By Wu Jinglian

In the first half of the year, China's GDP grew by 8.2 per cent, the total volume of retail sales in social consumption goods rose by 10.1 per cent, fixed asset investment in the society as a whole swelled by 11 per cent, export increased by 38.3 per cent, and the consumption price index went up by 0.1 per cent. There is no significant disagreement in the economics circle at present on the fact that a favourable change has taken place in the economic development of China, as can be seen from the warming up of the market and pick-up of the economic growth after hitting the bottom. If we mention any disagreement, it centers around the analysis of the causes and extents of the favourable turn. As accurate judgement on the situation is a precondition for correct decision-making, it is of great significance to clarify the issues involved in the discussion.

I. Analysis of the causes of the favourable turn

A typical viewpoint held by the economics circle at present is that the fundamental cause of the favourable turn of the economic situation lies in the adoption of an active financial policy by the Chinese Government and its efforts to expand domestic demand since 1998. However, since the role of the expansive financial policy has been limited so far to certain improvement of the insufficient demand and the basis is still very weak, estimation of the situation should not be too optimistic. Whether the national economy will maintain its upward trend of development in the future and whether a turning point has really taken shape will be determined by the continuous government efforts in implementing its active financial policy.

In my opinion, owing the favourable turn of the economic situation merely to the stimulating role of the expansive financial policy does not tell the whole story. As a matter of fact, the Chinese government adopted a "two-hand" policy after the eruption of the East Asian economic crisis, namely, to adopt an active financial policy to expand domestic demand on one hand, and promote reform of state-owned enterprises and the development of medium and small-sized enterprises on the other. The favourable turn of the economic situation on all fronts in the first half of the year has been exactly a result of the combined role of this "two-hand" policy. As early as the East Asian economic crisis broke out and the Chinese market slackened, some economists pointed out that we should adopt not only the traditional "Keynesian policy for expanding domestic demand", but also the "policy of revitalizing enterprises advocated by the supply school in the United States" in the early 1980s. In the actual economic work, the Chinese government implemented policies in these two aspects. First of all, resolute measures have been taken to issue hundreds of billions of yuan of State bonds each year since 1998 to raise funds for infrastructure construction and other fields. This has rapidly curbed the falling investment under the circumstance of shrinking consumption and export demand and month-to-month slow-down of economic growth, and gradually changed people's gloomy expectation for the future. At the same time, the government adopted a series of measures to reduce the difficulties of enterprises and stimulate the enthusiasm of social investment. These measures include publicity and implementation of the principle of common development of economies of various kinds of ownership promulgated at the 15th National Congress of the Communist Party of China, improvement of credit services and establishment of credit guarantee funds for medium and small-sized enterprises, large-scale replenishment of the capital fund of banks and proper disposal of their bad assets, empowering industrial enterprises (including non-governmental enterprises) to handle export business on their own accord, loosening administrative control on micro economic activities of enterprises, cancelling investment-regulating taxes, and accelerating restructure of the petrochemical, telecommunications, and other key industries.

Viewed superficially, the effect of these measures designed to invigorate enterprises and revitalize the national economy has not produced results as quickly and noticeably as financial methods have stimulated the growth of demand. However, these measures laid a solid foundation for the steady pick-up of the economy. At present, GDP growth in the coastal areas in Southeast China, Zhejiang, Guangdong, Jiangsu and some other provinces in particular, has reached two digits, social investment has bounced back rapidly, and the employment situation has been good. These areas have become pacesetters and played a leading role in the improvement of the national economy. Their excellent achievements have been exactly the result of implementing the policy measures mentioned above. As a matter of fact and according to my personal observation, it is likely that these areas have underestimated the strong growth of their production, investment and export due to the defects in the statistical system in China and the reluctance of some areas to "uncover their wealth". According to a report by the Zhejiang Provincial Statistical Bureau, for instance, the GDP of the province grew by 10.6 per cent in the first six months of this year over the same period last year, and the value added of its industries went up by 12 per cent. During the same period, its social consumption of electricity rose by 20.7 per cent, and electricity consumption by its industries soared by 22.8 per cent.

Such a big elasticity coefficient of electricity consumption is beyond imagination. What calls for special attention is that the southern part of Jiangsu Province, which used to take the lead in starting up the economy several times in depression, but put up a poor performance in economic development in recent years, now has seen a sharp rise in production, brisk investment, and a comeback of overall vitality since the start of this year after undergoing restructuring last year. Based on the above analysis, two conclusions can be drawn: First, a major turn for the better has indeed taken place in the economic development in China; and second, China's economy will continue its turn for the better and enter a new period of steady growth so long as correct policies are maintained. In order to get a clear understanding of the characteristics and advantages of the anti-depression policies adopted by the Chinese government, we might compare the practice of China with that adopted by Japan in the 1990s. In the early 1990s when Japan's stock market collapsed and the country fell into serious depression, the Japanese government introduced and maintained a highly expansive financial policy and a monetary policy with low and even zero interest rate to stimulate domestic demand. But they hesitated all the time to make up their minds about transforming their economic system, which was characterized by excessive government control and failed to bring about the vitality of enterprises, in particular the medium and small-sized enterprises. As a result, they failed to lay a micro foundation for economic prosperity. Once the expansive financial policy of the government was weakened, the accelerating trend of economic growth would turn around. China's situation is utterly different from that of Japan. If we fail to see this characteristic of our practice, we would underestimate the achievements we have already made, and find it difficult to grasp the correct future policy orientations.

II. We are in the crucial time of policy transition.

Policies concerning demand are short-term policies fit for the role as "starters", while policies concerning supply are long-term policies laying solid foundations for sustained and steady growth. It is an art to integrate the two properly. The advantage of stimulating domestic demand through financial investment is that it can play the role of a starter at a comparatively faster speed. Since financial investment produces a corresponding"squeezing effect" to reduce non-governmental investment, and financial deficits would have to be filled up with taxes in the end, therefore, financial investment would produce some negative influence upon the improvement of the business operation environment of enterprises and their willingness to make investment. The defect of supply policies is that these policies produce results at a comparatively slow speed. But as it can increase the vitality of enterprises, it is the basic road toward sustained and steady growth and long-term economic prosperity. This can be seen clearly from the role of the "supply policy" in the lasting prosperity of the US economy in the 1990s, implemented by Reagan in the 1980s after he was elected president of the United States. To achieve excellent policy effect, we should integrate the two properly, maximize their respective advantages and minimize their disadvantages, and have an insight into future developments at times of economic changes so as to adjust the balance of the powers of the "two hands".

It seems that the general principle for changing the balance of the powers of the "two hands" can be described like this: At the early stage of stagnation and depression with the economy just beginning its downhill slide, the "first-hand policy" mentioned above should be adopted so as to curb the economic slide and prevent the development of dismal expectations in society in good time. At the same time, the "second-hand policy" should be put into implementation to lay the in-depth basis supporting long-term economic prosperity. By the time when the trend of economic slide has been curbed, the intensity of the "first-hand policy" should be reduced gradually and opportunely to avoid possible harms resulting from accumulation of the negative effects of financial deficits. At the same time, the implementation of the "second-hand policy" should be intensified gradually with focus being put on the construction of a solid basis for fully bringing about the vitality of "the supply side" (enterprises).

According to my observation, we are now at such a point of policy transition. If a good job is done and the vitality of "the supply side" (enterprises) and the enthusiasm of the society in investment are stimulated, we can not only maintain the favourable turn of development, but also lay a solid foundation for Chinese enterprises to meet challenges of fierce competition that can be expected after China’s entry into WTO and for the long-term, sustained and steady growth of the national economy. For the sake of safety, of course, adjustment of the power of the "first-hand policy" should be made with great caution instead of a rush. Some people have proposed recently, for instance, that the interest rates of bank deposits be raised from the third quarter of this year to prevent the outflow of foreign exchanges and occurrence of inflation. In my opinion, however, it is more advisable to keep watching the trend of the economic pick-up and it would be better to maintain the current interest rates without making any changes. But it is imperative to further implement the "second-hand policy", arrangement should be made immediately on the basis of summarizing the successful experience accumulated in the past.

III. Government should take measures to further bring about the vitality of the "supply side".

If the analysis above is correct, our work in the future should be focused on accelerating the process of reform, further promoting the development of the private sector of the economy, and advancing of the excellent situation that has already developed in the restructuring of the state-owned sector of the economy. The specific measures to be taken in this regard should include:

First, to complete the tasks left over from the reform of the financial and taxation systems that started in 1994 by taking advantage of the opportunity of a comparatively lenient finance. The practice of levying corporate revenue taxes according to the "relationship of subordination", for instance, should be changed, and value-added taxes should be changed from production to consumption and extended into the field of circulation. This would be of great significance to the creation of an environment for fair competition between Chinese and overseas enterprises and between different trades and sectors.

Second, to establish a new social security system in the near future. The State Council has already planned the work in this regard, and efforts should be made to fulfill the task as scheduled. The establishment of a funded social security system will produce the following effects: Creating a social "security network" to absorb impacts from changes in the interest structure during the process of reform. Promoting the reform of state-owned enterprises and restructuring of the state-owned sector of the economy. Increasing bank savings (accumulation). Accelerating the development of the capital market.

Third, to quicken the pace of reform of the state-owned banks and the rural financial system to lower the risks of the country's financial systems, improve fund-raising environment that has become a source of complaint from enterprises, and support the growth of social investment.

Fourth, to open sectors and provide national treatment to domestic investors before they are opened to overseas investors. For this end, existing regulations, rules and policy stipulations should be sorted out completely, discriminative restrictions on production and business operation of private enterprises should be cancelled, and the "threshold" for these enterprises to acquire the right to handle foreign trade should be lowered. At the same time, construction of tax and credit systems should be speeded up, and efforts should be intensified to crackdown unfair competitions, such as bullying on markets, collaboration in pricing, monopoly of business operations, and local protectionism, so as to improve the business environment for enterprises.

Fifth, to properly handle the problems, such as the exercise of state-owned property rights and the effective corporate governance on the basis of summarizing the experience and lessons drawn from restructuring key industries and reforming key state-owned enterprises, so as to lay an institutional basis for bringing about the vitality of large enterprises and meeting challenges arising from China's accession to the WTO.

Sixth, to further reduce government's administrative control over and micro interference in pricing, investment, and other economic activities of enterprises. Such control and interference are omnipresent at present. Unless enterprises are freed from the shackles of these control and interference, it would be out of the question to bring about the basic role of market mechanisms in resource allocation. Seventh, most importantly, a good market order should be established and the rule of law should be introduced. A market economy must be based on transparent and fair rules of game. For this reason, market economy is an economy governed by law. Reluctance of the government to make reforms, failure to uphold public rights, and inability of the public to fully exercise their democratic rights will only result in widespread corruption in administrative system, rampant committal of organized crimes by the underworld, lack of social norms, and fall of enterprises deep into difficulties in business operation. These contradictions have now become extremely acute and must be solved with firm resolution.

August 2000