By Hou, Yongzhi & Feng, Jie

During the 9th Five-Year Plan period, China's economy maintained a rapid growth, which increased the overall national strength and ensured a better-off life for the people as a whole. In the year 2000, China successfully realized its second-phase strategic goals of the modernization drive. Other targets set for the 9th Five-Year Plan were also smoothly achieved: the economy realized a "soft landing", deflation was brought under control, structural adjustments made progress, and the basis for opening to the outside world was strengthened. The most outstanding problem during the 9th Five-Year Plan period was the aggravating inequality of income distribution, which should attract wide attention.

I. Economic Development Realized the Second-Phase Strategic Targets of the Modernization Drive.

(I) Greater Overall Economic Strength

During the 9th Five-Year Plan period, the Chinese economy continued to maintain a rapid growth. The gross domestic product (GDP) went up by 8.3 percent on an average during the 1995-1999 period and 8 percent in 2000. Although this growth rate was lower than the 9.6 percent for the initial period of reform and opening up (1979-1999) and even lower than the 12 percent during the 8th Five-Year Plan period, it was higher than the growth rates in most countries during the same period. The rapid growth steeply increased the economic aggregates (see chart 1). In 1999, China’s GDP totaled 8,205.4 billion yuan, which was close to 1,000 billion U.S. dollars at the official exchange rate and ranked the seventh in the world in terms of economic strength. In 2000, China’s GDP was expected to reach 8,900 billion yuan, which exceeded the 1,000 billion dollar and a per capita GDP of more than 800 dollars. In comparison with the requirements initially set for the second-phase strategic plan for the modernization drive, China has successfully accomplished the aggregate targets for this period.

(II) Better-off Life for the People

"A better-off life for the people by 2000" was an important content of the second-phase strategic plan for the modernization drive. During the 1995-1999 period, the per capita disposable income of urban families rose from 4,283 yuan to 5,854 yuan and the per capita net income of rural families went up from 1,578 yuan to 2,210 yuan. The income increases of both urban and rural residents boosted their wealth and consumption and improved the structure of consumption.

During the 1995-1999 period, total savings deposits of the urban and rural residents more than doubled, rising from 2,966.0 billion yuan to 5,962.2 billion yuan, with the per capita savings also doubled from 2,356 yuan to 4,735 yuan. At the end of 1999, the total savings of the urban and rural residents were 238 times as much as that by the end of 1980, with the per capita savings rising 118-fold. At the same time, other financial assets of the residents, including foreign exchange deposits, stocks, bonds and cash, also increased drastically.

Chart 1. GDP Growth Since 1980

The consumption of the residents nationwide rose from 803 yuan to 3,143 yuan during the 1995-1999 period. The figure was from 4,874 yuan to 6,750 yuan for the urban residents and 1,434 yuan to 3,168 yuan for the rural residents. During this period, the Engel coefficient ( Engels coefficient=Food consumption spending/Total consumption spending X 100, the higher the value, the lower the level of consumption.) declined from 49.9 percent to 41.9 percent for the urban residents and from 58.6 percent to 52.6 percent for the rural residents. In comparison with the quantitative standards set in 1992 by the State Statistics Bureau for the definition of a better-off life, our calculation indicates that Chinese residents as a whole are already living a better-off life.

II. Macro Regulation Reached Expected Objectives.

During the 9th Five-Year Plan period, the economy was operating in a drastically changing domestic and foreign environment. In the latter half of the 8th Five-Year Plan and the early part of the 9th Five-Year Plan, inflation was the principal threat to economic operation. However, economic operation encountered the Asian financial crisis in the middle of the 9th Five-Year Plan period and subsequently entered a state of deflation. The goal of macro regulation was to contain inflation in the early part of the 9th Five-Year Plan period and to harness deflation in the late part of that period. The actual economic performance indicated that the goals for the two stages were all achieved by and large.

(I) Successful "Soft Landing" Following the publication in 1992 of the remarks made by Comrade Deng Xiaoping during his inspection tour of southern China, a new round of growth circle began immediately. GDP growth in that year was as high as 14.2 percent, 5 percentage points higher than that of the previous year. This rapid growth was realized due to the support of relaxed fiscal and monetary policies. The ratio of fiscal revenue to GDP declined from 15.8 percent in 1990 to 13.1 percent in 1992, a drop of 2.7 percentage points. In 1992, domestic credit grew by 22 percent, slightly higher than the level of 1991. Credit expansion was not so fast, however, cash growth in the same year continued to be vigorous, reaching 36.4 percent at the end of December in 1992. This was an indication that at the end of December 1992, the basic trend of price level represented a worsening of inflation. While the consumer retail price index rose by 6.7 percent, the living cost index went up by 8.2 percent and in particular the living cost index for 35 large and medium-sized cities was up by 13.4 percent. In the first half of 1993, economic overheating was already obvious. In order to contain economic overheating, a total of 16 measures for stabilization were promulgated. Beginning in the second half of 1993, macro regulation was primarily aimed at realizing an economic "soft landing". But because of the tremendous inertia of economic operation, inflation remained at a two-digit level till 1995, when the annual commodity retail price index rose 14.8 percent and the residents’ consumption price index went up 17.1 percent. Therefore, we can say that in the early part of the 9th Five-Year Plan period, inflation remained the main threat to the healthy operation of the national economy. During that period, the central authorities continued to adopt a series of measures to strengthen macro regulation and finally brought the economy to a soft landing. In 1996, GDP growth rate declined to 9.6 percent from the peak of 14.2 percent in 1992, the commodity retail price index dropped to 6.1 percent from the peak of 21.7 percent in 1994, and the consumption price index also fell to 8.3 percent from the peak of 24.1 percent in 1994 (see chart 2).

(II) Effective Control of Deflation

When the soft landing was realized, economic operation encountered new contradictions and problems. For example, domestic effective demand began to shrink, investment growth slowed down, economic growth lacked momentum, price levels fell, enterprises were operating under capacity, and layoffs and unemployment went up. These problems aggravated as a result of the outbreak of the Asian financial crisis in July 1997 and the subsequent reduction of external demand. At that time, the central government adjusted the policy orientation of macro regulation without hesitation and adopted a series of policy measures to spur both domestic and external demands, including: (1) Introducing proactive fiscal policy and expanding the issue of treasury bond. Since 1998, the state issued 310 billion yuan of long-term construction treasury bond and accordingly induced 320 billion yuan of bank loans. (2) Introducing steady monetary policy. First, the value-insurance savings, previously introduced to contain economic overheating, was halted from April 1996. Second, interest rates for deposits were cut seven times from May 1996 to June 1999. Third, tax on savings interests was introduced in November 1999. (3) Increasing the salaries of civil servants and the level of "three security lines". (4) Increasing the rate of export rebates. The implementation of all these measures mitigated insufficient domestic demand and boosted external demand. As a result, economic operation overcame the constraints of deflation to a large extent and entered into a virtuous circle. In 2000, GDP growth was 0.9 percentage points higher than that of 1999, a sign of recovery in economic growth. The overall level of consumption price index throughout 2000 was 0.4 percent higher than in the previous year, a turnaround from the continuous fall in the preceding two years (see chart 3).

Chart 2. Economic Operation, 1990-2000

(III) Higher Ratio of Financial Revenue to GDP

Finance is one of the most important tools for macro regulation. From the beginning of reform in 1978 to the eve of the 9th Five-Year Plan, the ratio of fiscal revenue to GDP was sliding year after year due to the flaws of the fiscal system and the weak supervision and control over tax collection during the transitional period. The ratio declined from 31.2 percent in 1978 to 10.7 percent in 1995 (see chart 3). The falling ratio of fiscal revenue to GDP impaired the roles of financial leverage in macro-economic regulation. Therefore, to increase the ratio of financial revenue to GDP was regarded as one of the important tasks for the 9th Five-Year Plan period.

During the 9th Five-Year Plan period, China made certain progress in streamlining distribution relations and regulating economic order in keeping with the strategic "finance vitalization" requirement put forward by the Party Central Committee and the State Council. As a result, a relatively stable mechanism was established to ensure the growth of fiscal revenue. During the 9th Five-Year Plan period, total fiscal revenue increased by 135 billion yuan a year on an average, with its growth rate outpacing that of GDP. The ratio of fiscal revenue to GDP rose year after year, from less than 11 percent in 1995 to 12.4 percent in 1998, 13.9 percent in 1999 and 14.5 percent in 2000. Higher ratio of fiscal revenue to GDP strengthened government’s capability of macro regulation.

Chart 3. Changes in the Ratio of Financial Revenue to GDP

III. Economic Structure Underwent Marked Changes.

(I) Supply-Demand Relationship: Relative Oversupply Emerged

Before the 9th Five-Year Plan period, the Chinese economy had long been operating in a state of scarcity. The economic life was characterized by coupon requirement for the purchase of daily necessities, long shopping queue or even panic shopping, and hidden inflation. During the 9th Five-Year Plan period, economic scarcity eased to a large extent and oversupply emerged in many fields due to economic development. In the middle and late part of that period, the prices of consumption goods and the means of production began to fall and the general price index showed negative growth. This was a macro indication of oversupply. Following the beginning of reform and opening up, all the price indexes nationwide were continuously rising. During the 8th Five-Year Plan period, the commodity retail price index nationwide rose by 66.7 percentage points, the consumption price index by 77.4 percentage points, the consumption price index for urban residents by 84.1 percentage points, the consumption price index for rural residents by 72.6 percentage points, the purchasing price index for agricultural products by 96.7 percentage points, the retail price index for industrial products in the rural areas by 55 percentage points, the producing prices for industrial products by 81.8 percentage points, and the price index for fixed asset investment by 70.7 percentage points, on an annual basis, these indexes rose by 7.6 percent, 10.4 percent, 11.4 percent, 9.6 percent, 6.5 percent, 6.5 percent, 8.2 percent, and 8.9 percent respectively. In 1998, however, all the above indexes showed negative growth. In the first four years of the 9th Five-Year Plan period, with the exception for the consumption price index and the price index for fixed asset investment remaining basically unchanged, all the other indexes fell by a relatively large margin. In particular, the commodity retail price index dropped by 4.8 percentage points, the purchasing price index for agricultural products by 22.9 percentage points, the retail price index for industrial products in the rural areas by 3.8 percentage points and the producing price index for industrial products by 7 percentage points.

It is worth-noting that the oversupply now prevailing in China is a low-level oversupply. First, the oversupply occurred when the per capita GDP was less than 1,000 dollars and more than 20 percent of the population still had a daily consumption of less than 1 dollar (the poverty standard set by the World Bank in terms of purchasing power parity). It is a "poverty surplus", which cannot be compared with the surplus in the developed capitalist countries. Second, this oversupply occurred in tandem with deflation. In a sense, it is a result of macro regulation. Therefore, we cannot say that the economic development has encountered changes towards a new development phase. Third, this oversupply is a structural surplus instead of an all-round one. While many sectors and enterprises are obsessed with over-capacity and large product inventories, the supply of many other products cannot meet the qualitative and quantitative demands of the market.

(II) Industrial Structure: "Bottleneck" Constraints Eased

During the 8th Five-Year Plan period, the under-supply and slow growth of the infrastructure industries, the technological backwardness of the traditional industries and the slow growth of the emerging industries were the most outstanding drawbacks of China’s economic operation. Thanks to the development during the 9th Five-Year Plan period, all these problems mitigated to a considerable extent.

During the 9th Five-Year Plan period, especially in the middle and late parts of that period, the state increased inputs into transportation, energy and other sectors. As a result, infrastructure construction made significant progress. It was expected that, by the end of 2000, length of railway nationwide could reach 68,000 kilometers, 6,000 kilometers more than in 1995. The length of highway could total 1.4 million kilometers, 240,000 kilometers more over the 1995 figure. In particular, the length of expressway could total 15,000 kilometers, 12,900 kilometers more than in 1995. In the meantime, aviation, pipeline transportation, water transportation and other modes of transportation also posted rapid growth. Energy shortage became something of the past, with energy varieties having realized a transition from seller’s market to buyer’s market. In 1997, total energy production nationwide reached 1.324 billion tons, reversing the situation of under-supply. With the adjustment of industrial structure and the promotion of energy-saving, the emphasis of energy production had shifted from output increase and supply expansion in the past to aggregate control and structural optimization. The rapid growth of transportation, energy and other sectors had greatly eased the "bottlenecks" in China’s economic development.

While infrastructure construction scored rapid development, the state intensified the structural adjustment of the traditional industries. During the 9th Five-Year Plan period, the over-capacities of textile, coal, metallurgy, petrol-chemistry, building materials, machine-building, electric equipment, light industry and other industries were compressed, a large number of small enterprises, noted for enterprises with outdated technologies, resource wastes, poor product quality and heavy pollution, were shut down. By October 2000, the coal industry had banned and closed down a total of 36,000 illegal or irrational small coal mines, thus reducing a combined output of 300 million tons. In the field of power generation, China closed down small thermal power stations with a total capacity of 5.74 million KW from 1997 to 1999, and planned to close down other stations with capacity totaling 4.2 million KW.

In the meantime, China intensified the technological transformation of the traditional industries, including the iron and steel, manufacturing and petrol-chemistry. As a result, a large number of traditional industries were upgraded with new technologies and equipment. In addition, new and emerging industries scored fast growth during the 9th Five-Year Plan period, especially those knowledge-intensive industries equipped with information technology and biotechnology.

During the 9th Five-Year Plan period, the structure of China’s primary, secondary and tertiary industries continued to be improved. From 1995 to 1999, the primary industry saw its proportion of added value reduced from 20.5 percent to 17.7 percent, a drop of 2.8 percentage points; the secondary industry saw its proportion risen from 48.8 percent to 49.3 percent, up by 0.5 percentage points; and the tertiary industry saw its proportion risen from 30.7 percent to 33.0 percent, a growth of 2.3 percentage points. It is worth noting that, during the 9th Five-Year Plan period, the growth of the tertiary industry still lagged behind that of the secondary industry and the goal of accelerating the development of the tertiary industry was not fully achieved. In the first four years, the new added value of the tertiary industry accounted for about 30 percent of the new added value of GDP, roughly at the same level as in the 8th Five-Year Plan period. On the other hand, the secondary industry accounted for 59 percent of the new added value of GDP during the same period, 7 percentage points higher than in the 8th Five-Year Plan period.

(III) Organizational Structure of Industries: Small and Medium-sized Enterprises Received Greater Attention

During the 9th Five-Year Plan period, while the development of the large enterprises, especially the state-owned or state-held companies, received greater attention, the development of small and medium-sized enterprises, especially the private high-tech enterprises, began attracting wide attention.

In order to encourage and promote the development of small and medium-sized enterprises (SMEs), especially technology-intensive enterprises, the state adopted a series of policy measures. The procedures for the examination and approval of the establishment of SMEs were simplified. Various types of investors were encouraged to invest in or create SMEs with their technology and other factors of production. A technology innovation fund was set up for technology-intensive SMEs. The fund was designed to support the technology innovation of the small and medium-sized enterprises and promote the conversion of research results into production through funding aid, loans with discount interest, equity investment and other methods. More financing channels were explored to encourage and support the joint-stock banks, city commercial banks and city cooperative financial institutions to take the small and medium-sized enterprises as their main clients so as to gradually expand the direct financing channels for such enterprises. Restrictions on small and medium-sized enterprises, especially high-tech enterprises, to raise funds through listing and bond issuing on stock markets were liberalized. At the same time, preparations were underway to establish second-board market based on the existing capital markets so as to create conditions for the high-risk and high-tech SMEs to raise fund and for the venture investors to smoothly withdraw from market. Social and private investments were encouraged to establish the risk investment companies for small and medium-sized enterprises. Meanwhile, progress was also made in establishing credit guarantee systems, improving socialized service systems and mitigating the burden of small and medium-sized enterprises. The adoption and implementation of these measures created a fair external environment for the development of small and medium-sized enterprises and laid a sound foundation for their further growth.

(IV) Employment Structure: Employment Proportion of Primary Industry Continued to Decrease

In the first four years of the 9th Five-Year Plan period, employment nationwide increased by 26.39 million people, bringing the total employment to 705.86 million people. The annual growth rate on average was 0.96 percent, and in general the growth rate was slowing down. In terms of employment structure, a striking feature was that the primary industry’s proportion of employment continued to fall. In 1990, the primary, secondary and tertiary industries accounted for 60.1 percent, 21.4 percent and 18.5 percent of nationwide employment respectively. These proportions were changed to 52.2 percent, 23.0 percent and 24.8 percent in 1995 and further changed to 50.1 percent, 23.0 percent and 26.9 percent in 1999. In 1999, the primary industry saw its proportion of employment 2.1 percentage points lower than that in 1995 and 10 percentage points lower than that in 1990. As the secondary industry’s proportion of employment remained basically unchanged at 23 percent, the 2.1 percentage points reduced in the primary industry went to the tertiary industry, boosting the latter’s proportion to 26.9 percent in 1999. The continued reduction of the employment in the primary industry indicated that rural labor continued to flow out, which played an active role in the development of township and village enterprises and in the process of urbanization. Such a flow also provided abundant labor for the development of industries in general and the tertiary industry in particular.

We must see that while the employment in the primary industry continued to fall, the rate of reduction for the 9th Five-Year Plan period was 6.1 percentage points lower than in the 8th Five-Year Plan period. In addition, the primary industry’s proportion of employment picked up to more than 50 percent in 1999 after falling below 50 percent in 1997 and 1998. This was an indication that shift of rural labor to the non-agriculture sectors still had a long way to go.

(V) Consumption Structure: Engel Coefficient Fell Drastically

During the 9th Five-Year Plan period, the income growth of the Chinese people brought changes in their consumption structure. It is expected that by the end of 2000, the Engel coefficient of the Chinese people as a whole would fall below 50 percent, which indicates that their livelihood is moving from the type of having enough to