province during 1991-95), twice as many areas, the incidence of people actually become poor for at least one year. Therefore, anti- vulnerability has been low poverty policies should target not only those who are already poor but but rising, as the number of also those who are vulnerable to poverty. Research also indicates that unemployed and retirees households who are poor for more than one year are more likely to increases. For households remain poor for many more years. Hence, being poor over a long period of time reduces household's ability to lift itself out of poverty. living just above the official Source: Jalan & Ravallion(1998, 1999and2001) andMcCulloch & Calandrino(2001) 84 Providing each rural household with a piece of land has contributed to the dramatic drop in the (official) poverty headcount from 250 million in 1978 to 70 million in 1994, on the eve of the 8-7 poverty plan introduced in 1994. Better management of natural resources, investment in rural infrastructure, and technological upgrading can relieve, but not eliminate, the constraint on the income security land provides. 66 poverty line, any adverse factor, such as sickness in the family or bad weather, that reduces income or increases the living cost, can lead to poverty (Box 5.2). This suggests that a significant percentage of the rural and urban non-poor remain susceptible to falling under the official poverty line. Steps to address the most critical sources of vulnerability would include the establishment of universal access to basic health care, including protection against catastrophic illness and injury. Extending Social Security in Urban Areas 5.11 Widening the coverage of social security is important in order to close the widening gaps in urban areas and to broaden the system'sjinancial base and risk p00Lg5 The government has undertaken several reforms of urban social security schemes in recent years, including the social security reform pilot in Liaoning, new laws and national social security trust fund for pensions, and expansion of both the unemployment insurance program and the Minimum Living Standard Scheme. As a result, the blueprint of the alternative to the work-unit-based social security system for urban areas i s almost completed, though still far from implemented. The major impediments inits implementation are three: administrative, coverage and financial. As contributory schemes, such as the current urban social insurance, are difficult to design for the self- or the informally- employed even in developed economies, the priority could be to expand social security to the wage earners, both local and migrant, inthe formal sector in urban areas. The existing problems in the current urban social insurance schemes should be solved, however, before coverage i s expanded. 5.12 Extending social security to migrants is important as migration is desirable in the context of economic restructuring and rural poverty alleviation. The priority should be to cover all long-term migrants.86For the purposes of social security, long-term migrants could be regarded as part of the urban population. Such treatment of short-term migrants may, however, give rise to adverse incentives since, on average, the official urban poverty line i s nearly three times higher than the official rural poverty line.87A person may be poor according to the urban line but well off b y the rural line. 5.13 Expanding the coverage for contributory social security schemes may require administrative improvements and a clearing mechanism across urban areas. It i s relatively easy to expand coverage for non-contributory social security schemes, such as the Minimum Living Standard Scheme. But contributory schemes, such as old-age pension, medical care insurance and unemployment compensation, involve deferred benefits and raise the issue of portability. It i s possible to achieve portability even under the current level of decentralization. It would, however, create demands on the administrative capacity under each of the schemes and require information sharing and clearing mechanism across urban areas. To make benefits transferable across urban areas 85 In urban areas, the non-state sector is rapidly expanding, and includes most migrants and an increasing share of local residents. 86 For legal migrants, the local Public Police Stations monitor the length of stay in urban areas. Long-term basis can be defined as length of stay beyond 6 months. This definition i s used in Guangdong, see Box 5.3. *' RMB1,800 compared to RMB635 per persodyear on average 67 within provinces (and improve pooling of social security contributions and expenditures), it would be desirable to fully integrate social insurance administration and financing at the provincial level. Expansion of coverage could start with unemployment insurance, as the contribution rates are lower. As for medical care insurance, the urgency of extending the existing contributory scheme could be alleviated by establishing a universal basic insurance against catastrophic illness and injury, ideally along with immunization and other basic preventive care, in the context of a tax-funded universal basic health care program with a strictly defined minimumbenefit package. Centralizing the Financing and Provision of Social Security at the Provincial Level 5.14 A pooling of social security contributions and expendituresat theprovincial level is thepolicy aimfor urban social security, and would seem to be an urgentpriority in the case of old-age pensions and unemployment insurance. Upgrading the level of budgeting from cities to provinces can take a number of forms, ranging from a full integration to compensatory transfers within a decentralized system. Itraises important questions about the appropriate degree of decentralization in administration and about ensuring adequate equity across localities. 5.15 One immediate priority is to speed up the establishment of the administrative and informational infrastructure for social insurance. Given the 30-year history of reliance on work units for administering the labor insurance schemes, municipal governments lack the administrative structure that i s needed for a government-managed social security system. Municipal Labor and Social Security Bureaus that are to function as social security agencies are still in the process of establishment in many cities. Further, most provincial and municipal Labor and Social Security Bureaus lack the information system neededto operate a social insurance system that i s not reliant on work units. Establishing Income Maintenance and Basic Insurance Schemes in Rural Areas 5.16 The rural-urban segmentation running through the Chinese social security system should be considered temporary, but its abolition by extending.the current urban social security system in its entirety to rural areas does not seem to be feasible in the near future. As discussed above, the urban system suffers from problems in raising the coverage rate in urban areas and meeting its commitments to the covered labor force. Its immediate extension to rural areas would magnify the existing problems (Box 5.3). 5.17 To combat income poverty, the government may wish to consider an assistance scheme that would target poor people, rather than poor geographical areas. According to the official poverty line, the comprehensive rural income maintenance scheme would cover about 30 million people. Such a scheme could be established on the same line as the Minimum Living Standard Scheme for urban citizens. Zhejiang has taken a lead in this respect by extending the Minimum Living Standard Scheme to rural counties. However, the introduction of a comprehensive rural income maintenance scheme would be challenging. First, a pre-condition for the scheme i s that allowance for its local costs will be adequately reflected in the system of inter-governmental finance (discussed below). Second, assessing household income in agriculture i s problematic. Several 68 countries have managed to use community-based approaches effectively. If such systems are well administered, compared to the existing support for poor rural localities, household support organized through villages might provide better targeting and thus achieve greater poverty alleviation for a given cost. Centralization of the overall financing and management of rural social security schemes at the provincial level would allow easier risk pooling andbenefit portability across rural areas. Box 5.3 Three Options for Correcting Urban-Rural Segmentation inSocial Insurance The first option i s to gradually bring into the social insurance net rural migrants living and working in cities on a long-term basis. Guangdong province has extended social insurance to migrants staying beyond 6 months (the length of stay is monitored by the local Public Police Stations). The second i s to allow and encourage provinces or cities with well-functioning social insurance to extend the system to wage earners in rural counties within administrative boundaries. Given the growth of wage employment, the institution of a rural social insurance system parallel to that in urban areas financed by employer and employee contributions in larger rural enterprises would seem to be feasible. Shanghai and Zhejiang are planning to extend social insurance to their rural counties. The third is to accelerate the development of rural social security schemes such as those for old-age pensions and basic medical care with a view to an eventual integration with the urban scheme. 5.18 Insurance against the financial costs of medical care to address catastrophic illness and injury is urgently needed to address vulnerability. Injury and catastrophic illnesses tend to have devastating consequences for the affected household. It i s difficult to implement contributory insurance schemes for self-employed. Nonetheless, most countries at China's income level provide insurance against injury and catastrophic illness, usually, along with immunization and other basic preventive care, in the context of a tax-funded universal basic health care with a strictly defined minimum benefit package (broadly along the lines of the current experiments with medical financial assistance for the poorest in selected localities in China). This would also build upon the recent experience in coping with SARS, where weaknesses in health coverage for low- income groups were a dominant concern in designing containment measures. 5.19 Establishing an old-age pension scheme for the rural population is administratively difslcult. As noted above, a possible approach i s to cover the wage- earning rural population, that i s mainly employees of township and village and other rural enterprises. An alternative to expanding contributory pensions to the self-employed rural population would be to allow the elderly to qualify for the same minimum income support under a household-based rural income maintenance scheme discussed above. Such an approach has been adopted successfully in Brazil and other countries. Eventually, the basic insurance schemes in the rural areas may become a good basis for the needed removal of the existing rural-urban segmentation of the social security system. Financing the Delivery of Public Services 5.20 In many localities across China, the present inter-government finance system is not ensuring adequate delivery of public services. The delivery and financing of most core public services, including education, health care, social security and infrastructure are assigned to local governments (Table 5.3). As of 2001, 63 percent of overall government expenditure responsibilities was about equally distributed among the 69 provincial, prefecture and county levels of government, and townships accounted for 7 percent.88Since public services like basic education and public health, generate important spillover effects for society as a whole, they are usually seen as responsibilities shared b y central and sub-national governments. Often, the extensive decentralization of such responsibilities i s associated with regional inequalities, unless complementedby a strong system of inter-government fiscal transfers. 5.21 During the last decade in China, per-capita revenues and expenditures of local governments have varied greatly across provinces, with transfers playing some but not an adequate equalizing role (Table 5.4 and Figures 5.1 and 5.2). Similarly large disparities have existed within province^.'^ At the same time, some central standards and policies are applied without adequate allowance made for local conditions. For example, local government staffing and salaries, which absorb over two thirds of local government budgets, are set by the central government. The relative lack of autonomy in such a major spending area, disparities in fiscal capacity, and different levels of accountability of local governments largely explain why many local governments, especially those in poor localities, have fallen short of ensuring adequate delivery of public services. To raise more revenues, local government incentives have been biased toward diverting resources from the budget to extra-budgetary channels (so weakening prioritization of government expenditures), protecting local enterprises (thus adding to market fragmentation as discussed in Chapter 3) and imposing an array of arbitrary fees (creating obstacles to business and making schooling and medical care too costly for poor households). This oftenjeopardizes the implementation and ultimate accomplishment of policy priorities set by the central government. Table 5.3 Central and Local BudgetaryExpenditures,1998-2001 (percent) 1998 1999 2000 2001 Central Local Central Local Central Local Central Local Total 29 71 31 69 31 69 31 69 Capital Investment 44 56 50 50 34 66 34 66 Education and Healthcare 11 89 11 89 11 89 11 89 Pensions and Social Security 11 89 10 90 13 87 13 87 Government Administration 7 93 8 92 6 94 6 94 Agriculture Support 11 89 10 90 10 90 11 89 Research and Development 23 77 28 72 28 72 25 75 Source: Ministry of Finance and NationalBureau of Statistics Note: The proportion31:69 was reported also for 2002. 88 Data provided by Ministry of Finance. In comparison, for a sample of about 100 countries for which data are available, sub-national governments, including states or provinces, account on average for only 13 percent of total budgetary expenditures in developing countries, and 35 percent in developed countries. Inother countries social security i s almost always provided by the central government. Safety net mechanisms are almost always jointly financed by the national government. 89 World Bank (2002) found that inequalities in per-capita local government expenditures and revenues across counties and townships within selected provinces are comparable to inequalities across provinces. 70 Table 5.4 Local Government Per-Capita Revenues and Expenditures by Province (RMB) Local Government Revenue per Capita Local Government Expenditure per Capita M a x Min Ratio CV M a x Min Ratio CV 1995 Shanghai 1552 Tibet 90 17.3 0.95 Shanghai 1837 Anhui 226 8.1 0.70 Guizhou 111 14.0 0.94 Tibet 1453 6.4 0.59 Guangdong 557 Tibet 90 6.2 0.68 Guangdong 756 3.3 0.51 Guizhou 111 5.0 0.67 2000 Shanghai 2900 Tibet 206 14.1 1.03 Shanghai 3636 Henan 480 7.6 0.69 Gansu 239 12.1 1.02 Tibet 2290 4.8 0.59 Guangdong 1054 Tibet 206 5.1 0.87 Qinghai 1319 2.7 0.57 Gansu 239 4.4 0.86 2001 Shanghai 3776 Tibet 232 16.3 1.10 Shanghai 4387 Henan 532 8.2 0.72 Guizhou 263 14.4 1.09 Tibet 3976 7.5 0.65 Guangdong 1491 Tibet 232 6.4 0.94 Qinghai 1937 3.6 0.58 Guizhou 263 5.7 0.93 Notes: Includes all levels of local governments by province. Revenuei s net of transfers from the central government. Expenditure includes the proceeds from transfers. If the maximudminimumprovince i s a municipality or Tibet, the non-municipalityand non- Tibet maximudminimumprovince is also listed. CV i s coefficient of variation, a statistical measure of disparity. Source: Ministry of Finance and National Bureau of Statistics Figure 5.1 Disparity inLocal Government Per-Capita Figure 5.2 Local Government Per-Capita Expenditures Expenditures (coefficient of variation across provinces) and Local Per-Capita Income by Province, 2001 (FWB) 0.8 5000 0.6 01995 12000 02001 4000 3000 0.4 2000 0.2 0 All provinces Without Beijing,Shanghai,Tianjin 01 and Tibet 6000 8000 10000 12000 14000 16000 18000 20000 Source: National Bureau of Statistics and Ministry of Finance Source: China Statistical Yearbook, 2002 5.22 The central problem in inter-govemment finance and public service delivery is the large gap between expenditure and revenue assignments at the local level, but the most visible problem is the level of equalization grants. China i s unusual in not having a transfer system that provides for the expenditure needs of local governments. Although the volume of central transfers i s large, accounting for 46 and 48 percent of local expenditures in 2001 and 2002, respectively, the current system of intergovernmental transfers i s poorly designed to support the financing of vital social services such as rural education and rural public health. The combination of pushing down expenditure responsibilities to lower levels and not providing adequate financial support has produced large and growing fiscal disparities that reinforce income disparities across regions. This i s just the opposite of the expected role of government - that of alleviating income inequalities and protecting the poor and vulnerable groups. The outcomes are regressive, 71 where governments in poor regions are providing fewer and lower quality services and passing along a higher proportion of the costs to their constituents. 5.23 Recent increases in equalization transfers have helped, but by themselves cannot address public service delivery needs. In 2002, the central government allocated RMB435 billion (about 19 percent of total government expenditures, or 4.2 percent of GDP) on transfers to local governments on top of local government tax rebates of RMB301 billion. The local tax rebates accrue disproportionately to wealthier provinces as a reward for tax collection, and the rest of the transfers mainly pursue equalization objectives. The amount available for equalization transfers has been increasing over the past several years. This has resulted from tax reforms that expanded the share of central government revenues in the total revenues, from about 49 percent during 1996-98 to 58 percent in 2002 (11 percent of GDP). Equalization transfers have also been boosted by the fiscal stimulus package. Since its launch in 1998, earmarked grants for social security and capital programs have increased significantly. The allocation of equalization grants has also improved as the Ministry of Finance has been adjusting the formula for calculating the fiscal needs of individual provinces. The amounts available for equalization grants, however, continue to fall short of covering the fiscal needs determined by the formula. Furthermore, some earmarked grants require matching funds, which somewhat dilutes their equalization effects. 5.24 In recent years, a number of critical financial problems at the local level have been addressed by corrective interventions or by singling out specific local expenditures for more attention. In 2001-2002, the central government intervened to assist local governments in covering the cost of wage increases (mandated by the central government) and social security. This intervention accounted for over a half of transfers net of provincial tax rebates.g0Corrective interventions have also accompanied the rural fee reform which, while reducing the financial burden of farmers, has tended to deepen the financing gap of local governments. In 2002, this intervention accounted for 6 percent of transfers net of provincial tax rebates. 5.25 Such corrective interventions have helped alleviate immediate problems, but are not appropriate for meeting long-term needs. They indicate that the current expenditure assignments are both unsustainable and increasingly blurred, and signal the willingness of the central government to gradually accept more responsibility for financing stability- preserving expenditures such as social security and civil service wage payments. The continuing need for such corrective interventions, however, constrains central government spending in other areas, and limits the amount of resources available to finance strategic priorities. Furthermore, as these corrective interventions occur on an ad hoc basis, with the amounts often determined later in the fiscal year, based on the In2002, the central government transferred RMB24.5 billion as transfer payments to compensate local governments inprovinces carrying out the rural fee reform. Local governments obtained subsidies on financing wage increases inthe amount of to RMB89billion in 2001 and RMB82billion in 2002. Subsidies on social security schemes rose from zero to RMB10billion in 2000, RMB35 billion in 2001, and RMB77 billion in2002 (out of which subsidies to the local minimum living standard schemes were RMB2.3 billion in2001andRMB4.6billion in2002). 72 availability of funds, they raise unpredictability in local government budgeting. 91 Addressing specific spending items, such as teachers' salaries, without a broader sectoral, behavioral and macroeconomic context can also have negative effects (Box 5.4). Box 5.4 Centralizing the Payment of Teachers' Salaries The State Council "Decision on Rural Compulsory Education" issued in 2001 made two significant advances toward funding rural education. First, it declared that the costs of rural compulsory education should be borne primarily by the government, rather than rural families. Second, it mandated that salary payments for teachers be moved from the township to the county level, and factored into the county budget. These are important steps toward incorporating rural expenditure needs into the formal fiscal system. B y singling out salaries from other costs of education, however, this measure i s likely to exacerbate the tendency toward employing too many teachers. For example, in Gansu, where the responsibility for teachers' salaries has been at the county level, the evidence is that rural schools have added more teachers even though state guidelines for student-teacher ratios are already over-fulfilled. Funds for supplies and other non-personnel costs of education remain extremely inadequate. In addition, unless the State Council Decision i s followed up with a hard commitment of increased central and provincial transfers to the counties, the already hard-pressed county budgets will find it difficult to meet this new responsibility, and the fiscal problems will simply have moved up one tier inthe administrative structure. Reforming the Inter-government Finance System 5.26 Ensuring adequatepublic sewice delivery across China may not befeasible if the sole focus of inter-government fiscal reform is on equalization transfers. To implement i t s strategic priorities, central government needs to ensure financing for the minimum standards of public service provision and set up a system of clear accountability with respect to the quantity, quality, timeliness and cost of the respective services. Simultaneously, and as illustrated in Chapters 3 and 4 of this report, it needs to examine the need for continued government provision and financing, given the expanding role of the private sector in China. For services that are to be fully or partly financed b y the government, expenditure assignments need to be matched to revenue assignments. For example, some centralization of the responsibilities for financing and delivery may enhance public service delivery. Moving the responsibility for the financing and provision of selected services from the village, township or county level to a higher level of government may be beneficial in view of efficiency and administrative capacity as well as equity. Similarly, on the revenue side, the amounts allocated on tax rebates could be reduced further and the sharing of value added tax revenues could be further centralized. 92 In promoting fiscal equity across local governments, complementary measures on the revenue side could include a limited discretion offered to local governments in setting local tax rates, possibly as part of the property tax, personal income tax or excise tax. beginning o f the fiscal year, but was raised to RMB187 billion due to increased revenue flows to the central '' 91 In 2001, for example, the total amount had been budgeted at only RMB119.5 billion at the overnment. See Xiang (2002). Value added tax generates over 40 percent of total government revenues and its sharing system i s the most disequalizing part in local government revenues. For analysis see IMF (2002) and World Bank (2002). 73 5.27 It is expected that even with appropriate expenditure and revenue assignmentsfor each level of government, horizontal and vertical disparities will exist. This i s only natural for a country the size of China, with vastly different economic capabilities, concentrations of population, and levels of development in its different parts. An improved system of equalization of transfers will therefore be needed, with reforms building on the lessons of recent years. For example, once the national minimum standards of public service delivery are clearly defined, they may be supported by special non-matching transfers with conditions on standards and outreach of service. To reduce fiscal disparities across provinces and counties, general non-matching grants and fiscal capacity equalization transfers may need to be expanded. To compensate for benefit spillover or to influence local incentives in areas of high national priority, matching transfers may be considered. This would go beyond the financing of national minimum standards and possibly apply to education, public health, social security, research and development as well as rural market infrastructure. To tackle the problem of intra- provincial inequality, the equalization mechanism could be built either through a central transfer mechanism reaching down to counties, townships and villages, or through central norms on provincial arrangements to ensure that equalization takes place. 5.28 Greater autonomy and accountability on the expenditure side would be also beneficial. Giving local governments greater autonomy along with enforcing greater accountability can enhance allocative and operational efficiency in their expenditures. Most notably with respect to spending autonomy, the uniform national wage scales and the centralized system of determining staffing needs across the entire government could be eliminated. However, to use their larger autonomy well, local governments need to be clear about their role. The previous chapters of this report noted that in promoting growth with equity it i s important that local governments focus on the provision of core public services (and public goods) as opposed to direct interventions in the enterprise sector or the market, emphasize human capital in addition to ensuring the availability of adequate levels of physical capital, and concentrate on outcomes as opposed to inputs. To promote the alignment of incentives of local governments with their role, the central government may want to correspondingly revise the targets and indicators used to evaluate local government performance. Furthermore, governments.at each level could make their decision making process more open and transparent and strengthen monitoring and audit functions. Timely availability of relevant and reliable information forms the basis for accountability as well as executive capacity in public finance management. In this respect, the current effort to establish proper government accounting and budgetary systems and the overall government financial management system, and to extend these systems to the local governments will support the improvement and monitoring of results of fiscal policies, including public services delivery. 5.29 Hence, it is useful to evaluate every component of the inter-government finance system as part of a comprehensive reform package. The changes in expenditure and revenue assignments would need to be considered jointly to realign responsibilities with financial capacity at each government level. Moreover, expenditure and revenue assignments, and equalization transfers to close any major gaps, need to be considered in the context of government expenditure and tax policies, and in the context of the institutional arrangements and capacities available at each level of government. Greater 74 autonomy on the revenue and expenditure sides, complemented by provisions to raise local government accountability, can be attractive to local governments, possibly making the whole reform package somewhat more politically acceptable. Richer provinces, for example, will not easily agree with greater equalization transfers and lower tax rebates. The needed inter-government finance reform i s a large undertaking that would have to be synchronized with the government's overall policy priorities and reforms across sectors. A wealth of international experience and useful lessons learned in China not least since the last inter-government finance reform of 1994 can contribute to its success.93 Macroeconomic Stability 5.30 International financial markets are signaling a renewed risk to China's macroeconomic stability. A simple analysis of international and domestic interest rates on government bonds and of exchange rate forecasts suggests that since 2001, on top of the sovereign risk premium and exchange rate risk premium, the markets have been attributing to China an additional macroeconomic risk (Figure 5.3). 94 Macroeconomic risk appears also when estimating an index of macroeconomic vulnerability based on developments in the real effective exchange rate, the real growth of domestic credit, and broad money in relation to international reserves.95 Although below the threshold level, Figure 5.3 Residual Risk Perceived by the Market Figure 5.4 Index of Macro Vulnerability 6 3 2 1 J Index of Macro Vulnerability -3 -2 1 -4 Jan-00 Jan-01 Jan-02 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Source:WorldBank Source:World Bank 93 World Bank (2002) provides a detailed examination of China's inter-government fiscal system and proposes a comprehensive agenda of reforms. 94 This analysis i s conducted on the basis of the interest parity condition. The residual macroeconomic risk i s derived as a premium paid on the domestic government bonds over the level that would be expected based on the US treasury bill rate, sovereign risk premium and expected devaluation of the domestic currency (Kharas, Pinto and Ulatov, 2001): e, = id- i*- s, - e, where: e, is the residual macroeconomic risk, id i s the domestic, one year government bond rate, i*i s the one year US treasury bill rate, s,is the sovereign risk premium and e, is expected devaluation, taken from Consensus Forecasts. The sovereign risk premium i s measured by the spreadpaid by the government over a comparable maturity risk- free asset, inthis case the one-year US Treasury bill. 95 This estimation methodology is based on the assumption that real effective exchange rate, real growth rate of domestic credit and the ratio of broad money to international reserves drift in the same direction, or have a common element in their behavior prior to a macroeconomic crisis. Specifically, index 75 the level of the index indicates renewed macroeconomic vulnerability since 2001(Figure 5.4). Over time, monitoring of such market sentiment may provide early warning signals of any possible increases infuture macroeconomic risk. 5.3 1 Theperception of macroeconomic risk in China can be plausibly explained by the vulnerability of China's domestic financial sector and, related to it, by the fiscal risk facing the government. Weaknesses in the financial sector and perceived government fiscal risks have been accumulating over the past years. Without significant reforms, and with banks possibly coming under pressure during post-WTO accession liberalization, present trends may continue andimpair future macroeconomic management. Vulnerability of the Financial Sector 5.32 Risks in the financial sector arise from a higher level of non-performing loans. Non-performing loans have been estimated at about 25-30 percent of the total loans outstanding for the state commercial banks and higher for the rural credit cooperatives, city commercial banks and policy banks.96The continuing emergence of non-performing loans has been associated with the use of non-commercial lending practices and market distortions, both discussed in the previous chapters. The available estimates of non- performing loans are not very reliable since the information management systems within banks and the loan classification system itself are in the process of long needed modernization. These estimates, however, are enough to indicate that a majority of financial institutions in China (with state commercial banks, rural credit cooperatives, city commercial banks and policy banks accounting for about 59, 10, 10 and 12 percent of the total banking assets, respectively) are functioning on a severely eroded capital base. 5.33 State commercial banks are unlikely to be able to carry the current load of non- performing loans. Simple financial scenario analysis suggests that current and proposed efforts to decrease the rates of non-performing loans out of new lending, reduce bank operating costs, or raise interest spreads and non-interest income may not be sufficient to prevent a further erosion of their capital, even over a 10 year horizon (Figure 5.5).97The current burden of non-performing loans i s too large to allow the state commercial banks to fully restore their capital base. of macro vulnerability = real effective exchange rate+ realgrowth rate of domestic credit + broad money / international reserves. (Herrera and Garcia, 1999) 96 The official estimate for non-performing loans was about 27 percent of loans outstanding for state commercial banks in 2002. There i s a wide range of unofficial estimates, usually higher. The loss rate for non-performing loans has been estimated at about 75 percent for state commercial banks. 97 To illustrate the possible future performance of state commercial banks, a financial simulation model i s used to build scenarios based on the following main assumptions: a) non-performing loans at 30- 40 percent with 75-80 percent loss rate, b) non-performing loans on new lending gradually reduced from 11-13 to 3-10 percent, c) cost reductions that improve the banks' productivity at 2-6 percent a year, d) lending spreads rising from the current 3.5 percent to 5 percent and growing non-interest income, and e) stable macroeconomic conditions. Bello (2003) 76 Figure 5.5 Illustrative Scenario Capital of State Commercial Banks (% of assets - not risk weighted) 10% I 0% (10)4" (20)O/o Profitability and Operating CashFlow (RMB) 200 I I 0 , , I (400) (600) (800) I 0Netincomeafter tax (andprovisions) 0 N.I.before"NPLstock'provisions Cashflow from operations Source: Bello (2003) Note: The illustrative scenario i s based on the following assumptions: a) non-performing loans at 40 percent with 80 percent loss rate, b) non-performing loans on new lending gradually reduced from 13 to 3 percent, c) cost reductions that improve the banks' productivity at up to 6 percent a year, d) lending spreads at current 3.5 percent, and e) stable macroeconomic conditions. Box 5.5 Recapitalization and Reforms inthe Banking Sector The government recapitalized the state commercial banks twice in the late-I990s, once by direct capital contribution and once by the transfer of non-performing loans to the banks' asset management companies. Furthermore, to stem losses o f state commercial banks, the State Council in 1998 ordered a cutback of staff and branches and a reduction in the percentage of non-performing loans by 2-3 percentage points per year. This strategy strengthens the efforts of statebanks to collect or restructure non-performing loans and to reduce the incidence of new bad loans. But it may not be sufficient to bring non-performing loans to the targeted levels. Moreover, in an effort to comply with that requirement, the state banks may have reduced new lending to non-state firms. Also, steps were taken to strengthen governance, including the establishment of boards of supervisors. Yet whereas in other countries such boards would define broad objectives, policies and strategies for the banks and select, monitor and hold accountable top managers, in China they have been oriented to supplement state banks' internal control and audit mechanisms, a task for which they may not be well-suited. Recapitalization o f state-commercial banks and reform efforts to date seem not to have been as successful as had been hoped. Recently, the government announced further internal reforms for state commercial banks. State commercial banks may be corporatized, creating a distinct legal entity with a shareholding structure and a board of directors. Moreover, their ownership may be "diversified" beyond solely the central government. It can be envisioned that there will be calls for a further round of recapitalization. But the disappointing results of prior recapitalizations suggest a need for caution. The root cause of disappointing results so far may well be that ambiguities inobjectives to be pursued by state banks managers were not eliminated as a component of recapitalization. Governance arrangements may not have been sufficiently clarified, rationalized and professionalized, and the incentives facing managers of state banks may not have been fundamentally and systematically altered. Managers may still be motivated by potential political advancement rather than solely by the commercial performance of the bank. Furthermore, bank recapitalization was not closely linked with resolution of non-sustainable enterprise debt. Source: Scott (2002) 77 5.34 To restore banks to solvency and profitability, not only is there need for an injection of new capital, there is also needforfurther reform. The injection of capital i s likely to be effective only if accompanied b y structural and regulatory reforms in the financial system. The performance of the state commercial banks after their recapitalization in 2000, when non-performing loans in the amount of 20 percent of their then outstanding loans were transferred to asset management companies, suggests that bank recapitalization without complementary reform can deliver only short-term results (Box 5.5). Moreover, the experience of other countries suggests that recapitalization i s particularly effective if at least partly financed from private sources, through strategic investors, and accompanied by transfer and development of new technologies and skills, and if underlyingstructural problems inenterprises are resolved. FiscalRisk 5.35 The possible need to recapitalize the banking sector in the future is the largest Contingent liability for the Chinese govemment. Available estimates of the future likely fiscal cost associated with bank restructuring, at the current estimated level of non- performing loans, vary between 25 and 45 percent of GDP.98 5.36 Another relatively known fiscal risk relates to the pension system. As discussed above, the pension system appears under-funded, with future revenues falling short of spending commitments. Estimates of the future financing gap are very sensitive to possible future reforms (such as increasing the retirement age) and range from 20 to 100 percent of GDP, to accrue over the next 30-70 years.99 5.37 Less is known about the financial obligations of local governments. Although officially not permitted to borrow, many local governments have accumulated various, often implicit, contingent and direct liabilities. These obligations are in the form of credit taken from banks, or bonds issued through various municipal enterprises such as the urban development infrastructure companies, in the form of guarantee schemes and investment funds run by local government sponsored agencies, in the form of letters of comfort provided to local enterprises to facilitate their access to credit, in the form of concession contracts, and so on. Local governments themselves sometimes admit to not knowing all their contingent liabilities. In case of their realization, local governments tend to arrange various forms of bailouts. Sometimes, however, such bailouts directly affect the local government budget to such an extent as to force them to request financial intervention by the central government. 98 Several different methodologies exist to assess the expected fiscal cost of bank restructuring. The estimation includes steps to evaluate: (a) the ratio of non-performing loans (or, the rates of different types of non-performing loans according to the official classification) and their loss rate across financial institutions (including state commercial banks, rural credit cooperatives, policy banks, etc), and (b) expected loss rate on the total portfolio of the existing asset management companies. The result depends on the assumed target non-performing loanratio and target capital adequacy ratio. Different scenarios are built with respect to possible macroeconomic developments and the future flow of new non-performing loans. 99 Recent estimates are described in World Bank (2003). The financing gap in the pension system i s an implicit, not a contingent, liability since it is certain to arise eventually (as opposed to arising only in case a currently unknown or uncertain event were to occur, which is the definition of contingent liabilities). 78 5.38 At present, the total burden of government hidden obligations outstanding appears manageable. There are at least three reasons why the currently high level of contingent and implicit liabilities do not necessarily threaten future fiscal stability. First, the implicit liability under the pension system can be significantly reducedthrough timely and soundpension reforms. Second, the government i s able to raise substantial revenues by selling state enterprises, which has been the general direction of policy since 1999. In addition, large foreign exchange reserves and revenue-generation possibilities from the sale or lease of land and other assets provide the Chinese government with a cushion of financial safety. Third, even without resorting to asset sales, fiscal sustainability analysis suggests that at continuing high levels of economic growth and low levels of interest rates, the Chinese government would be able to service a significantly higher level of debt than today. 5.39 Lessfavorable macroeconomic conditions, however, could generate painful fiscal pressures. Should the rates of economic growth temporarily decline, an uncomfortably high fiscal surplus will need to be generated in the government budget to service debt beyond a level of 60 percent of GDP (which i s a commonly-used benchmark in domestic discussions of fiscal sustainability). Such pressures would be particularly unpleasant at a time when further resources are needed to improve the delivery of public services essential to promoting growth with equity. Furthermore, as the composition of the government debt portfolio i s as important as its size, usingthe debt/GDP ratio as the main indicator of fiscal sustainability has often proven misleading.loo 5.40 Most importantly, the continuing accumulation of government obligations poses fiscal risks. In the financial sector, without drastically reducing the rate of non- performing loans on new lending (from an estimated 11-13 percent over the past 10 years to some 3 percent), banks will be unable to generate positive cash flow from new lending or avoid periodic financial claims on the government in the future. Reducing the rate of non-performing loans on new lending may be feasible but, most likely, this would add financial distress among many of the less productive state-owned enterprises and constrain infrastructure finance, which may ultimately add more pressure on the government budget. Local governments, without tighter monitoring of their fiscal risks, are likely to continue accumulating obligations of various types, risking future financial health, with potential spillover risks for the central government. For instance, recent initiatives to promote private participation in infrastructure may, as international experience shows, imply significant public financial risk in the future unless the process i s coordinated within broader risk management approaches. Eventually, by adding to the loo Generally, the better is debt management capacity and the deeper are government bond markets, the higher the level of debt that can be assumed prudently. B y taking a strategic approach to debt management, government can reduce the risks of suddenly rising debt service costs or a liquidity crunch. Refinancing (rollover) risk, for instance, can be reduced by limiting the size of short-term debt and by generating a sound profile of amortization payments for long-term debt; interest rate risk can be mitigated by ensuring that issuance i s spread across the term structure. Government bond markets can reduce government exposure to refinancing and other financial risks if they are deep and liquid, by providing readily accessible domestic financing. Moreover, well developed government bond markets also allow government to reduce its debt service costs by lowering liquidity premia embedded in the yields on government bonds. 79 stock of government debt, possibly as much as a few percent of GDP every year, these obligations could impair fiscal sustainability. Prioritiesfor GovernmentRisk Management 5.41 The primary need is to stabilize the current level of govemment obligations. The existing obligations, including government debt and the expected fiscal cost of the current hidden obligations, appear to be sustainable. However, further growth inthe share of government obligations in GDP, whether through the budget deficit or off-budget operations, could make future fiscal performance vulnerable to unfavorable developments inother macroeconomic variables, such as the economic growth andinterest rates. 5.42 Reversing the accumulation of govemment contingent liabilities mainly requires improving performance in thefinancial sector. Reductions in the rate of non-performing loans on new lending and productivity improvements from reductions in operating cost are likely to come only with greater commercial orientation in the financial institutions and with improved regulatory and supervisory systems. Overall, these would work also toward reducing the risk of vulnerability in the financial sector. Specifically, attracting private capital into the financial sector would create conditions that more risks are assumed by those market participants willing and able to bear them, rather than by the government. As for state commercial banks, new ownership and governance arrangements need to ensure that their managers pursue the goal of long-term value creation and that this i s effectively monitored. Clear ownership policies, and better oversight and exit mechanisms are required for other financial institutions, such as the rural credit cooperatives and urban credit cooperatives. 5.43 The implicit liability arising in the pension system could be reduced by reforms under the existing pay as you go system, while new pension schemes need to be designed in a manner to prevent the emergence of new fiscal risks. Internationally, a combination of parametric changes such as raising the retirement age and lowering the benefits payable under pay-as-you go schemes, have proven an effective way of reducing financing gaps. These steps are needed prior to extending the scheme's coverage, essentially to avoid creating new unfunded liabilities. The inherited overhang of pension liabilities should ideally be financed from sources other than current payroll contributions. Inprinciple this i s provided by the State Council Circular of 2000, which moves towards setting aside a percentage of proceeds from the sale of state shares inenterprises to finance the overhang of pension liabilities. As for the funded component of the new pensions schemes, its finances need to be separated from the pay-as-you go schemes and be adequately regulated and monitored, without the needfor any government guarantee. 5.44 To limitfiscal risks arisingfrom local govemment activities, a country-widefiscal risk monitoring system could be established. International experience suggests that local government fiscal risk monitoring systems can be effectively established at the central level (as, for example, Colombia and Hungary) or subnational level (as, for example, the State of Ohio in the USA). In addition, some countries have effectively established a market-based system of financial discipline (driven, for example, by mandatory credit rating of local governments and related mandatory bank provisioning for credit to local 80 governments in Mexico). In China, local government fiscal risks could be monitored by provincial governments, with the central government then consolidating the information, using it in its overall fiscal analysis, and ensuring necessary oversight. China i s presently developing such a monitoring system. This system could be very effective if it captures the whole range of channels through which governments at the local level generate fiscal risks, including letters of comfort, credit and guarantee funds, urban development corporations, local government controlled enterprises, and so on. 5.45 On the whole, govemment would be able to reduce its exposure to fiscal risk by bringing fiscal risk into its current fiscal management processes and systems. 101 International good practice implies that government should periodically compile an inventory of major sources of fiscal risk and analyze the possible fiscal cost. Government fiscal analysis should internalize the major risk factors affecting revenues and expenditures for the years ahead. The government should establish a risk management strategy to guide public organizations, such as state-owned enterprises and public sector units, in taking actions that expose them to direct or contingent liability. Finally, the government could prepare detailed contingency plans for dealing with specific contingent liabilities when they occur. Careful fiscal management, across the entire portfolio of government direct and contingent, explicit and implicit, liabilities will ensure that future government deficits and debts remain at prudent levels and fiscal resources adequately support future needs for public services. As discussed in this report, a strong combination of progressive policy, private initiative and public finance i s required to achieve the growth and equity objectives of axiaokang society. lo' Brixi andSchick (2002) 81 REFERENCES Amiti, Mary. 1998. "New TradeTheories and Industrial Locationin the EU: a Survey of Evidence" Oxford Review of Economic Policy. Au, Chun-Chung and Vernon Henderson. 2002. "How Migration Restrictions Limit Agglomeration and Productivityin China." NBER Working Paper 8707. National Bureauof Economic Research. Bai, Chong-En, Yingjuan Du,Zhigang Tao and Sarah Y. Tong. 2002. "Protectionism and Regional Specialization: Evidence from China's Industries" University of Hong Kong Working Paper. Bao, Shuming, Gene Hsin Chang, Jeffrey D. Sachs and Wing Thye Woo. (2002, forthcoming). "Geographic Factors and China's Regional Development under Market Reforms, 1978-1998." China Economic Review 13 (2002) p 1-23. Barro, Robert J., Martin and Xavier Sala I.1990 and 1991. "Economic Growth and Convergence across the United States" Working Paper 3419, National Bureau of Economic Research (NBER). Bayoumi, A. Tamim and Andres K. Rose. 1993. "Domestic Savings and Intra-national Capital Flows" European Economic Review, Vol. 37, 1197-1202. Bello, Alfredo. 2003. "China State Owned Commercial Banks: Financial Simulation Model." (Unpublished). Bhattasali, Deepak, Shantong Li and William Martin. 2003. "China's Accession to the WTO: Impacts on China," Chapter one of "East Asia Integrates: A Trade Policy Agenda for Shared Growth." World Bank. Boyreau-Debray, Genevieve. 2002. "Financial Intermediation and Growth: Chinese Style" World Bank. . and S. Wei. 2002. "How Fragmented is the Capital Market in China" World BankDevelopment ResearchPaper. Brixi, Hana Polackova and Allen Schick. 2002. "Government at Risk: Contingent Liabilities andFiscal Risk." New York: World Bank and Oxford University Press. Chen, Dongqi. 2002. "Break UpLocal Market Fragmentation" (inChinese) Chen, Shaohua and Yan Wang. 2001. "China's Growth and Poverty Reduction: Trends between 1990 and 1999." World BankPolicy ResearchWorking Paper 2651. China Health Statistical Digest. 2001. China National Bureau of Statistics. "China Rural Poverty Monitoring Report." Various years inChinese. China Statistics Publishing House. 82 China Statistical Yearbook. Various years. Corbacho, A. and G. Schwartz. 2002. "Income Distribution and Social Expenditure Policies inMexico: What Can We Learn from the Data?" Cull, Robert, Minggao Shen and Lixin Colin Xu. 2002. "How Much i s Lack of Finance Holding Back China's Interior Provinces" (Processed). Dollar, David. 2002. "Improving the Investment Climate in China." World Bank, Washington, D.C. Development Research Center of the State Council. 2002. "Research on the Integration of Domestic Market in China." Economic Intelligence Unit. 2002. "United markets in China" Business China (August 19,2002) Fan, S., S. Robinson and X. Zhang. 2003. "Structural Change and Economic Growth" Review of Development Economics. Fan, Shenggen, Xiaobo Zhang and Linxiu Zhang. 2002. "Growth, Inequality and Poverty in Rural China: the Role of Public Investments." Research Report 125, International FoodPolicy Research Institute. Feinerman, J.V. 2003. "The Legal Problems of Central-Local Relations in the PRC after China's WTO Accession." Gibson, K. 2001. "Analyzing the Trends: Predicting the Future of Logistics in Asia" Presentation to the Conference on "Toward the Final Frontier: Logistics and the Efficient Supply Chain". September 27, 2001. Gibson, K. 2001. "Analyzing the Trends: Predicting the Future of Logistics in Asia." Presentation to the Conference on "Toward the Final Frontier: Logistics and the Efficient Supply Chain." September 27, 2001. Haarmann Hemmelrath Management Consultants. 2002. "From the Investors' Perspective." Background Paper for China 2002 Country Economic Memorandum. World Bank. Mimeo. Hallward-Driemeier, Mary, Scott Wallsten and Lixin Colin Xu. 2003. "The Investment Climate and the Firm:Firm-Level Evidence from China." Henrekson, Magnus, Johan Torstensson and Torstensson Rasha. 1996. "Growth Effects of European Integration" European Economic Review. Herrera, S. and C. Garcia. 1999. "User's Guide to an Early Warning System for Macroeconomic Vulnerability in Latin American Countries." Paper presented in the XVII Latin American Meeting of Econometric Society, in Cancun. Hertel, Thomas W., Paul V. Prechel, John A.L. Cranfield, and Maros Ivanic. 2001. "Poverty Impacts of Multilateral Trade Liberalization." Unpublished report. October 31. Ho, Peter 2001. "Who Owns China's Land? Policies, Property Rights and Deliberate Institutional Ambiguity." 83 Hon, Vivian and Peter Fallon. 2001. "Regional Development Policies: Theory and a Review of the Evidence." World Bank, Washington DC. Mimeo. Hu, Angang (ed.), 2001. "Regional Development: A New Strategy for the Development of the Western Region." China Planning and PublishingHouse. Hu,Jintao. 2003. HuJintao made a speech at the closing ceremony of the FirstSession of the 10th National People's Congress on March 18, 2003, in the Great Hall of the People. Ianchovichina, Elena and William Martin. 2002. "Economic Impacts of China's Accession to the WTO" paper prepared for presentation at the seminar on China's Accession to the WTO, Policy Reform and Poverty Reduction, Beijing, June 28- 29, 2002. International Monetary Fund. 2002. "Reforming Fiscal Relations Between Different Levels of Administration.'' Fiscal Affairs Department. Washington DC. Internal Trade Secretariat of Canada, www.intersec.mb.ca/index-he.htm Iwamoto, Yasushi, and Eric Van Wincoop. 2000. "Do Border Matter? Evidence from Japanese Regional Net Capital Inflows" InternationalEconomic 41 (1): 241-269. Jalan, Jyotsna and Martin Ravallion. 1998. "Determinants of Transient and Chronic Poverty: Evidence from Rural China." The World Bank Policy Research Working Paper 1936. June 1998. . 1999. "Are the Poor Less Well Insured?Evidence on Vulnerability to Income Risk in Rural China." Journal of Development Economics v58, nl, February 1999: 61-81. ,2001. "Household Income Dynamics in Rural China." The World Bank Policy Research Working Paper 2706. November 2001. Jefferson, Gary and Inderjit Singh. 1999. "Enterprise Reform in China: Ownership, Transition, and Performance" Jefferson, Gary and Su Jian, 2002. "China's Economic Growth: An Investigation into the Process of Growth at the FirmLevel." Background Paper for China 2002 Country Economic Memorandum. World Bank. Kharas, Homi, Brian Pinto and Sergei Ulatov. 2001. "An Analysis of Russia's 1998 Meltdown: Fundamentals and Market Signals." Brookings Paper on Economic Activity, 1:2001, pp. 1-68. Kim, Sukkoo. 1997. "Economic Integration and Convergence: U.S. Regions, 1840-1987" Working Paper 6335, National Bureauof Economic Research (NBER), December 1997. Leidy, Michael P. 1998. "The Canadian Agreement on Internal Trade: Development and Prospects". International Monetary Fund Working Paper WP/98/5 1, Washington DC. McCulloch, Neil and Michele Calandrino. 2001. "Poverty Dynamics in Rural Sichuan between 1991 and 1995." 84 Mohatrapa, S. 2001. "The Evolution of Modes of Production and China's Rural Economic Development" Working Paper, Department of Agricultural and ResourceEconomics, University of California, Davis Naughton, Barry. 1999. "How Much Can Regional Integration Do to Unify China's Markets?" Paper for Conferenceon Policy Reform inChina. Center for Research on Economic Development and Policy Research, Stanford University, November 18-20, 1999 OECD (Organization for Economic Cooperation and Development). 2002. China in the WorldEconomy, Paris. OECD (Organization for Economic Cooperation and Development). 2002. "China in the WorldEconomy." Paris. Park, Albert, Xiaoqing Song, Junsen Zhang, Yaohui Zhao. 2003. "The Growth of Wage Inequality inUrban China, 1988 to 1999." Park, Donghyun. 2002. "Recent Trends in Western Europe Income Convergence", Journal of Economic Integration v17, nl (March2002): 80-84 Poncet, Sandra. 2001a. "Is China Disintegrating? The Magnitude of Chinese Provinces" Domestic and InternationalBorderEffects". CERDImanuscript. . 2001b. "The Magnitude of Chinese Provinces' Internal and International Trade Integration" CERDI, April, 2001. . 2002a. "Fragmented China: Measure and Determinants of China's Domestic Market Lack of Integration" CERDIWorking Paper. . 2002b. "Measuring Chinese Domestic and International Integration" China Economic Review 15 (2001): 1-22. Ravallion, Martin and Shaohua Chen. 2001. "Measuring Pro-Poor Growth." World Bank Policy ResearchWorking PaperNo. 2666. WorldBank.WashingtonDC. Rozelle, Scott and Jikun Huang. 2002. "Agricultural Research and Total Factor Productivity inChina" American Journal of Agricultural Economics. Saggi, Kamal. 2002. "Technology Transfer via Foreign Direct Investment under Spillovers," prepared for the Foreign Investment Advisory service (FIAS) of the International FinanceCorporation (IFC). Scott, David. 2002. "Finance for Growth in China: Improving Access to Finance for Firms." Paperpresentedat the China InvestmentClimate Conference,Beijing. Sinn, Stefan. 1992. "Saving-investment Correlations and Capital Mobility: on the Evidence from Annual Data." Economic Journal: The Journal Of The Royal Economic Society (U.K.);102:1162-1170 September 1992. Skinner,William G. .1994. "Differential DevelopmentinLingnan" inT. P. Lyons and V. Nee (eds.): The Economic Transformation of South China: Reform and Developmentinthe Post-MaoEra.Come11EastAsia Series. 85 Steinfeld, Edward. 2001. "Chinese EnterpriseDevelopment and the Challenge of Global Integration." A paper presented at a conference East Asia's Future Economy. World Bank. Thomas, Vinod, Yan Wang and Xibo Fan. 2001. "Measuring Education Inequality: Gini Coefficients of Education." The World Bank Policy Research Working Paper 2525, January 2001. UNDP (UnitedNations Development Program). 2002. "Making Green Development A Choice." UNESCO (United Nations Educational, Scientific and Culture Organization). http://www .unesco.org. Wang, Rong. 2002. "Current Challenges in Education Across China." Background Paper for China 2002 Country Economic Memorandum.World Bank. Wang, Yan and Yudong Yao. 2001. "Sources of China's Economic Growth, 1952-99. Incorporating Human Capital Accumulation." The World Bank Policy Research Working Paper 2650. Wang, Yan. 2002. "China: Inequalities inEducation andHealth Outcomes." Background Paperfor China 2002 Country Economic Memorandum. World Bank. Wen, Jiabao. 2003. Wen Jiabao held his first press conference after the closing meeting of First Session of the 10thNational People'sCongress on March 18, 2003, inthe Great Hall of the People. WHO (World Health Organization). 2002. "The World Health Report - Reducing Risks, PromotingHealthy Life." World Bank. 1994. "China Internal Market Development and Regulation." Report No. 13664.Washington, D.C. . 1997. "China 2020: Development Challenges in the New Century." Washington, D.C. . 2001a. "China and the Knowledge Economy Seizing the 21st Century." - Washington, D.C. . 2001b. "China: Overcoming Rural Poverty." Report No. 22137. Washington, D.C. ,2002. "China NationalDevelopmentandSub-NationalFinance. A Review of Provincial Expenditures." ReportNo. 22951-CHA. WashingtonDC. . 2003. China Pension Liabilities and Reform Options for Old Age Insurance. (Draft). Washington, D.C. World Development Indicators. Various years. World Bank,Washington, D.C. Xiang, Huaicheng.2002. "China ProactiveFiscal Policy." Ministry of Finance. Beijing. Xu, Xinpeng and J.P. Voon. 2002. "Regional Integration in China: a Statistical Model" Economic Letters: 1-8. 86 Yamori, Nobuyoshi. 1995. "Relationship between Domestic Savings and Investment: the Feldstein-Horioka Test Using Japanese Regional Data" Economics Letters (Netherlands), 48, Nos. 3-4:361-66 June 1995. Young, Alwyn. 2000. "Gold into Base Metals: Productivity Growth in the People's Republic of China during the Reform Period." NBER Working Paper No. 7856 (August 2000). Yusuf, Shahid. 2003. "Innovative East Asia ­ The Future of Growth." World Bank, Washington, D.C. ________, and Simon J. Evenett. 2002. "Can East Asia Compete? -- Innovation for Global Markets." Zhao, Yaohui. 2002. "Earnings Differentials Between State and Non-state Enterprises in Urban China," Pacific Economic Review, Vol. 7, No. 1. STATISTICALAPPENDIX National Accounts Table 1 ­ 4 Balance of Payments Table 5 ­ 8 Trade Table 9 ­ 10 External and Domestic Debt Table 11 ­ 13 Money and Credit Table 14 ­ 17 Fiscal Accounts Table 18 ­ 28 Agriculture Table 29 ­ 30 Industry Table 31 ­ 32 Wages Table 33 - 38 Employment Table 39 - 40 Investment Table 41 - 44 Energy Table 45 Transport Table 46 ­ 48 88 Table 1: National Accounts (Billions of RMB, in current prices) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 GDP at market prices 1,854.8 2,161.8 2,663.8 3,463.4 4,675.9 5,847.8 6,788.5 7,446.3 7,834.5 8,206.7 8,946.8 9,731.5 10,479.1 GDP at factor cost 1,753.3 2,033.2 2,491.9 3,189.3 4,332.4 5,442.0 6,329.6 6,869.2 7,169.9 7,429.3 8,082.2 8,696.6 9,247.4 Agriculture 501.7 528.9 580.0 688.2 945.7 1,199.3 1,384.4 1,421.1 1,455.2 1,447.2 1,462.8 1,541.2 1,611.7 Industry 771.7 910.2 1,170.0 1,642.9 2,237.2 2,853.8 3,361.3 3,722.3 3,861.9 4,055.8 4,493.5 4,875.0 5,354.1 Mining and quarrying 48.0 60.7 82.3 118.8 174.2 234.8 290.8 356.5 367.3 371.9 390.5 423.7 460.7 Manufacturing 609.7 707.6 881.4 1,196.6 1,610.7 2,026.9 2,355.7 2,580.0 2,637.6 2,771.9 3,108.2 3,373.0 3,708.9 Services 581.4 722.7 913.9 1,132.4 1,493.0 1,794.7 2,042.8 2,302.9 2,517.4 2,703.8 2,990.5 3,315.3 3,513.3 Imports of goods & non-factor services 265.7 347.8 478.4 644.0 1,096.4 1,268.3 1,281.4 1,363.0 1,354.4 1,571.2 2,075.3 2,246.4 2,714.9 Exports of goods & non-factor services 325.2 420.0 519.5 591.4 1,184.0 1,402.7 1,427.4 1,718.0 1,717.3 1,808.8 2,314.3 2,478.1 3,024.3 Resource balance 59.5 72.2 41.1 -52.6 87.6 134.4 146.0 355.0 362.9 237.6 239.0 231.8 309.4 Total expenditures 1,795.3 2,089.6 2,622.7 3,516.1 4,588.3 5,713.4 6,642.5 7,091.3 7,471.6 7,969.1 8,707.8 9,499.7 10,169.7 Total consumption 1,136.5 1,314.6 1,595.2 2,018.2 2,679.6 3,363.5 4,000.4 4,358.0 4,640.6 4,972.3 5,460.1 5,892.7 6,236.5 General government 225.2 283.0 349.2 450.0 598.6 669.1 785.2 872.5 948.5 1,038.8 1,170.5 1,302.9 1,383.0 Non-government 911.3 1,031.6 1,246.0 1,568.2 2,081.0 2,694.4 3,215.2 3,485.5 3,692.1 3,933.5 4,289.6 4,589.8 4,853.5 Statistical discrepancy 14.4 23.3 63.9 -1.9 -17.4 -37.8 -44.6 -112.5 -123.6 -73.4 -2.3 -139.1 -302.3 Gross domestic investment 644.4 751.7 963.6 1,499.8 1,926.1 2,387.7 2,686.7 2,845.8 2,954.6 3,070.2 3,250.0 3,746.1 4,235.5 Gross domestic fixed investment 473.2 594.0 831.7 1,298.0 1,685.6 2,030.1 2,333.6 2,515.4 2,763.1 2,947.6 3,262.4 3,681.3 4,216.8 Nonfinancial public sector 298.6 371.4 549.9 792.6 961.5 1,089.8 1,200.6 1,309.2 1,536.9 1,594.8 1,650.4 1,760.7 1,887.7 Non-State sector 174.6 222.6 281.8 505.4 724.1 940.3 1,133.0 1,206.2 1,226.2 1,352.8 1,612.0 1,920.6 2,329.1 Changes in stocks 171.2 157.7 131.9 201.8 240.5 357.6 353.1 330.3 191.5 122.7 -12.4 64.8 18.7 Gross domestic saving 703.9 823.9 1,004.7 1,447.2 2,013.7 2,522.1 2,832.7 3,200.8 3,317.5 3,307.8 3,489.0 3,977.8 4,544.9 Net factor income 5.0 4.5 1.4 -7.4 -8.9 -98.3 -103.4 -91.2 -137.8 -148.8 -121.4 -158.7 -123.7 Net current transfers 1.3 4.4 6.4 6.8 11.5 12.0 17.7 42.6 35.4 40.9 52.3 70.4 107.5 Gross national saving 710.3 832.8 1,012.5 1,446.6 2,016.3 2,435.8 2,747.0 3,152.1 3,215.1 3,199.9 3,419.8 3,889.5 4,528.8 Net indirect taxes 101.5 128.6 171.9 274.1 343.5 405.8 458.9 577.1 664.6 777.4 864.6 1,034.9 1,231.7 Indirect taxes 197.5 216.9 248.6 345.0 411.5 475.1 538.0 667.8 769.2 875.9 997.5 1,138.9 1,322.4 Subsidies 96.0 88.3 76.7 70.9 68.0 69.3 79.1 90.7 104.6 98.5 132.9 104.0 90.7 Gross national product 1,859.8 2,166.3 2,665.2 3,456.1 4,667.0 5,749.5 6,685.1 7,355.1 7,696.7 8,057.9 8,825.4 9,572.8 10,355.4 Nominal official exchange rate (annual average) 4.8 5.3 5.5 5.8 8.6 8.4 8.3 8.3 8.3 8.3 8.3 8.3 8.3 GDP at market price (current million US$) 387,771.8 406,090.1 483,046.8 601,083.0 542,529.6 700,217.9 816,907.3 898,226.8 946,309.9 991,386.8 1,080,793.7 1,175,725.5 1,266,045.7 Source: China Statistical Yearbook; Balance of Payments, International Financial Statistics (IFS); staff calculations. 89 Table 2: National Accounts (Billions of RMB, in constant 1990 prices) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 GDP at market prices 1,854.8 2,025.4 2,313.0 2,625.3 2,956.1 3,266.5 3,580.1 3,895.1 4,198.9 4,497.1 4,856.8 5,221.1 5,638.8 Net indirect taxes 101.5 120.5 149.3 207.8 217.2 226.7 242.0 301.9 356.2 426.0 469.3 555.2 662.8 GDP at factor cost 1,753.3 1,904.9 2,163.8 2,417.5 2,738.9 3,039.8 3,338.1 3,593.2 3,842.7 4,071.1 4,387.5 4,665.9 4,976.0 Agriculture 501.7 513.7 537.9 563.2 589.6 619.1 650.7 673.5 697.0 716.6 733.8 754.3 776.2 Industry 771.7 879.0 1,065.4 1,277.4 1,512.4 1,722.6 1,931.1 2,133.8 2,323.7 2,512.0 2,748.1 2,978.9 3,270.9 Mining and quarrying 48.0 58.9 76.1 96.0 122.4 147.3 174.5 213.7 232.7 243.2 251.8 273.3 297.6 Manufacturing 609.7 686.7 815.3 966.9 1,131.1 1,271.6 1,413.1 1,546.2 1,671.0 1,812.6 2,004.5 2,175.8 2,395.5 Services, etc. 581.4 632.5 710.9 787.0 862.6 935.0 1,008.9 1,100.7 1,192.1 1,283.8 1,387.8 1,504.4 1,617.2 Statistical discrepancy 0.0 0.2 -1.1 -2.2 -8.5 -10.2 -10.6 -12.9 -13.9 -15.3 -12.8 -16.5 -25.5 Imports of goods & non-factor services 265.7 314.0 408.9 572.7 634.8 682.2 690.0 766.7 790.5 969.2 1,206.6 1,336.6 1,704.5 Exports of goods & non-factor services 325.2 367.7 408.9 464.5 581.5 618.6 614.6 755.0 809.1 931.8 1,216.6 1,333.7 1,726.0 Resource balance 59.5 53.7 0.0 -108.2 -53.3 -63.6 -75.4 -11.7 18.6 -37.4 10.0 -2.9 21.5 Total expenditures 1,795.3 1,971.7 2,313.0 2,733.5 3,009.4 3,330.1 3,655.5 3,906.8 4,180.3 4,534.5 4,846.8 5,224.0 5,617.3 Total consumption 1,112.6 1,242.8 1,419.3 1,551.3 1,675.4 1,829.5 2,014.3 2,134.6 2,290.9 2,488.6 2,721.9 2,917.2 3,112.3 General government 225.2 268.7 305.2 333.0 363.3 384.7 395.3 427.4 468.2 519.9 583.5 645.0 690.2 Non-government 887.4 974.14 1114.1 1218.32 1312.12 1444.79 1619 1707.2 1822.7 1968.7 2138.4 2,272.2 2,422.1 total consumption 38.3 31.7 106.6 199.0 197.4 187.9 224.3 283.6 305.9 363.5 360.6 297.0 225.9 Gross domestic investment 644.4 697.2 787.2 983.2 1,136.6 1,312.7 1,416.9 1,488.6 1,583.5 1,682.4 1,764.3 2,009.8 2,279.1 Gross domestic fixed investment 473.2 547.5 678.3 846.6 996.4 1,131.9 1,230.7 1,315.8 1,480.9 1,615.2 1,771.0 1,975.1 2,269.1 Nonfinancial public sector 298.6 348.0 477.5 600.8 607.9 608.8 633.2 684.8 823.7 873.9 895.9 944.6 1,015.8 Non-State sector 174.6 199.5 200.8 245.8 388.5 523.1 597.5 631.0 657.2 741.3 875.1 1,030.5 1,253.3 Changes in stocks 171.2 149.7 108.8 136.6 140.2 180.8 186.2 172.8 102.6 67.2 -6.7 34.7 10.0 Net factor income 5.0 3.7 2.1 -6.8 -7.7 -52.8 -51.4 -66.5 -71.6 -72.6 -60.7 -79.7 -60.3 Net current transfers 1.3 4.2 5.6 5.3 7.5 6.7 9.4 22.3 19.0 22.4 28.4 37.7 57.8 Gross national product 1,859.8 2,029.1 2,315.2 2,618.5 2,948.4 3,213.8 3,528.7 3,828.6 4,127.3 4,424.4 4,796.1 5,141.4 5,578.4 Gross domestic saving 703.9 750.9 787.2 875.0 1,083.3 1,249.1 1,341.5 1,476.9 1,602.1 1,645.0 1,774.3 2,006.9 2,473.4 Gross national saving 710.2 758.7 795.0 873.5 1,083.1 1,203.1 1,299.5 1,432.7 1,549.5 1,594.8 1,742.0 1,964.9 2,470.9 Capacity to import 325.2 379.2 444.0 525.9 685.5 754.5 768.6 966.4 1,002.3 1,125.2 1,345.5 1,475.0 1,898.8 Terms of trade adjustment 0.0 11.5 35.1 61.4 104.0 135.9 154.0 211.4 193.2 193.4 128.9 141.3 172.8 Gross domestic income 1,854.8 2,036.9 2,348.2 2,686.7 3,060.1 3,402.4 3,734.1 4,106.5 4,392.1 4,690.5 4,985.7 5,362.4 5,811.6 Gross national income 1,859.9 2,040.6 2,350.3 2,679.9 3,052.4 3,349.6 3,682.7 4,040.0 4,320.5 4,617.9 4,925.0 5,282.7 5,751.2 Source : China Statistical Yearbook; Balance of Payments-IFS; staff calculations. 90 Table 3: National Accounts (Implicit price deflators, 1990=100) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 GDP at market prices 100.0 106.7 115.2 131.9 158.2 179.0 189.6 191.2 186.6 182.5 184.2 186.4 185.8 Net indirect taxes 100.0 106.7 115.2 131.9 158.2 179.0 189.6 191.2 186.6 182.5 184.2 186.4 185.8 GDP at factor cost 100.0 106.7 115.2 131.9 158.2 179.0 189.6 191.2 186.6 182.5 184.2 186.4 185.8 Agriculture 100.0 103.0 107.8 122.2 160.4 193.7 212.8 211.0 208.8 202.0 199.4 204.3 207.7 Industry 100.0 103.6 109.8 128.6 147.9 165.7 174.1 174.4 166.2 161.5 163.5 163.7 163.7 Mining and quarrying 100.0 103.1 108.1 123.8 142.4 159.4 166.7 166.8 157.9 152.9 155.1 155.0 154.8 Manufacturing 100.0 103.0 108.1 123.8 142.4 159.4 166.7 166.9 157.8 152.9 155.1 155.0 154.8 Services, etc. 100.0 114.3 128.5 143.9 173.1 191.9 202.5 209.2 211.2 210.6 215.5 220.4 217.2 Imports of goods & non-factor services 100.0 110.8 117.0 112.5 172.7 185.9 185.7 177.8 171.3 162.1 172.0 168.1 159.3 Exports of goods & non-factor services 100.0 114.2 127.0 127.3 203.6 226.8 232.2 227.5 212.2 194.1 190.2 185.8 175.2 Terms of trade (Px/Pm) 100.0 103.1 108.6 113.2 117.9 122.0 125.1 128.0 123.9 119.7 110.6 110.6 110.0 Total expenditures 100.0 106.0 113.4 128.6 152.5 171.6 181.7 181.5 178.7 175.7 179.7 181.8 181.0 Total consumption, etc. 102.1 105.8 112.4 130.1 159.9 183.8 198.6 204.2 202.6 199.8 200.6 202.0 200.4 General government 100.0 105.3 114.4 135.1 164.8 173.9 198.6 204.1 202.6 199.8 200.6 202.0 200.4 Non-government 102.7 105.9 111.8 128.7 158.6 186.5 198.6 204.2 202.6 199.8 200.6 202.0 200.4 Gross domestic investment 100.0 107.8 122.4 152.5 169.5 181.9 189.6 191.2 186.6 182.5 184.2 186.4 185.8 Gross domestic fixed investment 100.0 108.5 122.6 153.3 169.2 179.4 189.6 191.2 186.6 182.5 184.2 186.4 185.8 Nonfinancial public sector 100.0 106.7 115.2 131.9 158.2 179.0 189.6 191.2 186.6 182.5 184.2 186.4 185.8 Non-State sector 100.0 111.6 140.3 205.6 186.4 179.8 189.6 191.2 186.6 182.5 184.2 186.4 185.8 Changes in stocks 100.0 105.3 121.2 147.7 171.6 197.7 189.6 191.2 186.7 182.5 185.4 186.6 187.1 Net factor income 100.2 121.8 64.3 108.3 115.6 186.4 201.2 137.3 192.5 204.9 200.0 199.1 205.1 Net current transfers 100.0 106.0 113.4 128.6 152.5 178.7 189.1 191.1 186.4 182.7 184.0 186.6 186.0 Gross national product 100.0 106.8 115.1 132.0 158.3 178.9 189.4 192.1 186.5 182.1 184.0 186.2 185.6 Gross domestic saving 100.0 109.7 127.6 165.4 185.9 201.9 211.2 216.7 207.1 201.1 196.6 198.2 183.8 Gross national saving 100.0 109.8 127.4 165.6 186.2 202.5 211.4 220.0 207.5 200.6 196.3 197.9 183.3 Source: Table 1 divided by Table 2. 91 Table 4: National Accounts (Percentage growth rates in constant 1990 prices) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 GDP at market prices 3.8 9.2 14.2 13.5 12.6 10.5 9.6 8.8 7.8 7.1 8.0 7.5 8.0 Net indirect taxes -0.5 18.7 23.9 39.2 4.5 4.4 6.8 24.7 18.0 19.6 10.2 18.3 19.4 GDP at factor cost 4.1 8.6 13.6 11.7 13.3 11.0 9.8 7.6 6.9 5.9 7.8 6.3 6.6 Agriculture 7.3 2.4 4.7 4.7 4.7 5.0 5.1 3.5 3.5 2.8 2.4 2.8 2.9 Industry 3.2 13.9 21.2 19.9 18.4 13.9 12.1 10.5 8.9 8.1 9.4 8.4 9.8 Mining and quarrying 9.7 22.6 29.3 26.1 27.4 20.4 18.4 22.5 8.9 4.5 3.5 8.5 8.9 Manufacturing 2.3 12.6 18.7 18.6 17.0 12.4 11.1 9.4 8.1 8.5 10.6 8.5 10.1 Services, etc. 2.3 8.8 12.4 10.7 9.6 8.4 7.9 9.1 8.3 7.7 8.1 8.4 7.5 Imports of goods & non-factor services -0.2 18.2 30.2 40.1 10.8 7.5 1.1 11.1 3.1 22.6 24.5 10.8 27.5 Exports of goods & non-factor services 24.5 13.1 11.2 13.6 25.2 6.4 -0.6 22.8 7.2 15.2 30.6 9.6 29.4 Resource balance .. .. .. .. .. .. .. .. .. .. .. .. .. Total expenditures 0.2 9.8 17.3 18.2 10.1 10.7 9.8 6.9 7.0 8.5 6.9 7.8 7.5 Total consumption, etc. -2.9 11.7 14.2 9.3 8.0 9.2 10.1 6.0 7.3 8.6 9.4 7.2 6.7 General government 9.2 19.3 13.6 9.1 9.1 5.9 2.8 8.1 9.5 11.0 12.2 10.5 7.0 Non-government 2.4 9.8 14.4 9.4 7.7 10.1 12.1 5.4 6.8 8.0 8.6 6.3 6.6 Gross domestic investment -0.2 8.2 12.9 24.9 15.6 15.5 7.9 5.1 6.4 6.2 4.9 13.9 13.4 Gross domestic fixed investment 3.4 15.7 23.9 24.8 17.7 13.6 8.7 6.9 12.5 9.1 9.6 11.5 14.9 Nonfinancial public sector 0.8 16.5 37.2 25.8 1.2 0.1 4.0 8.1 20.3 6.1 2.5 5.4 7.5 Non-State sector 8.2 14.3 0.7 22.4 58.1 34.6 14.2 5.6 4.2 12.8 18.0 17.8 21.6 Changes in stocks -9.0 -12.6 -27.3 25.5 2.6 29.0 3.0 -7.2 -40.6 -34.5 -110.0 -617.9 -71.2 Net factor income -348.9 -27.2 -41.5 -417.9 12.8 585.4 -2.6 29.3 7.7 1.4 -16.4 31.3 -24.3 Net current transfers -11.7 220.7 35.4 -6.3 42.7 -11.2 39.7 138.2 -14.8 17.9 26.8 32.7 53.3 Gross national product 4.2 9.1 14.1 13.1 12.6 9.0 9.8 8.5 7.8 7.2 8.4 7.2 8.5 Gross domestic saving 9.9 6.7 4.8 11.2 23.8 15.3 7.4 10.1 8.5 2.7 7.9 13.1 23.2 Gross national saving 11.0 6.8 4.8 9.9 24.0 11.1 8.0 10.3 8.1 2.9 9.2 12.8 25.8 Capacity to import .. .. .. .. .. .. .. .. .. .. .. .. .. Terms of trade adjustment .. .. .. .. .. .. .. .. .. .. .. .. .. Gross domestic income 4.4 9.8 15.3 14.4 13.9 11.2 9.7 10.0 7.0 6.8 6.3 7.6 8.4 Gross national income 4.8 9.7 15.2 14.0 13.9 9.7 9.9 9.7 6.9 6.9 6.7 7.3 8.9 Source: Table 2. 92 Table 5: Balance of Payments (Billions of US dollars) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Exports of goods and non-factor services 67.9 78.8 94.1 102.6 137.4 168.0 171.7 207.2 207.4 220.9 279.6 299.4 365.4 Merchandise (fob) 62.1 71.9 85.0 91.7 121.0 148.8 151.1 182.7 183.5 194.7 249.1 266.1 325.7 Non-factor services 5.8 6.9 9.2 10.9 16.4 19.1 20.6 24.6 23.9 26.2 30.4 33.3 39.7 Imports of goods and non-factor services 55.5 65.3 86.8 111.8 127.2 151.9 154.1 164.4 163.6 190.3 250.7 271.4 328.0 Merchandise (fob) 51.2 61.2 77.3 99.7 110.9 126.7 131.5 136.5 136.9 158.7 214.7 232.1 281.5 Non-factor services 4.4 4.1 9.4 12.0 16.3 25.2 22.6 28.0 26.7 31.6 36.0 39.3 46.5 Resource balance 12.4 13.5 7.4 -9.2 10.2 16.1 17.6 42.8 43.8 30.6 28.9 28.0 37.4 Net factor income 1.1 0.8 0.2 -1.3 -1.0 -11.8 -12.4 -11.0 -16.6 -14.5 -14.7 -19.2 -15.0 Factor receipts 3.0 3.7 5.6 4.4 5.7 5.2 7.3 5.7 5.6 8.3 12.6 9.4 8.3 Factor payments 2.0 2.9 5.3 5.7 6.8 17.0 19.8 16.7 22.2 22.8 27.2 28.6 23.3 Net current transfers 0.3 0.8 1.2 1.2 1.3 1.4 2.1 5.1 4.3 4.9 6.3 8.5 13.0 Current receipts 0.4 0.9 1.2 1.3 1.8 1.8 2.4 5.5 4.7 5.4 6.9 9.1 13.8 General government 0.1 0.4 0.4 0.4 0.7 0.7 0.4 0.5 0.2 0.2 0.2 0.1 0.9 Other current transfers 0.2 0.5 0.8 0.9 1.1 1.2 2.0 5.0 4.5 5.2 6.7 9.0 12.9 Current payments 0.1 0.1 0.1 0.1 0.4 0.4 0.2 0.3 0.4 0.4 0.6 0.6 0.81 General government 0.1 0.0 0.0 0.1 0.2 0.0 0.1 0.1 0.1 0.1 0.2 0.2 Other current transfers 0.0 0.0 0.0 0.3 0.4 0.2 0.3 0.3 0.5 0.4 0.7 Current account balance before official grants 13.6 14.8 8.4 -9.6 10.0 5.1 7.0 36.5 31.4 21.0 20.5 17.4 34.7 Current account balance as a share of GDP (percent) 3.5 3.6 1.7 -1.6 1.8 0.7 0.9 4.1 3.3 2.1 1.9 1.5 2.7 Net official capital grants 0.0 0.4 0.4 0.3 0.5 0.6 0.3 0.5 0.1 0.1 0.1 -0.1 0.7 Current account balance after official.grants 13.7 15.2 8.8 -9.3 10.5 5.7 7.3 37.0 31.5 21.1 20.5 17.3 35.4 Direct investment, Net 2.7 3.5 7.2 23.1 31.8 33.8 38.1 41.7 41.1 37.0 37.5 37.4 46.8 Long term capital inflows, Net 4.0 4.0 -6.4 1.2 0.4 3.6 1.7 5.3 -8.8 -16.7 -8.2 -7.9 -8.3 Total other items (net) -14.3 -11.5 -11.6 2.7 -12.1 -20.7 -15.4 -48.0 -57.5 -32.6 -39.1 0.6 1.6 Net short-term capital -9.2 -3.1 -0.9 -3.9 -3.1 0.4 -1.6 -16.8 -34.0 -21.7 -16.8 27.5 2.7 Capital flows not elsewhere included -3.6 -3.6 -4.9 13.8 -2.1 -7.4 1.7 -9.2 -4.6 6.7 -10.6 -22.2 -8.9 Errors and omissions -1.4 -4.8 -5.8 -7.1 -7.0 -13.7 -15.5 -22.1 -18.9 -17.6 -11.7 -4.7 7.8 Changes in net reserves -6.1 -11.1 2.1 -17.7 -30.5 -22.5 -31.7 -35.9 -6.3 -8.7 -10.7 -47.4 -75.5 Gross reserves (excluding gold)a 29.6 43.7 20.6 22.4 52.9 75.4 107.0 142.8 149.2 157.7 168.3 215.6 291.1 Gross reserves (including gold)b 34.5 48.3 24.8 27.3 57.8 80.3 111.7 146.4 152.8 161.4 171.75 220.0 297.7 Exchange rates: Nominal official exchange rate (average) 4.8 5.3 5.5 5.8 8.6 8.4 8.3 8.3 8.3 8.3 8.3 8.3 8.3 Nominal official exchange rate (end-of-year) 5.2 5.4 5.8 5.8 8.4 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 Manufactures Unit Value Index (% change) 3.9 2.0 3.9 0.7 3.6 5.9 -4.9 -7.0 -3.8 -0.3 -2.0 -1.4 -1.4 Real effective exchange rate index(1995 = 100) 112.4 97.6 94.3 82.3 91.7 100.0 107.4 112.2 112.4 106.9 107.6 110.5 108.3 aSince August 1992 the authorities have defined gross international reserves as the sum of only state foreign exchange reserves (not total reserves), gold, reserve position in the Fund and SDR holdings. bGold valued at London prices (Source: IFS) Source: State Administration of Foreign Exchange (SAFE), People's Republic of China (PRC); International Monetary Fund (IMF): IFS 93 Table 6: Balance of Payments: Services (Millions of US dollars) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 A. Shipment of freight (Including Port expenses) Credit 2,226 1,517 1,662 1,636 2,825 3,352 3,069 2,955 2,301 2,420 3,671 4,635 5,720 Debit 3,245 2,508 4,325 5,479 7,621 9,526 10,312 9,944 6,763 7,898 10,369 11,324 13,612 B. Insurance Credit 227 342 486 452 1,700 1,852 123 174 384 204 108 227 209 Debit 84 214 274 362 1,880 4,273 233 1,046 1,758 1,921 2,471 2,711 3,246 C. Travel Credit 1,738 2,346 3,530 4,683 7,323 8,730 10,200 12,074 12,602 14,098 16,231 17,192 20,385 Debit 470 511 2,512 2,797 3,036 3,688 4,474 8,130 9,205 10,864 13,114 13,909 15,398 D. Investment Income Credit 3,017 3,719 5,595 4,390 5,737 5,191 7,318 5,544 5,488 8,184 12,349 9,092 7,671 Debit 1,962 2,879 5,347 5,674 6,775 16,965 19,755 16,715 22,024 22,278 26,537 27,711 22,339 E. Posts Credit 159 221 349 471 706 756 315 272 819 590 1,345 271 550 Debit 13 15 72 85 146 217 134 290 207 193 242 326 470 F. Labor income Credit .. .. .. .. .. .. .. 166 97 146 202 297 674 Debit .. .. .. .. .. .. .. .. 204 523 679 852 950 G. Other services Credit 1,505 2,553 3,222 3,656 3,813 4,440 6,893 9,095 7,789 8,936 9,075 11,011 12,880 Debit 540 873 2,251 3,313 3,615 7,518 7,432 8,558 8,740 10,711 9,835 10,996 13,802 H. Total services Net 2,558 3,698 63 -2,422 -969 -17,866 -14,422 -14,403 -19,421 -19,810 -20,266 -25,104 -21,728 Credit 8,872 10,698 14,844 15,288 22,104 24,321 27,918 30,280 29,480 34,578 42,981 42,725 48,089 Debit 6,314 7,000 14,781 17,710 23,073 42,187 42,340 44,683 48,901 54,388 63,247 67,829 69,817 I. factor Services Net 1,055 840 248 -1,284 -1,036 -11,774 -12,437 -11,004 -16,644 -14,470 -14,665 -19,173 -14,945 Receipts (credit) 3,017 3,719 5,595 4,390 5,738 5,191 7,318 5,711 5,584 8,330 12,551 9,390 8,344 Payments (debit) 1,962 2,879 5,347 5,674 6,774 16,965 19,755 16,715 22,228 22,800 27,216 28,563 23,289 J. Non-factor services Net 1,503 2,858 -185 -1,138 67 -6,092 -1,985 -3,399 -2,777 -5,340 -5,601 -5,931 -6,783 Receipts (credit) 5,855 6,979 9,249 10,898 16,366 19,130 20,600 24,569 23,896 26,248 30,430 33,335 39,745 Payments (debit) 4,352 4,121 9,434 12,036 16,299 25,222 22,585 27,968 26,673 31,588 36,031 39,266 46,528 Source: SAFE, PRC. 94 Table 7: Transfers (Millions of US dollars) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Private unrequited transfers Net 222.0 444.0 804.0 883.0 836.0 810.1 1,827.6 4,659.9 4,187.8 4,835.5 6,257.3 8,559.0 13,058.1 Credit 233.0 484.0 821.0 901.0 1,095.0 1,170.1 1,989.0 4,994.0 4,477.7 5,166.7 6,713.0 8,987.0 13,708.9 Debit 11.0 40.0 17.0 18.0 259.0 360.0 161.4 334.1 289.9 331.2 455.7 428.0 650.8 Interofficial Net -132.0 -69.0 351.0 289.0 501.0 624.0 301.0 483.0 91.0 108.0 53.0 -67.0 -73.6 Credit 107.0 115.0 385.0 389.0 675.0 656.0 379.0 483.0 183.0 201.0 147.0 138.0 86.5 Debit 239.0 184.0 34.0 100.0 174.0 32.0 78.0 .. 92.0 93.0 94.0 205.0 160.1 Total transfers Net 90.0 375.0 1,155.0 1,172.0 1,337.0 1,434.1 2,128.6 5,142.9 4,278.8 4,943.5 6,310.3 8,492.0 12,984.5 Credit 340.0 599.0 1,206.0 1,290.0 1,770.0 1,826.1 2,368.0 5,477.0 4,660.7 5,367.7 6,860.0 9,125.0 13,795.4 Debit 250.0 224.0 51.0 118.0 433.0 392.0 239.4 334.1 381.9 424.2 549.7 633.0 810.9 Source: SAFE, PRC. 95 Table 8: International Reserves (Millions of US dollars) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total reserves (minus gold)a 29,600 43,700 20,620 22,387 52,914 75,377 107,040 142,760 149,190 157,730 168,280 215,600 291,100 SDR's 395 404 305 352 369 392 427 447 480 540 613 677 734 Reserve position with Fund 430 433 758 704 755 1,216 1,396 2,270 3,553 2,312 1,905 2,589 3,723 Foreign exchange reserves 28,594 42,664 19,443 21,199 51,620 73,579 105,029 139,890 145,000 154,700 165,574 212,165 286,407 Gold (million fine troy ounces) 13 13 13 13 13 13 13 13 13 13 13 16 19 Gold (National valuation)b 631 634 610 445 445 444 445 444 445 445 445 564 675 London gold price(US$ per oz) 385 354 333 391 383 387 369 290 288 290 274 277 343 Gold at London price (US$ million) 4,890 4,491 4,232 4,961 4,867 4,912 4,689 3,686 3,646 3,677 3,477 4,452 6,598 Total reserves including gold 30,231 44,334 21,230 22,832 53,359 75,821 107,485 143,204 149,635 158,175 168,725 216,164 291,775 (National valulation) Total reserves including Gold 34,490 48,191 24,852 27,348 57,781 80,289 111,729 146,446 152,836 161,407 171,757 220,052 297,698 (London price) aFrom August 1992 onwards the authorities have defined gross international reserves as the sum of only state foreign exchange reserves (not total reserves gold, reserve position with in the Fund and SDR holdings. bGold valued at SDR 35 per fine ounce. Source: World Bank, IMF: IFS. 96 Table 9: Commodity Composition of Merchandise Exports (Millions of US dollars, customs basis) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 PRIMARY GOODS 15,886 16,145 17,004 16,666 19,708 21,485 21,925 23,929 20,600 19,928 25,458 26,353 28,480 FOOD 6,609 7,226 8,309 8,399 10,015 9,954 10,232 11,054 10,619 10,459 12,282 12,779 14,623 Live animals chiefly for food 430 439 479 453 468 503 487 476 441 385 385 344 344 Meat and meat products 791 906 770 950 909 1,371 1,438 1,310 1,148 1,065 1,253 1,481 1,384 Fishes, shell-fish, molluscs etc. 1,370 1,181 1,366 1,254 2,320 2,853 2,855 2,927 2,652 2,958 3,652 3,998 4,481 Grain and grain products 614 1,169 1,692 1,660 1,687 285 525 1,500 1,657 1,276 1,817 1,237 1,876 Vegetables and fruits 1,742 1,946 2,023 2,163 2,889 3,342 3,118 3,071 2,994 3,104 3,299 3,708 4,243 Coffee, tea, cocoa etc. 534 491 499 510 484 516 552 622 594 545 555 592 612 NON-FOOD 3,537 3,486 3,143 3,052 4,127 4,375 4,046 4,193 3,517 3,921 4,464 4,173 4,404 Oil seeds and oil-containing fruits 619 741 867 793 666 522 479 279 284 373 417 461 462 Textile fibers etc. 1,095 1,125 4,224 4,179 1,093 753 713 805 609 980 1,086 751 902 Animal and vegetable raw materials 809 705 606 617 1,136 1,351 1,244 1,284 1,127 1,074 1,212 1,106 1,152 MINERAL FUELS 5,237 4,754 4,693 4,109 4,069 5,332 5,929 6,987 5,181 4,646 7,851 8,416 8,372 Coal, coke and briquettes 755 829 .. .. 1,054 1,695 1,730 1,925 1,869 1,638 2,379 3,598 3,496 Petroleum, petroleum products etc. 4,460 3,975 .. .. 2,789 3,243 3,902 4,247 2,664 2,228 4,662 3,939 3,991 OTHER 503 679 859 1,106 1,497 1,824 1,718 1,695 1,283 903 861 985 1,082 MANUFACTURED GOODS 46,205 55,698 67,936 75,078 101,298 127,298 129,141 158,767 163,157 175,003 223,754 239,802 297,085 CHEMICALS AND RELATED PRODUCTS 3,730 3,818 4,348 4,623 6,236 9,094 8,879 10,225 10,316 10,373 12,098 13,354 15,329 Organic 838 911 1,403 1,541 1,602 2,285 2,262 2,576 2,601 2,596 3,113 3,467 4,103 Inorganic 842 913 1,050 1,145 1,350 2,225 2,107 2,382 2,327 2,273 2,619 2,854 3,023 YARN, FABRICS, AND RELATED PRODUCTS 6,999 7,734 9,846 10,166 11,818 13,919 12,112 13,815 12,822 13,044 16,135 16,828 20,565 NON-METALLIC MINERALS 1,316 1,668 1,896 2,065 2,521 3,425 3,300 3,999 3,789 3,968 4,701 4,849 6,146 IRON AND STEEL 1,283 1,669 1,662 1,658 1,654 5,225 3,643 4,461 3,184 2,656 4,391 3,154 3,323 MACHINERY AND TRANSPORT EQUIPMENT 5,588 7,149 13,219 15,282 21,895 31,407 35,313 43,702 50,233 58,834 82,602 94,918 126,983 OTHER 27,289 33,659 36,965 41,284 57,174 64,229 65,894 82,565 82,813 86,129 103,827 106,699 124,740 Clothing and garments 6,848 8,998 16,883 18,325 23,732 24,049 25,037 31,781 30,060 30,078 36,072 36,656 41,306 TOTAL 62,091 71,843 84,940 91,744 121,006 148,780 151,066 182,696 183,757 194,931 249,203 266,098 325,565 Note: Data are based on Standard Industrial Trade Classification (SITC). Source: China Customs Statistics. 97 Table 10: Commodity Composition of Merchandise Imports (Millions of US dollars, customs basis) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 PRIMARY GOODS 9,853 10,834 13,255 14,210 16,468 24,411 25,440 28,620 22,952 26,845 46,740 45,774 49,272 Food 3,335 2,799 3,143 2,206 3,119 6,131 5,672 4,304 3,793 3,619 4,758 4,976 5,237 Beverages and tobacco 157 200 239 245 68 394 497 320 179 208 364 412 388 Animal and vegetable oils, fats and waxes 982 719 525 502 1,809 2,601 1,697 1,684 1,491 1,367 976 763 1,625 Petroleum, petroleum products etc. 1,272 2,113 3,570 5,819 3,595 4,568 5,921 9,330 5,880 7,631 18,930 15,926 17,226 Crude materials (non-food) 4,107 5,003 5,775 5,438 7,438 10,158 10,697 12,006 10,716 12,740 20,004 22,128 22,740 Others 0 0 3 0 439 559 956 976 893 1,281 1,708 1,569 2,057 MANUFACTURED GOODS 43,492 52,957 67,330 89,749 99,224 107,668 113,398 113,741 117,214 138,873 178,357 197,779 245,931 Chemicals and related products 6,648 9,277 11,157 9,704 12,130 17,300 18,106 19,297 20,166 24,030 30,213 32,106 39,041 Textile yarn (yarn, fabrics etc.) 2,748 3,689 3,690 3,145 9,347 10,914 11,980 12,267 11,082 11,081 12,832 12,574 13,061 Non metallic minerals 453 443 4,519 3,776 1,001 1,113 1,221 1,328 1,409 1,715 2,401 2,506 3,022 Iron and steel 2,852 2,694 5,051 13,896 9,438 6,878 7,244 6,665 6,488 7,495 9,690 10,750 13,599 Non-ferrous metals 579 816 2,420 2,224 1,659 2,683 3,002 3,183 3,470 4,716 6,746 6,206 7,524 Paper and related products 745 969 1,771 1,741 1,923 2,157 2,776 3,228 3,400 3,781 3,746 3,458 3,940 Rubber and related products 50 76 555 598 186 224 304 321 320 106 577 670 801 Furniture 72 49 178 218 111 90 64 83 96 26 170 237 293 Travel goods 6 7 302 327 50 42 24 14 19 1,102 33 38 42 Clothing 48 61 437 543 622 969 1,044 1,117 1,072 306 1,192 1,275 1,356 Footwear 9 11 506 513 325 341 353 358 290 306 320 330 304 Photo supplies 361 441 2,024 2,320 1,656 1,861 1,855 1,907 1,990 2,227 2,904 3,336 3,379 Others 28,919 34,424 34,721 50,745 60,777 63,094 65,424 63,973 67,411 81,983 107,532 124,295 159,570 Total 53,345 63,791 80,585 103,959 115,693 132,078 138,838 142,361 140,166 165,718 225,097 243,553 295,203 Note: Data are based on SITC. Source : China Statistical Yearbook, China Customs Statistics. 98 Table 11: External Debt: Disbursements and Repayments (Millions of US dollars) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 DISBURSEMENTS Public & publicly guaranteed long-term debt 9,665 8,659 16,308 19,227 16,151 21,441 20,985 22,458 10,679 12,719 9,672 8,612 Official creditors 2,578 2,649 3,103 5,501 4,200 9,073 5,669 6,214 5,012 7,332 5,768 4,742 Multilateral 1,158 1,455 1,523 2,252 2,558 2,838 2,797 2,939 2,830 2,396 3,280 2,575 of which IDA 507 612 778 869 680 812 811 713 592 460 379 311 of which IBRD 591 668 552 977 1,380 1,457 1,286 1,562 1,474 1,294 1,528 1,480 Bilateral 1,420 1,194 1,580 3,248 1,642 6,235 2,872 3,275 2,182 4,936 2,487 2,167 Private creditors 7,087 6,010 13,204 13,727 11,951 12,368 15,316 16,244 5,667 5,387 3,904 3,870 Bonds 277 260 894 2,737 3,337 1,224 2,777 3,105 1,325 1,067 848 1,486 Commercial banks 3,247 2,623 5,062 5,622 2,380 4,977 4,915 5,889 1,537 890 131 348 Other private 3,563 3,127 7,248 5,368 6,234 6,167 7,624 7,250 2,805 3,430 2,925 2,036 Private non-guaranteed long-term 0 0 198 332 0 544 129 1,518 469 7,665 7,082 6,170 Total long-term disbursements 9,665 8,659 16,505 19,559 16,151 21,985 21,114 23,976 11,148 20,384 16,754 14,782 IMF purchases 0 0 0 0 0 0 0 0 0 0 0 0 Net short-term capital 0 0 0 0 0 0 0 0 0 0 0 0 Total disbursements 9,665 8,659 16,505 19,559 16,151 21,985 21,114 23,976 11,148 20,384 16,754 14,782 REPAYMENT DUE Public & publicly guaranteed long-term deb 3,319 4,123 5,213 6,727 6,343 9,070 10,260 11,320 8,182 11,105 10,798 8,579 Official creditors 851 605 760 886 1,083 1,171 1,269 1,899 2,724 3,945 4,271 2,586 Multilateral 220 141 215 272 359 420 414 554 575 696 1,400 1,182 of which IDA 0 1 2 4 9 14 20 26 38 53 66 87 of which IBRD 216 130 196 245 315 350 343 351 396 505 578 817 Bilateral 631 464 545 614 725 751 854 1,345 2,150 3,249 2,871 1,404 Private creditors 2,468 3,517 4,453 5,841 5,260 7,899 8,991 9,421 5,458 7,160 6,527 5,993 Bonds 325 236 1,095 831 461 1,451 1,716 1,087 0 2,321 443 926 Commercial banks 808 2,010 2,046 2,893 1,803 2,645 4,132 5,159 3,018 1,638 2,016 1,557 Other private 1,335 1,271 1,312 2,117 2,996 3,803 3,143 3,175 2,440 3,201 4,068 3,510 Private non-guranteed long-term debt 0 0 0 0 0 0 0 207 3,027 8,730 9,127 8,064 Total long-term repayments due 3,319 4,123 5,213 6,729 6,343 9,070 10,260 11,527 11,209 19,835 19,925 16,643 IMF repurchases 490 451 0 0 0 0 0 0 0 0 0 0 Total long-term repayment & IMF repurchas 3,809 4,574 5,213 6,729 6,343 9,070 10,260 11,527 11,209 19,835 19,925 16,643 NET FLOWS Official creditors 1,727 2,044 2,343 4,615 3,117 7,902 4,401 4,315 2,288 3,387 1,497 2,156 of which IDA 507 611 777 865 671 798 791 687 554 407 314 224 of which IBRD 376 538 357 732 1,066 1,107 943 1,211 1,078 788 950 663 COMMITMENTS IBRD commitments 0 602 1,578 2,155 2,145 2,370 2,490 2,490 2,323 1,674 1,673 788 of which fast disbursing 0 0 0 0 0 0 0 0 0 0 0 0 IDA commitments 590 978 949 1,017 925 630 480 325 293 423 0 0 of which fast disbursing 0 0 0 0 0 0 0 0 0 0 0 0 Source : World Bank: World Debt Tables. 99 Table 12: External Debt: Interest and Debt Outstanding (Millions of US dollars) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 INTEREST DUE Public & publicly guaranteed long-term debt 2,534 2,953 2,708 2,618 3,818 4,624 4,631 5,498 4,612 3,692 4,075 4,244 Official creditors 531 635 678 827 1,131 1,288 1,310 1,785 1,813 1,935 2,387 2,575 Multilateral 226 263 319 377 480 619 684 730 817 965 1,518 1,808 of which IDA 19 23 29 34 41 49 52 56 59 64 65 64 of which IBRD 200 227 264 299 364 460 497 507 545 637 713 733 Bilateral 305 372 358 450 651 669 626 1,055 995 970 869 767 Private creditors 2,003 2,319 2,031 1,792 2,687 3,336 3,321 3,713 2,799 1,757 1,688 1,669 Bonds 367 356 337 286 363 594 506 568 397 483 521 690 Commercial banks 959 1,071 776 738 1,034 1,333 1,351 1,441 983 274 222 202 Other private 677 892 918 768 1,290 1,409 1,464 1,704 1,419 1,000 945 777 Private non-guaranteed long-term debt 0 0 0 12 26 33 53 55 963 2,195 1,924 1,916 Interest arrears 0 0 0 0 0 0 0 0 0 0 0 0 Reduction in arrears (-) 0 0 0 0 0 0 0 0 0 0 0 0 Total long-term interest due 2,534 2,954 2,708 2,630 3,844 4,657 4,685 5,553 5,575 5,887 5,999 6,160 IMF service charges 65 24 0 0 0 0 0 0 0 0 0 0 Interest on short-term debt 649 754 697 809 948 1,340 812 1,365 1,651 1,140 1,168 1,495 Total interest due 3,248 3,732 3,405 3,439 4,792 5,997 5,497 6,918 7,226 7,027 7,167 7,655 DEBT OUTSTANDING AND DISBURSED (DOD) Public & publicly guaranteed long-term debt 45,515 49,479 58,463 70,076 82,391 94,675 102,260 112,821 99,424 99,217 94,837 91,706 Official creditors 14,514 17,073 19,105 24,339 28,973 36,982 39,433 39,755 45,146 50,444 50,367 50,494 Multilateral 6,111 7,576 8,614 10,690 13,588 16,302 17,695 18,973 22,283 23,856 25,788 26,790 of which IDA 3,016 3,672 4,286 5,160 6,097 7,038 7,579 7,830 8,693 8,907 8,771 8,654 of which IBRD 2,865 3,494 3,752 4,549 5,933 7,209 7,616 8,239 9,644 10,400 11,118 11,550 Bilateral 8,403 9,497 10,491 13,650 15,385 20,680 21,737 20,782 22,862 26,588 24,579 23,704 Private creditors 31,001 32,406 39,358 45,737 53,418 57,693 62,828 73,066 54,278 48,774 44,470 41,212 Bonds 5,425 5,660 5,449 7,715 11,087 10,684 11,106 12,616 13,941 11,029 11,371 11,852 Commercial banks 14,520 14,963 17,913 20,678 21,475 23,869 24,437 34,873 24,400 13,485 10,622 6,762 Other private 11,056 11,783 15,996 17,344 20,856 23,140 27,285 25,577 15,937 24,260 22,477 22,598 Private non-guaranteed long-term 0 0 200 556 583 1,090 1,150 2,412 27,243 37,688 37,789 36,751 Total long-term DOD 45,515 49,479 58,663 70,632 82,974 95,764 103,410 115,233 126,667 136,905 132,626 128,457 Use of IMF credit 469 0 0 0 0 0 0 0 0 0 0 0 Short-term debt 9,317 10,780 13,765 15,296 17,483 22,326 25,407 31,464 17,340 15,180 13,080 41,680 Total external debt 55,301 60,259 72,428 85,928 100,457 118,090 128,817 146,697 144,007 152,085 145,706 170,137 MEMORANDUM ITEMS % Debt on concessional terms 21 21 20 19 19 19 18 16 21 22 21 20 % Debt at variable interest rates 36 33 28 29 28 30 30 39 49 44 47 46 % Bilateral debt on concessional terms 13 11 10 12 12 11 11 9 14 15 14 13 % Multilateral debt on concessional terms 6 6 6 8 8 8 7 7 7 7 7 7 Preferred creditor debt service 17 12 7 7 8 8 7 8 Source : World Bank, World Debt Tables. 100 Table 13: Domestic Debt (Billions of RMB) Year Type Amount Repayment issued issued period 2003 2004 2005 2006 2007 2008 2009 2010 2011 2014 2016 2017 2021 2032 1995 Treasury bonds 151.1 1-5 years 1996 Treasury bonds 212.6 0.5-10 years 1997 Treasury bonds 241.2 2-10 years 1998 Treasury bonds 380.9 3-10 years 1999 Treasury bonds 401.5 2-10 years 2000 Treasury bonds 465.7 1-10 years 2001 Treasury bonds 488.4 3-20 years 2002 Treasury bonds 593.4 TOTAL AMOUNT MATURING Issued to 287.5 298.3 271.3 173.0 218.8 170.0 221.4 112.0 80.0 20.0 69.3 24.0 40.0 26.0 Treasury bonds Households 241.0 209.1 192.2 133.0 102.6 100.0 95.4 14.0 20.0 Treasury bonds General public 36.8 22.4 32.0 80.5 40.0 20.0 24.0 24.0 Treasury bonds Financial institutions 46.5 52.4 79.1 40.0 93.8 38.0 45.5 98.0 20.0 20.0 49.3 16.0 26.0 Source : Quarterly Statistical Bulletin, People's Bank of China (PBOC) 101 Table 14: Monetary Survey 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Billions of RMB, end of period) Net foreign assets 222 506 637 952 1,422 1,557 1,749 2,052 2,669 3,191 Domestic credit 3,301 4,124 5,094 6,137 7,525 9,226 10,461 12,120 12,959 16,890 Claims on government (net) 118 131 165 216 159 483 586 586 1,098 1,330 Claims on other sectors 3,183 3,993 4,929 5,920 7,366 8,743 9,875 11,534 11,861 15,561 Money plus quasi-money (broad money) 3,330 4,483 5,825 7,361 8,897 10,230 11,764 13,249 15,289 18,325 Money 1,628 2,054 2,399 2,851 3,483 3,895 4,584 5,315 5,987 7,088 Currency 586 729 789 880 1,018 1,120 1,346 1,465 1,569 1,728 Demand deposits 1,042 1,325 1,610 1,971 2,465 2,775 3,238 3,849 4,418 5,360 Quasi-money 1,702 2,429 3,426 4,510 5,414 6,334 7,180 7,934 9,302 11,236 (Twelve-month Percentage Change) Domestic credit 42 25 24 20 23 23 13 16 7 30 Claims on Central government (net) 17 11 26 31 -26 203 21 0 87 21 Claims on other sectors 43 25 23 20 24 19 13 17 3 31 Money and quasi-money (broad money) 37 35 30 26 21 15 15 13 15 20 of which: currency 35 24 8 12 16 10 20 9 7 10 Source : PBOC. 102 Table 15: Banking Surveya (Billions of RMB, end of period) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Net foreign assets 222 506 637 921 1,366 1,504 1,703 2,012 2,642 3,175 Domestic credit 3,481 4,310 5,333 6,641 7,868 9,442 10,585 11,724 12,556 17,262 Claims on Government(net) 118 133 167 218 162 484 588 588 1,102 1,333 Claims on nonfinancial sectors 3,363 4,177 5,167 6,423 7,706 8,958 9,993 11,137 11,454 14,302 Money & Quasi-money 3,488 4,691 6,075 17,610 9,100 10,450 11,990 13,461 15,830 18,501 Money 1,628 2,053 2,399 12,852 3,483 3,895 4,584 5,315 5,987 7,088 Currency in circulation 586 728 789 880 1,018 1,120 1,346 1,465 1,569 1,728 Demand deposits 1,042 1,325 1,610 11,971 2,465 2,775 3,238 3,850 4,418 5,360 Quasi-money 1,860 2,638 3,676 4,758 5,617 6,554 7,406 8,146 9,843 11,413 Time deposits 125 194 332 504 674 830 948 1,126 1,418 1,643 Savings deposits 1,520 2,152 2,966 3,852 4,628 5,341 5,962 6,433 7,376 8,691 Other deposits 215 292 378 402 315 384 496 587 1,049 1,078 (Twelve-month change, in percent) Domestic credit ... 24 24 25 18 20 12 11 7 37 Money & Quasi-money ... 34 30 190 -48 15 15 12 18 17 Money ... 26 17 436 -73 12 18 16 13 18 Quasi-money ... 42 39 29 18 17 13 10 21 16 Currency in circulation ... 24 8 12 16 10 20 9 7 10 aIncludes the operations of PBOC, the deposit money banks, and other banks (or specific depository institutions). and later include, in addition, operations of two policy banks (the Export-Import Bank and the State Development Bank). *As the statistical adjustments, data from 1997 onwards are not comparable with historical ones. Source: Quarterly Statistical Bulletin, PBOC. 103 Table 16: Balance Sheets of Urban Credit Cooperatives (Billions of RMB, end of period) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002b Total Assets 118 215 304 375 499 561 630 678 780 88 Foreign assets (net) 0 0 0 0 0 0 0 0 0 0 Reserve assets 33 50 68 78 100 98 104 109 105 16 Required reserves 13 23 33 39 53 91 94 99 98 15 Deposits with the PBC 18 21 28 34 41 Cash in vault 2 3 5 4 7 7 10 9 7 1 Central bank bonds 0 2 2 0 0 0 0 0 0 0 Claims on central government 7 7 10 10 25 39 50 62 89 4 Claims on non-financial institutions 78 144 207 263 352 401 446 470 550 68 Claims on other financial institutions 0 14 19 24 22 23 29 39 37 1 Total Liablilities 118 214 304 375 499 561 630 678 780 109 Liabilities to non-financial institutions 134 235 336 400 538 608 664 679 781 101 Demand deposits 62 100 117 117 223 258 297 348 405 33 Time deposits 7 20 41 47 63 68 73 79 102 10 Savings deposits 38 73 126 183 242 272 282 240 251 55 Other deposits 27 42 52 52 10 10 12 12 23 2 Liabilities to central bank 2 3 3 3 4 4 14 31 32 4 Liabilities to other non-financial institutions 0 4 6 18 14 12 15 18 7 0 Bonds 0 0 0 0 0 0 0 0 0 Owners' equity 8 16 20 21 Paid-in capital 8 11 14 16 25 27 31 32 36 4 Other items (net)a -27 -45 -61 -67 -83 -91 -95 -82 -76 0 aIn keeping with the authorities' presentation, "other items, net" is shown as a negative entry on the liabilities side, rather than a positive entry on the assets side and does not net out bonds and owners' equity. bStarting from 2002, the statistics of Urban Credit Cooperatives exclude Urban Commercial Banks and are not comparable with the historical data. Source: Quarterly Statistical Bulletin, PBOC. 104 Table 17: Balance Sheets of Rural Credit Cooperatives (Billions of RMB, end of period) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002b Total Assets 375 505 679 871 1,012 1,143 1,239 1,393 1,611 1,848 Foreign assets (net) 0 0 0 0 0 0 0 0 0 0 Reserve assets 61 88 122 194 224 221 213 223 258 285 Required reserves 51 67 88 71 125 199 183 191 227 250 Deposits with the PBC 1 9 19 107 80 Cash in vault 9 12 16 16 20 21 30 33 32 35 Central bank bonds 0 0 0 0 0 0 0 0 0 0 Claims on central government 0 0 34 41 19 38 46 50 74 92 Claims on non-financial institutions 314 417 523 636 766 881 977 1,116 1,274 1,467 Claims on other financial institutions 0 0 0 0 3 3 3 4 4 3 Total Liabilities 375 506 679 871 1,012 1,143 1,239 1,393 1,611 2,115 Liabilities to nonfinancial sector 430 568 717 879 1,061 1,216 1,336 1,513 1,727 1,967 Demand deposits 68 81 89 101 126 145 180 229 271 327 Time deposits 4 6 9 12 16 21 26 39 59 77 Savings deposits 358 482 620 767 913 1,044 1,122 1,236 1,382 1,541 Other deposits 0 0 0 0 5 7 8 10 15 18 Liabilities to central bank 0 0 0 0 2 4 21 40 69 99 Liabilities to nonmonetary financial institutions 0 0 0 0 0 0 0 0 0 0 Bonds 0 0 0 0 0 0 0 0 0 0 Owners' equity 41 62 63 55 Paid-in capital 41 69 38 40 63 66 65 72 79 49 Other items (net)a -96 -124 -101 -63 -114 -144 -184 -232 -264 0 aIn keeping with the authorities' presentation, "other items, net" is shown as a negative entry on the liabilities side, rather than a positive entry on the assets side and does not net out bonds and owners' equity. bSince 2002, some rural commercial banks have been established on the basis of former rural credit cooperatives. This sheet does not include rural commercial banks. Therefore the data of 2002 are not comparable with historical data. Source: Quarterly Statistical Bulletin, PBOC. 105 Table 18: Consolidated Government Revenuea, b (Billions of RMB) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total revenue 367.2 392.8 476.0 558.4 651.6 770.4 902.0 1,020.9 1,173.4 1,367.4 1,668.6 1,917.4 Tax revenue 299.0 329.7 425.5 512.7 603.8 691.0 823.4 926.3 1,068.3 1,258.2 1,530.1 1,763.2 Taxes on income and profits 82.1 81.1 80.5 101.2 128.7 153.0 155.6 157.1 192.4 260.7 391.2 440.8 Enterprises income tax 73.1 72.1 67.9 70.9 87.8 96.8 94.7 92.6 121.6 166.2 263.1 300.9 State enterprises 62.7 62.5 58.3 61.0 75.9 82.2 79.4 74.4 63.9 82.7 .. Collectives 10.4 9.6 9.6 9.9 11.9 14.6 16.9 18.2 17.2 17.2 .. Others .. .. .. .. .. .. .. 0.0 40.5 66.2 .. Personal income tax (other) .. .. .. 7.2 13.1 19.3 26.0 33.9 41.4 66.0 99.5 107.9 Agricultural income tax 9.0 9.0 12.6 23.1 27.8 36.9 39.6 30.6 29.5 28.5 28.6 32.0 Taxes on goods and services 159.9 205.8 286.8 346.5 400.9 463.6 528.2 601.8 637.2 877.2 1,000.3 1,111.8 Product tax (Consumption tax) 62.9 69.3 82.1 48.7 54.1 62.0 67.4 81.5 82.1 85.8 93.0 97.0 Value added tax 40.6 70.6 108.1 230.8 260.2 296.3 328.4 362.8 388.2 455.3 535.7 616.8 Business tax 56.4 65.9 96.6 67.0 86.6 105.3 132.4 157.5 166.9 186.9 206.4 232.0 VAT and excises on imports 149.2 165.2 166.0 Customs tax 18.7 21.3 25.6 27.3 29.2 30.2 31.9 31.3 56.2 75.1 84.1 70.4 Other taxes 38.3 21.5 32.6 37.7 45.0 44.2 107.7 136.1 182.5 45.2 54.5 140.1 of which construction tax 3.1 3.2 3.8 4.3 5.3 6.2 7.8 10.8 13.0 4.6 1.6 0.0 Nontax revenue 68.2 63.1 50.5 45.7 47.8 79.4 78.6 94.6 105.1 109.3 138.5 154.2 GNP in current prices 2,166.3 2,665.2 3,456.1 4,667.0 5,749.5 6,685.1 7,355.1 7,696.7 8,057.9 8,825.4 9,572.8 10,355.4 aAccording to the definition contained in IMF, Manual on Government Finance Statistics (GFS), 1986. bThis includes all government revenue, with the exception of extrabudgetary receipts of the various levels of government. Source : IMF; China Statistical Yearbook. 106 Table 19: Central Government Revenue (Billions of RMB) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total revenuea 166.5 171.7 166.9 353.5 423.2 434.0 492.7 556.3 649.9 758.7 917.4 1064.6 Tax revenue 78.1 85.4 88.4 283.2 320.5 346.1 423.2 482.4 574.8 689.3 833.9 991.7 Taxes on income and profits 44.7 48.3 47.0 41.7 52.8 56.6 42.5 39.7 59.3 76.0 122.4 223.3 Enterprises income tax 44.7 48.3 47.0 41.7 52.8 56.6 42.5 39.7 59.2 61 94.5 169.3 Personal income tax (other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 15.0 27.9 54.0 Taxes on goods and services 36.76 31.6 40.6 256.3 291 333.4 381 432.6 496 600.6 681.3 748.6 Product tax (Consumption tax) 18.38 15.8 20.3 48.7 54.2 62.0 67.9 81.5 82.1 85.8 93 97 Value added tax 14.6 11.8 12.8 172.8 194.8 222.0 246 272.0 290.8 341.3 401.6 462.6 Business tax 3.7 4.0 7.5 2.3 3.7 4.6 16.3 23.5 21.5 24.3 21.5 23 VAT and excises on imports 0.0 0.0 0.0 32.5 38.3 44.8 50.8 55.6 101.6 149.2 165.2 166 Tax rebate on exports -25.5 -26.6 -30.0 -45.0 -55.0 -82.8 -55.5 -43.6 -62.7 -105 -108 -100 Customs tax 18.7 21.3 25.7 27.3 29.2 30.2 31.95 31.3 56.2 75.1 84.1 74.0 Other taxes 3.4 10.8 5.1 2.9 2.5 8.7 23.3 22.4 26.0 42.6 54.1 45.8 Nontax revenue 39.4 30.4 18.5 13.3 41.7 27.5 9.1 14.2 15.3 9.5 24.4 12.9 Revenue submitted by local government 49.0 55.9 60.0 57.0 61.0 60.4 60.4 59.7 59.8 59.9 59.1 60.0 aThe subsidies to loss-making enterprises are included. Source : Finace Yearbook of China. 107 Table 20: Local Government Revenue (Billions of RMB) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total revenuea 310.2 354.3 445.2 526.4 558.0 707.1 755.4 855.9 992.0 1106.8 1380.0 1530.5 Tax revenue 221.0 244.3 337.1 229.5 283.3 344.9 400.2 443.8 493.5 568.9 696.3 656.4 Taxes on income and profits 28.4 23.8 20.9 29.2 35.1 40.3 53.8 52.9 93.8 156.2 240.2 185.6 Enterprises income tax 28.4 23.8 20.9 29.2 35.1 40.3 53.8 52.9 52.5 105.2 168.6 131.6 Personal income tax (other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 41.3 51.0 71.6 54.0 Taxes on goods and services 104.2 120.7 184.5 122.7 148.2 174.9 198.5 224.9 242.8 276.6 319.1 363.2 Value added tax 51.5 58.8 95.4 58.0 65.4 74.3 82.4 90.8 97.4 114 134.2 154.2 Business tax 52.7 61.9 89.1 64.7 82.8 100.6 116.1 134.1 145.4 162.6 184.9 209 Other taxes 88.4 99.8 131.7 77.6 100.0 129.7 147.9 166.0 156.9 136.1 137.0 107.6 Construction tax 3.1 3.2 3.8 4.3 5.4 6.2 7.8 10.8 13.0 4.6 1.6 0 Nontax revenue 33.7 50.3 53.6 58.0 72.0 89.9 69.5 79.9 89.8 71.4 83.5 140.9 Transfers from Central government 55.5 59.7 54.5 238.9 202.7 272.3 285.7 332.2 408.7 466.5 600.2 733.2 aThe subsidies to loss-making enterprises are included. Source : Finace Yearbook of China. 108 Table 21: Structure of Consolidated Government Revenue (Percentage of total revenue) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Tax revenue 81.4 83.9 89.4 91.8 92.7 89.7 91.3 90.7 91.0 92.0 91.7 92.0 Taxes on income and profits 22.4 20.6 16.9 18.1 19.8 19.9 17.3 15.4 16.4 19.1 23.4 23.0 Enterprises income tax 19.9 18.4 14.3 12.7 13.5 12.6 10.5 9.1 10.4 12.2 15.8 15.7 State enterprises 17.1 15.9 12.2 10.9 11.6 10.7 8.8 7.3 5.4 6.1 .. .. Collectives 2.8 2.4 2.0 1.8 1.8 1.9 1.9 1.8 1.5 1.3 .. .. Others .. .. .. .. .. .. .. 0.0 3.4 4.8 .. .. Personal income tax (other) .. .. .. 1.3 2.0 2.5 2.9 3.3 3.5 4.8 6.0 5.6 Agricultural income tax 2.5 2.3 2.6 4.1 4.3 4.8 4.4 3.0 2.5 2.1 1.7 1.7 Taxes on goods and services 43.5 52.4 60.2 62.1 61.5 60.2 58.6 58.9 54.3 64.2 59.9 58.0 Product tax 17.1 17.6 17.2 8.7 8.3 8.0 7.5 8.0 7.0 6.3 5.6 5.1 Value added tax 11.1 18.0 22.7 41.3 39.9 38.5 36.4 35.5 33.1 33.3 32.1 32.2 Business tax 15.4 16.8 20.3 12.0 13.3 13.7 14.7 15.4 14.2 13.7 12.4 12.1 VAT and excises on imports 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 10.9 9.9 8.7 Customs tax 5.1 5.4 5.4 4.9 4.5 3.9 3.5 3.1 4.8 5.5 5.0 3.7 Other taxes 10.4 5.5 6.8 6.8 6.9 5.7 11.9 13.3 15.6 3.3 3.3 7.3 Construction tax 0.8 0.8 0.8 0.8 0.8 0.8 0.9 1.1 1.1 0.3 0.1 0.0 Nontax revenue 18.6 16.1 10.6 8.2 7.3 10.3 8.7 9.3 9.0 8.0 8.3 8.0 Source: Table 19. 109 Table 22: Structure of Government Revenue (Percentage of GNP) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total revenue 17.0 14.7 13.8 12.0 11.3 11.5 12.3 13.3 14.6 15.5 17.4 18.5 Tax revenue 13.8 12.4 12.3 11.0 10.5 10.3 11.2 12.0 13.3 14.3 16.0 17.0 Taxes on income and profits 3.8 3.0 2.3 2.2 2.2 2.3 2.1 2.0 2.4 3.0 4.1 4.3 Enterprises income tax 3.4 2.7 2.0 1.5 1.5 1.4 1.3 1.2 1.5 1.9 2.7 2.9 State enterprises 2.9 2.3 1.7 1.3 1.3 1.2 1.1 1.0 0.8 0.9 .. .. Collectives 0.5 0.4 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 .. .. Others .. .. .. .. .. .. .. 0.0 0.5 0.8 .. .. Personal income tax (other) .. .. .. 0.2 0.2 0.3 0.4 0.4 0.5 0.7 1.0 1.0 Agricultural income tax 0.4 0.3 0.4 0.5 0.5 0.6 0.5 0.4 0.4 0.3 0.3 0.3 Taxes on goods and services 7.4 7.7 8.3 7.4 7.0 6.9 7.2 7.8 7.9 9.9 10.4 10.7 Product tax 2.9 2.6 2.4 1.0 0.9 0.9 0.9 1.1 1.0 1.0 1.0 0.9 Value added tax 1.9 2.6 3.1 4.9 4.5 4.4 4.5 4.7 4.8 5.2 5.6 6.0 Business tax 2.6 2.5 2.8 1.4 1.5 1.6 1.8 2.0 2.1 2.1 2.2 2.2 VAT and excises on imports 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.7 1.7 1.6 Customs tax 0.9 0.8 0.7 0.6 0.5 0.5 0.4 0.4 0.7 0.9 0.9 0.7 Other taxes 1.8 0.8 0.9 0.8 0.8 0.7 1.5 1.8 2.3 0.5 0.6 1.4 Construction tax 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.0 0.0 Nontax revenue 3.1 2.4 1.5 1.0 0.8 1.2 1.1 1.2 1.3 1.2 1.4 1.5 Source: Table 19; Table 1. 110 Table 23: Structure of Central Government Revenue (Percentage of GNP) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total revenuea 7.7 6.4 4.8 7.6 7.4 6.5 6.7 7.2 8.1 8.6 9.6 10.3 Tax revenue 3.6 3.2 2.6 6.1 5.6 5.2 5.8 6.3 7.1 7.8 8.7 9.6 Taxes on income and profits 2.1 1.8 1.4 0.9 0.9 0.8 0.6 0.5 0.7 0.9 1.3 2.2 Enterprises income tax 2.1 1.8 1.4 0.9 0.9 0.8 0.6 0.5 0.7 0.7 1.0 1.6 Personal income tax (other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.3 0.5 Taxes on goods and services 1.7 1.2 1.2 5.5 5.1 5.0 5.2 5.6 6.2 6.8 7.1 7.2 Product tax (Consumption tax) 0.8 0.6 0.6 1.0 0.9 0.9 0.9 1.1 1.0 1.0 1.0 0.9 Value added tax 0.7 0.4 0.4 3.7 3.4 3.3 3.3 3.5 3.6 3.9 4.2 4.5 Business tax 0.2 0.2 0.2 0.0 0.1 0.1 0.2 0.3 0.3 0.3 0.2 0.2 VAT and excises on imports 0.0 0.0 0.0 0.7 0.7 0.7 0.7 0.7 1.3 1.7 1.7 1.6 Tax rebate on exports -1.2 -1.0 -0.9 -1.0 -1.0 -1.2 -0.8 -0.6 -0.8 -1.2 -1.1 -1.0 Customs tax 0.9 0.8 0.7 0.6 0.5 0.5 0.4 0.4 0.7 0.9 0.9 0.7 Other taxes 0.2 0.4 0.1 0.1 0.0 0.1 0.3 0.3 0.3 0.5 0.6 0.4 Nontax revenue 1.8 1.1 0.5 0.3 0.7 0.4 0.1 0.2 0.2 0.1 0.3 0.1 Revenue submitted by local government 2.3 2.1 1.7 1.2 1.1 0.9 0.8 0.8 0.7 0.7 0.6 0.6 aThe subsidies to loss-making enterprises are included. Source : Finace Yearbook of China. 111 Table 24: Structure of Local Government Revenue (Percentage of GNP) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total revenuea 14.3 13.3 12.9 11.3 9.7 10.6 10.3 11.1 12.3 12.5 14.4 14.8 Tax revenue 10.2 9.2 9.8 4.9 4.9 5.2 5.4 5.8 6.1 6.4 7.3 6.3 Taxes on income and profits 1.3 0.9 0.6 0.6 0.6 0.6 0.7 0.7 1.2 1.8 2.5 1.8 Enterprises income tax 1.3 0.9 0.6 0.6 0.6 0.6 0.7 0.7 0.7 1.2 1.8 1.3 Personal income tax (other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.6 0.7 0.5 Taxes on goods and services 4.8 4.5 5.3 2.6 2.6 2.6 2.7 2.9 3.0 3.1 3.3 3.5 Value added tax 2.4 2.2 2.8 1.2 1.1 1.1 1.1 1.2 1.2 1.3 1.4 1.5 Business tax 2.4 2.3 2.6 1.4 1.4 1.5 1.6 1.7 1.8 1.8 1.9 2.0 Other taxes 4.1 3.7 3.8 1.7 1.7 1.9 2.0 2.2 1.9 1.5 1.4 1.0 Construction tax 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.0 0.0 Nontax revenue 1.6 1.9 1.6 1.2 1.3 1.3 0.9 1.0 1.1 0.8 0.9 1.4 Transfers from Central government 2.6 2.2 1.6 5.1 3.5 4.1 3.9 4.3 5.1 5.3 6.3 7.1 aThe subsidies to loss-making enterprises are included. Source : Finace Yearbook of China. 112 Table 25: Structure of Government Expenditure 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Billions of RMB) Total expenditure and net lending 389.7 418.8 501.3 615.9 746.5 875.9 1039.5 1258.7 1505.2 1690.9 1957.9 2227.13 Current expenditure 315.6 340.8 400.0 510.4 618.2 721.3 857.4 985.8 1123.8 1316.1 1563.6 1738 Administration 34.4 42.5 53.6 72.9 87.3 104.1 113.7 132.7 152.6 178.8 219.75 289.6 Defense 33.0 37.8 42.6 55.1 63.7 72.0 81.3 93.5 107.6 120.8 144.2 170.8 Culture, education, public health, science & broadcasting 70.8 79.3 95.8 127.8 146.7 170.4 190.4 215.4 240.8 273.7 336.1 397.2 Economic services 33.4 37.8 44.8 56.5 59.9 69.9 77.0 83.1 88.9 100.5 121.7 142.4 Geological survey 3.8 4.4 4.9 6.4 6.6 6.9 7.3 8.3 8.4 8.8 9.9 10.3 Agriculture 24.4 26.9 32.3 40.0 43.0 51.0 56.1 62.6 67.7 76.7 91.8 108.8 Operating expenditure for industry, communication & commerce 5.2 6.5 7.6 10.1 10.3 12.0 13.6 12.2 12.8 15.0 20 23.3 Social welfare relief 6.7 6.6 7.5 9.5 11.5 12.8 14.2 17.1 18.0 21.3 26.7 36.8 Subsidies 88.4 76.7 71.0 68.0 69.3 79.1 92.1 104.5 98.8 132.1 104.2 90.7 Daily living necessities 37.4 32.2 29.9 31.4 36.5 45.4 55.2 71.2 69.8 104.2 74.2 64.8 Loss-making enterprises 51.0 44.5 41.1 36.6 32.8 33.7 36.9 33.3 29.0 27.9 30 25.9 Other 48.9 60.1 84.7 120.6 179.8 213.0 288.7 339.5 417.1 488.9 611.0 610.5 Capital expenditure 74.1 78.0 101.3 105.5 128.3 154.6 182.1 272.9 381.4 374.8 394.3 489.13 Capital construction 56.0 55.6 59.2 64.0 78.9 90.7 102.0 138.8 211.7 209.5 251.1 311.19 Development of the productive capacity of existing enterprises 18.1 22.4 42.1 41.5 49.4 52.3 64.3 64.1 76.6 86.5 99.2 95.71 (Percentage of GNP) Memorandum items: Current expenditure 14.6 12.8 11.6 10.9 10.8 10.8 11.7 12.8 13.9 14.9 16.3 16.8 Subsidies 4.1 2.9 2.1 1.5 1.2 1.2 1.3 1.4 1.2 1.5 1.1 0.9 Daily living necessities 1.7 1.2 0.9 0.7 0.6 0.7 0.8 0.9 0.9 1.2 0.8 0.6 Loss-making enterprises 2.4 1.7 1.2 0.8 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.3 Capital expenditure 3.4 2.9 2.9 2.3 2.2 2.3 2.5 3.5 4.7 4.2 4.1 4.7 (Percentage of total expenditure) Subsidies 22.7 18.3 14.2 11.0 9.3 9.0 8.9 8.3 6.6 7.8 5.3 4.1 Capital expenditure 19.0 18.6 20.2 17.1 17.2 17.7 17.5 21.7 25.3 22.2 20.1 22.0 Source: IMF; China Statistical Yearbook. 113 Table 26: Structure of Central Government Expenditure 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Billions of RMB) Total expenditure 132.7 133.9 137.3 181.2 236.8 270.7 342.1 465.6 577.8 594.6 589.6 696.6 Current expenditure 90.0 93.3 96.3 134.5 185.6 206.8 266.4 319.8 356.8 394.7 435.0 458.1 Administration 3.1 3.7 4.4 5.8 7.0 7.2 7.6 9.1 58.8 2.9 3.9 4.9 Defense 33.0 37.8 42.6 55.1 63.7 72.0 81.3 92.9 106.8 119.9 143.0 170.8 Culture, education, public health, science & broadcasting 8.4 9.1 10.4 13.8 14.6 16.1 18.7 24.1 25.8 28.6 36.0 64.8 Economic services 16.8 19.8 18.4 16.3 14.9 14.8 Geological survey 3.8 4.4 4.9 6.4 6.5 6.8 7.2 8.2 7.6 4.4 3.0 2.9 Agriculture 2.3 2.7 3.2 4.5 4.6 5.5 5.6 6.9 6.8 7.7 7.7 7.7 Operating expenditure for industry, communication & commerce 1.5 2.1 2.4 3.7 3.5 3.7 4.0 4.7 4.0 4.2 4.2 4.2 Social welfare relief 0.0 0.0 0.0 0.1 0.0 0.1 0.1 0.6 0.2 4.5 4.5 4.5 Subsidies 28.6 22.3 17.9 14.9 16.0 19.4 31.9 43.8 36.6 69.5 68.4 69.1 Daily living necessities 5.0 5.5 7.7 9.2 10.1 12.3 22.3 36.4 31.4 64.6 64.6 64.6 Loss-making enterprises 23.6 16.8 10.2 5.7 5.9 7.1 9.6 7.4 5.2 4.9 3.8 4.5 Other 16.9 20.4 21.0 44.8 84.3 92.0 110.0 129.5 110.2 153.0 164.3 129.3 Capital expenditure 42.7 40.6 41.0 46.7 51.2 63.9 75.7 145.8 221.0 199.9 154.6 238.5 Capital construction 36.6 33.2 31.0 34.7 37.8 39.8 43.6 61.0 105.5 100.2 100.2 100.2 Development of the productive capacity of existing enterprises 6.1 7.4 10.0 12.0 13.4 12.5 16.3 14.8 22.4 24.7 24.7 24.7 (Percentage of GNP) Memorandum items: Current expenditure 4.2 3.5 2.8 2.9 3.2 3.1 3.6 4.2 4.4 4.5 4.5 4.4 Subsidies 1.3 0.8 0.5 0.3 0.3 0.3 0.4 0.6 0.5 0.8 0.7 0.7 Daily living necessities 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.5 0.4 0.7 0.7 0.6 Loss-making enterprises 1.1 0.6 0.3 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.0 Capital expenditure 2.0 1.5 1.2 1.0 0.9 1.0 1.0 1.9 2.7 2.3 1.6 2.3 (Percentage of total expenditure) Subsidies 21.6 16.7 13.0 8.2 6.8 7.2 9.3 9.4 6.3 11.7 11.6 9.9 Capital expenditure 32.2 30.3 29.9 25.8 21.6 23.6 22.1 31.3 38.2 33.6 26.2 34.2 Source: IMF; China Statistical Yearbook. 114 Table 27: Structure of Local Government Expenditure 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Billions of RMB) Total expenditure 257.0 284.9 364.0 434.7 509.7 605.2 697.4 793.1 927.4 1096.3 1368.3 1530.5 Current expenditure 225.6 247.5 303.7 375.9 432.6 514.5 591.0 666.0 767.0 921.4 1128.6 1279.9 Administration 31.3 38.8 49.2 67.1 80.3 96.9 106.1 123.6 93.8 165.9 118.2 129.1 Defense 0.6 0.8 0.9 1.2 Culture, education, public health, science & broadcasting 62.4 70.2 85.4 114.0 132.1 154.3 171.7 191.3 215.0 245.1 300.1 332.4 Economic services 25.9 28.6 34.3 41.9 45.3 53.9 60.2 63.3 70.5 82.0 101.4 112.1 Geological survey 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.8 4.4 6.9 7.4 Agriculture 22.1 24.2 29.1 35.5 38.4 45.5 50.5 55.7 60.9 66.8 80.6 89.4 Operating expenditure for industry, communication & commerce 3.8 4.4 5.2 6.4 6.9 8.3 9.7 7.5 8.8 10.8 13.9 15.3 Social welfare relief 6.7 6.6 7.5 9.4 11.5 12.7 14.1 16.5 17.8 21.1 26.5 28.9 Subsidies 59.8 54.4 53.1 53.1 53.3 59.7 60.2 60.7 62.2 63.4 70.5 67.9 Daily living necessities 32.4 26.7 22.2 22.2 26.4 33.1 32.9 34.8 38.4 40.4 44.3 46.5 Loss-making enterprises 27.4 27.7 30.9 30.9 26.9 26.6 27.3 25.9 23.8 23.0 26.2 21.4 Other 39.6 48.9 74.2 90.4 110.1 137.0 178.7 210.0 306.9 343.0 510.7 609.5 Capital expenditure 31.4 37.4 60.3 58.8 77.1 90.7 106.4 127.1 160.4 174.9 239.7 250.6 Capital construction 19.4 22.4 28.2 29.3 41.1 50.9 58.4 77.8 106.2 114.2 165.5 168 Development of the productive capacity of existing enterprises 12.0 15.0 32.1 29.5 36.0 39.8 48.0 49.3 54.2 60.7 74.2 82.6 (Percentage of GNP) Memorandum items: Current expenditure 10.4 9.3 8.8 8.1 7.5 7.7 8.0 8.7 9.5 10.4 11.8 12.4 Subsidies 2.8 2.0 1.5 1.1 0.9 0.9 0.8 0.8 0.8 0.7 0.7 0.7 Daily living necessities 1.5 1.0 0.6 0.5 0.5 0.5 0.4 0.5 0.5 0.5 0.5 0.4 Loss-making enterprises 1.3 1.0 0.9 0.7 0.5 0.4 0.4 0.3 0.3 0.3 0.3 0.2 Capital expenditure 1.4 1.4 1.7 1.3 1.3 1.4 1.4 1.7 2.0 2.0 2.5 2.4 (Percentage of total expenditure) Subsidies 23.3 19.1 14.6 12.2 10.5 9.9 8.6 7.7 6.7 5.8 5.2 4.4 Capital expenditure 12.2 13.1 16.6 13.5 15.1 15.0 15.3 16.0 17.3 16.0 17.5 16.4 Source: IMF; China Statistical Yearbook. 115 Table 28: Budget and Its Financing 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Billions of RMB) Revenue 367.2 392.8 476.0 558.4 651.6 770.4 902.0 1,020.9 1,173.4 1,367.4 1,668.6 1,917.4 Expenditure 389.7 418.8 501.3 615.9 746.5 875.9 1,039.5 1,258.7 1,505.2 1,690.9 1,957.9 2,227.1 Deficit -22.5 -26.0 -25.3 -57.5 -94.9 -105.5 -137.5 -237.8 -331.8 -323.5 -289.3 -309.8 Financing 22.5 26.0 25.3 57.5 94.9 105.5 137.5 237.8 331.8 323.5 289.3 309.8 Domestic(net) 12.5 13.1 -1.6 53.6 70.9 85.9 116.7 190.9 285.0 309.7 282.2 301.8 Foreign(net) 10.0 12.9 26.9 4.0 24.0 19.6 20.8 46.9 46.8 13.8 7.1 8.0 (Percentage of GNP) Revenue 17.0 14.7 13.8 12.0 11.3 11.5 12.3 13.3 14.6 15.3 17.1 18.3 Expenditure 18.0 15.7 14.5 13.2 13.0 13.1 14.1 16.4 18.7 19.2 20.1 21.3 Deficit -1.0 -1.0 -0.7 -1.2 -1.7 -1.6 -1.9 -3.1 -4.1 -3.7 -3.0 -3.0 Financing 1.0 1.0 0.7 1.2 1.7 1.6 1.9 3.1 4.1 3.6 3.0 3.0 Domestic 0.6 0.5 0.0 1.1 1.2 1.3 1.6 2.5 3.5 3.5 2.9 2.9 Foreign 0.5 0.5 0.8 0.1 0.4 0.3 0.3 0.6 0.6 0.2 0.1 0.1 (Percentage of total deficit) Financing 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Domestic 55.6 50.4 -6.4 93.1 74.7 81.4 84.9 80.3 85.9 95.7 97.5 97.4 Foreign 44.4 49.6 106.4 6.9 25.3 18.6 15.1 19.7 14.1 4.3 2.5 2.6 Source: IMF. 116 Table 29: Production of Major Crops (Million tons) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total food grains 435.3 442.7 456.5 445.1 466.6 504.5 494.2 512.3 508.4 462.2 452.6 457.1 Rice 183.8 186.2 177.7 175.9 185.2 195.1 200.7 198.7 198.5 187.9 177.6 174.5 Wheat 96.0 101.6 106.4 99.3 102.0 110.6 123.3 109.7 113.9 99.6 93.9 90.3 Corn 98.8 95.4 102.7 99.3 112.0 127.5 104.3 133.0 128.1 106.0 114.1 121.3 Tuber 27.2 28.4 31.8 30.3 32.1 35.4 31.9 36.0 36.4 36.9 35.6 36.7 Total oil seeds 16.4 16.4 18.0 19.9 22.5 22.1 21.6 23.1 26.0 29.6 28.7 29.0 of which: Peanuts 6.3 6.0 8.4 9.7 10.2 10.1 9.7 11.9 12.6 14.4 14.4 14.8 Rapeseed 7.4 7.7 6.9 7.5 9.8 9.2 9.6 8.3 10.1 11.4 11.3 10.6 Cotton 5.7 4.5 3.7 4.3 4.8 4.2 4.6 4.5 3.8 4.4 5.3 4.9 Sugarcane 67.9 73.0 64.2 60.9 65.4 66.9 78.9 83.4 74.7 68.3 75.7 90.1 Beetroots 16.3 15.1 12.0 12.5 14.0 16.7 15.0 14.5 8.6 8.1 10.9 12.8 Cured tobacco 2.7 3.1 3.0 1.9 2.1 3.0 3.9 2.1 2.2 2.2 2.1 2.1 Fruits 21.8 24.4 30.1 35.0 42.1 46.5 50.9 54.5 62.4 62.3 66.6 69.5 Source: China Statistical Yearbook. 117 Table 30: Yield of Major Crops (By sown area, kg/hectare) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total food grains 3,930 3,870 4,004 4,131 4,063 4,239 4,483 4,377 4,502 4,493 4,261 4,267 4,399 Rice 5,730 5,640 5,803 5,848 5,831 6,025 6,212 6,319 6,366 6,345 6,272 6,163 6,189 Wheat 3,195 3,105 3,331 3,519 3,426 3,533 3,734 4,102 3,685 3,947 3,738 3,806 3,777 Corn 4,530 4,575 4,533 4,963 4,694 4,916 5,203 4,387 5,268 4,945 4,598 4,699 4,924 Soybeans 1,455 1,361 1,394 1,576 1,645 1,591 1,698 1,680 1,714 1,693 1,588 1,547 1,787 Tuber 3,015 2,985 3,141 3,450 3,264 3,374 3,609 3,262 3,604 3,516 3,497 3,487 3,710 Peanuts 2,190 2,190 2,000 2,492 2,564 2,687 2,804 2,592 2,943 2,961 2,973 2,888 3,011 Rapeseed 1,260 1,215 1,281 1,309 1,296 1,416 1,367 1,479 1,272 1,469 1,519 1,597 1,477 Cotton 810 870 660 750 785 879 890 1,025 1,009 1,028 1,093 1,107 1,175 Sugarcane 57,120 58,350 58,605 59,012 57,671 58,136 56,225 60,158 59,549 57,338 57,626 60,625 64,663 Beetroots 21,660 20,790 22,832 20,124 17,936 20,132 25,483 24,475 24,806 25,335 24,518 26,807 30,232 Cured tobacco 1,680 1,710 1,687 1,654 1,491 1,584 1,750 1,809 1,740 1,797 1,763 1,732 1,792 Source: China Statistical Yearbook. 118 Table 31: Gross Output Value of Industrial Enterprisesa 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Billions of RMB) Total 2,392.4 2,662.5 3,459.9 4,840.2 7,017.6 9,189.5 9,959.5 11,373.3 11,904.8 12,611.1 8,567.4 9,544.9 11,041.1 BY TYPE OF OWNERSHIP State-owned and state-controlb 1,306.4 1,495.5 1,782.4 2,272.5 2,620.1 3,122.0 3,617.3 3,596.8 3,362.1 3,557.1 4,055.4 4,240.9 4,610.3 Collective-owned 852.3 878.3 1,213.5 1,646.4 2,647.2 3,362.3 3,923.2 4,334.7 4,573.0 4,460.7 1,190.8 1,005.3 1,034.6 Individual-owned 129.0 128.7 200.6 386.1 708.2 1,182.1 1,542.0 2,037.6 2,037.2 2,292.8 Funded by foreigners, Hong Kong, Macao and Taiwan 1,072.2 1,211.7 1,439.9 1,775.0 2,007.8 2,346.5 2,722.1 3,192.8 BY TYPE OF INDUSTRY Light 1,181.3 1,288.7 1,612.3 2,250.7 3,249.1 4,346.6 4,793.2 5,570.1 5,867.3 6,179.4 3,409.5 3,763.7 4,320.3 Heavy 1,211.3 1,373.8 1,847.6 2,589.5 3,768.5 4,842.8 5,166.3 5,803.2 6,037.5 6,431.7 5,157.9 5,781.2 6,720.8 (Percentage of total) BY TYPE OF OWNERSHIP State-owned and state-controlb 54.6 56.2 51.5 46.9 37.3 34.0 36.3 31.6 28.2 28.2 47.3 44.4 41.8 Collective-owned 35.6 33.0 35.1 34.0 37.7 36.6 39.4 38.1 38.4 35.4 13.9 10.5 9.4 Individual-owned 5.4 4.8 5.8 8.0 10.1 12.9 15.5 17.9 17.1 18.2 Funded by foreigners, Hong Kong, Macao and Taiwan 11.7 12.2 12.7 14.9 15.9 27.4 28.5 28.9 BY TYPE OF INDUSTRY Light 49.4 48.4 46.6 46.5 46.3 47.3 48.1 49.0 49.3 49.0 39.8 39.4 39.1 Heavy 50.6 51.6 53.4 53.5 53.7 52.7 51.9 51.0 50.7 51.0 60.2 60.6 60.9 aData for 2000 onwards are not comparable with data of previous years, which only cover all state-owned industrial enterprises and non state-owned enterprises with an annual sales over 5 million yuan bData prior to 1996 only refer to state-owned enterprises. Source : China Statistical Yearbook. 119 Table 32: Output of Major Industrial Products Product 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Coal (million tons) 1,080 1,087 1,116 1,150 1,240 1,361 1,397 1,373 1,250 1,045 1,000 1,160 1,380 Crude oil (million tons) 138 141 142 145 146 150 157 161 161 160 163 165 167 Natural gas (billion cu m) 15 16 16 17 18 18 20 23 23 25 27 30 33 Electricity (billion kWh) 621 678 754 840 928 1,008 1,081 1,136 1,167 1,239 1,356 1,481 1,654 Hydro power 127 125 131 152 167 191 188 196 199 197 222 277 288 Steel (million tons) 66 71 81 90 93 95 101 109 116 124 129 152 182 Steel Products (million tons) 52 56 67 77 84 90 93 100 107 121 132 161 192 Cement (million tons) 210 253 308 368 421 476 491 512 536 573 597 661 725 Timber (million cu m) 56 58 62 64 66 68 67 64 60 52 47 46 50 Fertilizers (million tons) 19 20 20 20 23 26 28 28 30 33 32 34 38 (Growth rates) Coal 2 1 3 3 8 10 3 -2 -9 -16 -4 16 19 Crude oil 1 2 1 2 1 3 5 3 0 -1 2 1 1 Natural gas 2 5 -2 6 5 2 11 15 1 8 8 12 8 Electricity 6 9 11 11 11 9 7 5 3 6 9 9 12 Hydro power 7 -2 5 16 10 14 -1 4 2 -1 13 25 4 Steel 8 7 14 11 3 3 6 8 6 7 4 18 20 Rolled steel 6 9 19 15 9 7 4 8 7 13 9 22 20 Cement 0 20 22 19 14 13 3 4 5 7 4 11 10 Timber -4 4 6 3 4 3 -1 -4 -6 -13 -10 -3 11 Fertilizers 3 5 3 -4 16 12 10 0 6 10 -3 6 12 Source: China Statistical Yearbook. 120 Table 33: Total Wage Bill of Staff and Workers by Employment Category 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Billions of RMB Nominal) Total wage bill 295.1 332.4 393.9 491.6 665.6 810.0 908.0 940.5 929.7 987.6 1065.6 1183.1 1316.1 State-owned 232.4 259.5 309.0 381.3 517.7 608.0 679.3 721.1 681.3 716.1 761.3 835.6 894.86 Urban collectives 58.1 65.9 74.3 85.0 102.3 118.2 124.1 125.3 102.2 96.3 91.9 86.5 82.8 Other 4.6 7.0 10.6 25.4 45.6 83.8 104.6 94.1 146.2 175.2 212.4 261.1 338.4 (Percentage of total) Total wage bill 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 State-owned 78.8 78.1 78.5 77.6 77.8 75.1 74.8 76.7 73.3 72.5 71.4 70.6 68.0 Urban collectives 19.7 19.8 18.9 17.3 15.4 14.6 13.7 13.3 11.0 9.7 8.6 7.3 6.3 Other 1.6 2.1 2.7 5.2 6.8 10.3 11.5 10.0 15.7 17.7 19.9 22.1 25.7 (Nominal growth rates, Previous year = 100) Total wage bill 12.7 12.6 18.5 24.8 35.4 21.7 12.1 3.6 -1.2 6.2 7.9 11.0 11.2 State-owned 13.4 11.7 19.1 23.4 35.8 17.4 11.7 6.2 -5.5 5.1 6.3 9.8 7.1 Urban collectives 8.7 13.4 12.8 14.4 20.4 15.5 5.0 1.0 -18.5 -5.8 -4.5 -5.9 -4.3 Other 35.7 53.0 50.0 140.2 79.7 40.0 24.9 -10.0 55.4 19.8 21.3 22.9 29.6 (Real growth rates, Previous year = 100) Total wage bill 11.4 7.5 9.9 8.7 10.3 4.9 3.3 0.5 -0.6 7.5 7.1 7.1 12.0 State-owned 12.1 6.6 10.5 7.3 10.7 0.7 2.9 3.1 -4.9 6.4 5.5 5.5 7.9 Urban collectives 7.4 8.3 4.2 -1.7 -4.6 -1.3 -3.8 -2.1 -17.9 -4.5 -5.3 -5.3 -3.5 Other 34.4 48.0 41.4 124.1 54.6 23.2 10.5 20.6 56.0 21.1 20.4 20.4 30.4 Percentage share of wage bill in GDP 15.9 15.4 14.8 14.2 14.3 13.9 13.4 12.6 13.6 14.6 15.6 15.6 12.6 Note: 1. This table covers only the state-owned, collective and mixed ownership sectors. Private companies and the informal sector are excluded; 2. Payments to laid-off workers are included through 1997. The wage bill decrease in 1998 primarily represents the remoral of these payments from the total wage bill. Source: China Statistical Yearbook. 121 Table 34: Average Annual Wage by Sector and Ownership (RMB in current prices) Sector 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 By sector Total 2,140 2,340 2,711 3,371 4,538 5,500 6,210 6,470 7,479 8,346 9,371 10,870 12,422 Farming & forestry, etc. 1,541 1,652 1,828 2,042 2,819 3,522 4,050 4,311 4,528 4,832 5,184 5,741 6,398 Mining and quarrying 2,718 2,942 3,209 3,711 4,679 5,757 6,482 6,833 7,242 7,521 8,340 9,586 11,017 Manufacturing 2,073 2,289 2,635 3,348 4,283 5,169 5,642 5,933 7,064 7,794 8,750 9,774 11,001 Electric power, gas,and water 2,656 2,922 3,392 4,319 6,155 7,843 8,816 9,649 10,478 11,513 12,830 14,590 16,440 Geological survey 2,465 2,707 3,222 3,717 5,450 5,962 6,581 7,160 7,951 8,821 9,622 10,957 12,303 Construction 2,384 2,649 3,066 3,779 4,894 5,785 6,249 6,655 7,456 7,982 8,735 9,484 10,279 Transport & communications 2,426 2,686 3,114 4,273 5,690 6,948 7,870 8,600 9,808 10,991 12,319 14,167 16,044 Commerce & services etc. 1,818 1,981 2,204 2,679 3,537 4,248 4,661 4,845 5,865 6,417 7,190 8,192 9,398 Real estate 2,243 2,507 3,106 4,320 6,288 7,330 8,337 9,190 10,302 11,505 12,616 14,096 15,501 Social services 2,170 2,431 2,844 3,588 5,026 5,982 6,778 7,553 8,333 9,263 10,339 11,869 13,499 Health care, sports & welfare 2,209 2,370 2,812 3,413 5,126 5,860 6,790 7,599 8,493 9,664 10,930 12,933 14,795 Education, culture & arts etc. 2,117 2,243 2,715 3,278 4,923 5,435 6,144 6,759 7,474 8,510 9,482 11,452 13,290 Scientific research 2,403 2,573 3,115 3,904 6,162 6,846 8,048 9,049 10,241 11,601 13,620 16,437 19,113 Banking and insurance 2,097 2,255 2,829 3,740 6,712 7,376 8,406 9,734 10,633 12,046 13,478 16,277 19,135 Government agencies 2,113 2,275 2,768 3,505 4,962 5,526 6,340 6,981 7,773 8,978 10,043 12,142 13,975 Others 3,371 5,213 6,295 7,184 6,838 8,481 10,068 11,098 12,590 14,215 By ownership Total 2,140 2,340 2,711 3,371 4,538 5,500 6,210 6,470 7,479 8,346 9,371 10,870 12,422 State-owned units 2,284 2,477 2,878 3,532 4,797 5,625 6,280 6,747 7,668 8,543 9,552 11,178 12,869 Urban collective-owned units 1,681 1,866 2,109 2,592 3,245 3,931 4,302 4,512 5,331 5,774 6,262 6,867 7,667 Other types of ownership 2,987 3,468 3,966 4,966 6,303 7,463 8,261 8,789 8,972 9,829 10,984 12,140 13,212 Cooperative units 6,054 6,709 7,473 8,398 9,484 Joint ownership units 3,741 4,982 6,056 6,856 7,310 8,431 9,501 10,663 11,887 12,451 Limited liability corporations 7,750 8,632 9,766 10,993 11,997 Share-holding corporations Ltd. 5,171 6,383 7,277 7,623 7,693 8,833 9,720 11,131 12,385 13,850 Units with funds from Hong Kong, Macao & Taiwan 5,147 6,376 7,484 8,334 9,329 10,027 10,991 11,914 12,544 13,756 Foreign funded units 5,315 6,533 8,058 9,383 10,361 11,767 12,951 14,372 16,101 17,892 Others 3,279 4,954 6,494 7,131 7,063 6,133 8,425 10,223 11,621 .. Note: This table covers only the state-owned, collective and mixed ownership sectors. Private companies and the informal sector are excluded Source: China Statistical Yearbook. 122 Table 35: Indices of Average Annual Wage by Sector and Ownership Sector 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 By sector Total 100 104.6 111.5 119.5 126.1 131.5 135.8 138 160.5 181.5 202.1 233.0 268.2 Farming & forestry, etc. 100 102.5 104.4 100.5 108.8 116.9 123 127.7 135 145.9 155.3 170.9 191.8 Mining and quarrying 100 103.5 103.9 103.6 102.4 108.4 111.6 114.8 122.4 128.8 141.6 222.5 257.4 Manufacturing 100 105.6 111.9 122.5 122.8 127.6 127.4 130.7 156.5 174.9 194.8 216.2 245.2 Electric power, gas,and water 100 105.2 112.4 123.4 137.8 151.1 155.4 165.9 181.2 201.7 223 252.0 286.0 Geological survey 100 105 115 114.4 131.5 123.7 125 132.6 148.1 166.5 180.2 203.4 230.0 Construction 100 106.3 113.2 120.3 122.1 124.2 122.7 127.4 143.6 155.8 169.1 182.4 199.2 Transport & communications 100 105.9 113 133.6 139.5 146.5 151.8 161.8 185.7 210.8 234.4 267.9 305.4 Commerce & services etc. 100 104.2 106.7 111.8 115.7 119.5 120 121.7 148.2 164.2 182.6 206.8 240.9 Real estate 100 106.9 121.9 146.1 166.7 167.2 174 187 210.9 238.7 259.6 288.2 319.3 Social services 100 107.2 115.3 125.4 137.7 141 146.2 158.9 176.4 198.6 219.9 250.9 287.3 Health care, sports & welfare 100 102.6 112 117.2 138 135.7 143.9 157 176.6 203.6 228.4 268.7 309.5 Education, culture & arts etc. 100 101.3 112.9 117.5 138.3 131.4 135.8 145.8 162.2 187 206.8 248.3 290.0 Scientific research 100 102.4 114.1 123.2 152.5 145.8 156.8 171.9 195.7 224.6 261.6 313.9 367.6 Banking and insurance 100 102.9 118.7 135.3 190.3 180 187.6 211.9 232.9 267.3 296.7 356.2 421.7 Government agencies 100 103 115.3 125.8 139.6 133.8 140.4 150.8 169 197.7 219.4 263.7 305.6 Others 100.0 123.7 127.9 134.1 123.8 154.5 185.8 203.2 229.1 260.5 By ownership Total 100 105 112 120 126 132 136 138 161 182 202 233 268 State-owned units 100 103 110 117 127 127 131 136 156 176 195 226 263 Urban collective-owned units 100 106 110 116 116 121 122 124 147 161 174 189 213 Other types of ownership 100 110 116 125 127 129 131 136 139 155 171 188 207 Joint ownership units 100 106 111 115 119 138 158 176 195 204 Share-holding corporations Ltd. 100 99 96 93 91 105 117 133 147 164 Units with funds from Hong Kong, Macao & Taiwan 100 99 100 102 111 120 133 143 150 165 Foreign funded units 100 98 104 111 119 136 152 167 186 207 Others 100 121 136 137 132 115 160 192 217 191 Note: This table covers only the state-owned, collective and mixed ownership sectors. Private companies and the informal sector are excluded. Source: China Statistical Yearbook. 123 Table 36: Sectoral Average Annual Wage by Region in 2002 (RMB in current prices) Electric Transport power, & Commerce Health Education, Banking Mining & Manufactur gas,and Geological communica & services Real Social care, sports culture & Scientific and Government Total Agriculture quarrying ing water survey Construction tions etc. estate services & welfare arts etc. research insurance agencies Others Beijing 21852 13170 18039 17645 28111 23444 14455 26651 18476 22779 23022 30271 26287 30143 50189 26742 27983 Tianjing 16258 12505 19018 14237 22232 17023 15488 22203 13687 15589 14293 19681 16693 18755 22601 19019 12091 Hebei 10032 5003 12310 8800 15777 12861 7875 12884 6002 10338 9491 10963 10477 14764 13567 11181 9721 Shanxi 9357 7407 10446 7915 11024 8680 7921 13483 5175 8720 7351 9934 10550 12422 13088 10159 8418 Inner Mongolia 9683 6211 7440 8153 14776 9827 7201 12932 6272 9955 8047 11697 11655 12626 12741 12094 11715 Liaoning 11659 4976 11965 10511 16609 9986 9058 15359 9052 12505 10952 13068 12832 17144 18004 14126 11049 Jilin 9990 5055 8040 10195 14103 7985 7481 10662 5977 11194 10071 10903 11930 14566 13736 11750 11415 Heilongjiang 9926 5382 8329 8797 14398 16043 9034 12941 7644 10451 8785 12179 13089 13657 17052 12878 7974 Shanghai 23959 17184 22464 22083 29721 24851 21820 33110 21370 28474 18811 26476 24585 26710 37087 26199 23082 Jiangsu 13509 6974 12664 11520 22108 12418 11289 16060 9616 17290 14212 16343 15047 21464 20684 18453 13335 Zhejiang 18785 15967 12712 13298 27860 19686 14478 23970 16755 20796 16020 25149 22149 25987 25418 25080 19775 Anhui 9296 5799 10503 8356 11981 8490 7556 9770 5265 10020 8187 10911 10564 13124 12304 11795 9881 Fujian 13306 7548 9164 11396 18340 12560 12081 19409 11630 15823 12522 16173 14541 19266 21829 15277 15818 Jiangxi 9262 5195 7496 8314 10900 9638 8330 13104 6429 9655 8527 11286 10013 11272 12256 10535 10048 Shandong 11374 9031 15991 8763 16131 11692 9545 16291 6925 12982 10997 14519 12542 16964 17088 12933 11068 Henan 9174 5869 11030 7837 12750 14743 7825 12045 6890 9165 8268 10210 9297 13112 13152 9890 9110 Hubei 9611 4827 10273 8905 12464 9788 9253 11323 6754 9939 8526 10557 11343 14359 11925 11836 8785 Hunan 10967 5653 8740 9917 13895 9068 8934 13167 8899 11551 9820 13446 12193 14851 15881 11403 12119 Guangdong 17814 7684 10949 14701 23752 13993 13306 25783 14937 20564 19217 22032 18401 30202 29404 21769 17316 Guangxi 10774 6305 9625 9959 14716 9351 9054 14021 7290 10772 9543 12571 10796 14242 14709 13012 10272 Hainan 9480 4022 7490 9388 14480 7766 7235 16291 7737 12413 9517 14621 12672 11054 18493 13962 9457 Chongqing 10960 8072 8222 10214 13872 13090 8865 12444 8529 10570 9758 12197 11923 12280 19135 12766 12484 Sichuan 11183 8114 9866 9853 13506 13832 8444 13952 8033 11877 10621 13349 11766 18420 17603 13057 14541 Guizhou 9810 8446 9963 9326 16259 9268 7923 13168 7007 9880 9072 10142 9756 15046 14545 9850 12180 Yunnan 11987 8357 9777 11785 17214 11871 9800 13675 9846 12298 9892 14128 12799 14484 13677 12789 15706 Tibet 24766 20402 14978 10540 16543 28842 15031 22442 14616 20502 16151 29901 28110 31958 28390 28185 24387 Shaanxi 10351 7937 10705 9398 14214 10466 8600 13781 6308 10336 10284 10270 11169 14448 14756 10466 9580 Gansu 11147 8541 10176 10084 15590 11929 8738 14313 6406 10738 9289 12881 12465 13594 13066 12738 11386 Qinghai 14472 10706 15381 10816 19715 23055 10608 18000 8303 11188 9712 16329 16218 17837 15780 15988 13503 Ningxia 11640 6676 11973 9553 16159 12122 9971 16614 7713 10569 9460 14216 13550 15363 17897 12879 12883 Xinjiang 11605 6491 17632 10386 15797 12104 12021 17003 11266 12461 10393 14007 14229 15608 18643 14308 13416 Note: This table covers only the state-owned, collective and mixed ownership sectors. Private companies and the informal sector are excluded. Source: China Statistical Yearbook. 124 Table 37: Indices of Sectoral Average Annual Wage by Region in 2002 (Beijing=100) (RMB in current prices) Electric Transport power, & Commerce Health Education, Banking Mining & Manufactur gas,and Geological communica & services Real Social care, sports culture & Scientific and Government Total Agriculture quarrying ing water survey Construction tions etc. estate services & welfare arts etc. research insurance agencies Others Beijing 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Tianjing 74.4 95.0 105.4 80.7 79.1 72.6 107.1 83.3 74.1 68.4 62.1 65.0 63.5 62.2 45.0 71.1 43.2 Hebei 45.9 38.0 68.2 49.9 56.1 54.9 54.5 48.3 32.5 45.4 41.2 36.2 39.9 49.0 27.0 41.8 34.7 Shanxi 42.8 56.2 57.9 44.9 39.2 37.0 54.8 50.6 28.0 38.3 31.9 32.8 40.1 41.2 26.1 38.0 30.1 Inner Mongolia 44.3 47.2 41.2 46.2 52.6 41.9 49.8 48.5 33.9 43.7 35.0 38.6 44.3 41.9 25.4 45.2 41.9 Liaoning 53.4 37.8 66.3 59.6 59.1 42.6 62.7 57.6 49.0 54.9 47.6 43.2 48.8 56.9 35.9 52.8 39.5 Jilin 45.7 38.4 44.6 57.8 50.2 34.1 51.8 40.0 32.4 49.1 43.7 36.0 45.4 48.3 27.4 43.9 40.8 Heilongjiang 45.4 40.9 46.2 49.9 51.2 68.4 62.5 48.6 41.4 45.9 38.2 40.2 49.8 45.3 34.0 48.2 28.5 Shanghai 109.6 130.5 124.5 125.2 105.7 106.0 151.0 124.2 115.7 125.0 81.7 87.5 93.5 88.6 73.9 98.0 82.5 Jiangsu 61.8 53.0 70.2 65.3 78.6 53.0 78.1 60.3 52.0 75.9 61.7 54.0 57.2 71.2 41.2 69.0 47.7 Zhejiang 86.0 121.2 70.5 75.4 99.1 84.0 100.2 89.9 90.7 91.3 69.6 83.1 84.3 86.2 50.6 93.8 70.7 Anhui 42.5 44.0 58.2 47.4 42.6 36.2 52.3 36.7 28.5 44.0 35.6 36.0 40.2 43.5 24.5 44.1 35.3 Fujian 60.9 57.3 50.8 64.6 65.2 53.6 83.6 72.8 62.9 69.5 54.4 53.4 55.3 63.9 43.5 57.1 56.5 Jiangxi 42.4 39.4 41.6 47.1 38.8 41.1 57.6 49.2 34.8 42.4 37.0 37.3 38.1 37.4 24.4 39.4 35.9 Shandong 52.1 68.6 88.6 49.7 57.4 49.9 66.0 61.1 37.5 57.0 47.8 48.0 47.7 56.3 34.0 48.4 39.6 Henan 42.0 44.6 61.1 44.4 45.4 62.9 54.1 45.2 37.3 40.2 35.9 33.7 35.4 43.5 26.2 37.0 32.6 Hubei 44.0 36.7 56.9 50.5 44.3 41.8 64.0 42.5 36.6 43.6 37.0 34.9 43.2 47.6 23.8 44.3 31.4 Hunan 50.2 42.9 48.5 56.2 49.4 38.7 61.8 49.4 48.2 50.7 42.7 44.4 46.4 49.3 31.6 42.6 43.3 Guangdong 81.5 58.3 60.7 83.3 84.5 59.7 92.1 96.7 80.8 90.3 83.5 72.8 70.0 100.2 58.6 81.4 61.9 Guangxi 49.3 47.9 53.4 56.4 52.3 39.9 62.6 52.6 39.5 47.3 41.5 41.5 41.1 47.2 29.3 48.7 36.7 Hainan 43.4 30.5 41.5 53.2 51.5 33.1 50.1 61.1 41.9 54.5 41.3 48.3 48.2 36.7 36.8 52.2 33.8 Chongqing 50.2 61.3 45.6 57.9 49.3 55.8 61.3 46.7 46.2 46.4 42.4 40.3 45.4 40.7 38.1 47.7 44.6 Sichuan 51.2 61.6 54.7 55.8 48.0 59.0 58.4 52.4 43.5 52.1 46.1 44.1 44.8 61.1 35.1 48.8 52.0 Guizhou 44.9 64.1 55.2 52.9 57.8 39.5 54.8 49.4 37.9 43.4 39.4 33.5 37.1 49.9 29.0 36.8 43.5 Yunnan 54.9 63.5 54.2 66.8 61.2 50.6 67.8 51.3 53.3 54.0 43.0 46.7 48.7 48.1 27.3 47.8 56.1 Tibet 113.3 154.9 83.0 59.7 58.8 123.0 104.0 84.2 79.1 90.0 70.2 98.8 106.9 106.0 56.6 105.4 87.1 Shaanxi 47.4 60.3 59.3 53.3 50.6 44.6 59.5 51.7 34.1 45.4 44.7 33.9 42.5 47.9 29.4 39.1 34.2 Gansu 51.0 64.9 56.4 57.1 55.5 50.9 60.4 53.7 34.7 47.1 40.3 42.6 47.4 45.1 26.0 47.6 40.7 Qinghai 66.2 81.3 85.3 61.3 70.1 98.3 73.4 67.5 44.9 49.1 42.2 53.9 61.7 59.2 31.4 59.8 48.3 Ningxia 53.3 50.7 66.4 54.1 57.5 51.7 69.0 62.3 41.7 46.4 41.1 47.0 51.5 51.0 35.7 48.2 46.0 Xinjiang 53.1 49.3 97.7 58.9 56.2 51.6 83.2 63.8 61.0 54.7 45.1 46.3 54.1 51.8 37.1 53.5 47.9 Note: This table covers only the state-owned, collective and mixed ownership sectors. Private companies and the informal sector are excluded. Source: China Statistical Yearbook. 125 Table 38: Regional Average Annual Wage by Ownership in 2002 (RMB in current prices) Units with funds Urban Joint Limited Share-holding from Hong State-owned collective- Other types Cooperative ownership liability corporations Kong, Macao & Foreign Total units owned units of ownership units units corporations Ltd. Taiwan funded units Others Beijing 21852 23754 11997 21432 12888 15157 19510 21434 27193 39428 13978 Tianjing 16258 17059 9350 16686 15486 15466 15852 17097 15865 17643 5529 Hebei 10032 10578 6343 9537 7077 10521 9908 9298 10680 10628 5629 Shanxi 9357 9931 5524 9675 5914 7338 9994 10163 7694 10185 4097 9683 10287 6431 8777 5396 7564 8793 9906 6814 7765 4913 Inner Mongolia Liaoning 11659 12239 7094 12214 8122 9173 11206 13960 12805 14277 9186 Jilin 9990 10369 6411 10671 7678 6180 8746 11537 10011 15668 7818 Heilongjiang 9926 9921 5100 13232 10623 9494 8892 18474 11382 11340 10481 Shanghai 23959 24719 14851 24423 15204 18015 21226 25046 19583 30192 24716 Jiangsu 13509 15030 8638 12633 8983 10386 12067 12907 12655 16033 8786 Zhejiang 18785 22808 14123 15030 12557 15790 14441 18677 15477 14888 15914 Anhui 9296 9961 5808 9501 5607 8065 9148 11643 8166 11105 5874 Fujian 13306 15026 10119 11987 10888 12875 12155 15252 11386 12349 9981 Jiangxi 9262 9607 5859 9444 6257 8396 10177 11468 7880 10671 6523 Shandong 11374 12778 7129 9561 7065 10880 9651 9451 9713 10188 7323 Henan 9174 9864 6664 9335 7153 6260 9188 10081 10416 9920 7540 Hubei 9611 10403 6534 8180 6562 8881 8725 8165 8412 12345 6442 Hunan 10967 11378 7704 10748 9001 8241 10086 11727 11072 11716 15869 Guangdong 17814 19696 9881 17597 11881 19994 21450 22129 14349 19323 13899 Guangxi 10774 11086 7082 11204 6840 14841 11411 11249 7831 14954 11235 Hainan 9480 9368 6615 11247 13712 10744 10840 13850 8848 11505 9919 Chongqing 10960 11745 7598 10338 8838 9108 9115 13117 11777 14060 7381 Sichuan 11183 12388 7395 9233 7977 9016 8571 10020 12125 11500 10045 Guizhou 9810 10150 6566 9680 7727 6098 9820 10193 9427 9787 7819 Yunnan 11987 12429 7947 11443 8400 13534 11147 13138 11747 12397 9404 Tibet 24766 25675 9761 15693 14409 11368 16624 16438 Shaanxi 10351 10700 6080 10796 6746 9548 10172 11814 12104 18461 5019 Gansu 11147 11791 6967 9540 10661 6611 7555 11582 10139 14012 8081 Qinghai 14472 15816 7211 9585 9674 15105 9328 9814 13406 4509 Ningxia 11640 12366 7572 10400 8350 8962 10609 9909 7976 13324 6643 Xinjiang 11605 11435 9353 12767 10031 10378 11639 19273 11706 11793 8654 Note: This table covers only the state-owned, collective and mixed ownership sectors. Private companies and the informal sector are excluded. Source: China Statistical Yearbook. 126 Table 39: Labor Force by Sector (Millions of workers) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Farming forestry, animal husbandry, fishery 341.2 349.6 348.0 339.7 333.9 330.2 329.1 330.0 332.3 334.9 333.6 329.7 324.9 Mining and quarrying 8.8 9.1 9.0 9.3 9.2 9.3 9.0 8.7 7.2 6.7 6.0 5.6 5.6 Manufacturing 86.2 88.4 91.1 93.0 96.1 98.0 97.6 96.1 83.2 81.1 80.4 80.8 83.1 Electric power, gas and water 1.9 2.0 2.2 2.4 2.5 2.6 2.7 2.8 2.8 2.9 2.8 2.9 2.9 Geological survey & exploration 2.0 2.0 2.0 1.4 1.4 1.4 1.3 1.3 1.2 1.1 1.1 1.1 1.0 Construction 24.2 24.8 26.6 30.5 31.9 33.2 34.1 34.5 33.3 34.1 35.5 36.7 38.9 Transportation, posts & telecommunications 15.7 16.2 16.7 16.9 18.6 19.4 20.1 20.6 20.0 20.2 20.3 20.4 20.8 Commerce, catering trade, supply & 28.4 30.0 32.1 34.6 39.2 42.9 45.1 47.9 46.5 47.5 46.9 47.4 49.7 marketing of materials and warehouses Real estate 0.4 0.5 0.5 0.7 0.7 0.8 0.8 0.9 0.9 1.0 1.0 1.1 1.2 Social services 5.9 6.0 6.4 5.4 6.3 7.0 7.5 8.1 8.7 9.2 9.2 9.8 10.9 Public health, sports and social welfare 5.4 5.5 5.7 4.2 4.3 4.4 4.6 4.7 4.8 4.8 4.9 4.9 4.9 Education, culture, art, radio and 14.6 15.0 15.2 12.1 14.4 14.8 15.1 15.6 15.7 15.7 15.7 15.7 15.6 television broadcasting Scientific research, technical service 1.7 1.8 1.8 1.7 1.8 1.8 1.8 1.9 1.8 1.7 1.7 1.7 1.6 Banking and insurance 2.2 2.3 2.5 2.7 2.6 2.8 2.9 3.1 3.1 3.3 3.3 3.4 3.4 Governments, parties and organizations 10.8 11.4 11.5 10.3 10.3 10.4 10.9 10.9 11.0 11.0 11.0 11.0 10.7 Others 18.0 19.1 23.1 37.4 41.6 44.9 45.6 48.6 51.2 49.7 56.4 58.5 62.5 TOTAL 567.4 583.6 594.3 602.2 614.7 623.9 628.2 635.7 623.7 624.9 629.8 630.5 637.8 Agriculture 341.2 349.6 348.0 339.7 333.9 330.2 329.1 330.0 332.3 334.9 333.6 329.7 324.9 Industry 121.2 124.3 128.8 135.2 139.6 143.2 143.4 142.1 126.5 124.7 124.7 126.0 130.5 Service 105.0 109.8 117.6 127.4 141.2 150.6 155.7 163.6 164.9 165.2 171.5 174.8 182.4 Note: 1. This table covers only the state-owned, collective and mixed ownership sectors. Private companies and the informal sector are excluded 2. Laid-off workers are excluded since 1998. Source: China Statistical Yearbook. 127 Table 40: Labor Force by Employment Category 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Millions of workers) Total 647.5 654.9 661.5 668.1 674.6 680.7 689.5 698.2 706.4 713.9 720.9 730.25 737.4 Total Urban Laborers 170.4 174.7 178.6 182.6 186.5 190.4 199.2 207.8 216.2 224.1 231.5 239.4 247.8 State-owned 103.5 106.6 108.9 109.2 112.1 112.6 112.4 110.4 90.6 85.7 81.0 76.4 71.6 Urban collective-owned 35.5 36.3 36.2 33.9 32.9 31.5 30.2 28.8 19.6 17.1 15.0 12.9 11.2 Other ownership 31.5 31.7 33.5 39.5 41.5 46.3 56.6 68.6 106.0 121.3 135.5 150.1 165.0 Rural laborers 477.1 480.3 482.9 485.5 488.0 490.3 490.3 490.4 490.2 489.8 489.3 490.9 489.6 (Percentage of total) Total Urban Laborers 26.3 26.7 27.0 27.3 27.7 28.0 28.9 29.8 30.6 31.4 32.1 32.8 33.6 State-owned 16.0 16.3 16.5 16.3 16.6 16.5 16.3 15.8 12.8 12.0 11.2 10.5 9.7 Urban collective-owned 5.5 5.5 5.5 5.1 4.9 4.6 4.4 4.1 2.8 2.4 2.1 1.8 1.5 Other ownership 4.9 4.8 5.1 5.9 6.2 6.8 8.2 9.8 15.0 17.0 18.8 20.6 22.4 Rural laborers 73.7 73.3 73.0 72.7 72.3 72.0 71.1 70.2 69.4 68.6 67.9 67.2 66.4 (Growth rates) Total 17.0 1.1 1.0 1.0 1.0 0.9 1.3 1.3 1.2 1.1 1.0 1.3 1.0 Total Urban Laborers 18.4 2.5 2.3 2.2 2.1 2.1 4.6 4.3 4.0 3.7 3.3 3.4 3.5 State-owned 2.3 3.1 2.1 0.3 2.7 0.4 -0.2 -1.8 -18.0 -5.4 -5.5 -5.7 -6.2 Urban collective-owned 1.3 2.2 -0.2 -6.3 -3.2 -4.2 -4.0 -4.6 -31.8 -12.8 -12.4 -13.9 -13.2 Other ownership 7.2 0.9 5.6 17.8 5.2 11.5 22.2 21.2 54.4 14.5 11.7 10.8 9.9 Rural laborers 16.5 0.7 0.6 0.5 0.5 0.5 0.0 0.0 0.0 -0.1 -0.1 0.3 -0.3 Note: 1. This table covers only the state-owned, collective and mixed ownership sectors. Private companies and the informal sector are excluded. 2. Laid-off workers are excluded since 1998. Source: China Statistical Yearbook. 128 Table 41: Total Investment in Fixed Assets 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Billions of RMB) Total fixed investment 451.7 559.5 808.0 1,307.2 1,704.3 2,001.9 2,291.4 2,494.1 2,840.6 2,985.5 3,291.8 3,721.4 4320.2 State-owned 298.6 371.4 549.9 792.6 961.6 1,089.8 1,200.6 1,309.2 1,536.9 1,594.8 1,650.4 1760.7 1887.7 Collective-owned 52.9 69.8 135.9 231.7 275.9 328.9 365.2 385.1 419.2 433.9 480.2 527.9 590.2 Individual-owned 100.1 118.3 122.2 147.6 197.1 256.0 321.1 342.9 374.4 419.6 470.9 543 628 Other 135.3 269.8 327.1 404.5 456.9 510.0 537.3 690.3 889.8 1211.6 (Percentage of total) Total fixed investment 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 101.0 State-owned 66.1 66.4 68.1 60.6 56.4 54.4 52.4 52.5 54.1 53.4 50.1 47.3 43.7 Collective-owned 11.7 12.5 16.8 17.7 16.2 16.4 15.9 15.4 14.8 14.5 14.6 14.2 13.7 Individual-owned 22.2 21.1 15.1 11.3 11.6 12.8 14.0 13.7 13.2 14.1 14.3 14.6 14.5 Other 0.0 0.0 0.0 10.4 15.8 16.3 17.7 18.3 18.0 18.0 21.0 23.9 28.0 Total fixed investment/GDP (%) 24.4 25.9 30.3 37.7 36.4 34.4 33.8 33.8 33.8 33.8 33.8 38.2 41.2 Note: In 1997, the cut-off point of investment statistics to be included in statistical surveys on capital construction, on technical transformation and other investment statistics was changed from a minimum of 50,000 yuan to the minimum of 500,000 yuan, except statistics on investment in housing, rural collective investment and individual investment. Data before 1996 were based on the old coverage and data after 1996(including 1996) were based on the new coverage. Source: China Statistical Yearbook. 129 Table 42: Investment in Fixed Assets by Sourcea 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Billions of RMB) Fixed Investment 451.8 559.4 808.0 1,307.2 1,782.7 2,052.5 2,335.9 2,526.0 2,871.7 2,975.5 3,311.0 3,798.7 4,504.7 State Budget 39.3 38.0 34.7 48.4 53.0 62.1 62.6 69.7 119.7 185.2 210.9 254.6 316.1 Domestic loans 88.5 131.5 221.4 307.2 399.8 419.9 457.4 478.3 554.3 572.6 672.7 724.0 885.9 Foreign investment 28.5 31.9 46.9 95.4 176.9 229.6 274.7 268.4 261.7 200.7 169.6 173.1 208.5 Others 295.4 358.0 505.0 856.2 1,153.1 1,340.9 1,541.2 1,709.6 1,936.0 2,017.0 2,257.7 2,647.0 3,094.2 (Percentage of total) Fixed Investment 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 State Budget 8.7 6.8 4.3 3.7 3.0 3.0 2.7 2.8 4.2 6.2 6.4 6.7 7.0 Domestic loans 19.6 23.5 27.4 23.5 22.4 20.5 19.6 18.9 19.3 19.2 20.3 19.1 19.7 Foreign investment 6.3 5.7 5.8 7.3 9.9 11.2 11.8 10.6 9.1 6.7 5.1 4.6 4.6 Others 65.4 64.0 62.5 65.5 64.7 65.3 66.0 67.7 67.4 67.8 68.2 69.7 68.7 aIn 1997, the cut-off point of investment statistics to be included in statistical surveys on capital construction, on technical transformation and other investment statistics was changed from a minimum of 50,000 yuan to the minimum of 500,000 yuan, except statistics on investment in housing, rural collective investment Source : China Statistical Yearbook. 130 Table 43: Investment in Capital Constuction by Sector 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Billions of yuan) All Sectors 170.4 211.6 301.3 461.6 643.7 740.4 857.1 991.7 1191.6 1245.5 1342.7 1482.0 1766.7 Agriculture 2.6 3.3 4.4 4.6 5.7 7.7 10.9 15.4 22.5 29.9 36.1 43.5 58.8 Mining & quarrying 20.5 24.3 30.3 35.1 39.5 43.8 49.9 64.9 54.1 47.4 58.9 64.5 68 Manufacturing 38.2 47.8 59.9 88.5 121.6 154.0 168.0 153.2 148.4 118.3 117.5 150.9 209.8 Supply of electric power, gas and water 36.6 42.6 55.6 76.9 115.1 125.8 154.6 193.9 214.5 219.3 248.0 219.6 245.9 Construction 1.0 1.3 2.3 11.5 13.8 14.6 18.3 15.1 15.8 22.4 19.7 18.9 26.9 Geological prospecting & water conservancy 4.6 5.9 8.2 9.8 12.1 16.6 22.8 27.7 43.3 55.7 59.7 57.0 72 Transport & telecommunication services 21.1 34.0 45.8 90.1 137.3 158.8 184.5 219.7 325.2 342.9 364.2 411.6 439.4 Commerce 3.9 6.4 13.7 20.3 25.5 24.9 25.1 26.5 29.5 27.9 29.3 34.2 39.7 Finance & insurance 1.5 1.9 3.0 6.7 9.6 12.6 13.5 14.3 14.8 12.7 9.0 9.3 6.5 Real Estate 1.5 2.8 5.6 14.1 31.6 18.3 14.0 14.6 18.6 18.5 15.2 16.9 20.2 Social services 6.7 9.4 15.4 30.2 41.7 49.0 60.8 82.0 112.4 135.6 161.2 196.5 258.8 Health care, sports & social welfare 3.5 3.3 4.6 6.6 9.4 10.5 12.3 14.9 18.5 19.9 21.8 26.6 33.9 Educaiton, Health, & Culture etc. 10.3 11.9 15.1 20.4 26.2 35.3 41.8 52.9 61.6 71.2 82.3 95.1 116.5 Scientific research & polytechnic services 2.1 2.3 3.2 4.9 5.3 6.8 6.5 6.8 7.6 8.9 10.3 12.6 13.9 Government Agencies & Other 6.2 8.8 14.2 30.1 37.7 47.4 58.1 71.6 88.8 100.6 87.8 100.6 135.3 Others 10.1 5.6 20.1 11.7 11.7 14.4 16.1 18.1 16.1 14.5 21.7 24.2 21 (Percentage of total) All Sectors 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 1.5 1.6 1.4 1.0 0.9 1.0 1.3 1.6 1.9 2.4 2.7 2.9 3.3 Mining & quarrying 12.0 11.5 10.1 7.6 6.1 5.9 5.8 6.5 4.5 3.8 4.4 4.3 3.8 Manufacturing 22.4 22.6 19.9 19.2 18.9 20.8 19.6 15.4 12.5 9.5 8.8 10.2 11.9 Supply of electric power, gas and water 21.5 20.1 18.4 16.7 17.9 17.0 18.0 19.6 18.0 17.6 18.5 14.8 13.9 Construction 0.6 0.6 0.8 2.5 2.1 2.0 2.1 1.5 1.3 1.8 1.5 1.3 1.5 Geological prospecting & water conservancy 2.7 2.8 2.7 2.1 1.9 2.2 2.7 2.8 3.6 4.5 4.4 3.8 4.1 Transport & telecommunication services 12.4 16.1 15.2 19.5 21.3 21.4 21.5 22.2 27.3 27.5 27.1 27.8 24.9 Commerce 2.3 3.0 4.5 4.4 4.0 3.4 2.9 2.7 2.5 2.2 2.2 2.3 2.2 Finance & insurance 0.9 0.9 1.0 1.4 1.5 1.7 1.6 1.4 1.2 1.0 0.7 0.6 0.4 Real Estate 0.9 1.3 1.9 3.1 4.9 2.5 1.6 1.5 1.6 1.5 1.1 1.1 1.1 Social services 3.9 4.4 5.1 6.5 6.5 6.6 7.1 8.3 9.4 10.9 12.0 13.3 14.6 Health care, sports & social welfare 2.1 1.6 1.5 1.4 1.5 1.4 1.4 1.5 1.5 1.6 1.6 1.8 1.9 Educaiton, Health, & Culture etc. 6.0 5.6 5.0 4.4 4.1 4.8 4.9 5.3 5.2 5.7 6.1 6.4 6.6 Scientific research & polytechnic services 1.2 1.1 1.0 1.1 0.8 0.9 0.8 0.7 0.6 0.7 0.8 0.9 0.8 Government Agencies & Other 3.6 4.1 4.7 6.5 5.9 6.4 6.8 7.2 7.5 8.1 6.5 6.8 7.7 Others 5.9 2.6 6.7 2.5 1.8 1.9 1.9 1.8 1.3 1.2 1.6 1.6 1.2 Note: 1. In 1997,the cut-off point of investment statistics to be included in statistical surveys on capital construction, on technical transformation and other investment statistic was changed from a minimum of 50,000 yuan to the minimum of 500,000 yuan, except statistics on investment in housing, rural collective investment and individual investment. Data before 1996 were based on the old coverage and data after 1996(including 1996) were based on the new coverage. 2. Investment in capital construction in this table include not only that by State-owned units but also that by units of join-owned, share-holding, foreign-funded, Hong Kong-Macao- Taiwan-funded, which are included in the plan of capital construction and innovation. Source: China Statistical Yearbook. 131 Table 44: Foreign Direct Investments Inflows (Millions of US dollars) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 TOTAL 3,754.9 4,666.6 11,291.6 27,770.9 33,945.8 37,805.7 42,135.2 52,387.3 45,462.8 40,318.7 40,714.8 46,877.6 52,742.9 of which, from Hong Kong & Macao 2,118.5 2,661.8 7,908.9 18,032.5 20,332.1 20,624.9 21,457.9 21,954.4 18,929.9 16,672.7 15,847.3 17,038.4 18,329.3 Japan 520.5 609.5 748.3 1,361.4 2,086.2 3,212.5 3,692.1 4,390.4 3,400.4 2,973.1 2,915.9 4,348.4 4,190.1 Korea .. .. 674.8 381.5 726.1 1,047.1 1,504.2 2,227.6 1,803.2 1,274.7 1,489.6 2,151.8 2,720.7 Taiwan (China) .. 471.9 1,053.4 3,139.1 3,391.3 3,165.2 3,482.0 3,342.0 2,915.2 2,598.7 2,296.6 2,979.9 3,970.6 United Kingdom 19.9 37.9 38.5 220.5 688.8 915.2 1,301.9 1,859.6 1,174.9 1,044.5 1,164.1 1,051.7 895.8 France 23.4 11.7 46.9 141.4 193.4 287.0 424.7 475.9 714.9 884.3 853.2 532.5 575.6 Italy 8.1 41.3 26.7 99.9 206.2 270.2 169.4 218.1 274.6 187.4 209.5 220.0 176.7 United States 461.2 330.7 519.4 2,067.9 2,490.8 3,083.7 3,444.2 3,461.2 3,898.4 4,215.9 4,383.9 4,433.2 5,423.9 RECEIVED BY PROVINCES Regional Total 3,436.4 4,425.8 11,003.3 27,341.7 33,267.7 37,215.5 41,879.7 46,374.4 45,283.9 39,934.8 40,332.9 46,367.0 52,471.3 Beijing 279.0 245.0 349.9 666.9 1,371.6 1,080.0 1,552.9 1,592.9 2,168.0 1,975.3 1,683.7 1,768.2 1,724.6 Tianjin 36.9 132.6 107.8 613.7 1,015.0 1,520.9 2,006.4 2,511.4 2,113.6 1,764.0 1,166.0 2,133.5 1,582.0 Hebei 44.5 56.6 113.1 396.5 523.4 546.7 825.9 1,100.6 1,428.7 1,042.0 679.2 669.9 782.7 Shanxi 3.4 3.8 53.8 86.4 31.7 63.8 138.0 265.9 244.5 391.3 224.7 233.9 211.6 Inner Mongolia 10.6 1.7 5.2 85.3 40.1 57.8 71.9 73.3 90.8 64.6 105.7 107.0 177.0 Liaoning 257.3 362.4 516.4 1,279.1 1,440.1 1,424.6 1,737.7 2,204.7 2,190.5 1,061.7 2,044.5 2,516.1 3,411.7 Jilin 17.6 31.6 75.3 275.3 241.9 408.0 451.6 402.3 409.2 301.2 337.0 337.7 244.7 Heilongjiang 28.4 20.9 72.2 232.3 347.6 516.9 548.4 734.9 526.4 318.3 300.9 341.1 355.1 Shanghai 174.0 145.2 493.6 3,160.3 2,473.1 2,892.6 3,940.9 4,225.4 3,601.5 2,836.7 3,160.1 4,291.6 4,272.3 Jiangsu 134.0 219.2 1,463.2 2,843.7 3,763.2 5,190.8 5,210.1 5,435.1 6,631.8 6,077.6 6,425.5 6,914.8 10,189.6 Zhejiang 49.1 92.3 239.8 1,031.8 1,150.3 1,258.1 1,520.5 1,503.5 1,318.0 1,232.6 1,612.7 2,211.6 3,075.1 Anhui 13.5 10.7 54.7 257.6 370.0 482.6 506.6 434.4 276.7 261.3 318.5 336.7 383.8 Fujian 319.9 471.2 1,423.6 2,874.4 3,713.2 4,043.9 4,084.5 4,197.1 4,212.1 4,024.0 3,431.9 3,918.0 3,838.4 Jiangxi 7.5 19.5 99.7 208.2 261.7 288.9 300.7 481.0 465.0 320.8 227.2 395.8 1,082.0 Shandong 185.7 216.4 1,003.4 1,874.1 2,552.4 2,689.0 2,633.6 2,775.6 2,202.7 2,258.8 2,971.2 3,520.9 4,734.0 Henan 11.4 38.0 53.2 304.9 386.7 478.6 523.6 692.0 616.5 521.4 564.0 457.3 404.6 Hubei 31.8 46.6 203.1 540.5 601.9 625.1 680.0 790.2 972.9 914.9 943.7 1,188.6 1,426.7 Hunan 14.2 25.4 132.7 437.5 331.1 507.7 703.4 917.0 818.2 653.7 678.3 810.1 900.2 Guangdong 1,582.3 1,942.9 3,701.1 7,555.8 9,463.4 10,260.1 11,754.1 12,635.0 12,019.9 11,657.5 11,280.9 11,932.0 11,334.0 Guangxi 35.6 31.9 182.0 884.6 836.3 672.6 663.1 885.8 886.1 635.1 524.7 384.2 417.3 Hainan 103.0 176.7 452.6 707.1 918.1 1,062.1 789.1 705.5 717.2 484.5 430.8 466.9 512.0 Chongqing 3.3 90.2 190.3 439.5 357.4 418.0 431.1 238.9 244.4 256.5 195.8 Sichuan 21.1 80.9 22.0 381.1 482.3 184.2 440.9 248.5 372.5 341.0 436.9 581.9 555.8 Guizhou 11.1 16.3 19.8 42.9 63.6 57.0 31.4 49.8 45.4 40.9 25.0 28.3 38.2 Yunnan 7.4 3.5 28.8 97.0 65.0 97.7 65.4 165.7 145.7 153.9 128.1 64.6 111.7 Tibet Shaanxi 47.3 31.8 45.5 234.3 238.8 324.1 325.1 628.2 300.1 242.0 288.4 351.7 360.1 Gansu 1.2 4.8 0.4 12.0 87.8 63.9 90.0 41.4 38.6 41.0 62.4 74.4 61.2 Qinghai 0.0 0.0 0.7 3.2 2.4 1.6 1.0 2.5 .. 4.6 .. 36.5 47.3 Ningxia 0.3 0.2 0.4 11.9 7.3 3.9 5.6 6.7 18.6 51.3 17.4 16.8 22.0 Xinjiang 5.4 0.2 0.0 53.0 48.3 54.9 63.9 24.7 21.7 24.0 19.1 20.4 19.0 Source: China Statistical Yearbook. 132 Table 45: Production and Consumption of Energy 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 PRODUCTION 1,039.2 1,048.4 1,072.6 1,110.6 1,187.3 1,290.3 1,326.2 1,324.1 1,242.5 1,091.3 1,070.0 1209 1390 (millions of tons of coal equivalent) (Percentage of total) Coal 74.2 74.1 74.3 74.0 74.6 75.3 75.2 74.1 71.9 68.3 66.6 68.6 70.7 Crude oil 19.0 19.2 18.9 18.7 17.6 16.6 17.0 17.3 18.5 21.0 21.8 19.4 17.2 Natural gas 2.0 2.0 2.0 2.0 1.9 1.9 2.0 2.1 2.5 3.1 3.4 3.3 3.2 Hydro power 4.8 4.7 4.8 5.3 5.9 6.2 5.8 6.5 7.1 7.6 8.2 8.7 8.9 CONSUMPTION 987.0 1,037.8 1,091.7 1,159.9 1,227.4 1,311.8 1,389.5 1,378.0 1,322.1 1,301.2 1,303.0 1349 1480 (Percentage of total) Coal 76.2 76.1 75.7 74.7 75.0 74.6 74.7 71.5 69.6 68.0 66.1 65.3 66.1 Crude oil 16.6 17.1 17.5 18.2 17.4 17.5 18.0 20.4 21.5 23.2 24.6 24.3 23.4 Natural gas 2.1 2.0 1.9 1.9 1.9 1.8 1.8 1.7 2.2 2.2 2.5 2.7 2.7 Hydro power 5.1 4.8 4.9 5.2 5.7 6.1 5.5 6.2 6.7 6.6 6.8 7.7 7.8 GDP (billion of yuan, constant 1990 price) 1,854.8 2,025.4 2,313.0 2,625.3 2,956.1 3,266.5 3,580.1 3,895.1 4,198.9 4,497.1 4,856.8 5,221.1 5,638.8 Energy consumption/ GDP (%) 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.3 0.3 ( ton per yuan) Notes: Excluding bio-energy, solar, geothermal and nuclear energy. All fuels are converted into standard fuel with thermal equivalent of 7,000 kilocalories per kilogram. The conversion is 1 kg of coal (5,000 kcal) = 0.714 kg of standard fuel. 1 kg of crude oil (10,000 kcal) = 1.43 kg of standard fuel. 1 cubic meter of natural gas (9,310 kcal) = 1.33 kg. of standard fuel. The conversion of hydropower into standard fuel is calculated on the basis of the consumption quota of standard coal for thermal power generation for the year. Source: China Statistical Yearbook. 133 Table 46: Freight Traffic 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Billion ton-km) Rail 1,062.2 1,097.2 1,157.6 1,195.5 1,245.8 1,287.0 1,304.4 1,325.3 1,251.7 1,283.8 1,390.2 1,457.5 1,551.6 Road 335.8 342.8 375.5 407.1 448.6 469.5 501.1 527.2 548.3 572.4 612.9 633.0 678.2 Waterways 1,159.2 1,295.5 1,325.6 1,386.1 1,568.7 1,755.2 1,786.3 1,923.5 1,940.6 2,126.3 2,373.4 2,598.9 2,751.1 Pipelines 62.7 62.1 61.7 60.8 61.2 59.0 58.5 57.9 60.6 62.8 63.6 65.3 100.7 Civil aviation 0.7 1.0 1.3 1.7 1.9 2.2 2.5 2.9 3.3 4.2 5.0 4.4 5.2 OVERALL 2,620.7 2,798.6 2,921.8 3,051.0 3,326.1 3,573.0 3,652.8 3,836.8 3,804.6 4,049.6 4,445.2 4,759 5,087 (Percentage of total) Rail 40.5 39.2 39.6 39.2 37.5 36.0 35.7 34.5 32.9 31.7 31.3 30.6 30.5 Road 12.8 12.2 12.9 13.3 13.5 13.1 13.7 13.7 14.4 14.1 13.8 13.3 13.3 Waterways 44.2 46.3 45.4 45.4 47.2 49.1 48.9 50.1 51.0 52.5 53.4 54.6 54.1 Pipelines 2.4 2.2 2.1 2.0 1.8 1.7 1.6 1.5 1.6 1.6 1.4 1.4 2.0 Civil aviation -- -- -- 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 OVERALL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 101.0 (Growth rate) Rail 2.2 3.3 5.5 3.3 4.2 3.3 1.4 1.6 -5.6 2.6 8.3 4.8 6.5 Road -0.5 2.1 9.6 8.4 10.2 4.6 6.7 5.2 4.0 4.4 7.1 3.3 7.1 Waterways 3.6 11.8 2.3 4.6 13.2 11.9 1.8 7.7 0.9 9.6 11.6 9.5 5.9 Pipelines -0.3 -1.0 -0.6 -1.5 0.7 -3.6 -0.8 -1.0 4.7 3.6 1.3 2.7 54.2 Civil aviation 18.8 23.2 32.9 23.8 11.9 20.0 12.1 16.0 15.3 26.5 18.9 -12.5 17.3 OVERALL 2.4 6.8 4.4 4.4 9.0 7.4 2.2 5.0 -0.8 6.4 9.8 7.1 6.9 Source: China Statistical Yearbook. 134 Table 47: Passenger Traffic 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Billion passenger-km) Rail 261.3 282.8 315.2 348.3 363.6 354.6 334.8 358.5 377.3 413.6 453.3 476.7 496.9 Road 262.0 287.2 319.3 370.1 422.0 460.3 490.9 554.1 594.3 619.9 665.7 720.7 780.6 Waterways 16.5 17.7 19.8 19.6 18.4 17.2 16.1 15.6 12.0 10.7 10.1 9.0 8.2 Civil aviation 23.0 30.1 40.6 47.8 55.2 68.1 74.8 77.4 80.0 85.7 97.1 109.1 126.9 OVERALL 562.8 617.8 694.9 785.8 859.1 900.2 916.5 1005.6 1063.7 1130.0 1226.1 1315.5 1412.6 (Percentage of total) Rail 46.4 45.8 45.4 44.3 42.3 39.4 36.5 35.7 35.5 36.6 37.0 36.2 35.2 Road 46.6 46.5 45.9 47.1 49.1 51.1 53.6 55.1 55.9 54.9 54.3 54.8 55.3 Waterways 2.9 2.9 2.9 2.5 2.1 1.9 1.8 1.6 1.1 0.9 0.8 0.7 0.6 Civil aviation 4.1 4.9 5.8 6.1 6.4 7.6 8.2 7.7 7.5 7.6 7.9 8.3 9.0 OVERALL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (Growth rate) Rail -14.0 8.2 11.5 10.5 4.4 -2.5 -5.6 7.1 5.2 9.6 9.6 5.2 4.2 Road -1.6 9.6 11.2 15.9 14.0 9.1 6.6 12.9 7.3 4.3 7.4 8.3 8.3 Waterways -12.4 7.5 11.9 -1.0 -6.6 -6.4 -6.3 -3.1 -22.9 -10.8 -6.3 -10.4 -8.9 Civil aviation 23.4 30.7 34.8 17.6 15.5 23.5 9.8 3.5 3.4 7.2 13.2 12.4 16.3 OVERALL -7.3 9.8 12.5 13.1 9.3 4.8 1.8 9.7 5.8 6.2 8.5 7.3 7.4 Source: China Statistical Yearbook. 135 Table 48: Average Shipping Distance 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (Kilometers) Rail 705 718 734 735 791 807 766 770 763 768 767 757 760 Road 46 46 48 48 50 50 51 54 56 58 59 60 61 Waterways 1,447 1,554 1,433 1,415 1,465 1,551 1,402 1,696 1,771 1,855 1,939 1,959 1,940 Pipelines 398 399 417 409 406 386 366 362 348 310 340 336 339 Civil aviation 2,218 2,234 2,330 2,393 2,241 2,206 2,168 2,334 2,388 2,482 2,556 2,557 2,251 OVERALL 270 284 279 274 282 289 282 300 300 313 326 340 341 (Growth rate) Rail 2.8 1.8 2.2 0.1 7.6 2.0 -5.1 0.5 -0.9 0.7 -0.1 -1.3 0.4 Road 0.0 0.0 4.3 0.0 4.2 0.0 2.0 5.9 3.7 3.6 1.7 1.7 1.7 Waterways 13.0 7.4 -7.8 -1.3 3.5 5.9 -9.6 21.0 4.4 4.7 4.5 1.0 -1.0 Pipelines -1.0 0.3 4.5 -1.9 -0.7 -4.9 -5.2 -1.1 -3.9 -10.9 9.7 -1.2 0.9 Civil aviation -0.4 0.7 4.3 2.7 -6.4 -1.6 -1.7 7.7 2.3 3.9 3.0 0.0 -12.0 OVERALL 4.7 5.2 -1.8 -1.8 2.9 2.5 -2.4 6.4 0.0 4.3 4.2 4.3 0.3 Source: China Statistical Yearbook.