Understanding China's Economy

The following sections are included:

• PREFACE

• CONTENTS

In the early 1990s the world began to recognize that China's economy is dynamic and rapidly growing and that rapid growth is likely to continue for some time. This recognition is partly reflected in the tremendous expansion of foreign capital flowing into China and in the increase in the Hang Seng index of Hong Kong stock prices from approximately 3,000 in January 1989 to about 10,000 in January 1994. Many people must believe that economic development in China will be fast enough, and the political institution stable enough, to assure the continued increase in profits of companies in Hong Kong, a city to become part of China after July 1, 1997. If one projects an average annual rate of growth of 8.5% (as compared with 9.5% real growth in China between 1977 and 1988 and about 13% in 1992) the economy will be 7.69 times after 25 years, while a 2.5% annual growth amounts to 1.85 times. If in 1995, per capita output of China were one-fortieth of that of the U.S., so that total output would be about one-ninth, in 2020, using the above growth rates for the two countries, China's output will be (1/9) × 7.69/1.85 or about 46% of that of the U.S. China will soon be a major economic power if it is not already one today. This book represents the author's attempts over the past ten years to understand the Chinese economy…

Before 1978 in China, the economic institutions for agriculture and industry operated essentially under a centrally planned system. The reasons for a change toward a more market-oriented economy and the key elements of economic reform are discussed. Today the major issues being deliberated by the leading economic ofmcials include reform of the price system, the administrative structure of state-owned enterprises, the banking system and macroeconomic control mechanisms, and foreign trade and investment.

The following sections are included:

• Introduction

• Historical Background and Characteristics of the Reform Process

• Reform Policies Similar to Those of Taiwan

• Reform in Urban Housing

• References

The following sections are included:

• Introduction

• What Economic Institutions to Reform

• How Economic Reform was Achieved

• Characteristics of the Reform Process

• References

What kind of economic institutions China will have in the twenty-first century depends partly on the nature of economics education in Chinese universities today. Economics education affects the way future Chinese leaders think about economic issues and hence the design of the Chinese economic system in the future. This paper is concerned with economics education in China and economic exchanges with the United States.

The following sections are included:

• Introduction

• Economics Education

• Economic Reform

• Political Reform and Hong Kong

The student movement and the ensuing mass demonstrations split China's political leadership. One unfortunate outcome was the resignation of Party Secretary- General Zhao Ziyang. The economic policies of Premier Li Peng and Vice Premier Yao Yilin were not, and are not, very different from Zhao's. Although Zhao would rely on free markets to a larger extent, all three, together with nearly all other current economic administrators, had by 1979 given up Soviet-style central planning and accepted the usefulness of decentralization and markets. Supporting evidence (Chow 1988) can be found in Li Peng's pronouncements before June 1989 and Yao Yilin's policy statements (Chow 1985). Statements by Deng Xiaoping and Li Peng after June 4 emphasized the continuation of the open-door policy, economic reform and the maintenance of capitalism for Hong Kong after 1997…

In late June 1989, soon after the tragic event in Tiananmen Square, I predicted that China would enjoy an annual growth of real output of about 7.5% over the next decade. It is therefore reassuring to read in China: Between Plan and Market (World Bank Country Study, 1990) that “… the latent dynamism of [China's] productive sectors will enable the economy to continue growing during the 1990s at rates (once the contractionary policy is eased) that would be considered very respectable in most countries.”…

The following sections are included:

• Introduction

• Economic Growth and Transformation of Taiwan and the Chinese Mainland

• Interregional and Intraregional Economic Integration

• Impact on the United States

• References

I feel honored to be the speaker of this event which is sponsored by Lingnan College and the Hong Kong Economic Association. I was a primary school student of Lingnan at Stubbs Road — before the Japanese attacked Pearl Harbor and Hong Kong in December 1941 — and received a first rate education there. The Hong Kong Economic Association has been active in recent years to promote friendship as well as scholarship among economists in Hong Kong. I would like to thank all of you for coming here this evening to share with me our common concern about possible inflation in China…

This article points out that the development of statistics in China is a part of the modernization process. It reviews the scope and the quality of Chinese statistics and discusses the statistics of consumption and national income in particular. The future prospects of Chinese statistics are also indicated.

The purpose of this paper is to survey the state of economic research in China as of 1984. Some information contained herein was obtained in the summer of 1984 when the author organized a six-week microeconomics workshop at Peking University on behalf of the Chinese Ministry of Education. This survey may be useful to general readers interested in China, as well as to economists outside China who are interested in research on China and possibly in cooperative research with Chinese economists. To economists in China, an outside view concerning their work and its future prospects might also be of interest. In 1984 the state of economic research is in the process of rapid change, as is the state of the Chinese economic system itself. Where and how fast it will go depends on the actions to be taken by Chinese economists and on the cooperation of economists outside China. It is therefore timely to survey the current state of economic research, to indicate its possible future directions, and to suggest where outside cooperation might be useful.

The following sections are included:

• Production Functions

• Theory of Consumer Behavior

• Law of Supply in Agriculture

• Money and Price Level Determination

• The Acceleration Principle and National Income Determination

• Conclusion

• References

The following sections are included:

• Characterizing the Chinese Economic System
  • Domestic microeconomic institutions
  • Foreign trade and investment
  • Macroeconomic management

• Evaluating the Chinese Economic System

• Retrospect and Prospect

• References

A basic hypothesis of asset management is advanced that an asset manager will try to derive the most benefit from the management. It is used to derive laws of asset management which can explain the behavior observed in China in managing one's own person, one's nonhuman assets for own use, one's nonhuman assets for use by others, and collections of assets in the form of state enterprises. Two models of management behavior for state enterprises before and after economic reforms in the early 1980s axe provided. They are models of maximizing behavior, but the objective function and the constraints vary according to economic institution.

This paper outlines an econometric model for Chinese economic planning, consisting of four parts: (1) a dynamic input–output model, (2) final demand for products, (3) equations determining income and prices, and (4) government revenues and expenditures. It points out how optimal control techniques can be applied to economic planning using this model, in particular, to address the basic problems facing the PRC planners as cited in the introduction.

First, production functions are estimated for China's aggregate economy and for the five sectors — agriculture, industry, construction, transportation, and commerce — using annual data (some constructed by the author) from 1952 to 1980. Then, this paper measures the contribution of capital formation to the growth of these sectors, the effects of the Great Leap Forward of 1958–1962 and of the Cultural Revolution of 1966–1976 on outputs, the impact of economic reforms since 1979 on growth, the rates of return to capital, and the effects of sectorial growths on relative prices.

A model consisting of a consumption function and an investment function is used to explain Chinese annual data in constant prices from 1953 to 1982. The data confirm Robert Hall's version of the permanent income hypothesis and the accelerations principle. Deviations of the observations from predictions of this model are attributed to political factors, including the Great Leap Forward in 1959–62, the Cultural Revolution in 1967–68, and the Special government policies in 1978 and 1981.

The quantity theory of money provides a useful starting point in explaining the price level in China. The ratio of money supply to real output is an important variable in explaining the price level, but the elasticity is below unity, suggesting that velocity is not constant. A short-run model for changes in the price level explains the Chinese annual data from 1952 to 1983 better than the United States data from 1922 to 1953. This model is stable after 1979 and forecasts well in 1984. J. Comp. Econ. September 1987, 11(3), pp. 319–333. Princeton University, Princeton, New Jersey 08544, ©1987 Academic Press, Inc.

The following sections are included:

• INDEX