An analysis of China's economic development policies and prospects

Business Economics, July, 1998 by Roger Chen

2. The growth of these large firms will absorb the surplus workforce and alleviate the unemployment burden.

3. The government hopes that these large Chinese firms can become the backbone of their national economy, competing with foreign companies that have penetrated the Chinese market.

Whether these strategies will solve China's daunting SOE problems remains unclear.

Industrial Development Policies

China's economic growth mainly comes from three sources: (1) exports; (2) the domestic consumer market; and (3) government investment in infrastructure and industries. Due to the Asian financial crisis, China expects that it may have difficulties experiencing high growth in exports in 1998, so that the export contribution to economic growth will decrease. Domestic consumption also is expected to be weak, mainly because of the growing unemployment problem, which not only reduces many people's purchasing power but also shakes consumer confidence. Therefore, government investments must be the major source of economic growth. It is estimated that the government plans to invest about 3 trillion yuan (more than $300 billion U.S. dollars) to boost economic growth. The government also intends to use these huge investments to modernize its economic structure. The development strategies focus on three areas:

1. Infrastructure and public sectors. Because China needs to improve its infrastructure to boost economic growth, it has undertaken several major infrastructure projects, such as the Three Gorge Dam and the PuDong international airport. In the next few years, the Chinese government will invest heavily in dams, water supply, ports, airports, and power generation and distribution. The World Bank estimated that from 1995 to 2004, China needs $280 billion to invest in infrastructure and public facilities. The Chinese government, however, predicted that the country will need some $800 billion to develop its public facilities and infrastructure in the next ten years (People's Daily, December 27, 1997). These investments will not only drastically improve China's economic infrastructure but will also become critical driving forces for China's economic development.

2. The Chinese government has decided to develop modern and strategically important industries, such as electronics, information technology, software, automobile, pollution control and raw material industries. China wants to develop these sectors not only to modernize its industries, but also to create new economic growth sources. To develop these sectors, the government will invest heavily and try to attract more foreign capital and technologies in these sectors.

3. The Chinese government also plans to invest in traditional industries. Currently, many small SOEs use very backward equipment and facilities. Most of their products are outdated and are of low quality. Many of these firms are too small to enjoy economies of scale. These firms face great difficulties in the increasingly competitive Chinese markets. In some of these sectors, excessive manufacturing capacity also exists, which causes further difficulties for firm survival. To change the situation, the Chinese government encouraged small firms to merge, successful firms to grow and acquire weak firms. In addition, the government will invest heavily in the sectors. But these investments are not to increase capacity. The government has made it clear that it will restrict investments in projects that have low market potential or in which China already has excessive manufacturing capacity. The main objective is to use advanced technologies to renovate and upgrade existing facilities and help companies develop new products, thus increasing competitiveness.