An analysis of China's economic development policies and prospects

Business Economics, July, 1998 by Roger Chen

The year 1997 was a good one for China's economic development. Its economic growth reached 8.8 percent, (a sustainable and less inflationary rate than earlier double-digit growth rates), total foreign investment increased 13 percent, while inflation was less than 1 percent. Exports, which play a critical role in the country's economic growth, increased 20 percent, reaching $180 billion and generating more than $40 billion of surplus (People's Daily, December 31, 1997). The country's foreign exchange reserves exceeded $140 billion.

At the same time, China's economic transition also reached a critical stage. Significant internal developments were and still are forcing the government to consider more aggressive reforms. Some of the government's greatest challenges lie ahead. These challenges include reform of state-owned enterprises (SOE), sustaining economic growth and coping with the Asian financial crisis. Overcoming these challenges will have a critical impact on China's economic transition and development in the next decade.

ECONOMIC REFORM: CHALLENGES AND STRATEGIES

State-owned Enterprise Reform

The emergence and development of a buyers' market in China have increased market competition and caused difficulties for many SOEs in China. This problem has become more serious in recent years. It is estimated that more than 45 percent of the SOEs in China are loosing money. In the past several years, China lacked a policy solution for the SOE problem. In 1996, the government developed a plan and specific measures to reform the country's SOEs systematically. The general idea is to transform these firms so that they operate and develop or else die under market competition. The government plans to solve the SOE problems in about three years.

The government has developed different strategies toward large and small SOEs. For large SOEs, the government plans to support and develop a number of large or superlarge SOEs or groups in each industry (the government calls this "grasp big" policy). For example, in the electronics industry, the government will support six large Chinese firms. In 1996, the government supported a total of 300 large SOEs and fifty-seven conglomerate groups. By the end of 1998, it will have increased its support to 512 large SOEs and 120 conglomerates Moreover, the government has chosen six superlarge companies from this group for additional assistance and intends to help them find a place among the 500 largest companies in the world by the year 2010. These six companies are in the steel making, home appliance, electronics, shipbuilding, and pharmaceutical industries. In total, the government plans to support some 1000 large state-owned companies or groups in the near future (People's Daily, January 20, 1998).

The Chinese government also will release the strict control it exercised over these large firms under the old central planning system. These companies will enjoy a high degree of autonomy so they can operate in competitive markets. Most of these large firms can issue stock, with the government serving as a shareholder. For example, the government plans to help these SOEs issue some $12.5 billion of stock (People's Daily, December 18, 1997). This approach represents a drastic change in the enterprise system, suggesting that China plans to use stock ownership to replace its traditional state-owned enterprise system (although for large firms the government is likely to retain majority control).

The Chinese government also has instituted favorable policies to support the development of large SOEs. For example, the government will help these firms cooperate with foreign companies to acquire advanced technology. Some firms currently enjoy tax benefits, and some receive government financial support in the form of loans and direct investment. In addition, the Chinese government plans to spend some $5 billion to absorb the bad debts of these large firms (People's Daily, December 18, 1991). At the same time, the government also encourages and helps these firms to acquire other companies, diversify into different business sectors, provinces, and even foreign countries. In sum, the Chinese government intends to make these companies key competitive players in their respective business sectors.

For small SOEs, the government has adopted a "let go" strategy. The government does not plan to support these firms, instead letting them die or grow under market competition. The government will allow small SOEs that are not doing well to go bankrupt or transfer ownership to private owners or even to employees. The government also encourages successful Chinese as well as foreign companies to acquire or merge with troubled small SOEs. In some cases, individuals can lease small firms for a few years and then transfer the ownership to the manager. Without government control, many small firms will become truly private firms.

China's SOE reform strategies have several objectives:

1. The government wants to support and develop large firms, and to make them strong players in their respective markets.