~MAY 1999~

1998 was the most difficult year for China's economy. It becomes clearer and clearer that China's economy is adversely affected by the financial crisis in Asia although the Chinese currency, RMB, has not been devalued. The growth of industrial output was negative in the first half of 1998 though a little growth reappeared in the second half. There was zero growth of investment in the non-public sector in the first half of 1998 (1).

There are two key issues facing the Chinese Government. The first one is the stability of currency. The Chinese Government has repeatedly emphasized that the Chinese currency, RMB, will not be devalued. It is a way to maintain the purchasing power of Chinese people and to avoid social unrest (2). The second issue is that economic growth should be kept at eight percent or above. It is believed that this is not a matter of ability, but a matter of necessity. In the last few years, economic growth has moved downwards. Many people think that this movement must be changed and eight- percent economic growth is the minimum standard (3).

Moreover, high economic growth is the only way to defend the RMB. Continuous decline of growth rate will cause instability in the Chinese currency and social unrest. Secondly, high economic growth can create more job opportunities. Unemployment in urban areas has been increasing consistently. Moreover, the reform of state-owned enterprises in China has produced more than 10 million laid-off workers (4). To the Chinese Government, high economic growth is the only way to create more opportunities for laid-off workers. For example, they can run small private businesses. In fact, there were fewer jobs in 1998 than in 1997. Labour supply is much greater than demand (5).

Economic growth and foreign investment

To the Chinese Government, to safeguard the currency and maintain high economic growth are twin brothers. However, they will not come together necessarily in reality. Since rapid devaluation of currencies of other Asian countries, China's exports have become less competitive because RMB has not been devalued. Export growth was down and made zero contribution to the growth of GDP in 1998, and the growth may be negative in 1999 (6).

Foreign investment is also down because of economic difficulties. Committed foreign investment decreased by 24.2 percent in 1997 although actual foreign investment went up by 15.7 percent. Since the committed foreign investment will be realized a few years later, foreign investment will become less in the coming few years and it will definitely push down economic growth in the future (7). In fact, due to keen competition of other developing countries, foreign investment in China has become unstable in the last few years. Sometimes growth went up and sometimes it went down. The financial crisis makes the situation worse.

The Chinese Government also realizes that long-term dependence on foreign investment as the main force for economic growth is dangerous, in particular, export conditions are less favourable in the face of keen competition from other developing Asian countries. Export growth has moved downwards since 1993 and it is estimated that the growth may be negative in 1999 (8). Unfavourable export conditions attract less foreign investment. Under the threat of less foreign capital, the Chinese Government has tried hard to expand local consumption. From 1993 to 1996, high inflation weakened the purchasing power of people and discouraged local investment. In 1996, one of main targets for the Chinese government was to keep inflation at four percent or below (9). It was successful but local consumption did not go up much.

Because of the financial crisis and unfavourable export conditions, the growth of local investment is lower than expected (10). In 1998, although the Chinese Government took the initiative to increase the growth of investment by state-owned enterprises on fixed capital by 20 percent, but the total growth of investment on fixed capital in China in 1998 was 15 percent only, three percent lower than expected. Low growth of bank loans also indicates hesitation of local investment. The amount of new loans in the first half of 1998 could not even reach one third of expectations (11).

The consumer market in China is continuously expanding, but it only constitutes a small percentage of China's GDP. In addition, because many people's income will come down or will be below what was predicted, the consumption market cannot be expanded much.

Low investment and weak consumption create big difficulties for enterprises in China. A scholar warns that most enterprises in China have big bank loans. Now the total liability rate of enterprises in China is up to 85 percent. Low investment and weak consumption create less space for enterprises. They could easily collapse or be forced to delay repaying loans or interest to banks. This would threaten the financial system in China eventually and also create more unemployment (12). It is a serious issue indeed.

The new poor class

Weak consumption results from high inflation and uneven distribution of wealth. Although the Chinese Government succeeded in pushing down inflation to a low rate, zero in 1997 and negative in 1998 (13), uneven distribution of wealth is still very serious and is becoming more serious. In fact, salary growth was far below the growth of GDP in China over the last decade. From 1986 to 1997, the average growth of GDP in China was 9.8 percent, but salary growth on average was only 4.2 percent. This makes citizens' consumption growth always below the growth of GDP (8.2 percent on average). In 1997, family income only shared 45.5 percent of GDP in China, but was 57.7 percent in 1985. It is clear that majority of wealth is shifted to business (14).

China's economic reform has been proceeding for twenty years. Adherents of pragmatism believe that a small number of people will be rich first, and the rest come later. Therefore, uneven distribution of wealth is acceptable. Since the 1990s, however, the gap between the rich and the poor has become wider and wider because of rapid growth of the share market. From 1990 to 1998, the difference between the income of the top 20 percent and the poorest 20 percent in the urban area increased from 4.2 times to 9.6 times. For the lowest 20 percent, the ratio of their income to the total income in the urban area fell from 9.0 percent down to 5.5 percent. But for the top 20 percent, the ratio was increased from 38.1 percent to 52.3 percent. This is even worse than in the United States (15). Someone even guesses that the Gini Co-efficiency data in China has reached 0.59 (16). This is very horrible.

If every citizen's quality of life could be improved, a big gap between the rich and the poor could be tolerated (17). However, in the 1990s, a new poor class is emerging in urban areas. Most of them are laid-off workers in state-owned enterprises (18). Due to corruption and poor management, more than 50 percent of state-owned enterprises are losing money. So many workers are laid off. According to data from the Chinese Labour Ministry, 10.7 million workers have been laid off. Among them, 66.8 percent (7.14 million) are workers from state-owned enterprises (19). They are entitled to the minimum wages, but hardly ever receive them. Among the laid-off workers, only 50 percent receive regular subsidies. On average, everyone can only get RMB182 a month. 46 percent of laid-off workers (3.3 million) cannot enjoy the minimum living standard (20).

Moreover, most laid-off workers cannot easily get other jobs. According to a research on the laid-off workers in Tianjin, 58.7 percent of laid-off workers do not find new jobs. Of those who changed jobs, only 16.7 percent have signed contracts with their new employers, and 58.2 percent work as temporary workers. It means that they can easily lose their jobs again. Their average income is also lower than the average income of the city(21).

To those workers who are still working, their situation is not good either. In a research on enterprises in 13 provinces in China, by the end of September 1998, 29 percent of enterprises (33,988 enterprises) stopped production or had inadequate production. In total 6.25 million workers did not receive their salaries. Total wages in arrears were RMB 17 billion. Even worse, more than 1.6 million workers are living below the poverty line (22). Research in October 1998 showed that the ones who benefit the least from economic reform are workers of state-owned enterprises. The second are peasants and the third are peasant workers. One the whole, workers suffer the most (23). The group who benefits the most is private business people because most wealth is shifted to them (24).

Those who do not enjoy minimum protection are supposed to get public assistance from local governments. Due to the economic imbalance of different areas in China, some local governments have no money to provide such minimum protection. It is estimated that less than a million people really receive public assistance from government. Although the Chinese Government has huge foreign reserves, it still tries to keep money in hand to defend the Chinese currency, which makes the situation worse.

The poor population in urban areas in China is continuously increasing. Millions of people will join this group every year. The social security system is still poor in China. Traditionally, social security is the work of enterprises. According to the 1995 Labour Law, enterprises should participate in various kinds of social insurance for workers, but most private and foreign enterprises do not do so. So the coverage is limited, mainly to workers in state-owned enterprises. Because state-owned enterprises are losing money, many workers do not enjoy real protection. For instance, in protection for retirement, by the end of 1998, 1,700 workers did not get their pensions and medical allowances. The total amount was RMB 20 billion (25).

Those who do not enjoy minimum protection are supposed to get public assistance from local governments. Due to the economic imbalance of different areas in China, some local governments have no money to provide such minimum protection. It is estimated that less than a million people really receive public assistance from government (26). Although the Chinese Government has huge foreign reserves, it still tries to keep money in hand to defend the Chinese currency, which makes the situation worse.

Conclusion

China's economy is adversely affected by the financial crisis in Asia. Less foreign investment and low incentives for local investment have pushed down economic growth. Low economic growth cannot lessen the suffering of huge unemployment. However, the financial crisis is not the cause of economic difficulties in China. It just intensifies the problems and makes them more explicit. In fact, many problems have existed for several years. Instability of foreign investment began in 1993 and economic growth has declined. Huge unemployment has emerged because of rapid marketisation. In the process of marketisation and trade liberalisation, state-owned enterprises are being reformed which creates numerous laid-off workers (27). All of these problems are built-in in the existing structure of China's economy in the process of marketisation. The problems will come out once the economy develops to a certain stage. As He Qinglian mentions, the wonderful fruits of the economic reform in the 1980's in China is only a result of primary capital accumulation. It is a primitive capitalism. Economic growth will rapidly develop for a certain time, but it will also cause many problems. Many social problems will also occur. Economic development cannot be measured simply by the growth of GDP. Uneven distribution of wealth cannot be ignored. It will also undermine the economic growth (28). China's economic reform has been proceeding for twenty years. It is a good time for comprehensive evaluation and forecast. It seems that primitive capitalism can no longer bring a promising future. A new direction should be found.

In the process of marketisation, workers are the victims. They are the first group to suffer and suffer the most. The question is that if someone must be sacrificed in the process of economic reform, why should workers bear almost all the pain? Is it fair?

By CHAN Ka Wai
Associate Director

*1. Investment of non-public sector shares 46 percent of investment on fixed capital in China. "A Summary of 'the Autumn Conference on the Analysis and Forecast of China's Economic Situation, 1988'", in Liu Guoguang, et.al. (eds.), Analysis and Forecast of the Economic Situation in China in 1999 (Beijing: Social Science Documents Press, Dec. 1998), p.27.
*2. Although the Chinese government holds US$140 billion in foreign reserves (the second largest in the world), the growth of money supply is behind expectations. In the first half of 1998, the growth of M0, M1 and M2 are 6.6 percent, 6.7 percent and 14 percent respectively. The data is far below expectations. Moreover, it is the lowest growth in the last two years. Ibid., p.34.
*3. Ibid., p.29. Some scholars warned that it was not difficult to keep economic growth at 8 percent in 1998 if the Chinese Government determined to do so (but the actual economic growth in 1998 was 7.8 percent). The question is whether the means, such as issuing bonds and mass expansion, are short- or long-term activities. How can we guarantee that the economic growth is still at 8 percent or above in 1999? A crazy search for high economic growth could easily create many problems. See Li Yiyuan and Hua Ruxing, "On 'Ensuring 8 percent Growth Rate'", Analysis and Forecast of the Economic Situation in China in 1999, p.142.
*4. Laid-off (xiagong) in China cannot be simply regarded as unemployment. Laid-off workers still maintain a certain relationship with their enterprises. They can still receive minimum wages or social security from their enterprises. Of course, many enterprises are losing money, so most of them cannot pay laid-off workers any money although they are still entitled to it.
*5. Mao Wing "Employment in China 1998-1999", Analysis and Forecast of the Social Situation in China in 1999 (Beijing: Social Science Documents Press, Jan. 1999), pp. 231-242.
*6. Li Jingwen and Zhu Yunfa, "An Analysis of the Trend of China's Economic Development in 1998-1999", Analysis and Forecast of the Economic Situation in China in 1999, p.42.
*7. A study predicts that the foreign investment on the fixed capital will be decreased by 10 percent and 5 percent in 1998 and in 1999 respectively. Ibid., p.45.
*8. "A Summary of 'the Autumn Conference on the Analysis and Forecast of China's Economic Situation, 1988'", p.29.
*9.Chan Ka Wai "Issues Facing China's Economy under the Financial Crisis in Asia", in Financial Crisis: Our Response (HK: Asia Alliance of YMCAs, 1998).
*10. "A Summary of 'the Autumn Conference on the Analysis and Forecast of China's Economic Situation, 1988'", p.27.
*11. Ibid., p.34.
*12. Zhou Tianyong, "Warning: Deep Recession Could Trigger off a Financial Crisis", Analysis and Forecast of the Economic Situation in China in 1999, p.36.
*13. Tang Jun, "Poverty and Poverty Alleviation in China", Analysis and Forecast of the Social Situation in China in 1999, p.403.
*14. "A Summary of 'the Autumn Conference on the Analysis and Forecast of China's Economic Situation, 1988'", p.31.
*15. Sun Li and Zheng Weidong, "1998-1999: Employment, Income Distribution, and Information Industry in China", Analysis and Forecast of the Social Situation in China in 1999, p.33.
*16. He Qinglian, The Primary Capital Accumulation in Contemporary China (HK: Mirror Books, 1997), p.258.
*17. In He's analysis, a wide gap between the rich and the poor not only results from marketisation, but mainly from uneven distribution of power. Most of the people who can get rich quickly are high ranking government officials or those who have close relationships with them. This makes people very dissatisfied. (See He's book, Ch.7). In fact, in the June-Fourth event in 1989, one of the early demands of students was to fight against corruption and uneven distribution of power.
*18. There are an estimated 15 to 18 million people living below the poverty line in urban areas. Almost half of them are laid-off workers and their families: Tang Jun, "Poverty and Poverty Alleviation in China", p.403.
*19. Lu Jianhua, "China in 1998-1999: Analysis and Forecast of Social Situation", Analysis and Forecast of the Social Situation in China in 1999, p.9.
*20. Qiao Jian, "Workers and Staff in 1988", Analysis and Forecast of the Social Situation in China in 1999, p.429.
*21. Yan Yaojun, et.al., "Sampling Study of Laid-offs in Tianjin", Analysis and Forecast of the Social Situation in China in 1999, p261.
*22. Ibid.
*23. Peasant workers are workers from rural areas working in factories in cities. Most of them are young women, aged from 16-23. Their working conditions are very harsh. Many of them are even working in dangerous conditions. The Hong Kong Christian Industrial Committee has done much research in the last five years about the working conditions of peasant workers.
*24. Lu Jianhua, "China in 1998-1999: Analysis and Forecast of Social Situation", Analysis and Forecast of the Social Situation in China in 1999, p.11.
*25. Ibid.
*26. Tang Jun, "Poverty and Poverty Alleviation in China", p.403.
*27. In the process of reform of state-owned enterprises, lay-offs become the only way for higher efficiency. Some scholars argue that this is incorrect. In many cases, the problem is not the number of workers, but rather poor management and corruption. The problem of redundancy should not be exaggerated. Yang Yiyong and Xin Xiaobai, "A Report on Laid-offs and Re-employment", Analysis and Forecast of the Social Situation in China in 1999, pp.251-2.
*28. He, Ch.5.