China s Economic Reform and Development: A General Approach A lecture to students from Flinders Univ., Australia July 2014 Jihong Ding School of Economics Nankai University 1 Lecture Description This lecture will examine the performance of Chinese economy since 1978 Understanding China s economy is of intrinsic interest as one-fifth of the world population live in China It is also of interest in that China s economic growth has effects far beyond China s borders during the past thirty years. 2 1
China is the world's secondlargest economy China s miracle Its GDP is 56.9 trillion yuan in 2013, with growth rate 7.7% 3 Since the introduction of market-based economic reforms in 1978, China has become the world's fastest-growing major economy China s GDP growth from 1979 to 2007 is 9.8% a year China s miracle 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1978 500000 14.20% 471564 16% 450000 12.70% 401513 14% 400000 10% 10.10% 10.40% 314045.4 340903 10.40% 12% 350000 9.20% 300000 265810.3 10% 9.20% 250000 216314.4 9.60% 8% 200000 135822.8 159878.3184937.4 150000 6% 4% 100000 50000 2% 0 1980 1982 1984 1986 1988 1990 GDP 增长率 1992 1994 2003 2004 2005 2006 2007 2008 2009 2010 2011 1996 GDP 1998 2000 2002 2004 2006 2008 4 2010 0% 2
China s Growth Since 1949 China GDP: 67.9 billion yuan in 1952 30 trillion yuan in 2008 1952-2008 annual growth rate is 8.1% (world average annual growth rate is 3.6% for 1961-2008) 100m yuan 1952-2008 China GDP 5 2009-2013 China GDP and its Growth Rate 6 3
China s Growth Since 1949 China GDP per capita: 119 yuan in 1952 22,698 yuan in 2008 41,804.7 yuan in 2013 yuan 1952-2008 China GDP per capita 7 Readings China s Economic Transformation, 2nd ed, Gregory Chow, Wiley- Blackwell, 2007 The China Miracle: Development Strategy and Economic Reform, Justin Yifu Lin, Fang Cai and Zhou Li, the Chinese University Press, 2003 8 4
Main Topics Overview of the planning economy in the pre-reform period Overview of the post-1978 reform Economic growth & China s miracle China s Economic fluctuation 9 China s Planning Economy 10 5
China s Planning Economy The People s Republic of China was established on Oct 1, 1949 Since 1949, Chinese economy has made tremendous progress 11 The Planning Economy in the Pre- Reform Period From its founding in 1949 until late 1978, the P. R. China was a Soviet-style centrally planned economy There was no private businesses In Marxian economics, capitalism is a system based on exploitation 12 6
The Planning Economy in the Pre- Reform Period From its founding in 1949 until late 1978, the P. R. China was a Sovietstyle centrally planned economy Government s central planning formulates all decisions about the use of resources, and controls all major sectors of the economy 13 Planning V.S. Marketing Economies Scarcity and Choice are the two essential ingredients of an economic topic The resources are scarce while the desire is infinite We must make a choice when we try to meet the desire with the scarce resources Input B Product Possibility Frontier Input A 14 7
Planning V.S. Marketing Economies In a market setting, production, distribution, pricing, and investment decisions are made by individuals based upon their interests rather than upon a macroeconomic plan. Price is used to ration goods and resources There are multiple markets Each market has its own supply and demand P 15 Planning V.S. Marketing Economies Price Floor -> Excess Price Ceiling -> Shortage P m P 0 P D Excess E S P 0 P D E S P m Shortage O Q D Q 0 Q S Q O Q S Q 0 Q D Q 16 8
Planning V.S. Marketing Economies In a planned economy, planners decide what should be produced and direct lowerlevel enterprises to produce those goods in accordance with national and social objectives. Plan quota is used to ration goods and resources. 17 Planning V.S. Marketing Economies The grain tickets, the cloth tickets, pork tickets, the oil tickets, 18 9
Planning V.S. Marketing Economies Planning has the abilities to channel savings into productive investment and to coordinate economic activities that otherwise might not exist But the reality of central planning is that it is technically difficult highly politicized 19 The Planning Economy in the Pre- Reform Period Fast economic development in 1949-57 On the ruin of war, the national economy was recovered, and there was rapid growth of the industrial production Between 1949-52, the average annual growth of total industrial output value was 34.8% During the entire "First Five-Year Plan" period (1953-57), China's industrial production has made great achievements The average annual growth rate of industrial value added was 19.8%, while 3.8% for agriculture 20 10
China s Five-Year Plans China s five-year plans are a series of social and economic development initiatives. It started from the 1st plan in 1953-1957 The current plan is the 12 th guideline in 2011-2015 In order to more accurately reflect China's transition from a Soviet-style planned economy to a socialist market economy with Chinese characteristics, the name of the 11th and 12th five-year programs were changed to "guideline" instead of plan" 21 The Planning Economy in the Pre- Reform Period The Great Leap Forward famine and the adjustment of national economy, 1958-65 The planned economy largely stagnated and was disrupted by the Great Leap Forward, which was an economic and social campaign, from 1958 to 1961, aiming to rapidly transform the country from an agrarian economy into a modern communist society through the process of rapid industrialization, and collectivization. The Great Leap Forward ended in famine, a disaster from grain shortage With three (1963-65) years comprehensive management of the national economic development, China's economy was recovered. The industrial growth has significantly accelerated. The average annual growth of the industrial value added, was 21.4% during 1963-65 22 11
The Planning Economy in the Pre- Reform Period Industrial economic ups and downs, 1966-78 The Cultural Revolution was a social-political movement from 1966 through 1976, which disrupted the economy, leading ups and downs of industrial economy The national economy has not yet fully on track 1976-78 23 China s Economic Reform 24 12
China s Economic Reform Since 1978, Deng Xiaoping and the new Chinese leadership began to reform the economy and move towards a more market-oriented economy with Chinese characteristics Free up our minds, Seek truth from facts No matter whether it is a white cat or a black cat,a cat that can catch rats is a good cat We have to wade across the stream by feeling the way, since there is no previous experience to fall back on, 25 China s Economic Reform The strategic plan of modernization in three steps: Using 1980 as the base year, the first step is to double GDP in the decade from 1981 to 90, to solve the problem of food and clothing for people across the country The first step was actually realized in 1987 The second step is to further double GDP in another decade from 1991 to 2000, so that people's living standards can reach a fairly comfortable level The second step was actually realized in 1995 The third step is that until the mid-21st century, China's per capita GDP reaches the level of moderately developed countries in the world, people's living standards are relatively affluent, and modernization is basically realized 26 13
China s Economic Reform 1978-84 Household-responsibility system By the late 1970s, food supplies and production had become very deficient First reforms began in agriculture, a sector long neglected 27 China s Economic Reform 1978-84 In winter 1978, 18 farmers from Xiaogang Village pressed the red handprints in the land responsibility contract, in the way of Tuogu The "press" became the first declaration of China's rural reform, and opened the prelude to China's reform and opening up 28 14
China s Economic Reform 1978-84 Household-responsibility system This system divided the land of the People s communes into private plots Farmers were able to keep the land's output after paying a share to the state (sell it in the market) It increased agricultural production, and stimulated rural industry 29 Agriculture Since the reform, there has been a significant increase in grain and other major agricultural production production of wheat in China (1961-2004) 30 15
Agriculture Since the reform, the income of rural residents has been substantially increased, and their living standards are improved In 1978-2007, the per capita net income of farmers increased from 134 yuan to 4140 yuan, after deducting price factors, the average annual increase of 7.1% 31 China s Economic Reform 1978-84 Reforms were also implemented in urban industry to increase productivity A dual price system was introduced State-owned industries were allowed to sell any production above the plan quota, and commodities were sold at both plan and market prices, allowing citizens to avoid the shortage of the pre-reform era e.g.: oil pice: 100 yuan per ton at plan price, while more than 600 yuan per ton at market price 32 16
China s Economic Reform 1978-84 China has experienced three shifts of dual price system to the one price system the first is the production the second is the RMB exchange rate the third is in the capital market RMB exchange rate, the review 33 China s Economic Reform 1978-84 Reforms were also implemented in urban industry to increase productivity Private businesses were allowed to operate, and they gradually began to make up a greater percentage of industrial output 34 17
China s Economic Reform 1978-84 The country was opened to foreign investment The government created a series of special economic zones for foreign investment that were relatively free of the bureaucratic regulations and interventions that hampered economic growth, i.e., Shenzhen, Zhuhai, Shantou, and Xiamen in 1980 35 Shenzhen was a fishing village before 1980 Migrant workers moved to Shenzhen since 1980s Today s Shenzhen Famous billboard of Deng in Shenzhen 36 18
China s Economic Reform 1978-84 The country was opened to foreign investment Special Economic Zones Engines of growth for the national economy Pilot region of reform. The main purposes and effects are: to expand the country's foreign trade; to absorb more foreign funds, technology and management experience; to increase employment opportunities; to speed up the regional economic development, and the formation of a new industrial structure 37 China s Economic Reform 1978-84 The country was opened to foreign investment Special Economic Zones Hainan Province was established as SEZ in 1988 Kashgar in Xinjiang was established as SEZ in 2010 There are Development Zones in almost all cities/counties now 38 19
Four Steps of China s Opening up Process China's opening up is from south to north, from east to west China s opening up process can be divided into 4 steps: The first step is the founder of Special Economic Zones The second step is to open the coastal port cities 14 cities in 1984, e.g.: Tianjin, Shanghai The third step is to establish a coastal economic open zones Yangtze River Delta, Pearl River Delta and Minnan Triangle in 1985, Bohai Sea Open Area in 1988 The fourth step is to open cities along the Yangtze River, the inland cities and the border cities 5 cities along the river in 1992, e.g.: Wuhan, Chongqing 17 inland cities in 1992, e.g.: Changsha, Chengdu, More than 15 border cities in 1992, e.g.: Heihe, 39 China s Economic Reform 1985-93 Township and village enterprises (TVEs) TVEs, firms nominally owned by local governments but effectively private, began to gain market share at the expense of the state sector State control began to be decentralized, leaving local provincial leaders to experiment with ways to increase economic growth and privatize the state sector TVEs include enterprises sponsored by townships and villages, the alliance enterprises formed by peasants, other alliance enterprises, and individual enterprises located in townships and villages 40 20
China s Economic Reform 1985-93 Township and village enterprises TVEs became the most vibrant part of the Chinese economy as they experienced significant expansion in the 1980s and early 1990s TVE employment grew from 28 million in 1978 to a peak of 135 million in 1996. In Jiangsu and Shandong they employed some 30 percent of the rural workforce. 41 China s Economic Reform 1985-93 Township and village enterprises Production of TVEs increased to 1.8 trillian yuan in 1992 from 49 billion yuan in 1978. In 2002, there was 21 million TVEs. GDP of TVEs was about 34% of China s GDP 2002 TVEs 42 21
China s Economic Reform 1993-2005 In 1997 and 1998, large-scale privatization occurred, in which all state enterprises, except a few large monopolies, were liquidated and their assets sold to private investors Between 2001 and 2004, the number of state-owned enterprises decreased by 48 percent. The domestic private sector first exceeded 50% of GDP in 2005 and has further expanded since. However, some state monopolies still remained, such as in petroleum and banking. 43 China s Economic Reform 1993-2005 Dec 11, 2001, China formally joined the WTO As of 2010, China s all commitments of its access to WTO have been fulfilled China reduced tariffs, trade barriers and regulations. China reduced tariffs of imports from 15.3% in 2001 to 9.8% in 2010 China further expanded the service market opening. China opened 100, among 160 sub-sectors of the WTO Trade in Services Classification, close to the average level of developed countries. Covering finance, telecommunications, retails, household appliances, and etc 澳洲联邦银行 (Commonwealth Bank of Australia) 44 22
China s Economic Reform 1993-2005 Dec 11, 2001, China formally joined the WTO Joining the WTO has profound and long-term effects on China's economy, although short-term difficulties are inevitable 45 China s Economic Reform 1993-2005 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 货物出口额 货物进口额 货物进出口总额比上年增长 18986 17435 15779 14285 13948 12186 12017 11331 9690 9560 10056 7620 7519 5933 6600 5612 34.70% 36% 23.20% 23.80% 23.50% 17.80% 13.90% 2004 2005 2006 2007 2008 2009 2010 2011 140% 120% 100% 80% 60% 40% 22.50% 20% 0% 46 23
Exports Imports Net Export 47 China s Economic Reform 1993-2005 Foreign exchange reserves ranked first in the world 35000 30000 28473 31811 25000 23990 20000 15000 10000 5000 6099 8189 10663 15282 19460 0 2004 2005 2006 2007 2008 2009 2010 2011 2004 2010 年年末国家外汇储备 ( 单位 : 亿美元 ) 48 24
China s Economic Reform 2005- Present Scientific Developement was proposed by Former President Hu in 2003, and was implemented since the 11th Five-Year Guideline Meaning: People-oriented, comprehensive, coordinated and sustainable development 49 China s Economic Reform 2005- Present Scientific Developement Fundamental methods: co-ordination of the urban and rural development, balancing regional development, co-ordination of economic and social development, co-ordination of human and nature harmonious development, co-ordination of domestic development and opening-up 50 25
Economic Growth & China s Miracle 51 Economic growth & China s miracle Since the introduction of market-based economic reforms in 1978, China has become the world's fastestgrowing major economy China s GDP growth from 1979 to 2007 is 9.8% a year 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 GDP 增长率 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 500000 14.20% 471564 16% 450000 12.70% 401513 14% 400000 10% 10.10% 10.40% 314045.4 340903 10.40% 12% 350000 9.20% 300000 265810.3 10% 9.20% 250000 216314.4 9.60% 8% 200000 135822.8 159878.3184937.4 6% 150000 4% 100000 50000 2% 0 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 52 GDP 26
Economic growth & China s miracle Growth rates of BRICS 12 中国, 10.3 10 中国, 9.2 印度 8 巴西 印度 中国, 7.5 印度 6 4 俄罗斯 南非 巴西 俄罗斯 南非 巴西 俄罗斯 南非 2 0 2010 2011 2012E 53 Economic growth & China s miracle Growth rate of real GDP per capita of BRICS and USA in 2001-2011 Source: World Bank 54 27
Economic growth & China s miracle 80 70 资本投入增长贡献率 Capital contribution share 劳动投入增长贡献率 Labor contribution share TFP contribution 增长贡献率 share 60 50 40 30 20 10 0 1981-2005 1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 55 Economic growth & China s miracle Demographic dividend & demographic liabilities Baby boom in the working period Baby boom in the retirement period 56 28
Proportion of people during15-64 Proportion of people younger than 15 Proportion of people older than 65 Proportion of people in different ages in China Proportion of people during15-64 India China Japan 57 Economic growth & China s miracle Capital accumulation during industrialization Although China used to have more than 70% of population in rural areas, China's economic growth depends not on agricultural sector but on the industrial sector, especially the expansion of the manufacturing sector. China s economic growth, to a large extent, is similar to the pattern of new industrialization strategy in East Asia s emerging industrialized economies. 58 29
60 50 Economic growth & China s miracle Industrial scale keeps growing. The dominant position of industry in the national economy has been strengthened. China's industrial share of GDP is 46.8% 第一产业第二产业第三产业 40 30 20 10 第一产业 10.10% China 2011 0 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 59 Economic growth & China s miracle China's economic growth is in fact driven by the manufacturing sector rather than the agricultural sector In theory, the growth of the industrialized type of format is close to the neoclassical growth model. The high savings rate and rapid capital formation is the main source of economic growth. 60 30
Economic growth & China s miracle Industrialization is main engine of growth in China Fixed Investment / GDP (%) 61 Economic growth & China s miracle This increase in industrial output is largely the result of the removal of barriers to entry and increased competition since the reform 62 31
Economic growth & China s miracle Industrialization and urbanization are complementary with each other China's urbanization rate increased from 17.9% in 1978, to 44.9% in 2007, to above 52.57 % in 2012 urbanization rate: proportion of urban population in the total population Urban population Rural population 63 Economic growth & China s miracle China's urbanization 65% 60% 60% 55% 52.57% 2011 年超过 in 2012 50% 50% 45% 45.70% 40% 37.66% 35% 30% 27.99% 30.48% 25% 23.71% 20% 17.92% 15% 1978 1992 1997 2002 2009 2015 2020 64 32
Economic growth & China s miracle period 1981-2005 1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 GDP growth rate 9.8 10.8 7.9 12.3 8.6 9.5 TFP growth rate 3.6 4.5 1.5 7.1 3.5 2.9 TFP contribution share 36.7 41.6 19.5 57.5 40.8 30.6 It is expected that China s TFP growth in 2012-2020 will still be around 2.5%-3% 65 Economic growth & China s miracle Government s education expenditure is 4% of GDP 66 33
Economic growth & China s miracle China s R&D expenditure was 1.83% of GDP in 2011 2.50% 2.20% 2.00% 1.50% 1.75% 1.83% 1.00% 0.50% 0.00% 2010 2011 2012 2013 2014 2015 研究与实验发展经费支出占国内生产总值比重 % 67 China s Economic Fluctuation & Macroeconomics Policies 68 34
China s Economic Fluctuation & Macro Policies Before the reform, there existed output ups and downs, sometimes negative growth. GDP % 30 20 10 0-10 -20-30 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 69 China s Economic Fluctuation & Macro Policies Since the reform, the output fluctuation has been decreased. 30 25 20 GDP growth CPI growth 15 10 5 0-5 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 70 35
China s Economic Fluctuation & Macro Policies Three components of demand are also called three horses driving Chinese economy ahead: consumption, investment, and export 71 China s GDP by Expenditure approach 80 70 Final Consumption Rate Capital Formation Rate Net Export Rate 最终消费率 资本形成率 净出口率 60 50 40 30 20 10 0-10 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 72 36
Contribution Share and Contribution of the Three Components of GDP to the Growth of GDP Data in value terms in this table are calculated at constant prices. Final Consumption Expenditure Gross Capital Formation Net Exports of Goods and Services Year Contribution Share Contribution Contribution Share Contribution Contribution Share Contribution (%) (percentage points) (%) (percentage points) (%) (percentage points) 1978 39.4 4.6 66.0 7.7-5.4-0.6 1980 71.8 5.6 26.4 2.1 1.8 0.1 1985 85.5 11.5 80.9 10.9-66.4-8.9 1990 47.8 1.8 1.8 0.1 50.4 1.9 1995 44.7 4.9 55.0 6.0 0.3 2000 65.1 5.5 22.4 1.9 12.5 1.0 2001 50.2 4.2 49.9 4.1-0.1 2002 43.9 4.0 48.5 4.4 7.6 0.7 2003 35.8 3.6 63.2 6.3 1.0 0.1 2004 39.5 4.0 54.5 5.5 6.0 0.6 2005 37.9 4.3 39.0 4.4 23.1 2.6 2006 40.0 5.1 43.9 5.6 16.1 2.0 2007 39.2 5.6 42.7 6.1 18.1 2.5 2008 43.5 4.2 47.5 4.6 9.0 0.8 2009 47.6 4.4 91.3 8.4-38.9-3.6 2010 36.8 3.8 54.0 5.6 9.2 0.9 Contribution share of the three components to the increase of the GDP refers to the proportion of the increment of the each component of GDP by expenditure approach to the increment of GDP. 73 Contribution of the three components to GDP growth refers to the growth rate of GDP multiplied by the contribution share of the three components. China s Economic Fluctuation & Macro Policies The fiscal revenue in 2011 was 10.3740 trillion yuan, about 22% of GDP. Gov Rev (100m yuan) Gov Rev / GDP (%) Gov Exp (100m yuan) 74 74 37
China s Economic Fluctuation & Macro Policies China's government debt is safe, controlled In the end of 2011, Chinese government has total liabilities of 19.9 trillion yuan, 42% of GDP, which is below international warning line 60% The public debt ratios in such developed countries as France, Germany, Japan, the United States, and United Kingdom are all about twice that of China The average ratio of OECD is more than twice that of China the ratios of BRIC other three countries are also significantly higher than that of China 75 China s Economic Fluctuation & Macro Policies China s money growth rate was higher than its GDP growth rate in decades, leading to rises of CPI The annual growth rate of nominal GDP was 16% in 1978-2009 The annual growth rate of M2 was 22.5% in 1978-2009 M2 growth rate GDP growth rate CPI growth rate China s money growth rate, GDP growth rate, and CPI growth rate since 1980 76 38
China s Economic Fluctuation & Macro Policies China's currency rate, measured by the M2/GDP, is high (178% in 2009) M2/GDP for selected countries(1985-2009) US UK Japan Singapore 77 China 78 39