Economic Development in China

The People’s Republic of China has one of the fastest growing economies in the world. China’s huge and consistent economic growth reflects the success of China’s economic reforms.

Economic growth of China since the early 80s is remarkable. Real GDP per capita grew by 8% to 9. 5% annual growth in the 1978-1995 and 1989-98 periods respectively. Whereas the major economic reforms in the 1980s concentrated on the introduction of market mechanisms, key reforms since 1993 focussed on economic efficiency and sustainable growth.After a quarter of a century of intermittent high growth with little inflation and more or less external balanced external current payments, the relationship between growth and stability in China changed fundamentally in the reformed period.

Growth has been consistently, but unevenly high and fluctuations in output growth have generated periods of high inflation and substantial deficits in current payments. 2 Starting in 1978, China has made a concerted effort to open and enlarge its economic and political relations with the outside world.Formal diplomatic relations with the United States was established at that time, with two-way trade increasing from $2. 3 billion in 1979 to over $50 billion in 1995. 3 Openness of the Chinese economy came about in gradual fashion.

The initial step was devaluation of RMB and the second step was introduction of FDI. These two steps set solid foundation for rapid export growth, which in turn enabled the economy to absorb more FDI and maintain a stable and fair (less distorted) foreign exchange market.Export push, FDI, and a stable exchange market are three important elements of openness, which created a favourable external environment for rapid and sustainable economic growth. 4 As a result of open door policy, China’s exports grew at a hefty annual rate of 18% from US $ 13. 7 billion in 1979 to US $ 249 billion in 2000.

China’s success in attracting FDI has been even more impressive. From 1988 to 2000, total actual FDI inflow amounted to US $ 339 billion, making China the second largest recipient of international capital in the world after the United States.Till the year 2000, more than 200 of world’s largest multinationals have invested in China. A substantial part of China’s exports (48% in 2000) came from foreign invested enterprises, particularly those from Taiwan and Hong Kong.

The success of export oriented market economy in China lies in the fact that China apart from having large pool of skilled and non-skilled labour, also has a large domestic market for all sorts of products, both high tech and low tech to enjoy the advantage of economies of scale. With lower cost generated as a result of high volume of production, China is able to enjoy its natural cost advantage.Banking reforms introduced in China came earlier than reforms in other sectors. The reform consists of establishment of the central bank, reformed of the specialised banks, reform and development of urban and rural cooperatives, reform of non-bank financial institutions and the financial market and reform of interest rate structures. By the end of 1988, there are almost 100 foreign banks represented in China, of whom about 30 are Japanese.

Foreign banks operate approximately 176 representative offices, of which 102 are in Beijing and 30 branches all of which are in the Special Economic Zones.The banking reforms have revitalised the monetarization process. The growth rate of total domestic deposits for the period from 1979-89 is 572. 7%, while the growth rate of urban and rural savings are 1743% and 251. 7% respectively. The Central Bank oversees the overall developments and activities of the monetary sector, maintaining economic and currency stability.

5 Economic development and growth of tertiary sector The leading role of industrial sector in the GDP growth since 1978 places China’s economic growth within the context of traditional economic development.The unusually large contribution of the tertiary sector to growth places China’s experience within the context of economic transition from traditional central planning. The rapid development of the service sector after 1978 and the shifting of the Chinese labour force away from agriculture towards industry and services increased aggregate output because the marginal product of labour in the primary sector lower than the marginal productivity of labour in the secondary and service sectors. In short, the marketization of centrally planned economy of China had led to normal economic development in China.Economic development and FDI in China Since economic reform and the open door policies started in the late 1970s, China had experienced rapid economic growth with GDP growing at 10 percent per year on average during 1977 to 1997. 7 However, as China’s first effort to encourage foreign direct investment flow started in 1979, FDI was negligible at that time.

Large foreign investment inflow did not occur until 1984. From 1979 to 1982, FDI flows into China were relatively small, amounting to approximately $1. 76 billion. FDI inflow to China grew quickly from 1983 through 1991, increasing at an annual rate of about 44 per cent.There was a surge in foreign investment in 1984, 1988, and again from 1991 onwards.

Cumulated FDI commitments increased from U. S. $ 5. 5 billion by the end of 1982 to U.

S. $ 52 billion by the end of 1991. The growth of utilized FDI inflow slowed down after the second investment charge in 1988, largely due to the effect of Tiananmen Square incident in 1989. The confidence of foreign investors over Chinese market was regained since 1991, largely due to Chinese government’s consistent efforts to improve the investment environment.Annual utilised FDI in China grew from $636 million in 1983 to $61 billion in 2004 (it was estimated at $58 billion in 2005). Analyst predicts that as investment barriers are reduced under China’s WTO commitments, FDI is expected to flow continuously and Chinese demand for imports would continue an upward trend.

9 The uniqueness of China's approach to economic development is now widely recognized. While other transition economies like the former Soviet Union adopted a ‘shock therapy’ approach, China's reform path has been described as ‘gradualist’.This means that, while the power of the Communist Party, large state-owned enterprises and many regions away from coastal areas have remained substantially unreformed, significant, but incremental, changes have occurred elsewhere. Capital markets have developed to some extent, privatization has occurred mainly outside heavy industry, and labor migration has continued towards the coastal economic zones. Inward FDI has been permitted and encouraged using forms of entry mode that have gradually permitted higher levels of foreign ownership and control.

11 Inward FDI had interacted positively with economic growth in China.On the other hand, FDI contributed to economic growth through formatting capital, transferring technology and managerial skills, creating jobs, and promoting exports. Economic growth increased demand for foreign capital, expanded the domestic market for FDI, and improved capacity to absorb technologies embodied in FDI. 7 This emphasis on gradual economic reform with little political change and, particularly, China's gradually liberal attitude towards inward investment, has resulted in extremely high rates of inward FDI, substantially higher than rates achieved by other economies in transition.Even in per capita terms for a country with over one billion inhabitants, China achieved inward FDI of $18.

20 per capita, 1989–1995. 12 China's real GDP during 1978–2002 had on average grown 9. 41% annually, and its real GDP per capita, 8. 1% during the same period. At these growth rates, China's aggregate economic power in 2002 was 857.

4% of that in 1978, and the purchasing power of each citizen in 2002 was 639. 7% of that in 1978. This remarkable growth performance allows China to become the second largest economy measured in purchasing power parity.In 2003, China's real GDP reached 11. 67 trillion yuan (or 1. 42 trillion USD), an increase of 9.

1% over 2002, and GDP per capita for the first time surpassed $1000. 13 Economic development and regional disparity Interregional disparities in China’s economic development have attracted considerable political and scholarly attention. Although in a country of such a vast size as China, large disparities seem to be an unavoidable fact of nature, there is the additional impact here of distorting policy interventions and spatially divergent institutional change, which renders the topic analytically very difficult and politically sensitive.Pronounced disparities in income and economic opportunities exist between the coastal and the inland regions of China. Factors responsible for these regional inequalities include preferential government policies, favourable geographical location, and superior infrastructure facilities in the coastal regions. 15 The late Deng Xiaoping’s motto of “letting some to get rich first” has meant that economic development concentrated in the coastal regions led to differences in income and wealth between the coastal and interior regions.

Typically, the coastal regions have gained a larger share in both foreign direct investment and trade. Various aspects of economic reforms in the 1990s, e. g. , the banking reform and state-owned enterprises reform, have a greater impact on the coastal than the interior provinces. Thus, there is discrepancy among different regions in China, although the central government since the mid-1990s has emphasized the importance of developing the interior regions. 16 The income gap between the coastal provinces and the hinterland has grown fast since the country opened its doors in the early 1980s.

At the same time, there was a rapid agglomeration of manufacturing in the coast. Empirical studies have suggested that the surge in international trade and foreign direct investment (FDI) and the significant increase of rural-to-urban labour mobility may be important factors for manufacturing agglomeration and regional income disparity . 17 Yang and Zhou18 observed that urban–rural per capita consumption and income experienced a V-shaped change after economic reform was launched in the late 1970s.The differentials first decreased from 1978 to 1985 but increased sharply afterwards.

Tracing of the changes through the 1990s revealed that the consumption differential peaking around 1993–1994 and then apparently experiencing another V-shaped change afterwards. Apart from level of economic development, other factors might also have contributed to rural–urban income disparity. Yang and Zhou 18 revealed inter-sector gaps in marginal productivity of labour and highlights barriers to inter-sector reallocation of labour as a major source of urban–rural disparity.Yang 19 attributed the rise in urban–rural disparity after 1985 to what he called “ urban biased policy mix” including increasing urban subsidies, investment and banking credits, which have affected higher inflationary taxes on rural earnings. Johnson 20 summarized three major policy areas that have adversely affected rural incomes, namely, the restrictions on rural-to-urban migration, the less accessibility of education in rural areas, and the urban-biased allocation of investment and credit.

A model study Dapeng 21 shows that the improving trade condition and the increasing rural-to-urban labour mobility in China may be the reasons for the enlarging income gap between the coastal area and the hinterland. With a geographical advantage in international trade, the coast becomes the initial location for industrial agglomeration and its leadership becomes strengthened by the positive feedback mechanism from increasing returns to scale. The necessary labour supply for industrial agglomeration in the coast comes from intraregional rural-to-urban migration instead of interregional migration.As a consequence of the industrial agglomeration, the income disparity between the coast and the hinterland increases.

The location disadvantage of the interior comes from higher transportation cost in international trade. 21 The reasons given by scholars for the regional diversities in economic reform and growth in China include poor economic basis, lack of capital, low quality of education, closed culture, economic policy, and poor natural conditions of the interior provinces. 22 While the incidence of extreme poverty fell dramatically in China over 1980–2001, progress was uneven over time and across provinces.Rural areas accounted for the bulk of the gains to the poor, though migration to urban areas helped. Rural economic growth was far more important to national poverty reduction than urban economic growth and agriculture played a far more important role than the secondary or tertiary sources of GDP.

Taxation of farmers and inflation hurt interest of the poor and local government spending helped them in absolute terms. Provinces starting with relatively high inequality saw slower progress against poverty, due both to lower growth and a lower growth elasticity of poverty reduction. 23