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The Australia-China Chamber of Commerce and Industry of New South
Wales Newsletter No. 18 28 April 2000 |
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 CONTENTS Focus on the Western Provinces Recent Developments in the Campaign |
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ACCCI ELECTRONIC NEWSLETTER NO. 18 E-Letter No. 17 was dated 24 March. We have tried
to send out an issue every 2 weeks, but obviously missed one in the middle of
April. This was due mainly to a 3-week visit to Beijing, Xi'an and Wuhan
during that period. Hopefully we can now get back to the regular schedule. The focus for this issue is the Development of
China's Western Provinces. We noted in E-Letter No. 16 (10 March) that a
substantial amount of funds are being allocated to boost the economies of the
interior provinces (Yunnan,
Xinjiang,
Tibet, Sichuan, Shaanxi, Qinghai, Guizhou, Gansu, Ningxia and the Chongqing Municipality). The announcement at the last National People's
Congress drew considerable attention in China. Not all media reports have
been consistent, however, and we provide commentary below with a view to
reconciling some of these statements. Prior to that, we comment on a recent event that
has potential bearing on the renminbi exchange rate. |
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Tom Holland, a correspondent for the Far Eastern
Economic Review (dated 4 May 2000) was one of the first to note the
potential significance of a weakening of China's currency relative to the US
dollar on 14 April. At various times since the East Asian crisis began
in July 1997, rumours of a devaluation of the renminbi circulated widely in
the Western media. We commented frequently that there was no economic reason
to believe that a substantial devaluation would occur. We even suggested that
the financial analysts who created the rumours might have been motivated by a
desire to achieve their "15 minutes of fame". Does the recent weakening of the renmimbi indicate
that these rumours are finally being realised? No, the significance of the
event lies elsewhere. The Chinese authorities have maintained an exchange
rate with the US dollar that was based upon a relatively simple rule. The
People's Bank of China (PBOC) intervened in the market to maintain a rate
that did not vary by more than 0.3 per cent of the weighted average of the
previous day's trade. Since July 1997, intervention occurred frequently
and the rate remained relatively stable between 8.2770 renminbi and 8.2800
renminbi to the dollar. This stability earned the Chinese authorities
considerable praise within the region since devaluation would undoubtedly
have complicated the adjustment process for the East Asian nations that were
most affected by the crisis. The significance of the 14 April event is that the
PBOC did not intervene on that day and allowed the dollar to reach 8.2830
renminbi. The difference is relatively small (about 0.05 per cent from the
middle of the range). How can this represent a potentially significant event? Comments began to circulate early this year that
China will need to widen the range within which the renminbi is allowed to
fluctuate, and hence to allow the rate to drift. This need arises from the
desire to maintain export competitiveness with the East Asian economies that
are recovering from the crisis and, at the same time, to fulfil the promise
of liberalising capital account transactions (including repatriation of
renminbi earnings by foreign enterprises) after accession to the World Trade
Organisation. Increased flexibility in the foreign exchange
market will soon be an essential element in China's desire to integrate more
completely into the global economy. Additionally, and perhaps more
importantly, the East Asian crisis demonstrated the consequences (especially
for Thailand and Indonesia) of maintaining a fixed exchange rate with a more
open capital account. China was insulated against currency raids through
its relatively closed capital account. Now that it is to be more open,
insurance against speculative attacks will become more costly if a relatively
rigid exchange rate regime is followed. Hence, introducing greater
flexibility on a gradual basis when exports are expanding makes a lot of
sense. |
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FOCUS ON THE WESTERN PROVINCES A plan to direct financial resources to
western provinces in not new. Mao Zedong tried it in 1956 by shifting major
manufacturing activities to the interior provinces. During 1999, the central government provided loans
worth 1.57 trillion yuan to the western region. This was 16.1 percent higher
than the previous year, and the growth rate was 1.5 percentage points higher
than other regions in the country. But the current plan represents a much
stronger commitment. The central bank promised to increase total bank
lending to the region to 20 per cent of the national total within five years.
This represents a 15 per cent increase, or 1.6 trillion renminbi, since the
end of last year. The central government is also offering once-off grants of
620 million renminbi for tourism, 800 million renminbi for education and 400
million renminbi for high-tech industries (FEER, 4 May 2000). From our own observations (noted below) the
commitment resembles a campaign and has already mobilised provincial
officials and party cadres from the western region. Is the western region falling further
behind the coastal provinces? The answer depends partly on which income and
production figures are examined. In a commentary published by ChinaOnline,
Professor Susumu Yabuki at Yokohama City University suggested that per capita
income differentials have not widened substantially since 1980. More
specifically, in 1980 per capita income in Shanghai (which has the highest
per capita income) was 12.5 times greater than that in Guizhou Province
(which has the lowest per capita income). In 1999, the differential was 12.1
times greater. This implies that the difference is narrowing, though by a
trivial amount. Other data appear to contradict this implication.
For example, the Far Eastern Economic Review reported that in 1999 per
capita GDP in the western region as a whole fell to 4,300 renminbi or 40 per
cent of the level in the east, down from 56 per cent in 1983. The western
region accounted for only 13 per cent of China's consumer spending last year,
although 23 per cent of the population lives there. A examination of provincial GDP data for the past
several years (from the China Statistical Yearbook) indicates that the
growth rates in western provinces have been consistently below those of the
coastal provinces. How can we reconcile the two sets of
data? Growth in output in the western region has a substantially
greater gap than growth in income per capita, relative to the coastal region.
This results mainly from the central government's practice of revenue
sharing. Western provinces receive more from the central government, in the
form of revenue transfers, than they pass along to the central government.
Coastal provinces, in comparison, receive less than they collect on behalf of
the central government. Transfers to the western provinces add to income in
that region, but come from the gross provincial product of another region. In
that sense, the difference is similar to the one between GDP and GNP at the
national level. Moreover, while most provinces spend more than they
receive in the form of revenue, the deficit as a percentage of gross
provincial product has been consistently larger for the western provinces.
This implies that part of the per capita income in the western provinces
comes from borrowed funds, and some of those funds are sourced in other
provinces. Thus, transfers and borrowing for provincial
government spending allows growth in income per capita to differ from growth
in per capita output. The process helps to equalise incomes, but it is
becoming increasingly more expensive for the central government to maintain
that method of equalisation. This is undoubtedly one of the principal
motivations for the current "Develop the West" campaign. By shifting part of the burden to the private
sector, the central government can come part of the way toward a
"retreat of the state" that has characterised Western economies
since the end of the Cold War in 1989. The new economic liberalism is
referred to as the beginning of "geo-economics" by Robert Gilpin in
his recent book (reference is given at the end). Is a "retreat of the state" a
viable strategy for China? An answer to this requires more debate than is
possible in this Newsletter. Several points should nevertheless be mentioned. First, the demonstrations at the Seattle meeting of
the World Trade Organisation last December indicated that new alliances are
being formed among people who are angry about the way "rich people are
running the world". Social stability is an extremely important objective
of China's leaders and it is one that cannot be left entirely to the private
sector -- for obvious reasons. Thus, it is most unlikely that the state apparatus
in China will go into full retreat on this issue. Nevertheless, mobilising
the private sector to assist in narrowing income gaps is a reasonable
strategy. Second, the amount of economic waste from government
administration in China (corruption as well as unintended mismanagement) is
known to be substantial. Closing down the sources of this waste, through a
partial "retreat of the state", is an effective way of eliminating
it. What are the main income gaps in China? A survey by the State Statistics Bureau, reported
by ChinaOnline shows that the gap between rich and poor is widening in
China. The nationwide survey of 150,000 urban and rural households in the
third quarter of 1999 indicated that there was a noticeably widening income
gap among urban and rural residents, with rich and poor groups. The richest 20 per cent of households account for
42.2 per cent of total income, with an average income of RMB 992 per person
per household per year. The poorest 20 per cent of households comprise 6.5
per cent of total income, with an income of RMB 124 per person per household,
only one-eighth that of the richest 20 per cent. The poorest 10 per cent
account for a mere 2.2 per cent of total income. The survey also shows that the individuals with the
highest income are famous film stars, singers, fashion models, writers,
sportsmen, some self-employed business people and private business owners,
middle and high level management in foreign-invested enterprises and international
institutions, management personnel in financial institutions, real estate
developers and managers, some contractors, technological shareholders,
pioneers in some new and high-tech industries, well-known economists, and
lawyers. These people add up to no more than 1 per cent of those surveyed,
but their annual income is more than RMB 200,000 per household. How does this relate to regional
differences? People in the higher income brackets tend to
gravitate to the coastal provinces. This "personal income drain",
as well as a "brain drain" of educated people, tends to hollow out
the western economies. By creating a belief that western provinces are set to
"take off" on a more rapid growth path, these "drains"
may be reduced. Will it succeed in reducing the
fundamental income gap? As we commented previously, a campaign to
revitalise the west will most probably not do a great deal on its own to
produce a permanent change in regional differences. As recent events show,
however, it is apparently easier to focus attention on regional differences
than to seek ways of redistributing income within cities and provinces. The campaign should be viewed as a start to the
possible development of a part of China that has a number of natural
disadvantages, some of which can be minimised but many of which cannot be
entirely eliminated. |
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RECENT DEVELOPMENTS IN THE CAMPAIGN The Chamber was in Xi'an (Shaanxi Province) during
the Fourth China East-West Co-operation and Investment Trade Fair that closed
on April 10. Some 750 domestic co-operation contracts were signed, with total
investment of 31.5 billion yuan. These contracts represent a form of
inter-provincial investment, which, if continued, could do much to make
China's provinces a true common market. The first "Western Forum" will be held in
mid-October in Chengdu. The meeting was initiated by ministries and
commissions of the central government, including the Development Research
Centre, the Information Office under the State Council and the Chinese Academy
of Social Sciences. It is to be organised by the Chengdu People's Government.
The forum is expected to follow the same structure
as the Fortune Forum held in Shanghai last year. Invitations to 500 CEOs of
transnational corporations and enterprises have already been sent out. The
focus will most probably be on infrastructure needs of western provinces,
including education and training. The work plans of many associations in China have
been altered to allow increased attention to be given to western provinces.
For example, the China Federation of Industrial Economies (CFIE) informed the
Chamber that studies will be made by the federation of ways to revitalise
older enterprises in the west and northeast. |
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The Chamber commented to a number of delegations
from China that their revenue sharing has some similarities with Australia's
Horizontal Fiscal Equalisation Scheme. We suggested further that study groups
from China's relevant ministries could be arranged with a view to examining: (a) the Australian procedures for uniform financial
accounting and reporting by States and Territories, (b) public sector borrowing that is sound in
principal, consistent across second-level governments and is both transparent
and accountable to relevant financial markets, and (c) the delivery and pricing of government services
for the purpose of minimising transfers under an equalisation scheme. The large increase in grants and transfers to the
western provinces underscores the need for these considerations, and we know
of no OECD nation, other than Australia, that has in place a fiscal
equalisation scheme that comes close to meeting China's needs. For some time, the Chamber expressed the view that
Australia's contributions to the western provinces are likely to be more
effective, in comparison with the coastal provinces. Despite this view, trade
and investment seminars from the coastal cities, such as Dalian, continue to
attract more businesses in Australia than seminars from interior cities.
There is an obvious desire to be "where the action is" and that has
clearly been in the coastal region. The "Develop the West" campaign may
change that, and to a large extent the campaign will succeed if such a change
occurs. |
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"Relaxing the Renminbi", FEER, 4
May 2000. "Saving the West", FEER, 4 May
2000. "Be Mentally Prepared for Long-term
Battle", People's Daily, 19 April 2000. "Western Forum to Be Held in Chengdu This
October", People's Daily, 19 April 2000. "Persistent Efforts Needed in Developing the
West", People's Daily, 18 April 2000. "Big Steel Maker Looks to the West, China
Daily Business Weekly, 15 April 2000. "China East-West Trade Fair Closes",
People's Daily, 13 April 2000. "China's Policy for Foreign Investment in
Western Region Being Implemented", People's Daily, 13 April 2000. "China Should Set up Fund for Developing
Western Regions", People's Daily, 13 April 2000. "Asian Development Bank Applauds Plan to
Develop Western China", People's Daily, 13 April 2000. "China Steps up Fiscal Transfer to Western
Areas", People's Daily, 13 April 2000. "Ten Major Projects Slated for West
China", People's Daily, 12 April 2000. "The Large-Scale Development Of China's
Western Region", Commentary by Prof. Susumu Yabuki, Yokohama City
University, ChinaOnline, 10 April 2000. "Individual Income Differences Widening in
China", ChinaOnline, 10 April 2000. "China Should Open Up Current Account -
Expert", ChinaOnline, 6 April 2000. Professor Robert Gilpin's book is entitled The
Challenge to Global Capitalism, published by Princeton University Press.
On the basis of the review appearing in the New York Times (http://www.nytimes.com) and chapter 1 of the book, which can be downloaded from
that Internet site, we recommend the book to anyone who is interested in
following the debate about economic liberalism and global developments. The Internet site for ChinaOnline is http://www.chinaonline.com. People's
Daily is at http://www.peopledaily.com.cn (go to "Features" for
articles on the western provinces) and for China Daily it is http://www.chinadaily.com.cn. The Far Eastern Economic
Review can be obtained at http://www.feer.com. Send comments on this newsletter to: j.zerby@unsw.edu.au |
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