China’s economy: A remarkable transformation

[freemexy]

The pace of economic change in China has been extremely rapid since the start of economic reforms just over 25 years ago. According to official statistics, economic growth has averaged 9.5% over the past two decades and seems likely to continue at that pace for some time. National income has been doubling every eight years. Such an increase in output represents one of the most sustained and rapid economic transformations seen in the world economy in the past 50 years.To get more economy news today, you can visit shine news official website.

The size of the economy, when adjusted for differences in purchasing power, is already larger than all but one or two OECD economies, depending on the purchasing power parity used for comparison. While average incomes are still below those in other middle income countries, there are large parts of the country that resemble developed East Asian countries just one generation ago and are proceeding along a similar rapid catch-up path. Many industries have become completely integrated into the world supply chain and, based on current trends, China could become the largest exporter in the world by the beginning of the next decade, with as much as 10% of global trade compared with 6% at present.

This extraordinary economic performance has been driven by changes in government economic policy that have progressively given greater rein to market forces. The transformation started in the agricultural sector more than two decades ago and was extended gradually to industry and large parts of the service sector, so that price regulation was essentially dismantled by 2000 outside the energy sector. During this period, the government introduced a pioneering company law that for the first time permitted private individuals to own limited liability corporations. The government also rigorously enforced a number of competition laws in order to unify the internal market, while sharpening the business environment by allowing foreign direct investment in the country, reducing tariffs, abolishing the state export trading monopoly and ending multiple exchange rates.
The momentum towards a freer economy has continued this decade with membership of the World Trade Organization leading to the reform of a large number of China’s laws and regulations and the prospect of further tariff reductions. In 2005, regulations that prevented privately-owned companies from entering a number of sectors of the economy, such as infrastructure, public utilities and financial services were abolished. Overall, these changes have permitted the emergence of a powerful private sector in the economy.

But that is not all. The government has also introduced wide ranging reforms into the state-owned sector that dominated the economy in the early 1990s. State-owned enterprises have been transformed into corporations and many have been listed on stock exchanges since these were re-opened 15 years ago. Since 1998, a policy of “letting small enterprises go” through privatisation and closure on the one hand, and restructuring large companies on the other, has proved successful. The number of state-controlled industrial enterprises fell by over one half in the following five years and their payroll dropped by over 14 million, thanks in part to the introduction of more flexible employment contracts. This process was helped by the creation of unemployment and welfare programmes.

These and other reforms have improved the framework for mobilising the resources generated by one of the highest rates of savings in any economy–the gross saving rate approaches half of GDP–generating a particularly rapid increase in the capital stock, although such growth estimates can only be approximate. Investment has also led to an increasingly urban society–a movement that has gone in step with a flow of people from the land into the service and manufacturing sectors of the economy. Since workers in agriculture have low productivity, this movement has given a sharp boost to growth.

Moreover, the government has pursued a policy of raising the educational qualifications of young people. It launched a programme to give all children nine years’ education, moving recently to ensure that all rural areas achieve this goal by 2006. Higher education has also been transformed. The wages for educated staff have been pushed up by the growing influence of a market economy.

Still, the high level of investment should not obscure the need for much better allocation of capital. To be sure, government debt has been stabilised at only one-third of that seen in the OECD area. But banks have not been lending on a commercial basis and so bad loans are equivalent to 30% of GDP and this will, eventually, have to be financed by the government. A start has been made on re-organising the major banks. A considerable effort is still needed to ensure that the whole of the banking system acts in a commercial manner. Moreover, capital markets need to be reformed: the state-owned shares of listed companies should be made tradable and both stock and bond markets need to be opened to private companies.