By Wang Mengkui, Lu Baipu, and Lu Zhongyuan

I. Phasic Changes of Great Historical Significance

In terms of the three-step modernization strategy, China has completed the first two steps by doubling the 1980 GDP in 1990 and again the 1990 GDP in 2000. From the beginning of the new century, China entered a new stage of moving toward its third-step strategic goal -- basic realization of modernization by the middle of this century.

1. Remarkable enhancement of comprehensive national strength.

During the 1978-2000 period, China's annual economic growth was 9.52 percent, the fastest in the world. In 2000, China's GDP reached 8.94 trillion yuan, or more than one trillion U.S. dollars at the current exchange rate, which ranked the sixth among the largest economies in the world. Compared with 1980, the GDP in 2000 was more than five times larger. While the population increased by 300 million, China's per capita GDP was quadrupled. This is higher than the goal set at the beginning of reform and opening up to quadruple the total amount of the economy in 20 years. As a result, the national wealth increased and the outputs of main industrial and agricultural products rose dramatically, with those of some important products ranking among world leaders. Since the mid-1990s, commodity scarcity that had long associated with China's economic development and its people's livelihood has become something of the past. This is a result of the development of productive forces and also a result of the change of economic system.

In a worldwide view, China's economic development has moved the country fro the low-income ranks to the mid-lower income ranks. According to the classification standard of the World Bank, the per capita GNP of the mid-lower income countries worldwide in 1999 was more than 756 U.S. dollars and China's per capita GNP reached 780 U.S. dollars in that year. In the year 2000, China's per capita GDP, slightly higher than the average per capita GNP, was 848 U.S. dollars. There are two factors that need to be taken into account when one examines the Chinese economy: the total amount and the per capita amount. The total amount of the Chinese economy indicates the country already has a considerable economic strength, while the relatively low per capita level (China ranked 140th among the 206 economies in the world in terms of average per capita GNP in 1999) is an indication that China is still a developing country.

2. Two historical steps forward in people's livelihood.

A qualitative change has taken place ill the livelihood of urban and rural residents. Both the structure of their consumption and the quality of their life have improved visibly. During the 1978-2000 period, the Engel coefficient for urban and rural residents dropped respectively from 57.5 percent and 67.7 to 39.2 percent and 49.1 percent. The number of people living in poverty in the urban and rural areas reduced drastically. In the rural areas ill particular, the number of poverty-stricken people fell by a big margin from 250 million ill 1978 to 30 million in 2000, with their proportion of the total rural population dropping from 30.7 percent to about 3 percent. In the urban areas, multiple forms of employment have sprung up. The establishment of a social security system, though still in the initial stage, has played an important part in alleviating urban poverty, in just 22 years since the beginning of reform and opening up, two historical strides have been made in the livelihood of urban and rural residents: from poverty to having enough food and clothing, and further to leading a relatively well-off life. The issue of feeding the Chinese people, which has plagued tile country for centuries, has been fundamentally solved. The dream of many generations has become a reality under the leadership of the Chinese Communist Party.

3. Major economic restructuring and speedier industrialization.

In terms of China's industrial structure, manufacturing strength and export structure, we can conclude that China has moved to the medium stage of industrialization from the initial stage. We have the Following facts to support our conclusion. First, while the total amount of agricultural products has increased rapidly, the proportion of the primary industry and agriculture has declined markedly. During the 1978-2000 period, tile supply of agricultural products realized a historical change thanks to the swill development of agriculture from a prolonged shortage to an overall balance and further to a surplus in good years. In the meantime, the proportion of the added value of the primary industry fell from 28.1 percent to 15.9 percent, diversified operations replaced the unitary structure of agricultural production, and traditional agriculture began developing to modem agriculture. Second, while the total population increased by 300 million, the proportion of farm workers dropped from 70.5 percent to 50 percent. The proportion of the added value of the secondary industry rose from 48 percent to 50.9 percent, while that of the tertiary industry went up from 23.7 percent to 33.2 percent. The bottlenecks, such as raw materials, energy and transport, that had long restrained China''s economic development, were basically removed. At the same time, modem service industries began to prosper. Third, a relatively complete industrial system is already in place and in particular the manufacturing industry is able to provide a considerable proportion of technologic equipment for the national economy. Industrial restructuring and technological advance are making increasingly great contributions and the high- and new-tech industries have become an important driving force for the growth of industries and even the entire economy. Fourth, while the exports of agricultural and other primary products have increased rapidly, their percentage in the export mix is visibly lower. During the 1980-2000 period, the proportion of primary products to total export fell from 50.3 percent to 10.2 percent, while that of industrial manufactured products rose from 49.7 percent to 89.8 percent. With the process of industrialization, the industrial structure is obviously moving from the primary level to the advanced level, from a serious imbalance to a basic rationality, and from mainly meeting basic needs to gradually meeting consumption upgrading and demand diversification.

4. Breakthroughs in system reform with the planned economy preliminarily replaced by a socialist market economy.

The rural reform that highlighted the household contract system has laid a foundation for the basic economic system and the operation system that conform to China's rural productive forces. As a result, commercialization, industrialization and marketization of the rural economy have been stepped up gradually. The ownership structure is getting increasingly plural; the evolution is continuing in which the public ownership plays the leading role and the economies of diverse ownerships develop simultaneously; and the vitality of economic operation is becoming stronger. Along with the rapid growth of the commodity market, the market system for production factors is taking shape. The state''s macro-regulatory ability is visibly greater thanks to the establishment of a macro-regulatory system and the improvement of indirect regulatory tools. The mode of income distribution is gradually in conformity with the demand of the market economy, and the mode of distribution that integrates labor with other production factors has helped stimulate micro-economic efficiency. The separation of government functions from enterprise operations has also brought about a positive change in the government functions of managing the economy.

In the course of transforming the economic system, the basic role of the market in resource allocation has become stronger and the degree of the marketization of the national economy higher. Most estimates by Chinese scholars indicate that the degree of the marketization of the Chinese economy in the later 1990s was higher than 50 percent. According to the 2001 Report on World Economic Freedom published in Canada, the index of China's economic freedom during 1980-1999 rose from 3.2 to 5.8, moving ahead from the 101st in 107 economies to the 81st in 123 economies. Economic reform was the powerful driving force for the rapid economic growth.

5. The all-round opening up to the outside world has turned a closed or semi-closed economy into an open one.

The Chinese economy has taken on increasingly noticeable signs of internationalization. Its opening is moving from limited areas to all areas, from meeting short-term needs to meeting long-term development goals and integrating with international practices, and from opening to some countries and regions to opening to the entire world trade system. During the 1978-2000 period, China's foreign trade went up from the 32"d in the world to the 8th, with the country's dependence on foreign trade rising from 14.4 percent in 1980 to 43.9 percent in 2000. Since 1993, China has been the largest foreign investment destination among tile developing countries and the second largest worldwide next only to the United States. The exchange rate of national currency Renminbi has been basically stable, it has been convertible for current account and partially for capital account. China''s foreign exchange reserve has risen to more than 220 billion U.S. dollars from 840 million U.S. dollars at the beginning of reform and opening up, ranking second in the world since 1996 (next only to Japan). It is precisely with this strength that China was able to maintain the value of Renminbi unchanged during the Asian financial crisis and has made an important contribution to the economic and financial stability in Asia. Its entry to the World Trade Organization indicates that China has been developing an open economy in a wider scope and at a deeper level. It also reflects the international community's recognition of China's economic development and reform.

6. All-round development of social undertakings and major changes in social structure.

A rapid progress has been made in science and technology. Right now, China is among the world leaders ill the areas of atomic energy, biotechnology, high-energy physics, space technology, automation, new materials and other high and new technologies. Education has been developing vigorously, with the primary and middle school enrollment rates being higher than the world's average levels. Medical care has been improving gradually, leading to a noticeable improvement in the health conditions of the Chinese people. At present, China's average life expectancy is 71 years as against the world's average of 66.5 years, and the infant mortality rate has dropped to 3.32 percent as against the world's average of 5.43 percent. According to the United Nations Report on Human Development 2001, China's human development was in the world's middle rank, with its human development index rising from 0.553 in 1980 to 0.718 in 1999, which was not only higher than the average index of 0.684 for the countries with medium development but also exceeded the world's average level of 0.716 for the first time. China ranked 87th among 162 countries and regions. The steady rise in China's human development is a positive result of the country's reform and opening up and its sustained and rapid economic growth. It is also an important testimony to the coordinated economic and social development and the all-round social progress.

The social structure has undergone profound changes, with a remarkable improvement in law and order. The stratified and closed social structure under the system of planned economy that classified people's status mainly by their positions, work milts or residence registration is being replaced by an egalitarian and open social structure under the system of market economy that values one's ability, knowledge and contribution. Members of the society now have an unprecedented freedom of choice and a new social stratification is increasingly tangible. As there are plural subjects of interests instead of only one, the relatively independent relationship of interest between governments, work units, families and individuals is being gradually and widely accepted. The mode of social organization and management is also moving from the one-way mandatory type to the two-way contract type. Democracy and the rule of law are being strengthened and the rights of citizens are better protected. While progress is being made in the areas of freedom of speech and freedom of academic pursuit, people's spiritual life has never been so active. The Chinese society is in a stage of dramatic changes. However, the country has maintained political stability, national unity and social tranquility. Social coherence and adaptability are increasing. All these have laid a valuable social foundation for smooth economic construction, reform and opening up.

II. Prominent Contradictions and Problems in the New Stage of Development

The above phasic changes represented concrete evolutions that were inevitable for the entire preliminary stage of socialism. China was noted for a huge population, a poor foundation to start with, an underdeveloped productive force and regional disparity in development. All these basic national characteristics are yet to be fundamentally changed. The problems, contradictions and comparative disadvantages accumulated in the country's economy and society have been gradually revealed in the course of social transformation. At the same time, new contradictions and problems have been emerging. The interweaving and overlapping of these unfavorable factors constitute a serious challenge and a major constraint to tile smooth development of economy and society.

1. The prominent contradiction associated with the dualist urban and rural economic structure.

Nationwide, the problems in agriculture, rural areas and farmers, the slow progress ill urbanization and the widening of regional gap and income gap are, in the final analysis, manifestations of this contradiction. Rural development is facing the following main problems after entering a new stage.

(1) Agriculture remains to be the weakest industry, without mechanisms for steady increase in grain and other main farm products. Some of the conditions for agricultural production are worsening. For example, drought is more extensive and frequent, ecological damage and environmental pollution have resulted in output decline and quality degradation.

(2) As labor is abundant and land and water resources are insufficient, large-scale farm operations are difficult. While the comparative efficiency of agricultural production is declining, the growth of farmers' income is slowing down or turning negative. The low productive inputs and farmers' consumption have a direct impact on tile expansion of nationwide investment and consumption demand.

(3) The enormous surplus rural labors find it difficult to move to non-farm occupations. Rural unemployment is increasingly acute.

(4) Social development in the rural areas is seriously lagging behind that in the urban areas. Rural infrastructure facilities, culture, education, medical care and retirement insurance are all backward.
China's urbanization process has been slow and the urban-rural relations are not harmonious. Compared with the countries that are at the similar level of economic development, the level of China's urbanization is relatively low. Ill 1999, it was only 32 percent, 14 percentage points lower than the world's average, 18 percentage points below the average of middle-income countries and 45 percentage points below the average of high-income countries.

China's urbanization process is visibly slower than industrialization. The international ratio of urbanization and industrialization is generally 140-250 percent. During the 1978-2000 period, China's ratio rose only from 40.45 percent to 81.76 percent. The urban-rural separation mechanisms have not been fundamentally changed, with some regions even tightening their restrictions on the entry of farmers into the urban areas. These factors impeded the transfer of rural labor and a virtuous circle of the urban and rural economies, resulting in a constant widening of the regional gap and the urban-rural gap. The income gap between China's urban and rural residents widened from 1.86:1 in 1985 to 2.79:1 in 2000. In 1998, this income gap was 2.24:1 in the east region and 3.14:1 in the west region. The gap in the west region is conspicuously wider than in the east region.

Slow urbanization impeded the upgrading of industrial structure. The primary industry, noted for a weak foundation and low productivity, accounts for only 15.9 percent of the GDP, but as high as 50 percent of employment. The secondary industry is noted for a poor innovation ability, the tertiary industry, especially the modem service industry, is grossly underdeveloped. There is a sharp gap between China's industrial structure and that of India and Brazil that are more or less at the same level of development as China.

2. The relatively weak international competitiveness of the Chinese economy.

Joining economic globalization means to face fierce competition and conflict of interests. The economic and technological gaps between China and the developed countries are still widening in many aspects. China''s technological input accounted for I percent of the GDP in 2000, which is noticeably lower than the average of 2.3 percent in the developed countries. China's ability of independent research and development in many advanced technologies and major core technologies is still weak. The application of information technology in the national economy and society is lower than the world's average level, lagging far behind the developed countries. 

In these areas, China is vulnerable to the control by others. China's industries, especially the manufacturing industry, are falling behind their counterparts in the advanced countries in terms of cost and technological equipment. The competitiveness of Chinese enterprises is still very weak. In 1999, the overall competitiveness of China's 1,000 largest industrial enterprises ranked only 38th in the world, far lower than that of their counterparts in the top 10 developed countries. In terms of international division of labor and competition, China's exports are mainly low-technology products and labor-intensive products, that are noted for low added value and face unfavorable trade structure and terms. According to the technological achievement index and sequence published for the first time in the United Nations Report on Human Development 2001, the 2000 index for China was 0.299, ranking 45th among the 72 countries and regions.

China's average technological level is not only lagging far behind the developed countries, but also lower than such developing countries as Malaysia, Mexico and Argentina

3. System-related contradictions are still acute.

The growth of the market of production factors is slow, the function of macro-regulation is unsound, the public financial system is yet to take shape, and the conductive mechanism of monetary policy is incomplete. The scope of the state-owned economy is too extensive and its geographic distribution is irrational. Those deserving to be strengthened have not been strengthened while those deserving to be withdrawn have not been withdrawn. The operational mechanisms of the state-owned enterprises are yet to be fundamentally changed. The reform of investment and financing systems is lagging behind, and there lack rigid investment risk responsibility mechanisms, a factor that often leads to major investment mistake. In general, the change of government functions is behind the transformation of the economic system. The government still has too many restrictions on non-public economies, and as a result, the environment for fair competition is unsound. In some government departments, there emerges interest grouping and public functions are weakening. Market order is chaotic, and regional protectionism and administrative monopoly are impeding the establishment of the market economy system. The credit standing systems of the society, enterprises and individuals are seriously inadequate, especially in the commercial and banking sectors. Many regional and governmental departments are directly involved in economic activities and cannot live up to their credibility, thus generating more negative effects than enterprises.

WTO accession will produce a profound impact on China's existing economic system, and the governments at various levels will inevitably bear the brunt because most WTO rules are in fact directed at governments. In order to participate in international economic competition under the uniform rules of market economy, China has put forward new demands on the contents and methods of government's management of economy. The opening of the market will bring about shocks of different degrees to various industries and enterprises in China and induce some economic and social problems. The government will face new tests in handling crisis and maintaining macroeconomic stability.

4. State economic security faces grave challenges.

Participating in economic globalization can give rise to new risks as well as development opportunities. China's high-risk sectors include the financial system, the less competitive bulk farm products, petroleum and information.

Financial risk is the most prominent challenge facing the state economic security. China's modern systems of financial institutions, financial market and financial regulation are still unsound. In the past, the main tool to prevent international financial crisis was the incomplete opening of the capital account rather than mainly relying on a sound system of financial institutions and an effective system of financial regulation. In particular, the state-owned commercial banks are lagging behind in terms of systems and mechanisms and face an even more difficult task of integrated reform. China's overall debt ratio is already considerably high, and its fiscal and financial risks are clearly greater. Financial risks generally occur abruptly and spread rapidly. They can cause overall damage to economic development and social stability, therefore we must be highly vigilant.

At present and for some time in the future, China's annual oil production can only be maintained at 160 million tons or slightly higher. As a result, the supply-demand contradiction will become increasingly acute. It is expected that by 2010 China''s dependence on foreign oil resources will reach 50 percent and by 2020 the country may become the largest oil importer in the world. As the risk of oil import increases, oil strategic security will be gravely threatened in any unexpected event. At a time when information and networking technologies are playing a great role and China opens further to the outside world, information security also becomes all issue that cannot be neglected.

5. The tremendous pressure from population and employment.

First, there will be oversupply of new labors. In the next five to ten years, more than 10 million young people will go to the labor market each year.

Next, the stock of employment will face drastic structural turmoil. The reform of state-owned enterprises and the economic restructuring will inevitably aggravate the problem of unemployment. At present, the most conservative estimates put the urban jobless people at more than 10 million. Our own survey and analysis indicate that the real unemployment rate in the urban areas could be about 10 percent. Unemployment arising from structural adjustment will increase after China's entry into the WTO, and the real unemployment rate could jump over 15 percent.

Third, while high-quality labor force is insufficient, low-quality labor force will be too much. This will make the structural contradiction between supply and demand on the labor market all the more conspicuous.

Ageing population in China has also become one of the problems that are characteristics of the developed countries. People at 60 years old and older now account for 11.5 percent of the entire population, surpassing the 10 percent demarcation line of an ageing society. It is rare in the world that the structure of population age has so rapidly moved from an adult society to an ageing society within 20 years, The rapid growth of population, the early arrival of the ageing society, the surplus of labor force and the excessive burden of retirement pension will all become increasingly grave social problems.

6. As resources are relatively scarce and wastes are much serious, the worsening of ecological environment has yet to be fundamentally reversed. China's per capita possession of natural resources is relatively low,