By Liu Shijin

I. New Development in Structural Adjustment and Some Major Trends

Recently, some important developments have taken place in structural adjustment while the national economy maintained a strong growth momentum.

First, the automobile and the housing industries witnessed fast growth and started to play the role of new leading industries. Housing industry maintained a rapid growth momentum in the past few years. The growth rate of the main indicators of the space sold and sales incomes of commercial housing remained over 20%. From January to July in 2001, the accumulative investment in real estate development reached RMB265.2 billion, representing an increase of 31.6% over the same period of last year. It was 7.5 percentage points higher over the same period of last year and made the sector the fastest growing one among all the tertiary industries. In fact, the proportion of sales of commercial housing to private owners took up 85%, while the growth of demand for private housing became a major driving force for the rapid development of the housing industry. In the first half of this year, the growth in the incomes of the automobile industry rose even higher to 25%, which was only next to that of the electronic and communications product manufacturing industries. Compared with the complete automobiles manufacturing sector, the automobile parts manufacturing sector achieved an even faster increase and maintained a growth rate of over 40% in export in the first half of this year.

Second, the rate of investment growth in the western region speeded up significantly. Investment in the mid-eastern part of the region amounted to RMB197.3 billion, representing an increase of 29.4%; while investment in the middle and western parts of the region reached 36.7% and 40.3% respectively, which were remarkably higher than the overall level in the whole country.

Third, the comparative advantage of certain sectors of the Chinese manufacturing industries is gradually emerging. Since the beginning this year, international multi-national corporations have increased their efforts in shifting manufacturing bases to China. In the mobile communication area, the Philips Electronic Group moved its entire mobile phone manufacturing capacity to the joint venture in Shenzhen, China. Siemens Company raised the current output of 10 million mobile phones by its Shanghai base to 14 million next year, making Shanghai the only mobile phone manufacturing base outside Germany. Ericsson intends to expand its mobile phone production in China and turn its China manufacturing enterprise into one of the four major supply centres in the world. In addition, Motorola and Nokia are also expanding their production in China. It is reported that half of the 1143 companies listed in the Tokyo Stock Exchange expressed the intention to move the manufacturing bases elsewhere, while 70% of them have chosen China as the major destination.

Fourth, the growth rate of the previously slow-growing coal and metallurgical industries has picked up. Since the beginning of this year, the sales income of the coal industry has grown by 15%, overtaking the average rate of industrial growth for the first time. The accelerated growth of the coal industry is mainly attributable to the accelerated growth of the high energy-consuming heavy industry and raw materials industry, as well as the fluctuating international oil prices, which pulled up international demand for coal. The measures to close up and rectify small coal mines also contributed to the changing relations between supply and demand of the industry. Thanks to the accelerated growth in major steel-consuming industries, such as the construction industry, the machinery industry, the light industry and the automobile industry, as well as the increase in international demand for steel, the metallurgical industry also witnessed rapid growth since last year. However, stable bases for the sustainable growth of these sectors are still lacking.

Fifth, some cities have started to reform the household registration system. Over a period of time, some localities have started the reform in the household registration system. Significant progresses have been made in Guangdong, Zhejiang, Anhui, Shanghai, Hebei, Sichuan, Chongqing and Shaanxi provinces. Anhui has implemented household registration system reform in the whole province and extended the reform experience from small townships to large cities, including the provincial capital of Hefei. Guangdong plans to abolish the division of traditional agricultural households and non-agricultural households and adopt a principle of actual residential area registration system for the provincial population. The urban entry population control target will be replaced by entry conditions in various cities including Guangzhou and Shenzhen. Ningbo in Zhejiang Province has recently implemented an overall reform in the household registration system. The city has abolished restrictions on the urban entry target, adopted a registration system based on residential areas and relaxed requirements on the residence and income of the moved-in citizens.

Amid the above developments, the most important are the emerging leading role of the housing and the automobile industries, the transfer of the international manufacture bases to China and the household registration system reform. The impact of such developments over restructuring and economic and social development will become increasingly significant.

II. Structural Adjustment in the Near Future Should Focus on Expansion of Domestic Demand.

Since the beginning of this year, China's export growth decreased as a result of the slow-down of international economic growth, particularly that of the American economy. China's export experienced negative growth in June. Faced with sluggish external demand, it is especially vital to expand domestic demand. Restructuring in the near future should, therefore, focus on the expansion of domestic demand. In the mid- and long-term future, expansion of domestic demand should be considered as and may also become one of the major objectives of restructuring. In this regard, there are certain major issues that require clear understanding.

Taking the living and travel concerns of the urban population as the key areas for restructuring. One of the major characteristics of the market economy is to take consumer demand as the starting point and the objective of economic operations. At the current stage, China's economy still remains in the dual-structural stage with significant differences between the income and consumption of urban and rural population. The upgrading of the consumption structure of urban population will lead to rapid and stable growth of the overall national economy. It will first pull up the development of a group of leading industries, expand the overall economic scale and promote the transfer of farmers to non-agricultural sectors to raise their incomes, and then create markets for a large number of traditional industries and revitalize the overall economic growth. Superficially, the slow growth of farmers’ income is caused by agricultural and rural problems. It is actually the result of insufficient employment scale afforded by the non-agricultural sectors and cities, which is caused by the constrained upgrading of urban consumption structure and industrial structure. At present, the priority in upgrading the consumption structure of urban population is to solve their living and travel problems. In fact, the leading roles of the housing and automobile industries have just emerged thereon.

Restructuring with emphasis on speeding up the migration of farmers into cities, and stabilizing and institutionalizing the process. Among all others, the contradiction between urban and rural areas is the major structural contradiction in China. In fact, the expansion of domestic demand, increasing farmers'income, maintaining economic growth and social stability all depend on the elimination of contradiction between urban and rural areas. On the one hand, more opportunities should be created to transfer rural population to non-agricultural industries and cities through consumption and industrial restructuring and upgrading. On the other hand, efforts should be made to settle down the farmers that have already migrated into the cities and provide them with necessary institutional protection. According to conservative estimates, there are currently 60-70 million migrating population, the so called "peasant workers", travelling between the urban and rural areas. Most of them have no fixed residence, suffer from employment discrimination and "float" between urban and rural areas. Such situation has increased uncertainty for farmers to migrate into the cities and created negative impact on the stability of the cities. The reform in the household registration system and the adjustments in other policies will bring institutional protection in terms of urban employment and living conditions to the people from other places who have legal residence, stable jobs and income resources. It will not only contribute to the acceleration of urbanization process and its sustainability, but also greatly improve the expectation of rural population for migrating into cities, and create significant market demand. For example, the requirement of "legal residence" will drive up the growth of housing industry and the construction of relevant urban infrastructure, eliminate the "identity discrimination" out of the division of rural and non-rural residences, expand employment channel in non-agricultural industries for the rural population, enhance their employment stability and raise their income and consumption levels.

Taking the opportunity of the transfer of international manufacturing bases to China to promote industrial restructuring and upgrading. Over the past few years, most of the overseas manufacturing capacities shifted to China are related to household electric appliances, computer and mobile communications sectors. Compared with the original processing industries with advantages in China, they have more technological content and added value. In the foreseeable future, the shifting of manufacturing capacity of automobile industry to China may also accelerate. There are already talks at home and abroad about China's becoming the "manufacturing centre of the world". This happened, firstly, because China has competitive cost advantages in some production factors compared with the developed countries. The Ministry of Economy and Industry of Japan has made a price comparison for 152 industrial products and 33 industrial services of seven countries for the period of September-November of 2000. The results show that at the prices of industrial products and industrial services in Japan were 2.49 times and 8.44 times, respectively, of those in the mainland China. According to some Japanese companies, China has become the first choice to shift their production bases because labor cost in China is only 1/30 of that in Japan. Secondly, China already has fairly good manufacturing basis. The improvement in production technology and management level in the past few years has gradually narrowed the gap between the Chinese products and those of the developed countries and thus created major conditions to attract the transfer of international processing and manufacturing capacities to China. In terms of China’s industrial development trend, China has gone through the development stage focusing on the light and textile industries and heavy and chemical industries and is now entering into a development stage emphasizing the processing, assembling and manufacturing industries with higher technological content and added value. In fact, the coincidence of the advent of this stage with the transfer of international manufacturing capacity is not accidental. Against this background, efforts should be made to develop new manufacturing industries, reform and upgrade the previous manufacturing industries, especially the equipment manufacturing industry, so as to lead China's industrial structure onto a much higher level.

Giving priority to reforms related to restructuring and taking the scale of expansion of domestic demand as the major measurement for the effect of restructuring. Behind the structural problems, there are often institutional and policy problems. The acceleration of structural adjustment requires reform inspiration and ideas. In particular, various institutional and policy obstructions should be removed through reform and a restructuring mechanism should be established to meet the needs of the market economy. With regard to the importance and urgency of expanding the domestic demand, at present and for a certain period of time in future, priority should be given to promote the reforms that have major impact on restructuring and take the achievement in expanding domestic demand as major measurement for restructuring effects. To handle the relationship between reform, restructuring and development based on this measurement is necessary for expanding domestic demand and keeping a high economic growth in the near future, as well as conducive to promoting reform in other areas in the mid- and long-term future.

III. Current Priorities of Restructuring

Based on the above understanding, restructuring priority in the near future may be given to the areas listed below.

First, emphasizing on the nurturing and development of the new leading industries, such as housing and automobile manufacturing. In this aspect, there is still a lot to do to further relax the institutional and policy restrictions to upgrade consumption structure. With the termination of welfare housing distribution system, one of the urgent issues is how to transform the housing purchase and construction fund of the original working units into actual purchasing power of the employees, so as to maintain a vast and constant base of market demand for the development of housing industry. Situations in various localities reveal unbalanced development. In places of slow development, there is already "disappearance" of market demand due to problematic transition of the old system to the new. With basically clear understanding on the monetization of housing distribution and fairly complete matching policies, the key issue is to rationalize interest relationships and effectively implement the policies. Recently, the issues concerning automobile consumption policies and consumption environment have become focus of attention of all circles in the society. The relevant department has issued policies to relax restrictions on prices and reduce and adjust charges, thus leading to positive developments. However, adjustments of consumption policy have not been effective. In addition to adjustment in consumption policies, improvements in the overall consumption environment also require matched adjustments in urban development strategies, transportation layout and finance and taxation policies. It is necessary to attach importance to the method and timing of the issuance of consumption policies. Heated publicity accompanied by slow promulgation of policies will inevitably influence consumers' expectations and prolong their money-in-hand waiting for purchase, which will directly affect the growth of automobile production in the near future.

Second, further relaxing the industrial access restrictions. This issue has been raised for a long time but has witnessed little progress. Apart from issues related to people's understanding and policies, most of the increasing problems concentrate on interest conflicts. The existing enterprises in the industry do not welcome new-comers to join in, they do not wish to face fiercer competition and give up the various privileges of monopoly. Therefore, they should be persuaded to give regard to the overall situation and future development, partial and local interests should be subordinated to the fundamental interest of the state and all people. To stress on this issue at present is not only necessary for the restructuring and the promotion of public investment, but also necessary for adapting to the WTO rules. In fact, priority may be given to three areas. Firstly, the access restrictions on new leading industries, including automobile industry, should be relaxed. The relevant department has already proposed to reform the administrative approval and catalogue management methods for the automobile industry. However, some of the new enterprises still have no way to get their business licenses. Such situation should be changed without delay. Secondly, access restrictions should be relaxed on some industries where competition can be introduced, so as to incorporate with reforms in sectors with certain level of monopoly, such as the telecommunication, power, railway, civil aviation, insurance and financial sectors. Thirdly, the access restrictions on urban infrastructure sector should be relaxed. The accelerated process of China's urbanization, especially the construction of large projects such as rail transport, requires huge capital input which is beyond the capacity of government expenditures. The principle of "depending on market methods whenever available and getting government financial subsidies when market methods are not directly available to enable social investment to make average returns" should be adopted to encourage and guide large foreign capital and domestic private capital into the infrastructure area. Successful experience of some cities in this regard should be summarized and popularized.

A related issue is how to prevent new administrative duplication of construction projects. This is also where some people worry about relaxing industrial access restrictions. The basic way to solve this problem is to "open up the market and control the government". The effective method to control administrative construction duplication is to reform the investment and financing systems of the government and the state-owned enterprises. Before the reform has achieved substantial progress, it should be clearly stipulated that "government finance should not be invested into any processing projects in competitive industries and the state-owned enterprises should not be forced to invest in the above projects". For the possible blind investment of non-state investors, the government's role is not to restrict their entry, but to provide them with information and to strengthen guidance.

Third, grasping the opportunity of the transfer of international manufacturing industries to China and promoting the merger of relevant sectors in China to raise the overall level of the Chinese manufacturing industries. The transfer of international manufacturing industries to China will become the new attraction to international capital. Efforts should be made to utilize this opportunity, through joint venture and cooperation, to promote the technological level of relevant industries, enhance their forward and backward pulling ability, optimize the industrial organization structure and gradually create certain manufacturing bases with unique characteristics and international influence. The equipment industry should also utilize this market opportunity to speed up its restructuring. The transfer of international manufacturing industries, specially the transfer of the manufacturing capacity of the multi-national corporations, has already created and will continue to exert competition pressure over some enterprises and products with advantages in China. This is most evident in the household electronic appliances manufacturing sector, which has been developing rapidly out of full competition in the past years, but their enterprise profitability suffered bitterly from the sustained price wars. Faced with new competition pressure from the multi-national corporations, these enterprises should lose no time to consider and speed up merger and restructuring. Merger and restructuring are certainly enterprise behaviours, but government policy guidance is also necessary. Meanwhile, the government should encourage enterprises to expand toward "upward" (enhancing research and development capability) and "external" (developing international markets) directions and gradually turn their domestic competitiveness into international competitiveness.

Fourth, relaxing restrictions on the migration of farmers into cities and adopting rational urbanization strategies. Currently, efforts should be made to grasp the opportunity of the accelerated household registration system reform to focus on the stabilization and institutionalization of farmers' migration into the cities. In addition to eliminating the division of the agricultural and non-agricultural populations and abolishing the management of planned targets in small towns, the medium and large cities should also speed up the reform in the household registration system appropriately according to their own specific conditions. The local policies with employment discrimination against the rural migrants who have moved into cities should be abolished and no more such policies should be adopted. Conditions should be created to gradually accredit the rural migrants who have already obtained legal status after the household registration system reform the "resident treatment" in terms of housing, education, medical-care and social security, while the welfare system that favors the urban population should be gradually reformed. New demand should be created through the stabilization and institutionalization of rural migrants to promote economic growth and further increase the number of rural migrants into cities in an orderly way. Meanwhile, enough importance should be attached to urban development strategies. During the urbanization process, some localities simply turned the locations of local government in the administrative areas into the main cities and implemented some repetition infrastructure projects in their own judicial areas. Such understandings and practices are not in line with the laws of modern city development and will lead to serious waste in the urbanization process. In light of this, in-depth research should be conducted to study various urban system development strategies in China, so as to design plans and strengthen guidance. The Central Government and the provincial governments should increase their authority and capacity in coordinating trans-regional infrastructure projects, and introduce legal protection whenever necessary.

Institute for Industrial Economic Research

October 2001