New PRC leadership to continue economic and trade reforms; prospects for U.S. exports are expected to improve - People's Republic of China

Business America, April 25, 1988 by Chen Nai-Ruenn

Prospects for U.S. Exports Are Expected to Improve

U.S. exports to the People's Republic of China in 1988 are projected to reach $4 billion, an increase of 14 percent over 1987. Exports began to grow in the second half of 1987, supported by an increase in China's foreign exchange reserves, the decline in the value of the dollar, and the desire of the Chinese Government to move forward aggressively with major projects in the current five-year plan.

U.S. imports from China will likely increase to about $8 billion this year, from the 1987 level of $6.9 billion. This increase would represent a continuation of the pace of growth of the last several years. Thus, this year's U.S. trade deficit with China could reach $4 billion, compared to $3.4 billion in 1987.

China's economy grew impressively in 1987. Real GNP rose 9.4 percent. The gross value of industrial output grew by 16.5 percent. Heavy and light industries grew at about the same rate. Industrial output of the non-state sector grew faster than that of the state-owned sector. Output of state enterprises increased by 11 percent, while collectively-owned enterprises registered a 25 percent increase, individually-owned enterprises 48 percent, and foreign invested enterprises 98 percent. The Chinese economy remained seriously "overheated," giving rise to concerns that the lagging growth of the energy and raw materials sectors could result in serious shortages of industrial inputs.

The efficiency of state industrial enterprises improved last year. A greater number of these enterprises adopted an independent management system called the "contract responsibility system." Last year's labor productivity rose by 7.6 percent, but high production costs and low rates of return continued to plague the operations of many state industrial establishments.

Agricultural production in 1987 increased 4.7 percent. Due to bad weather and a reduction in sown acreage, grain output failed to reach the 1987 target of 405 million tons. At 402.4 million tons, however, last year's production was some 11 million tons more than the 1986 level. Cotton output totaled 4.19 million tons, up 18.4 percent from 1986. Output of sugarcane, beetroot, jute, and ambary hemp declined. The number of pigs and pork production also dropped, largely due to an economically irrational relationship between feed grain and pork prices.

Retail sales increased 9.6 percent in real terms in 1987. For many years, market supplies have failed to keep pace with growing consumer demand. Shortages of certain consumer durables and non-staple foods were particularly acute. Inflation remained a serious problem. Retail prices were up 7.3 percent nationwide, and 9.1 percent in cities. To alleviate the inflationary pressures, the government has tightened control over credit growth, and has reintroduced rationing of pork, eggs, and sugar in urban areas.

China's campaign to reduce its growing overall trade deficit showed remarkable results in 1987. Exports grew to $39.5 billion, an increase of 27.8 percent over 1986, while imports dropped by 0.7 percent to $43.2 billion. The trade deficit fell to $3.7 billion, from $12 billion in 1986. Many items included in Chinese import statistics, such as those used for joint ventures, processing and assembling arrangements, and compensation trade, do not involve foreign exchange outflows. Taking this factor and the reported $3.39 billion surplus in invisibles, we believe that China had its first current-account surplus since 1984. As a result, foreign exchange reserves increased from $10.5 billion at the end of 1986 to $15.2 billion last October.

During 1987, 2,230 foreign investment projects were approved by the Chinese Government. The total contract value for these investments was $3.68 billion, an increase of 30 percent over 1986. From 1979 to the end of 1987, the number of foreign invested enterprises grew to 10,008, with $21.96 billion in foreign capital commitments. During the same period, U.S. companies signed over 300 investment contracts with China, committing a total of $3.1 billion. At present, the United States remains the second largest source of foreign investment capital after Hong Kong, and has established the third largest number of investment operations following Hong Kong and Japan.

Political developments in China in the last six months have given foreign businesses renewed confidence about trade and investment activities in that country. Last October, China's Communist Party Congress elected a new, reformist leadership. China's best known reformer, Zhao Ziyang, was named Party General Secretary, and the recently concluded National People's Congress confirmed the reformist slate, and took further steps to shrink and consolidate China's lumbering bureaucracy. In December, Li Peng was chosen as Acting Premier of the State Council. The new leaders have focused their efforts on economic development. They also have taken major steps to advance the economic and trade reform program begun in 1979.