FIECCp FOR OFFICIAL USE ONLY. March 31, Document of the World Bank. Public Disclosure Authorized

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report No CHA China: Recent Economic Trends and Policy Developments March 31, 1983 East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY Document of the World Bank FIECCp This document has a restricted distribution and may be used by recipients only in the performance of their official duties Its contents may not otherwise be disclosed without World Bank authorization

2 CURRENCY EQUIVALENTS The Chinese currency is called Renminbi (RMB). It is denominated in yuan (Y). Each yuan is subdivided: 1 yuan = 10 jiao = 100 fen Exchange rates used in this report are as follows: 1979 $1.00 = Y $1.00 = Y $1.00 = Y $1.00 = Y 1.89 WEIGHTS AND MEASURES Chinese statistics are usually in metric units; in addition, mu and jin are often used: 1 mu = acres = hectares (ha) 1 jin = 0.5 kg FISCAL YEAR January 1 - December 31 TRANSLITERATION The Pinyin system is used in this report.

3 FOR OFFICIAL USE ONLY CHINA COUNTRY ECONOMIC MEMORANDUM Table of Contents Page No. SUMMARY AND CONCLUSIONS i-ix 1. INTRODUCTION A. Economic Setting I B. Overview of Reform, Adjustment and Stabilization MANAGEMENT OF GROWTH AND ADJUSTMENT A. Planning and Management B. Growth and Structure of the Economy C. Incomes and Employment Urban Incomes and Employment Rural Incomes D. Investment Size and Composition of the Investment Program Investment Process FINANCIAL AND BALANCE OF PAYMENTS MANAGEMENT A. Inflation and Prices Inflation Price Structure Price Reform.23 B. Fiscal Policy Budgetary Deficits and their Impact Trends in Expenditures.26 Revenue Developments.26 Fiscal Decentralization.29 C. Monetary Policy.30 Money and Credit in Stabilization Interest Rates and Banking Reform This report was prepared by Ian Porter, Bill Byrd and Gene Tidrick. Mr. Porter and Mr. Byrd visited China in March/April 1982 as members of an IMF Article IV consultation mission and the report is based largely on the information provided to the IMF mission. A draft of the report was discussed with the Government in January 1983 by a mission led by Mr. Parvez Hasan and including Mr. Porter and Mr. Byrd, and was revised to take account of comments received as well as developments since April This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 -2- Page No. D. The Balance of Payments Exports and Imports. 35 External Borrowing and Creditworthiness Institutional and Policy Changes in the External Sector SECTORAL POLICIES AND REFORMS A. Agriculture Agricultural Growth and Adjustment Production Responsibility Systems B. Industry Adjustment in Industry Institutional and Policy Changes C. Energy.. 59 Energy Consumption Incentives for Energy Conservation, Substitution and Production Short- and Long-term Energy Planning D. Transport and Commerce.62 Transport Commercial Sales and Inventories Commercial Reforms ECONOMIC PROSPECTS A. Constraints and Options Human Resources Agriculture Energy Industry Infrastructure Financial Resources B. Macroeconomic Prospects The Sixth Five Year Plan ( ) Scenarios for the 1980s C. Prospects for Economic Reform D. Concluding Remarks TABLES IN TEXT 2.1 Agricultural and Industrial Growth, Growth of NMP at Current and Constant Prices, Structure of NMP at Current Prices,

5 - 3- Page No. 2.4 Consumption and Ownership of Specific Commodities, Urban Incomes, Survey of Rural Incomes, Gross Fixed Investment, State Capital Construction Investment, Inflation, Growth Rates of Sales and Incomes at Current Prices, Budget Deficits, Budgetary Expenditures and Subsidies, Domestic Revenues, Developments in Money and Credit, Current Account, Value, Price and Volume Indices of Exports and Imports, Composition and Growth of Exports, Composition of Imports, Direction of Trade, Gross Agricultural Output, Foodgrain Balance, Use of Manufactured Inputs in Agriculture, Industrial Growth: Percentage Change Per Year in Gross Output, Growth of Manufactured Exports, Imports of Machinery and Equipment, Changes in Main Transportation Indicators, Selected Sixth Five Year Plan Targets State Capital Construction Investment by Sector Effects of Low Growth and Moderate Energy Savings, Effects of Moderate Growth and Moderate Energy Savings, Effects of High Growth and High Energy Savings, ANNEXES 1. Restructuring of the Commissions and Ministries of the State Council 2. Conversion of Macroeconomic Statistics STATISTICAL APPENDIX MAP

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7 - i - SUMMARY AND CONCLUSIONS 1. The first World Bank report on China entitled "China: Socialist Economic Development" was distributed to the Executive Directors in June The report was designed to be as comprehensive as possible and included an analysis of China-s economic system, a review of development efforts over the past three decades, a comparison of the economic situation and level of development of China with those of other countries and an assessment of China's development prospects. This Country Economic Memorandum focusses primarily on economic developments since 1978 and on the implications of these developments for China's future economic prospects. Background 2. Following a period of major institutional changes in the 1950s, which included land reform and the eventual establishment of communes in rural areas and the extension of public ownership to cover almost all of the modern sector, development efforts in China have been directed toward the major objectives of industrialization and poverty reduction. Substantial progress has been made: China now produces a far greater variety of industrial goods than most developing countries, and in terms of basic education, nutrition and health the Chinese population is much better off than most of its counterparts in other developing countries. Despite these achievements, however, China remains a very poor country with a GNP per capita of only $300 in 1981 /1 and about 200 million people or 20% of the population with unacceptably low incomes. The economy is also inefficient: past growth has come mainly from massive mobilization of resources and fundamental institutional changes; relatively little attention has been paid to issues of efficiency. For a country that faces significant domestic resource constraints this is a particularly serious problem. 3. To address the underlying weaknesses and imbalances in the economy and ensure rapid growth and improvements in living standards, the Government initiated a program of adjustment and reform in Structural adjustment is aimed at speeding improvements in living standards. It has involved readjusting the relative shares of consumption and investment in national income, some sectoral and subsectoral readjustments and an emphasis on foreign trade. Economic reform is aimed at improving the overall efficiency of the economic system and involves: (a) restoring and improving the quality of central planning and policy coordination; (b) devolving more decision-making authority to lower level units in the economic system; (c) establishing more /1 Calculated according to the World Bank Atlas Methodology.

8 - ii - direct links between incomes and the performance of economic units and individuals; and (d) placing more reliance on market mechanisms and economic instruments, less on administrative directives, to influence economic activity. In 1981 problems of inflation and large budgetary and current account deficits resulted in short-term stabilization temporarily receiving the highest priority, but by 1982 the Government was again pushing ahead rapidly with adjustment and reform. Economic Reform 4. Reforms in the system of economic management have now affected all sectors of the economy and institutions from the central government down to production teams and rural households. A major reorganization of the central government has strengthened the core planning and management agencies (especially the State Planning Commission and the State Economic Commission) and reduced the total number of commissions, ministries and agencies under the State Council from 98 to 52. A reorganization of departments and divisions within ministries and of provincial and local governments is underway. Economic management has also been decentralized: provincial and local planning commissions and banks have been given more autonomy in investment decision-making and there has been an increased use of credit to finance investments; provincial and local governments have been granted greater budgetary flexibility and more incentives to expand revenues and/or economize on expenditures; and the powers of ministries, new territorially based trading companies and, in some cases, enterprises to engage directly in foreign trade have been substantially increased. 5. Reforms of the economic system have been greatest in rural areas. The most important and fundamental change has been the introduction of various types of "production responsibility system" which give lower level collective units, groups and households more autonomy in production and investment decisions and link incomes directly with output. By the end of 1982, 92% of production teams in China had implemented some form of production responsibility system; 78% of teams had implemented some form of household responsibility system, which involves retaining collective ownership of farm land and major equipment but contracting out plots of land to individual households. In many cases households can farm the land as they wish and retain whatever they produce beyond their obligations to the state (in the form of taxes and compulsory deliveries at fixed prices) and to the collective (for welfare and other expenses). These obligations now account on average for about one third of a household's production. In recent years there has also been an increase in the number and types of rural markets at which households can freely trade commodities. 6. Economic reform has not proceeded as far or as fast in urban areas, but significant systemic changes have still taken place. Management of state

9 - iii - enterprises has been affected by a number of changes and experiments aimed at improving incentives, including the introduction of profit retention schemes and more flexible payment and employment practices. There has been experimentation with different types of state enterprise organization, a greater variety of marketing channels, some price flexibility and adjustment of relative prices, and greater autonomy for state enterprises in production decisions. The scope for collective and individual economic activities has also been enlarged. 7. Many economic reforms, especially those in rural areas, have already had a positive impact on efficiency, while others will take longer to have a significant effect. There are also some emerging issues with economic reform that the Government will need to address. In rural areas for example there is the issue of the potential conflict between enhanced economic incentives and equity in income distribution as well as preservation of some of the strengths of the commune system in terms of provision of basic needs and other services and mobilization of labor for construction and maintenance of community infrastructure. In the state enterprise sector, many units still do not have to take full responsibility for their decisions (commercial units buy whatever they produce and there is no risk of being closed down) and are therefore still inclined to overinvest and overproduce. Substantial decentralization of decision making without reforms in the pricing system has also caused lower level units to make some inappropriate investment and production decisions. More use is being made of the market, but information and transport systems are still weak, markets are fragmented and competition is limited. It has also been difficult to develop effective indirect fiscal and monetary policy instruments. During 1982 the Government reviewed such issues and concluded that weaknesses and inconsistencies in reform should be overcome not by backtracking on reform but by carrying out more careful studies and experiments and speeding up the reform process. Adjustment, Stabilization and Growth 8. During the past four years the Government has followed a strategy of setting relatively modest targets while pushing ahead with economic and administrative measures that would contribute to adjustment and stabilization as well as to economic growth. The various measures have included: major increases in agricultural procurement prices; strict controls on many other prices; rationing and other administrative measures to improve efficiency of resource use; changes in the amount and composition of state capital construction; various fiscal measures designed to limit the budget deficit; increases in and a rationalization of interest rates; moderation of currency and credit expansion; and the introduction of an internal settlement rate for foreign exchange transactions and other measures to encourage exports and economize on imports. 9. These economic and administrative measures have combined with systemic changes to play an important role in the impressive performance of

10 - iv - the Chinese economy in recent years. They have contributed to structural adjustment by helping to reduce the share of investment in net material product (NMP) from 36% in 1978 to 28% in 1981, by stimulating agricultural production and by shifting the emphasis from heavy to light industry. In several ways they have also been critical in restoring economic stability in 1981 and First they helped to lower the rate of inflation (prices of nonstaple foodstuffs and some other goods have been increasing quite rapidly but the overall level of retail prices rose by only 2.4% in 1981 and an estimated 2% in 1982 compared with 6% in 1981). Second they helped to reduce the budget deficit (adjusted to eliminate financing items) from 7% of NMP in 1979 and 5% in 1980 to less than 2% in 1981 and Finally they helped to convert the $2.4 billion current account deficit of 1980 into a $2.0 billion surplus in 1981 and an estimated $4.4 billion surplus in Throughout the period the various policy measures and reforms have also been important in ensuring a satisfactory overall rate of economic growth: gross agricultural and industrial output at constant prices has grown by 6.9% per year between 1978 and 1982 and NMP at constant prices by an estimated 5.3%. In the period net investment appears to have stagnated or even declined in real terms while material consumption grew in real terms by over 8% p.a. 10. The combination of structural adjustment, rapid overall economic growth and a low population growth rate (1.3% p.a. between 1978 and 1981) has led to rapid increases in per capita incomes in recent years. In urban areas, general wage increases and higher bonuses have more than offset the increase in the cost of living index, and real per capita incomes increased by 4.8% p.a. between 1978 and The number of urban unemployed has been reduced dramatically and, with government encouragement, urban self-employment has grown rapidly. Even more impressive, however, has been the increase in rural incomes. After a long period of stagnation, rural per capita incomes increased in money terms by 16-18% p.a. between 1978 and 1981; the real increase in incomes was 10-12% p.a. About 60% of this dramatic increase is due to increased production and the remainder to shifts in the terms of trade in favor of rural producers. While areas and households that were already relatively well off may have benefited the most and income differentials at a local level may have increased, many poor areas and households have apparently enjoyed substantial income improvements. During 1982 there were further increases in real per capita incomes, with rural incomes continuing to grow more rapidly than urban incomes. 11. The high rate of investment in 1978 and the low returns to much of this investment made a cutback in the investment rate a priority for the adjustment program. But achieving such a cutback has proved to be a difficult task. Decentralization of investment decision making and financial resources without accompanying reforms in prices and enterprise responsibility has resulted in a rapid expansion in investment financed from retained earnings or local resources. Some of this investment has gone to priority areas including housing but other investment appears to have been in projects that from a national perspective are of a relatively low priority. The central government has found it difficult to control such investment, even through administrative

11 regulations. Meanwhile state budget investment has been constrained by the need to restore fiscal stability. As a result most of the cutbacks in investment have had to be in large centrally financed projects and in 1981 even the priority sectors of energy and transportation were affected. Some of these high priority projects were revived later in 1981 and during 1982, but appropriate planning techniques and incentive systems still need to be developed that will ensure a more optimal level and composition of investment. 12. The introduction of "production responsibility systems" in rural areas, the major improvement in the terms of trade for rural producers and reductions in the quantity of grain and other products farmers are obliged to provide to the state at fixed prices have all contributed to a very strong performance of agriculture. Gross agricultural output at constant prices increased by 6.0% p.a. between 1978 and 1982; however real value added in agriculture has not been growing as rapidly. There has been a substantial diversification of the sector, with production of cash crops including oilseeds, cotton and sugar expanding rapidly and large increases in livestock and sideline production (including brigade and team industry). Grain production has also done well, increasing by about 2.8% p.a. during as a result of significant yield improvements (the area planted to grain has actually fallen). However, domestic grain consumption appears to have increased more rapidly, and net imports of grain have risen to about 15 million tons (4% of total domestic consumption). Emphasis is now being placed on providing the incentives (including price incentives) and other assistance that will further stimulate agricultural production and ensure an appropriate balance between grain and nongrain agriculture. 13. The industrial sector has also performed well in recent years: gross output at constant prices has increased by 7.2% p.a. during (heavy industry by 3.3% p.a. and light industry by 11.8% p.a.). Both the overall growth rate and the pattern of industrial production have been affected by the energy situation. Due to the stagnation of energy production and continued exports of energy products, domestic consumption of energy has grown by less than 2% p.a. during , while NMP has risen by nearly 5% p.a. This has been possible largely because of the changing structure of industry: heavy industry consumes about four times as much energy per unit of output as light industry and heavy industry grew very slowly in 1980 and actually declined in 1981 before picking up again in The Government has been stressing the importance of improved efficiency and energy savings within sectors and has been pursuing energy conservation through rationing and other administrative measures as well as a few selected price and tax changes. It is recognized that as economic reforms proceed further, the role of pricing in energy conservation will become more important. 14. The restoration of fiscal stability in 1981 and 1982 has been achieved more through expenditure restraints than through revenue growth. Total domestic revenues have been increasing but at only half the rate of growth of NMP, in part due to the introduction of profit retention schemes and the shift in the composition of industrial output from heavy to light

12 - vi - industry. Among expenditure items, spending on capital construction has fallen in every year since 1978 while subsidies (mainly on daily living necessities) have increased dramatically from 6.6% of total expenditures in 1978 to 26.0% in However, the issue of subsidies is more a pricing and income distribution issue than a fiscal issue. Because of the Government's concern about open inflation, many of the increases in agricultural procurement prices have been financed by subsidies rather than being passed on to urban consumers, but without such subsidies the Government would probably have been obliged to permit larger wage increases and hence lower profit remittances (which are a major source of government revenue), leaving the fiscal situation largely unaffected. 15. The improvement in the balance of payments in 1981 and 1982 has been much greater than anticipated. The performance of merchandise exports has been very impressive with real growth averaging over 15% p.a. during , mainly because of a rapid growth in manufactured exports which has been encouraged by the decentralization of foreign trade and the introduction of the internal settlement rate. However, some of the growth appears to have resulted from excessive competition among provinces and organizations and from exports of basic consumer and producer goods that are in short supply domestically. To address such problems the Government introduced various export quotas and export duties during The real growth rate of exports has been declining steadily since 1978, reaching an estimated 8% in Export prices have also declined and the nominal value of exports in 1982 increased by only 3%. Meanwhile the volume of imports declined in both 1981 and 1982, due in part to the lagged effect of contract cancellations and suspensions (which resulted in a 50% drop in the value of imports of complete plants and sets of equipment in 1982), but also to delays in delivery of equipment already ordered and to problems in obtaining high technology goods. A substantial increase in imports is expected in 1983 and 1984 as China endeavors to take advantage of its strong balance of payments position to import more machinery and equipment and expand its investment program, especially in the priority sectors of energy and transport. 16. A major consequence of the Government's conservative trade and balance of payments strategy has been a much reduced need for foreign borrowing. In 1930 and 1981 the Government cut back sharply on interbank borrowing and in 1981 and 1982 took advantage of the unexpectedly strong current account position to repay commercial bank and other loans. In 1981 China's debt service ratio was 7.8%, due in part to accelerated loan repayments. At the end of 1981 total reserves (excluding gold) were $5.0 billion or 3 months of 1981 f.o.b. imports; by the end of the third quarter of 1982 they had increased to $9.4 billion. Prospects 17. During the remainder of the 1980s the Government's efforts to improve the living standards of the Chinese people should be helped considerably by the continuation of a relatively low population growth rate; by opportunities to make greater and more efficient use of foreign technology

13 - vii - and capital; and by the possibilities for improving efficiency through economic reform. Rapid and equitable economic development is constrained by a number of factors, however, some of long-standing and others of more recent origin. There are serious shortages of skilled manpower and current enrollment in both universities and technical and vocational schools is one quarter of the average for other developing countries. The performance of agriculture in recent years has been very good; but with no possibilities for expanding the cultivated area and with cropping intensities and yields already quite high, the growth rate for agriculture (excluding brigade and team industry) is unlikely to average more than 3-4% p.a. during the 1980s. Efforts also need to be made to ensure that all areas and regions participate in agricultural growth. Energy availability will continue to constrain industrial growth during the remainder of the decade, and there are capacity constraints in the transport and commercial sectors. Large investments will be required in energy and transport at a time when competing demands from other sectors, especially housing, are very great, domestic revenues have not been growing rapidly and decentralization and reform have resulted in the central government having relatively little control over large parts of the investment program. To address some of these problems and maintain relatively rapid growth and improvements in living standards, further reform and adjustment measures will be required including price reform and greater use of foreign imports and capital. 18. In recognition of these problems and issues the Government's Sixth Five Year Plan (published in December 1982 but covering the period January December 1985) emphasizes continuation of the program of "adjustment, reform, consolidation and improvement of the national economy." The period is essentially viewed as an interim period during which important readjustments and reforms of the economy will occur. These will lay the foundation for more rapid economic development during subsequent plan periods. Modest targets are set for production and income growth (the target growth rates for gross agricultural and industrial output and for NMP are 4%), consumption is expected to grow faster than investment, prices will be kept basically stable, the budget deficit will be kept low and a significant expansion in foreign trade is forecast, with imports growing more rapidly than exports. In all sectors of the economy the priority will be on policy and institutional measures to improve efficiency rather than on maximization of output, but the Government expects that most of the production targets of the Sixth Plan will be surpassed, as they have been in the first two years of the plan. 19. Whatever the exact rate of production and income growth, China's temporary situation of current account surpluses is expected to change quickly to one of moderate current account deficits and its requirements for foreign capital to finance its development and modernization programs are expected to increase greatly during the remainder of the 1980s. However the actual size of the current account deficits and the magnitude of foreign borrowing requirements are very sensitive to assumptions about economic trends and policy developments. Moreover even a slight acceleration of

14 - viii - economic growth without stgnificant improvements in efficiency, especially energy efficiency, could result in large current account deficits and debt management difficulties by the end of the 1980s. In these circumstances the Government will need to remain cautious in its import and foreign borrowing strategy. Imports of capital and intermediate goods are expected to expand rapidly. By the late 1980s, some imports of energy also appear to be necessary before new production capacity is established. But the overall rate of import expansion and the overall rate of economic growth are crucially dependent on a continued good performance of manufactured exports and on the rate at which efficiency can be improved. The Government will need to monitor developments in these areas closely and adjust its import and foreign borrowing strategy accordingly. A relatively high rate of economic growth (6-7% p.a. during the remainder of the 1980s) will probably only be feasible if major improvements in energy efficiency continue to be achieved. 20. The need for efficiency improvements highlights the importance of economic reform and the Goverrment's decision that reform implementation will be speeded up during the next three years. Rural reforms are to be broadened and strengthened, with production responsibility systems extended to new spheres of activity, new types of organization including joint ventures between rural and urban units encouraged and the administrative functions of communes separated from their economic functions. In state owned industry schemes for replacing profit remittances with taxes will be greatly expanded, the system of industrial administration will be revamped and streamlined and greater efforts will be made to close down inefficient enterprises. Reform of the commercial system will receive special attention during the next three years and the development of collective and individual commerce, particularly in rural areas, will be promoted. In the area of investment planning the Government is emphasizing more effective implementation of existing administrative regulations, but improving the structure and efficiency of investment will be a long and difficult process, dependent very much on progress on other aspects of reform. Of particular importance are measures to introduce formal economic analysis (including use of shadow prices) into investment decisions and to decentralize decision making not just to administrative units but also to producing units which can be made more economically and financially responsible for their decisions through appropriate pricing and incentive schemes. Price reform itself is critical. The Government recognizes this but, in view of the complexities and magnitude of the changes that will be required, has decided that it will not be possible to implement comprehensive price reform until after However, appropriate upward or downward adjustments in the most distorted prices can and will be made, and the prices of many minor commodities will be allowed to fluctuate according to market conditions. These will be important steps forward in what is likely to be a gradual process of reform that will need to take account of the scope for "unfreezing" of prices and how state determined prices should relate both to domestic costs and to world prices.

15 - ix The 1980s is a difficult period of transition for China. But during the past four years the Government's programs of adjustment, reform and stabilization have achieved very significant results. In fact, in terms of production and growth, efficiency improvements and stability (as measured by budgetary and current account deficits) the achievements have been greater than expected. Nonetheless China is still a very poor country and its investment and modernization requirements are enormous. To help meet these needs and ensure continued rapid growth and improvements in living standards, it is important that the Government continue with its program of structural adjustment (including an expansion in foreign trade and borrowing), and with its program of economic reform, that will help improve the overall efficiency of the Chinese economy. Continued effective implementation of these programs should help ensure a reasonable rate of growth during the remainder of the 1980s while setting the stage for more rapid growth and development in the 199 Os.

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17 1. INTRODUCTION 1.01 The first World Bank economic mission to China visited the country between October and December The mission's findings were presented in a report entitled "China: Socialist Economic Development" (Report No CHA), which was distributed to the Executive Directors in June The report was designed to be as comprehensive as possible and to compare the economic situation and level of development of China with those of other countries. The report included an analysis of China's economic system and development prospects and has provided a basis for planning the World Bank's future activities in China This country economic memorandum focusses mainly on recent developments in the Chinese economy. It reviews the progress and impact of the Government's programs of reform, adjustment and stabilization between 1979 and 1982, and assesses the implications of recent internal and external developments for China's future economic prospects. The remainder of this chapter provides a brief summary of the Chinese economic system and its achievements and problems; It also provides an overview of progress in implementing programs of reform, adjustment and stabilization. The second chapter reviews developments in the planning and management system and macro-economic trends, particularly in consumption and investment. The third chapter discusses financial and balance of payments developments, while the fourth provides a summary of the impact of the various programs on the key sectors of agriculture, industry, energy, transport and commerce. The final chapter draws the discussion of macro and sectoral trends together and reviews the Sixth Plan and some of the medium term prospects and issues that are facing the Chinese economy. A. Economic Setting 1.03 China's economic system reflects in large measure the major institutional changes that took place in the 1950s, including land reform and the eventual establishment of communes in rural areas and the extension of public ownership to cover almost all of the modern sector. But the system has evolved since then and is continuing to change as a result of the Government's program of economic reform. Basic policy in China is determined by the Communist Party while the state (or the administrative organs of government) manage the economy. Despite recent reforms, the economic management system is still quite hierarchical and subject to administrative controls, with commands constantly flowing downwards and information upwards between levels (the center, the provinces, the municipalities or prefectures, the counties or districts and lower level administrative units). But the extent of central control has varied almost continuously since the 1950s and remains the subject of much debate The rural economy consists in the main of people's communes, /1 about 53,000 of them, each with about 3,500 households. The commune itself /1 State farms only account for about 5% of the cultivated area.

18 - 2 - is a multi-level management system, with each household being part of a team, each team part of a brigade and each brigade part of a commune. The division of responsibility for economic and social activities among these levels varies with the locality and is now undergoing major change. But everywhere land remains collectively owned Enterprises owned by the state make up much of the rest of the economy. Traditionally such organizations have enjoyed little independence, but this is gradually being changed as a result of recent reforms. Workers are allocated to these organizations by central and local labor bureaus, and they receive both prescribed wages and bonuses. In addition, urban collectives employ about one-f ith of the urban labor force, and the self-employed are a small but rapidly growing part of the Chinese economic system During the past three decades, development efforts in China have been directed toward the major objectives of industrialization and poverty reduction. Substantial progress has been made. Between 1952 and 1979, gross industrial output grew at an annual average rate of 11% (13% in heavy industry and 9% in light industry). China now produces a far greater variety of industrial goods than most developing countries and is much less dependent on imported equipment and materials. Almost the entire range of modern industries have been set up, and special efforts have been made to spread manufacturing into poorer regions and into rural areas China's record in terms of poverty reduction has also been impressive. Due to the rapid growth of savings and investment, per capita consumption in real terms grew by only 1.9% per year between 1957 and 1979, compared with a real GNP per capita growth rate of %. But substantial progress has been made in meeting the basic needs of the population, particularly basic education, nutrition and health. There is almost universal primary school enrollment, adult literacy is now well ahead of the average for low-income countries, and life expectancy has risen to 68 years. Despite these achievements, however, China remains a very poor country. In 1981 GNP per capita was only $300,/1 and about 200 million people, or 20% of the population, still have unacceptably low incomes./ Morever, the Chinese economy remains inefficient. Past growth has come mainly from massive mobilization of resources and fundamental /1 Annex 2 provides information on the assumptions made by the World Bank in converting Chinese data from the system of material production to the UN system of national accounts. Conversion of GNP to US dollars is based on the World Bank Atlas methodology. /2 The poorest fifth of the population had an average annual per capita income of about Y 70 in 1979 which would purchase only about 300 kg of unmilled rice (equivalent to about 2,100 calories per day) even if nothing were spent on other commodities.

19 - 3 - institutional changes; until recently relatively little attention has been paid to improvement of systems and technologies. The state economy is inefficient in terms of converting inputs into outputs, matching supply with demand and choosing appropriate investment projects; supply bottlenecks frequently occur and there are large inventories of often poor quality goods. The commune economy appears, at least in principle, to be a much more efficient system, but it too has sometimes used inputs inefficiently and failed to produce the most appropriate outputs. Such inefficiencies and problems in both the state and the collective economies appear to have stemmed mainly from inefficient planning and management; from the lack of objective methods for making choices between different activities and techniques; from the failure to use instruments such as prices as incentives to improve efficiency; and from the country's isolation from technological and other developments in the rest of the world In view of the widespread poverty remaining in China and the generally low standard of living, the Government is seeking a rapid improvement in living standards. Factors favoring this goal include, most importantly, the low population growth rate. But China faces serious shortages of resources. The scarcity of good agricultural land is a centuries old problem, but the total arable area, as well as the amount of land per worker, may now be declining and the cropping index and yields are already high relative to other developing countries. China is faced with a serious energy constraint: domestic primary energy production actually declined in 1980 and 1981 and only slow growth can be expected for the remainder of the 1980s. Insufficient infrastructural development in key sectors like transport also constrains growth. The labor force continues to expand and substantial underemployment remains in rural areas. On the other hand there are serious shortages of skilled high-level and technical manpower. China could ease some of its domestic resource constraints by opening up its economy more to international trade and by making more use of external borrowing. But to achieve a rapid growth of production and an increase in living standards China must improve the efficiency with which it uses both domestic and external resources (the present low level of efficiency indicates the possible gains from such improvements). B. Overview of Reform, Adjustment and Stabilization 1.10 In China, the period since 1977 has been characterized by much debate concerning development strategies and the strengths and weaknesses of the Chinese economic system. Initially the Government's major concerns were to overcome the disruptions and setbacks caused by the Cultural Revolution ( ) and resume a rapid growth path. Emphasis was placed on the modernization of agriculture, industry, national defense, and science and technology; an ambitious investment program was prepared and a comprehensive ten-year economic development plan announced. But by 1979, it was apparent that underlying weaknesses in the economy would make the investment program and the plan unsustainable. Thus, the Government initiated a program of "adjustment, reform, consolidation and improvement of the national economy".

20 Economic reform is designed to improve the functioning of the economic system and thereby the overall efficiency of the Chinese economy. Its major objectives have been to: (a) restore and improve the quality of central planning and policy coordination; (b) devolve more decision-making authority to lower level units in the economic system; (c) link incomes and rewards more directly with the work and effort of economic units; and (d) rely more on market mechanisms and on economic instruments and less on administrative directives to influence economic developments. Economic reforms first got under way in 1979, but most of their effects were not apparent until after The government's planning and management systems and the management of state enterprises and collectives have all been affected Accompanying economic reform has been a major program of structural adjustment designed to speed improvements in living standards, particularly in rural areas. The key feature of this program has been a readjustment in the relative shares of investment and consumption and of different productive sectors in national income. In view of the already relatively high share of investment in national income and the low returns to some of this investment, the Government decided in 1979 to raise the share of consumption and reduce the share of investment in aggregate demand, by cutting capital construction, raising agricultural prices and increasing money wages. The associated need for substantial sectoral and subsectoral readjustments of production and investment was recognized, with more emphasis being placed on agriculture and light industry at the expense of heavy industry. There has also been a continued emphasis on foreign trade Managing the reform and adjustment programs has proved to be a difficult task. In 1979, there was a large budget deficit, a significant deficit in the balance of payments, a sharp increase in the amount of currency in circulation and upward pressure on prices. The Government took some corrective measures in 1980, including a reduction in capital construction expenditures financed by the state budget, but these proved insufficient to restore stability. In 1980 the budget and balance of payments deficits remained large and open inflation increased. At the end of 1980 there was a review of the economic situation and in 1981 the Government instituted a more restrictive stabilization program. At its core were sharp cuts in investment, a restoration of budgetary balance and a moderation of currency and credit expansion. The stabilization program proved to be even more effective than planned: there was a large swing in the current account, a cut in the absolute level of investment and a reduction in the rate of open inflation as well as a sharp reduction in the overall rate of economic growth. In 1982 investment expanded again and the economy resumed a path of more rapid growth Thus the period since 1979 has been characterized by a series of government programs designed to improve efficiency and raise living standards while maintaining domestic stability. The management of these various programs, the conflicts and complementarities between programs and their macro and micro effects are the subject of this memorandum.

21 2. MANAGEMENT OF GROWTH AND ADJUSTMENT A. Planning and Management 2.01 In recent years the Government has been endeavoring simultaneously to readjust the structure of the economy and to improve the overall efficiency of resource use. Many policy changes and reforms of the system have been introduced with potentially wide-ranging effects. Managing this overall process and ensuring that programs and measures are complementary and not conflicting has proved to be a difficult task, particularly for a country with a still relatively weak central planning and management system. In fact it is well recognized in China that readjustment and efficiency improvements require not only reforms in the management of the collective and state enterprise sectors and more use of the market but also a restoration and strengthening of central planning and policy coordination In an effort to improve the quality, speed and coordination of central decisionmaking, a major reorganization of the central government was initiated in early This has resulted in a reduction in the number of vice premiers from thirteen to two and in the number of Commissions, Ministries and agencies under the State Council from 98 to 52./l The staff of the State Council' and Ministries and Commissions is also being cut by 30% from 49,000 to 32,000. Particular emphasis has been placed on strengthening and improving the core planning and management agencies: the State Planning Commission is being strengthened, and the State Economic Commission has been reorganized (to include the State Capital Construction Commission and several other commissions) and its functions and powers augmented. The State Planning Commission remains responsible for longer term planning while the State Economic Commission is responsible for helping prepare and implement shorter term economic plans. A reorganization of departments and divisions within ministries and of provincial and local governments is under way Other measures to improve the quality of central planning are accompanying this administrative reorganization. Planning methodologies are being improved; more emphasis is being placed on economic criteria in making planning and investment decisions; and the statistical system is being strengthened, with sample surveys supplementing the Government-s previous dependence on comprehensive administrative reporting. The promulgation of a detailed and comprehensive Sixth Five-Year Plan in December 1982 demonstrates the progress that China's planning system has made since the mid 1970s. /1 Details on the restructuring of Commissions and Ministries are contained in Annex 1.

22 The Government has recognized, however, that improvements in central planning and policy coordination on their own are unlikely to ensure the efficiency improvements China requires. Accordingly a set of reforms has been introduced designed to improve the management and efficiency of lower-level administrative and economic units by giving them more responsibility and autonomy, by linking incomes and rewards more directly with output and productivity, and by relying less on administrative measures and more on the market and on indirect economic instruments to influence their activities Management of state enterprises has been affected by a number of changes and experiments aimed at improving incentives, including the introduction of profit retention schemes and more flexible payment and employment practices. There has been extensive experimentation with different types of state enterprise organization, the variety of channels through which goods can be marketed has been expanded, some flexibility in prices has beeni introduced, and state enterprises have been given more control over what they produce. At the same time the Government has endeavored to improve the efficiency of state enterprises through indirect measures such as providing loan instead of grant finance and introducing charges on their fixed assets and circulating capital Major changes in the organization and management of the collective sector have taken place. In rural areas more responsibility has been given to lower-level collective units and to households; incomes and rewards have been more directly linked to the work and efforts of groups and households; and new types of rural organizations are being encouraged. There has also been an expansion in the number and types of rural markets at which households can freely trade commodities. Meanwhile in urban areas the scope for collective and individual economic activities has been enlarged Of particular importance for central-local government relations has been the decentralization of fiscal and foreign trade management: a revenue and expenditure sharing system between provinces and the central government was introduced in 1980, and provincial branches of foreign trade corporations, local trading companies and in some cases enterprises can now export and import without having to seek approval from the central government The Government has recognized that when an economic system relies less on administrative decisions and commands and more on economic instruments, the legal rights and obligations of economic agents need to be better defined. In the last three years major additions have been made to the body of China's laws and regulations - additions aimed at strengthening the socialist legal system domestically as well as facilitating foreign investment. The political, administrative and judicial structure and organization of Chinese society and the rights and responsibilities of individuals have been spelled out legally; laws on domestic economic contracts have been enacted; and laws and regulations concerning joint ventures, income taxes,

23 - 7 - exchange controls and the development of offshore petroleum reserves have all been introduced. In December 1982 the National Peoples Congress adopted a new constitution as well as endorsing the Sixth Five-Year Plan The array of reforms that lhave been introduced in recent years testifies to the Government's determination to improve planning and management at the local, enterprise and collective as well as at the central levels. It is likely to be some time, however, before the effects of many of these changes on the overall efficiency of the Chinese economy are apparent, and indeed the effectiveness of many reforms is dependent on reforms taking place elsewhere in the economy. Reforms appear to have been most effective in the area of incentives - most economic units now operate under financial reward systems of one sort or another, and peasantsand workers- incomes are dependent in part on individual or work unit performance. Distortions in the price system have, however, led to some inequities in rewards The reforms have also involved a substantial decentralization of decisionmaking. But again the absence of major price reform has sometimes resulted in inappropriate investment and production decisions by lower-level units. In addition, in the state enterprise sector some units apparently still do not have to take full responsibility for their decisions - state trading corporations tend to buy whatever the units produce and for most units the risk of financial penalties or being closed down as a result of bad management or performance is negligible. In these circumstances there is a built-in tendency for enterprises to overinvest and overproduce. In some cases, it also appears that administrative decentralization has meant that powers supposedly put in the hands of enterprises have actually accrued to local governments. To offset some of these tendencies the central government has been obliged from time to time to resort to administrative interventions and restrictions More use is now being made of the market in determining resource allocation, but information and transport systems are still weak and markets tend to be small and fragmented along territorial lines. Competition is often limited; markets have in some cases been subject to price and trade restrictions. More generally the Government has found it difficult to develop effective indirect fiscal and monetary policy instruments to replace or at least supplement the tight microeconomic supervision inherent in command planning Some of the difficulties with economic reform are an inevitable part of any effort at transformation from one kind of economic system to another, while others stem from inconsistencies in some of the reform measures. These difficulties were analyzed during 1982 as part of an overall review of economic reforms. The Government has now decided to increase the pace of economic reform, but each new measure will be preceded by careful study and, wherever possible, by some initial experiments./l /1 Future reforms are discussed in more detail in paras

24 - 8 - B. Growth and Structure of the Economy 2.13 Some reforms, particularly those in rural areas, have contributed greatly to the readjustment and overall growth of the economy. But others have made the process more difficult. For example, greater autonomy and financial resources for lower level units has made it more difficult to reduce and redirect the investment program. Nonetheless significant adjustments in the structure of the economy have taken place. Except in 1981 a high overall rate of economic growth has also been maintained. Some of the structural and growth developments reflect a continued recovery of the economy from the Cultural Revolution period, but adjustment and stabilization policies as well as system reforms have had an important role to play An outstanding feature of recent economic developments has been the high rate of agricultural and industrial growth (see Table 2.1). Gross agricultural output at constant prices has increased by 6.0% per year between 1978 and 1982, much above the growth rate in the first half of the 1970s. Industry by contrast has been able to maintain a high overall growth rate throughout the 1970s and early 1980s, but in recent years there has been a major shift in the structure of industry with light industry growing much faster than heavy industry between 1979 and The strong performance of both agriculture and industry is reflected in the high overall rate of economic growth. In fact it was only in 1981 that the growth rate of net material product (NMP) at constant prices fell below the average growth rate in the early 1970s when the requirements of stabilization took precedence over economic growth and adjustment (Table 2.2). In 1982 however the pace of development speeded up again and the constant price NMP growth rate is estimated to have been about 6%. Table 2.1: AGRICULTURAL AND INDUSTRIAL GROWTH, (% change in gross output value at constant prices) (prelim) Agriculture Industry Heavy Light Total Agriculture plus Industry Source: Statistical Appendix, Table 2.5.

25 Table 2.2: GROWTH OF NMP AT CURRENT AND CONSTANT PRICES, (% per annum) Agriculture: current prices constant prices /a Industry: current prices constant prices /a Other material sectors:/b current prices constant prices Investment: current prices constant prices Consumption: current prices constant prices Total NMP: current prices constant prices /a In view of the difficulties in deflating NMP data, not much should be read into the differences between these growth rates and the gross output growth rates in Table 2.1. Growth rates are single deflated in keeping with present S.S.B. practice. /b Including construction, transport and commerce. Source: Statistical Appendix, Tables 2.3, 2.4 and 2.5, and Annex 2, Tables 1-4.

26 The rapid increase in agricultural and industrial production has been accompanied by and in the case of agriculture was encouraged by major shifts in relative prices. Although information on prices is limited, it is clear that agricultural procurement prices have risen much more rapidly than either industrial prices or retail prices in recent years (see para. 3.05). The comparison of current and constant price NMP growth rates shows the effects of such price changes. Agricultural growth at current prices was much above its growth rate at constant prices; industrial growth was almost the same at current and at constant prices; and the growth rate of other sectors was lower at current than at constant prices due to the profits of the commerciat sector being squeezed. It should also be noted that the constant price growth rates do not take account of the fact that input prices have been rising less rapidly than output prices for agriculture, while the reverse has been true for industry./l Taking these price changes into account would reduce the estimated real growth rate of agriculture between 1978 and 1981 from about 5.0% to about 3.5% per year and increase the estimated average annual industrial growth rate in real terms from 6.1% to over 8% In the period since 1978 changes have taken place in the structure of expenditures as well as the structure of production, with the share of consumption in NMP rising from 65% to 71% in 1981 before declining slightly in 1982 (Table 2.3) was however an exceptional year; in 1977 and for most of the early 1970s the share of consumption in NMP was between 68 and 70%. The recent shift from investment to consumption is also due in part to changes in relative prices because prices of investment goods appear to have been rising less rapidly than consumption goods prices. Nonetheless since 1978 consumption in real terms has been growing more rapidly than investment; in 1981 investment actually fell in both current and constant prices, while consumption continued to grow. There has also been a major change in the structure of investment, with nonproductive investment (mainly housing) growing much more rapidly than productive investment./2 /1 This is because agricultural and industrial growth rates are only single-deflated in keeping with present State Statistical Bureau (SSB) practice. Annex 2 provides further information on the effects of relative price changes. /2 The composition of investment is discussed in more detail in paras

27 Table 2.3: STRUCTURE OF NMP AT CURRENT PRICES Production (net output) Agriculture Industry Other Total (NMP) Expenditure Investment Productive Nonproductive Consumption Foreign material trade balance Total (NMP) Source: Statistical Appendix, Tables 2.3, 2.4 and 3.1. C. Incomes and Employment 2.17 In recent years government policies on consumption and employment have been aimed not only at ensuring a more rapid improvement in living standards, but also at reducing urban unemployment and narrowing the differentials between urban and rural incomes. Substantial progress has been made in all these areas. Due to the combination of a high overall rate of economic growth, the low population growth rate and the shift from investment to consumption, a more rapid growth in per capita consumption than in the early 1970s has been possible. At current prices material consumption per capita increased by over 12% p.a. between 1978 and 1981 and stood at Y 280 in 1981; including nonmaterial services would increase per capita consumption to Y 320. When account is taken of estimated price increases, the real level of material consumption per capita increased by more than 6% p.a. between 1978 and 1981, much above the average 1.3% p.a. recorded between 1957 and 1977, and there have been significant increases in consumption and ownership of key commodities (Table 2.4).

28 Table 2.4: CONSUMPTION AND OWNERSHIP OF SPECIFIC COMMODITIES, Annual Per Capita Consumption Grain, milled basis (kg) /a Pork (kg) Sugar (kg) Cotton cloth (meters) Ownership of Consumer Durables (per 100 persons) Radios n.a Bicycles n.a Watches n.a /a This is trade grain i.e. milled rice and millet plus other grains on an original weight basis. Source: State Statistical Bureau In recent years personal incomes appear to have been growing even more rapidly than average material consumption. This reflects in part a decline in the share of government consumption in total consumption. But private financial savings (excluding cash) have also increased rapidly from Y 2.7 billion in 1978 to Y 13.2 billion in 1981 and have become more important at the margin (though the government budget and the retention of profits and other funds by enterprises still account for the bulk of total national savings). In 1980 and 1981, private financial savings amounted to about 3.5% of NMP compared with less than 1% in High marginal savings rates may partly reflect shortages of consumer goods (see para. 3.03), but to a much greater extent are probably the result of interest rate changes and other banking reforms which have made savings more attractive. Urban Incomes and Employment 2.19 Average nominal wages (including bonuses) in urban areas have increased substantially in recent years, reaching Y 772 per worker in 1981 (Table 2.5). The increase in wages has resulted mainly from the three general increases in wage rates introduced by the Government in 1978, 1979 and 1980, but it also reflects the impact of higher bonuses as a result of industrial reform./l In 1981, however, the stabilization program resulted in no general increase in wage rates and efforts were made to link both wages and bonuses much more closely to efficiency criteria. As a result average /1 Industrial reform is described in detail in paras

29 wages rose by only 1.3%. Participation rates increased, however, and average per capita incomes in urban areas (excluding nonwage incomes) rose by 2.6% in 1981, about as fast as the cost of living index. Overall real per capita incomes in urban areas increased by about 4.8% p.a. between 1978 and Wages remained under relatively tight control in 1982 but there were increases for certain groups of workers and staff. Participation rates also appear to have risen again and consequently some further increase in urban per capita incomes should have taken place. Table 2.5: URBAN INCOMES, /a Average annual growth (%) Annual level (Y) Money Real terms terms Average wage Participation rate (%) Per capita income /a Excluding nonwage incomes. Source: Statistical Appendix, Table 1.6, and information on participation rates In recent years substantial progress has been made in addressing the problem of open urban unemployment. At the end of the Cultural Revolution, many young people who had been obliged to work in rural areas returned to their homes in cities and towns and swelled the ranks of those looking for jobs in urban areas. As a result about 20 million people or 15% of the urban population were either unemployed or only in temporary employment. This number has now been substantially reduced: at the end of 1981, urban unemployment had fallen to 3 million, of whom 2 million were recent college and school graduates and 1 million had been waiting for jobs since before In 1981, the state arranged for the employment of 8.2 million people, of whom 5.3 million had previously been unemployed and the rest were either demobilized soldiers, recent graduates of secondary schools and colleges or people from rural.areas. 5.2 million were given jobs in state enterprises, mainly in urban areas, 2.7 million found employment in urban collectives, and the rest were allowed to work as individual laborers in cities and towns.

30 The Government acknowledges that not all of the additional employment has been in very productive activities (labor productivity in state industrial enterprises actually fell by 1.8% in 1981). Since all additions to the labor force cannot be productively employed in state enterprises, the growth of urban collective and self-employment has been actively encouraged. The number of workers in individual enterprises in all sectors rose from 320,000 in 1979 to 810,000 in 1980 and 1.1 million in 1981, when they still accounted for only 2% of total urban employment. Rural Incomes 2.22 Rural incomes in both money and real terms have increased greatly in recent years, much more rapidly than urban incomes. A sample survey of 18,500 households in 568 counties of 28 provinces suggests that average per capita rural incomes in current prices increased by 19% p.a. in both 1979 and 1980 and by a further 17% in 1981 (Table 2.6). When account is taken of estimated price increases, the average increase in real per capita incomes in rural areas between 1978 and 1981 was 10-12% p.a. Rural income growth estimates based on consumption and savings changes and rural production and terms of trade changes also suggest that real per capita income growth rates have been 10-12% p.a./l About 60% of this very large increase is a result of greater rural production and the remainder is due to improvements in relative prices. The income survey also reveals the substantial change in the composition of rural incomes due mainly to reform of the rural collective system: between 1979 and 1981, income from collective sources grew very slowly and almost all the income gains came from other sources. Data on agricultural production and incomes from the Ministry of Agriculture and the State Statistical Bureau suggest that further major increases in rural incomes took place in 1982 and that rural incomes have continued to grow more rapidly than urban incomes. Table 2.6: SURVEY OF RURAL INCOMES, Level of income (Y) Average annual growth (%) Money terms Real terms Per capita total Of which Collective n.a. Others n.a. Source: State Statistical Bureau, Survey of Rural Incomes and Annex 2, Table 7. /1 Annex 2, Table 7 provides further information on this issue.

31 Because substantial regional inequalities have persisted in China due in part to differences in agro-climatic conditions and the availability of agricultural land, a key question is how well the recent increases in rural incomes have been distributed. Many teams and households in rural areas have done even better than the average: households located close to cities or towns, those that specialize in cash crops and those that already market a lot of their output (and therefore benefit immediately from higher agricultural procurement prices) appear to have done particularly well. Most of these households are already relatively well off. But some of the poorer households have apparently also enjoyed higher incomes in recent years. Ministry of Agriculture data /1 suggest that recent policies have been most effective in raising collective income in the North China Plain and in the south eastern coastal mountains and least effective in the Yunnan-Guizhou plateau and in the dry northwest From the data available it cannot be determined whether inequalities within communes, brigades and production teams may have begun to increase in recent years. Previously inequalities within teams and brigades were quite low relative to regional inequalities. The reduction in the size of the economic accounting unit (to the work group or household) and the increased emphasis on linking incomes to output is likely to have increased income differentials at the local level. However, any such trends could be counteracted, for instance by introducing a progressive income tax or a land tax, without reversing the direction and intent of economic reform. D. Investment 2.25 In 1978, the rate of investment was very high - 36% of NMP, equivalent to a gross investment to GDP ratio of 34%, compared with an average of 21% in other low-income countries and 25% in middle-income countries. The investment program was also inefficient: the amount of investment used to increase stocks was high in relation to GDP and the overall efficiency of investment was relatively low and getting worse (the incremental capitaloutput ratio had risen from 3.0 in the 1950s to 5.5 in the s). These inefficiencies resulted from such factors as shortages of necessary materials and supplies, transport constraints and wastage, as well as from inappropriate and inefficient procedures for selecting and implementing investment projects. In these circumstances, and given the emphasis on raising living standards, the Government decided in 1979 to cut back the size of the investment program in relation to national income (which if appropriately /1 Survey Nongyebu Renmin Gongshe Guanliju reprinted in Xinhua Yuebao, February 1980.

32 carried out would on its own improve the overall efficiency of investment) and to introduce measures aimed at improving investment decision making and implementation. Size and Composition of the Investment Program 2.26 Since 1978 the Government has been able to reduce both the overall rate of investment and the share of inventory investment in total investment, but the process has proved to be difficult. After a large increase in 1978, gross fixed investment at current prices increased by 7% in 1979 and 8% in 1980, before falling by about 4% in 1981 when the stabilization program was implemented. This fall in investment was due entirely to a 21% cutback in state capital construction investment. Despite its determination to control the overall level of investment, the Government has found it very difficult to influence other investment, which consists of investment in renewing and transforming industrial enterprises (most of which is now financed from retained earnings and bank loans), urban and rural collective investment and individual investment. This category has been growing much faster than state capital construction in recent years (Table 2.7)./I Table 2.7: GROSS FIXED INVESTMENT, (Current prices) Average Annual growth rate (%) Amount of investment (Y billion) /a Gross fixed investment n.a. 7.9 n.a. State capital construction investment Other investment n.a n.a. /a Estimate. Source: Statistical Appendix Table 2.7 and Annex 2, Table 8. /1 State capital construction investment includes all fixed investment in new projects, including expansion of existing enterprises when completely new facilities (buildings and equipment) are required. Investment in renewing and tranforming enterprises includes fixed investment to rehabilitate existing enterprises. It is often difficult in practice to draw a line between the two.

33 There have, however, been problems in controlling even state capital construction investment. This is partly because fiscal and state enterprise reforms (see paras and 3.19) have left enterprises and local governments with increased financial resources, which they can use for capital construction investment (see Table 2.8). But there has also been resistance to reducing state budget capital construction, in part because of the costs of abandoning projects already under way. In 1981, the Government continued to face difficulties in controlling the amount of locally financed capital construction. Most of the cutbacks were therefore in large, centrally financed projects: 151 large and medium-sized projects were cancelled or suspended and the number of large and medium-sized projects under construction at the end of the year was 893, 213 less than at the end of The investment cutbacks affected all sectors including the priority sectors of energy, transportation and agriculture. The share of nonproductive investment has continued to expand greatly due to increases in housing investment, a priority in view of the Government s desire to raise living standards and years of neglect of this sector. In 1982 capital construction investment rebounded and almost reached Table 2.8: STATE CAPITAL CONSTRUCTION INVESTMENT, (% share) /a Total By Sector Energy n.a. Other heavy industry n.a. Light industry n.a. Agriculture n.a. Transport/Communications n.a. Other n.a. By Type of Investment Productive Housing Other nonproductive By Source of Finance State budget /b Local government and enterprise funds Domestic bank loans } 29 Foreign loans } /a Estimate. W This figure probably includes some capital construction financed from domestic and foreign loans, amounting to about 4% out of the 79%. Source: Statistical Appendix Tables 2.6 and 2.7.

34 its 1980 level. The share of the state budget, however, has further declined and that of domestic and foreign bank loans (many of which are subject to a considerable degree of control by central authorities) has risen sharply It is difficult to assess the effects of the 1981 cutbacks in investment. For such a relatively short period it would not be meaningful to analyze changes in incremental capital-output ratios, and the information necessary for making a more micro assessment is not available. Overall investment efficiency should have been improved by the emphasis placed on cancelling or suspending projects that had not been properly prepared or for which the necessary supplies and materials were not available. But other measures may have reduced efficiency. For example, priority was placed on completing projects that were already under construction rather than on starting new projects. This helped to increase the availability of fixed assets in relation to total state capital construction expenditures, but it would only have improved efficiency if completing these ongoing projects showed higher returns than starting selected new projects. A number of high priority energy and transportation projects were suspended because they were part of the relatively small share of total investment over which the central government had direct control. Towards the end of 1981 it became apparent that some of the cutbacks in investment had been too severe and that resources were available to fund more well prepared priority projects. Some of the cancelled projects were revived then and more were revived in 1982, but the cancellations and delays themselves will have had an adverse effect on the overall efficiency of capital construction and on the future growth potential of the Chinese economy. Investment Process 2.29 As part of China-s reform program, efforts have been made to improve the overall efficiency of investment by reforming the investment process. In the past the process of selecting investment projects has been complicated by a fragmented and inappropriate allocation of responsibility among different levels and institutions. The central government has had to make too many specific investment decisions, it has lacked any objective criteria for ranking competing claims for investment resources, and it has been hampered by problems of insufficient information and data, as well as a lack of sectoral coordination. The central government has also faced difficulties in implementing investment decisions and in monitoring and controlling the aggregate level of investment. At the local level, many enterprises and even government units have regarded investment as essentially costless (capital charges have been low and enterprises in difficulty have been subsidized in various ways); therefore they have tended to demand more investment resources than were available. The lack of objective criteria for assessing investment projects and insufficient information and data have also been problems at the local level In recent years there has been substantial decentralization of investment decision making to lower administrative levels of government. In industry for example the process by which investment proposals are approved now depends on the project size, its location (some provinces have more autonomy) and the type of financial resources required (domestic loans,

35 foreign exchange, etc). Large-scale projects must be approved by the State Planning Commission in consultation with other national commissions. For other projects, the threshold of referral varies by sector and region: in Shanghai, for example, the local planning commission can now approve projects costing up to Y 10 million provided no foreign exchange is required. The banking system is now playing greater role as a result of the increased use of credit in financing fixed investment projects. Since 1979, credit financing of investment has proceeded along two avenues: (a) capital construction loans by the People's Construction Bank of China (PCBC), and (b) short- and mediumr-term equipment loans granted by the People's Bank of China (PBC) and various specialized banks including the Agricultural Bank of China. Foreign exchange loans for investment purposes are provided by the Bank of China (BOC) and by the recently established China Investment Bank (CIB). Interest rates vary between 2.4% and 3.6% per year for capital construction loans and between 5.0% and 6.5% per year for equipment loans depending on maturity. As a means of encouraging enterprises to use capital more productively, taxes ("charges") on the fixed assets and circulating capital of state-owned enterprises were introduced in The rates vary from 2.4% to 9.6% per year for fixed assets (based on their original value) and from 2.5% to 7.2% per year for circulating capital At the same time, the Government is seeking to improve the procedures and criteria for project selection and implementation. Considerable emphasis is now placed on choosing projects that conform to the state plan and national objectives, and for which materials and markets are available. Emphasis is also being placed on preparing good feasibility studies, strengthening survey and design work, shortening construction periods, putting large projects into operation in stages and improving the overall efficiency of construction companies and other project implementing agencies These measures are designed to improve the investment process, but they need to be further refined and clarified if they are to have a significant impact on investment efficiency in China. Perhaps the most important issue is the need for formal economic analysis of projects and objective criteria against which proposed projects can be measured. This is important regardless of whether investment decisions are centralized or decentralized and is particularly important in a context where major distortions in relative prices can result in inappropriate investment decisions. In the absence of other reforms the significance of credit financing of investment and capital charges is also reduced. Even substantial interest or capital charges may not motivate state enterprises to economize on the use of investment funds, since they can repay loans and finance charges out of the project's profits, most of which would otherwise be remitted to the Government. Moreover, even if enterprises share the profits from good investments they may take unnecessary risks and waste capital unless they are also made responsible for the losses resulting from bad investment decisions. The result has been that the Government has found it difficult to influence the size and composition of state enterprise investment even through administrative regulations.

36 FINANCIAL AND BALANCE OF PAYMENTS MANAGEMENT 3.01 The implementation of adjustment and reform policies was accompanied in 1979 and 1980 by unprecedented large budget deficits, moderate inflation, rapid growth in the money supply and a widening of the current account deficit. Though except for the budget deficit the symptoms of instability were quite mild by international standards, they were taken very seriously in a country that still remembers the hyperinflation of the 1940s and had become accustomed to insignificant inflation rates during the last two decades. Accordingly in 1981 stabilization temporarily took priority over longer-term reform objectives. The main instruments used in achieving stabilization goals were price controls, a tight budget, sharp cutbacks in investment expenditures and capital goods imports, reduced growth of money and credit and export promotion. In 1982 the success of the stabilization program permitted resumption of more rapid growth and a higher aggregate level of investment, but the budget deficit remained relatively small, and prices and currency in circulation were kept under control. Inflation A. Inflation and Prices 3.02 Restoration of price stability was a key objective of the stabilization program which has been largely achieved. In terms of open inflation the official index of retail prices increased by 2% in 1979 and by a further 6% in 1980 (see Table 3.1), mainly because part of the 22% increase in agricultural procurement prices implemented in 1979 was passed on to urban consumers (much of the impact was neutralized by increased subsidies). In 1981, however, there were far fewer official price increases and a ceiling was placed on "negotiated prices"./1 Free market prices were also put under greater supervision and control, partly through administrative "monitoring", in part through purchases and sales of commodities by government authorities. As a result, in 1981 the retail price index rose by only 2.4%, and the cost-of-living index (which measures price changes affecting urban residents5 by 2.5% (Table 3.1). Prices appear to have remained under control in 1982 with the cost of living index rising by no more than about 2%. Of course prices of some commodities have risen much faster than average; for instance, prices of nonstaple foodstuffs rose by 32.1% between 1978 and 1981./2 /1 Negotiated prices are agreed upon directly between buyer and seller. They apply to surplus production that is not allocated in the state plan. /2 Hongqi (Red Flag) 1982 (8), p. 27.

37 Table 3.1: INFLATION (% per annum) Retail prices Cost of living for urban residents Agricultural procurement prices Prices of industrial products sold in rural areas Rural market prices n.a Source: Statistical Appendix Table Open inflation in an economy like China's results when the authorities let inflationary pressures be transformed into changes in official retail prices. The question remains whether repressed inflation and concomitant supply shortages have increased or diminished during the past several years. In the case of urban areas comparison of the total wage bill (the most important determinant of urban incomes) with the total value of urban retail sales suggests that though the demand-supply situation may have deteriorated somewhat in 1979 and 1980, measures to restrict increases in nominal incomes in 1981 brought about a considerable improvement (see Table 3.2). Consumers may still have been obliged to make substitutions when goods of the desired specification and quality were not available, but in general the growth in supplies of consumer goods and some open price inflation have largely counterbalanced the growth of nominal incomes. In rural areas shortages of consumer goods may be a more significant issue. In 1979 and 1980, rural retail sales apparently grew about as fast as estimated total rural income but more slowly than cash income (the significant variable); in 1981 the gap between supply and demand in rural areas appears to have widened as total income grew faster than retail sales and there were increases in rural free market prices. Nonetheless, supplies of consumer goods in rural areas have increased greatly in recent years, contributing to a much improved material standard of living.

38 Table 3.2: GROWTH RATES OF SALES AND INCOMES AT CURRENT PRICES, (% per annum) Nominal rate of growth of urban retail sales Total wage bill Nominal rate of growth of rural retail sales Rural incomes (cash and kind) Source: Statistical Appendix Tables 1.6 and Total rural income is derived by multiplying average per capita income by estimated rural population Limited information is available for assessing inflation and inflationary pressures in markets for industrial producer goods, but it appears that the previous situation of generalized and self-reinforcing shortages has been transformed into one where continuing severe bottlenecks in certain sectors are accompanied by marked excess supply in others. Shortages of energy supplies have become acute (see para. 4.20), while shortages of many types of machinery and equipment have disappeared and in some cases prices have been reduced. This variegated pattern is the result of a number of factors, the most important of which are medium-term physical resource constraints in sectors like energy and the adjustment program which caused sharp cutbacks in demand for certain heavy industry products. Distorted relative prices and the increased emphasis on profits may also have resulted in production shortfalls for goods with artificially low prices and tendencies toward excess supply of high-riced commodities. Price Structure 3.05 Major changes in relative prices have occurred during the past several years, the most significant being the dramatic improvement in the terms of trade for rural producers. The largest rise in state agricultural procurement prices % - was implemented in 1979, but there were also substantial increases of 7.1% in 1980 and 5.9% in Since the prices of industrial products sold in rural areas rose only 2% between 1978 and 1981, the terms of trade for rural inhabitants improved by nearly 36% There have also been substantial changes in the prices of different goods within sectors. In agriculture, in 1979 the mixed average procurement price of grain was raised by 26% and that of edible oil by 41% (see

39 Statistical Appendix, Table 11.2), /1 while there were increases for other agricultural commodities including cotton and timber. In 1980, inter alia, the procurement price for cotton was further adjusted and there were price increases for both jute and tung oil. In 1981 procurement prices for soybeans and flue-cured tobacco were raised In industry there were price increases for nonferrous metals and mineral products in 1979, the most important of which was a Y 5 per ton rise in the price of coal. Prices of plastic goods, electrical products and some types of machinery were reduced. In 1980, prices were raised for 18 types of metallurgical products, 8 chemical products and 7 light industrial and mechanical products, partly to compensate for increased costs of raw material inputs. Prices of some types of machinery, 9 types of steel products and 4 types of chemical products were lowered. In 1981, prices of timber, plywood, newsprint, 8 kinds of small steel products and high-quality cigarettes and alcohol were increased, while those of television sets, domestic appliances and heavy trucks were reduced. Similar price adjustments continued in 1982, and in early 1983 the prices of synthetic fiber textiles were reduced by 20-30% and those of cotton textiles were raised by about 20%. Prices of certain durable consumer goods now in excess supply are being reduced Though far from complete, the above information does indicate that much greater use is now being made of relative price changes to correct distortions that affect profitability and production decisions. Moreover, changes in official prices have usually been based on production costs or changing demand-supply conditions. The major exception to this pattern is the category of important basic consumer goods from the agricultural sector or those containing a large agricultural raw material component. Increases in prices paid to rural producers have by and large not been passed on to urban consumers but have rather been absorbed by budget subsidies (see para. 3.14). In addition, for many goods, notably coal, the price increases already implemented probably provide an insufficient profit incentive to spur increased production and investment. Although the direction of recent changes in prices has usually been appropriate, significant distortions in levels of relative prices remain both between and within sectors. Price Reform 3.09 In the long run, changes in the mode of price formation are more important than administrative measures to rationalize the structure of relative prices. Such changes include both the development of rational criteria /1 Mixed average procurement prices are obtained by dividing the total value of a certain commodity procured by the volume procured. Thus they reflect the influence of changes in list prices, changes in the proportion that is procured at above-quota prices and changes in the mix of products procured within a larger commodity category.

40 for setting official prices and permitting producers and traders more flexibility in negotiating prices, presumably subject to effective budget and market constraints. Some price flexibility has been introduced in China: above-plan output of many goods and the total output of some goods can be sold at prices negotiated directly between buyers and sellers; there is also some downward price flexibility for producer goods in excess supply. However price flexibility remains limited and little progress seems to have been made in developing rational criteria for setting official prices. The difficulties of implementing comprehensive price reform in a country like China should not be underestimated. Price policies have traditionally been used as a means of raising government revenue (via industrial and commercial profit remittances), influencing income distribution across individuals and regions and promoting stability in living standards (by maintaining stable prices for basic necessities). Given the difficulties in reconciling some of these longstanding goals of Chinese price policy, price reform will inevitably be a difficult and slow process. B. Fiscal Policy 3.10 The state budget has been and remains one of the main instruments by which the Government influences the economy. About 30% of NMP flows through the state budget and most sectors have traditionally relied on it for a significant proportion of their development expenditures. A key component of the stabilization program has therefore been to reduce the budget deficit to a more manageable level, despite slow growth in budgetary revenues and burgeoning subsidies. Budgetary Deficits and their Impact 3.11 Official statistics indicate that China achieved large reductions in its budget deficit in 1980 and 1981 (Table 3.3). Although there has been no return to the budget surpluses of 1977 and 1978, the 1981 and 1982 deficits are relatively modest and appear to pose no great threat to economic stability. However, the statistics need to be adjusted to eliminate financing items like foreign loans and Treasury Bond issues /1 from the revenue side and debt repayments from the expenditure side. For the resulting deficit figures are higher than those in the official accounts, but the significant reductions of 1980 and 1981, indicative of more restrictive fiscal policy, remain. /1 Treasury Bonds were first issued by the Government in 1981 to dampen inflationary pressures and raise revenue. Y 4.87 billion worth of Treasury Bonds were sold that year, almost all to organizations on an involuntary basis. In 1982 the Government sold an estimated Y 4.2 billion worth of Treasury Bonds, about half to organizations and half, on a voluntary basis, to individuals (with an 8% annual interest payment for the latter as opposed to 4% for the former).

41 Table 3.3: BUDGET DEFICITS, /a (estimate) Official accounts Total (Y billion) % of NMP n.a. Deficit after elimination of financing items Total (Y billion) % of NMP n.a. /a Minus indicates a surplus. Source: Statistical Appendix, Tables 3.4, 5.1 and 5.6 and Annex 2, Table The much tighter fiscal policy is even more evident when account is taken of the mode of deficit financing, which can dramatically affect the macroeconomic impact of any given budget deficit. Financing by means of Treasury Bond issues basically negates any impact of a budget deficit on aggregate demand, because the bonds soak up the money balances of decisionmaking units in the domestic economy. On the other hand, deficit financing by means of money creation places more liquidity in the hands of individuals and organizations, stimulating consumption and investment demand. In 1979, Y 17.1 billion of China's budget deficit was financed by money creation, in the form of a drawdown of accumulated budget surpluses from previous years (totalling Y 8 billion) and a Y 9 billion overdraft from the PEC, which apparently bears no interest charge. In 1980 the domestic deficit was also financed entirely by money creation, consisting of a Y 8 billion loan from the PBC (with an annual interest charge of 6%) and a temporary drawdown of government deposits at the PBC, which for accounting purposes was replenished with the proceeds of Treasury Bond sales in 1981./l Since 1981 the Ministry of Finance has not borrowed additional funds from the PBC; the Government intends to adhere firmly to this new policy, and future deficits will be financed either through Treasury Bond sales or by means of drawdowns of government deposits. The latter financing device does involve money creation but is limited by the need to maintain sufficient working capital in government deposits. In 1982 most of the budget deficit was financed by Treasury Bond sales. /1 Fiscal policy in 1981 was therefore even more restrictive than is indicated by the official budgetary statistics.

42 Trends in Expenditures 3.13 After a rise of 51% from 1977 to 1979, China's total budgetary expenditures dropped by 6.7% in 1980 and more sharply by 8.6% in It is estimated that there was a further very small decline in expenditures in But expenditures on subsidies are subtracted from the gross profits of enterprises and therefore do not appear on either the revenue or the expenditure side of the official accounts. If subsidies are included and various financing items subtracted, the 1980 reduction in budgetary expenditures is converted into a slight rise (2.6%), the 1981 decline becqmes a much more modest 1.6% decrease and the 1982 fall is converted into a small increase. (Table 3.4). Budgetary stabilization goals, therefore, have been achieved mainly by means of constrained expenditure growth rather than outright reductions Among expenditure items, spending on capital construction showed the greatest variation, rising by over 50% in 1978 and nearly 14% in 1979, then falling by 19% in 1980 and 21% in There was apparently no recovery in These expenditure cuts may have adversely affected China-s future growth potential, but were necessary to avoid even larger budget deficits than were actually recorded. There has also been a cutback in defense expenditures. Subsidies, which grew by an estimated 387% between 1978 and 1982, now outweigh capital construction as a proportion of total budget expenditure. The Y 21.6 billion rise in subsidies between 1979 and 1982 more than offset the Y 21.2 billion decline in capital construction expenditures during the same period. Subsidies have increased so rapidly because the Government allowed producer prices of many agricultural commodities to rise significantly while holding retail prices constant (so that urban consumers could maintain their standard of living) or, in the case of nonstaple foodstuffs, providing income supplements to workers. In the absence of such subsidies, however, the Government might have been obliged to permit larger wage increases and hence lower profit remittances. The overall fiscal situation might not have been greatly affected. Therefore subsidies reflect mainly a pricing problem rather than fiscal difficulties and need to addressed as part of the overall reform of pricing and taxation. Revenue Developments 3.15 Official statistics on net domestic revenues (excluding foreign loans) show a decline in total revenues of 9.1% between 1978 and 1981, followed by a rise of 4% in They also show net profit remittances from state enterprises dropping from over 51% of total revenue in 1978 to only 35% in 1981 and an estimated 29% in But to get a reasonably accurate picture of revenue performance, the effect of subsidies and in 1982 that of Treasury Bond sales must also be taken into account. When this is done, it can be seen that China-s domestic budgetary revenues not only did not fall but grew substantially by 15.4% between 1978 and 1981 and by a further 1% in 1982 (Table 3.5); in addition enterprise profit remittances rose through 1980 and fell only slightly in 1981 and 1982.

43 Table 3.4: BUDGETARY EXPENDITURES AND SUBSIDIES, (Y billion) (prelim.) Total Expenditures n.a Total Expenditures Net of Subsidies /a Of which: Capital construction (30.1) (45.2) (51.5) (41.9) (33.1) (30.3) Education, culture & health (9.0) (11.3) (13.2) (15.6) (17.1) (19.0) Defense (14.9) (16.8) (22.3) (19.4) (16.8) (17.9) Administration (4.3) (4.9) (5.7) (6.7) (7.1) (8.0) Other (26.0) (32.9) (34.8) (35.2) (34.6) (33.0) Subsidies n.a Of which: Subsidies on daily living necessities n.a. n.a. (13.9) (22.0) (29.4) } Subsidies on agricultural } 33.0 inputs n.a. n.a. (2.1) (2.0) (2.1) } Wage subsidies /b 0 0 (0.4) (4.7) (4.9) 5.0 /a These figures do not include the cost of amortizing Government debt and therefore differ somewhat from the official statistics. /b This refers to the Y 5 per month paid to each employee in stateowned units to offset increases in the retail prices of nonstaple foodstuffs introduced in To obtain the total cost of this subsidy, the average number of workers and staff in state-owned enterprises was obtained from figures on the total wage bill and average wages (Statistical Appendix Table 1.6) and then multiplied by Y 60 for and Y 5 in 1979 (assuming the increase went into effect in December 1979). In the absence of information on 1982, it is assumed that the cost of this subsidy went up by 2% in that year. Sources: Statistical Appendix, Table 5.6 and Annex 2, Table 9.

44 Table 3.5: DOMESTIC REVENUES, (Y billion) (prelim.) Domestic Revenues (Net of Subsidies) Of which: Profits (40.2) (57.2) (49.3) (43.5) (35.4) (31.1) Taxes (46.8) (51.9) (53.9) (57.2) (63.0) (68.0) Other (0.3) (2.8) (3.6) (3.5) (3.2) (6.6)/a Plus Subsidies n.a Less Domestic Revenues Attributable to Foreign Loans /b Total Domestic Revenues n.a Of which: Profits n.a /a Including Y 4.2 billion worth of Treasury Bond sales, which are not included in the figure on total domestic revenues because they are a financing item. /b This adjustment is necessary to ensure rough consistency between information on and that for earlier years. The difference between expenditures financed by foreign loans and revenue from foreign loans is subtracted from total revenue in Source: Statistical Appendix, Table 5.1 and Annex 2, Table From 1978 tc 1981 domestic revenues grew at only a little more than half the rate of growth in the nominal value of NMP (15% as against a 29% rise in NMP). Economic reforms such as the introduction of profit retention schemes have contributed to this slow growth. The shift in the composition of industrial output from heavy to light industry is another important factor, since the latter generates less government revenue per unit of output value than the former. Price adjustments may also have adversely affected profits and therefore budgetary revenues, aside from the effects counteracted by explicit subsidies.

45 China has introduced new taxes in the past several years, while leaving the mainstay of its tax system (the consolidated industrial and commercial tax) largely unchanged. Many of the new taxes are being implemented on an experimental basis in a few areas and units. Potentially the most important are taxes ("charges") on the fixed assets and circulating capital of state-owned enterprises (see para. 2.30). An income tax for about 460 state-owned industrial enterprises (to substitute for profit remittances by these enterprises to the state budget) and a value added tax have been instituted on an experimental basis. Tax regulations on joint ventures and foreign companies doing business in China have also been published. The new tax on individual incomes will apply almost exclusively to foreign residents. In general, more use is now being made of taxes as a policy instrument and source of revenue than in the past. Fiscal Decentralization 3.18 The reform of government finance has been aimed at more efficient provision of services and better economic decision-making and has involved a major decentralization of authority and financial resources to lower level units. One aspect of fiscal decentralization has been the granting of greater budgetary flexibility to provincial and local governments and the provision of greater incentives to expand revenues and/or economize on expenditures. In 1980 a revenue and expenditure sharing system between provinces and the central government was implemented. Provinces whose normal revenues exceed their expenditures share certain types of income with the center in fixed proportions, while those whose revenues cannot meet expenditures are granted a fixed subsidy by the center. The sharing rates and subsidies are supposed to remain fixed for five years except for the three centrally administered municipalities (Beijing, Shanghai, and Tianjin), whose retained proportion of total budgetary revenues is fixed each year. It appears, however, that revenue decentralization has exceeded the amount of expenditure decentralization. Imbalances have resulted with the center incurring large deficits (considerably larger than the reported consolidated budget deficits) and many provinces running surpluses. In 1981, the central government's "deficit" vis-a-vis the provinces was a net Y 8 billion. To ameliorate this situation the Government raised involuntary loans totalling Y 7 billion from the provinces. These loans carry no interest charge and have no set repayment period. In 1982, the central-local budgetary imbalance was apparently considerably smaller, and the central government only had to levy about Y 4 billion in involuntary loans from the provinces. Such transfers of funds are necessary to deal with the immediate problem of fiscal imbalances between central and local governments, pending development of a more permanent solution A second aspect of fiscal decentralization has been the rapid growth of extra budgetary funds (EBFs). This is a natural consequence of reforms in the state enterprise sector of the economy, which permit enterprises to retain some funds that would otherwise be remitted to the

46 government. Unfortunately, however, indirect control mechanisms have not yet been devised to ensure responsible use of EBFs by the units they accrue to. As a result the rapid growth of EBFs has stimulated excessive investment demand, exacerbating the central government s difficulties in achieving stabilization. The total value of EBFs generated in 1981 was about Y 60 billion. Y 47.5 billion consisted of income accruing to enterprises and departments supervising enterprises, in the form of depreciation funds, retained profits, enterprise funds, etc. This is the fastest growing component of EBFs but is also the category most amenable to central control, since regulations governing these funds are mostly determined at the central level. In an effort to control the use of this type of EBFs the Government has introduced direct administrative restrictions on investment projects financed with EBFs. In late 1982 the Government announced that it will levy a tax on some EBFs of this type to raise revenue for key energy and transport projects. This tax is expected to raise Y 12 billion in The second main source of EBFs (Y 17 billion in 1981) is the non-budgetary revenues of administrative organizations and nonprofit institutions. The smallest category of EBFs (Y 4.5 billion in 1981) consists of the extrabudgetary revenues of provincial and local governments, mainly surtaxes on the industrial and commercial tax and the agricultural tax, as well as other miscellaneous levies. In contrast to enterprise retained funds, these types of EBFs have not been growing rapidly and moreover do not have a serious macroeconomic impact. C. Monetary Policy 3.20 In recent years money and credit have come to play an increasingly important role in the Chinese economic system. Innovations like credit financing of fixed investmernt and profit retention schemes have given lowerlevel units greater access to financial resources and more autonomy in deciding how they are used. This places a greater burden on the banking system in mobilizing and guiding the allocation of such resources. In these,circumstances the Government has recognized that monetary policy has an important role to play in adjustment and stabilization, and it has begun to make more use of economic levers (such as interest rates) as tools of economic management. Growth of the money supply (especially cash in circulation) has been slowed considerably since , but it remains rapid. This is understandable in view of the reforms and major structural changes China is undergoing. Government policies have also been partially successful in controlling the growth of credit. Money and Credit in Stabilization 3.21 Whatever definition is used, China's money supply grew very rapidly in 1979 and 1980, considerably more slowly in 1981 and 1982 (see Table 3.6). The 1980 growth rates for different aggregates varied between 26.8% for M3

47 (currency in circulation, individual deposits and enterprise and collective deposits) and 34% for M2 (currency and individual deposits). In 1981 the slowdown in monetary expansion was much more marked for relatively liquid assets like currency in circulation, which grew only half as fast as in 1980, than for monetary aggregates including less liquid types of assets such as M3, for which the decline in growth rate was only about 20%. Generally speaking, the same appears to be true of This reflects the dominant focus of China-s restrictive monetary policies on controlling currency expansion, with little concern about the rapid growth of individual or enterprise deposits. It also reflects the increasing attractiveness of savings deposits in relation to cash holdings Given the rapid monetary expansion, velocity of money has fallen considerably. Income velocity of Ml (NMP divided by currency and individual demand deposits) dropped from 9.9 in 1979 to 7.3 in 1981, a reduction of over 26%, while transactions velocity (total retail sales divided by money supply) fell from 5.3 to 4.4 during the same period, a decrease of 17%./l The decline in velocity is greater if 1977 or 1978 is taken as the base year. Income velocity of M2 dropped by 42-43% between and 1981, compared with a fall of only a little over 30% from 1979 to In the absence of structural change the observed decline in velocity would suggest that problems of monetary overhang and repressed inflation in China have worsened significantly. Such a conclusion is premature, however, in view of the massive structural shifts that have occurred during this period. Perhaps the most important are the increased monetization of rural economic activities and the growth in transactions demand for money balances that have resulted from the implementation of production responsibility systems. The dramatic shift in the composition of industrial output from heavy to light industry may also be an important factor. The commercial network in urban areas has expanded rapidly, primarily through proliferation of collective and individual commercial and other service undertakings. Finally, holding financial assets has become considerably more attractive to individuals as a result of government policy measures. Any attempt to quantify the impact of these and other structural changes on the appropriate level of velocity in China is fraught with uncertainty. Nevertheless these shifts may well explain most or all of the observed decline in velocity. /1 Since the figures on total retail sales do not include free market transactions within the rural sector, the actual decline in transactions velocity is less than this.

48 Table 3.6: DEVELOPMENTS IN MONEY AND CREDIT, (% increase in balance outstanding at year end) /a Money Supply Currency in circulation /b Ml n.a. n.a M M3 n.a. n.a Credit _c Of which: To state industry To state commerce To agriculture To collective enterprises and individuals Short- and medium-term equipment loans /a Annual growth rate from the end of the third quarter of 1981 to the end of the third quarter of These are estimates based on statistics in the journal Zhongguo jinrong (China's finance). /b It is estimated that currency outstanding at the end of 1982 was 11.0% more than at the end of /c 1978 and 1979 totals cover only China's state banking system (excluding the People's Construction Bank of China), while totals and breakdowns for 1980 and 1981 include the loans of the rural credit cooperatives. Growth in credit outstanding of China's state banking system was 18.4% in 1980 and 14.5% in Source: Statistical Appendix, Tables 6.1, 6.2 and 6.3 and International Financial Statistics As part of the stabilization program there was a decline in credit expansion in 1981 and 1982 (see Table 3.6). There have also been some changes in the sectoral composition of credit. Loans to individuals and to collective enterprises, as well as short- and medium-term equipment loans, have grown extremely rapidly from small bases. Credit to state industry has grown somewhat more slowly than credit to state commerce, especially in 1982, but within the former category loans outstanding to industrial supply and marketing units have remained virtually constant while credit to production enterprises grew by over 40% in The slow

49 growth in outstanding credit to agriculture in 1981 masks a continued expansion in the gross flow of loan funds to the sector, since repayments also rose rapidly in that year. Similarly, the sharp slowdown in the growth of credit outstanding to state industry in 1982 probably reflects greater ability on the part of industrial enterprises to repay loans as a result of the resumption of more rapid growth in the sector. Interest Rates and Banking Reform 3.24 Greater reliance on credit financing of fixed investment is one aspect of the Government's overall program to expand the role of the banking system and strengthen its autonomy at all levels. This has been accompanied by a less dramatic increase in the proportion of working capital requirements financed by credit, resulting from a sharp decrease in state budget appropriations for this purpose. As an integral part of banking reforms, greater use is also being made of interest rates to influence economic decision-making at the micro level. Interest rates paid on individuals' bank deposits have been raised three times (in 1979, 1980, and see Statistical Appendix, Table 6.5), with the highest increases reserved for long-term time deposits./l These increases have more than kept up with increases in inflation or inflationary expectations. New types of deposits have been created, broadening the range of financial assets individuals can choose from. In 1982, enterprises and organizations were for the first time permitted to hold time deposits, which earn higher interest payments (see Statistical Appendix, Table 6.6). Perhaps the most important adjustment, however, was the general increase in interest rates on loans implemented in January 1982 (Statistical Appendix Table 6.4). The standard rate on circulating capital loans was raised from 5.04% to 7.2% p.a. Certain other loan interest rates were raised even more in proportional terms. Gradations in rates based on maturity have been introduced, and lower level bank branches have been given some flexibility in setting interest rates. These adjustments have made the structure of interest rates much more rational The core of institutional reform of the banking system has been significant territorial decentralization of authority and implementation of a kind of "responsibility system" for bank branches. Branches at the provincial level and below may make more loans than provided for in their plans if they can increase deposits above the plan level or economize on planned loans. Bank branches have also been transformed into enterprise-like organizations, with bonuses for employees based on branch profitability. This innovation may be more meaningful now that banking activities are profitable at the margin as a result of the latest adjustments in interest rates. But there is still plenty of scope for transforming the role of banks from one of passive monitoring of plan fulfillment and extension of /1 But since interest payments are not compounded the difference in effective annual yields is much smaller.

50 credit based on developments in inventories to one with a more active influence on decision-making related to current production and investment. D. The Balance of Payments 3.26 Historically China has been a relatively closed economy. Foreign trade has been low in relation to total production (both exports and imports were less than 5% of GNP in ). The objective of trade policy was to import only goods that could not be produced domestically in sufficient quantity, and to export enough to cover essential imports and to fund China's foreign aid program Following normalization of international relations in the 1970s, China has become more active in seeking foreign loans and investment, aid to other developing countries has been reduced, non-oil exports have grown steadily and imports of advanced technology from abroad have been expanded. The emergence of an oil surplus in the early 1970s and the sharp increase in oil prices further helped both exports and imports to expand rapidly. With the emphasis on modernization after 1977, large contracts to import complete plants and new technology (worth $6.7 billion in ) were concluded. The policy of adjustment and reform included a continued emphasis on making use of foreign technology and imports, but trade policy was modified in three ways: (a) overall growth and investment targets were scaled down, thus reducing import demand; (b) emphasis shifted from importing complete plants to importing selected equipment for modernization of industry; and (c) promotion of exports, especially of industrial products, was stressed Although exports grew rapidly between 1978 and 1980, imports expanded just as fast and the surplus on factor services and transfers declined. The current account deficit therefore widened from $0.7 billion in 1978 to$2.4 billion in 1980 (Table 3.7). With imports of equipment from previous commitments still growing, the Government cancelled or postponed several large import contracts in early 1981 and instituted a sharp cut in overall investment in order to reduce inflation and the budget and balance of payments deficits. Exports continued to grow rapidly in 1981, and the stabilization program was even more successful in improving the balance of payments than anticipated. The $2.4 billion deficit of 1980 was converted into a $2 billion current account surplus in Export growth slowed sharply in 1982 (according to Ministry of Foreign Trade figures the value of exports in current prices increased by only 3%). But imports also declined significantly (by over 12%). As a result the current account surplus widened to an estimated $4.4 billion in 1982.

51 Table 3.7: CURRENT ACCOUNT (US$ billion at current prices) (prelim.) Exports of goods & nonfactor services n.a. Imports of goods & nonfactor services n.a. Resource balance n.a. Net factor service & transfer income n.a. Current balance Source: Statistical Appendix, Table 3.1. Exports and Imports 3.29 Merchandise exports and imports both nearly doubled in value during the two year period (Table 3.8). In 1981, exports again grew by 19.1% but imports fell by 4.5%; and in 1982 export growth slowed and imports continued to fall. In real terms merchandise exports grew at an annual rate of 19% during and 17% during , but the growth rate has been declining. The volume of imports and exports grew at similar rates during , but the stabilization program reduced real imports by 8.6% in 1981 and there was a further decline in the volume of imports in Government estimates show the terms of trade declining from 1978 to 1981 before improving in The decline is somewhat surprising in view of the doubling of relative world petroleum prices between 1978 and Although China's manufactured exports consist mainly of goods subject to intense price competition and China is often forced to sell at a discount because of difficulties with quality, packaging, or delivery, the official price statistics may also be underestimating price increases for non-oil exports.

52 Table 3.8: VALUE, PRICE AND VOLUME INDICES OF EXPORTS AND IMPORTS, /a (1978 = 100) Annual Growth /b Exports Value Volume Price Imports Value Volume Price Terms of Trade /a Price indices are chain-linked with annual rebasing. Growth rates are based on end-points. /b Estimate. Source: Statistical Appendix, Tables 3.1 and Table 3.9 shows the sectoral breakdown of export growth during Mineral fuels and oils contributed one-third of incremental export earnings, but this was mainly due to increases in petroleum prices in 1979 and 1980; oil exports were essentially constant from In 1982 however the estimated increase in the value of exports of mineral fuels and oils was due primarily to growth in export volume rather than price rises. The rapid growth of manufactured exports mainly reflects increases in volume rather than price. Heavy industry exports grew especially fast, with machinery and transport equipment contributing the most to this growth (see para. 4.22).

53 In every sector, including the relatively slow-growing "other primary goods," exports grew faster than domestic production in Exports also grew faster than world imports and China has increased its share of world trade. The export growth rate fell somewhat in both 1980 and 1981, and then dropped sharply in 1982, reflecting the slowdown in the growth of world trade and the increasing difficulty of raising China's share of some exports. The Government is sensibly stressing the importance of quality, in order to improve competitiveness and to move into products with better price and growth prospects. Table 3.9: COMPOSITION AND GROWTH OF EXPORTS, (current prices) Share of incre- Annual growth Share of exports mental exports rate Primary Products Mineral fuels and oils Other primary goods Manufactured Products Heavy industry Light industry Total Exports /a /a This table is based on data from the Ministry of Foreign Trade, which include only the net value of export processing trade. The growth of total exports therefore differs slightly from that in Table 3.8. Source: Statistical Appendix, Table The impact of recent macroeconomic policy is apparent from the changing structure of imports (Table 3.10). Raw material imports for heavy industry dropped sharply and those for light industry rose due to the shift in emphasis of industrial policy. Consumer goods imports also increased sharply in line with the increased share of consumption in NMP. Half of this increase was due to expanded imports of cereals, but there were also large increases in imports of consumer durables such as television sets. Imports of machinery and equipment surged in 1979 and 1980 and complete

54 plant imports continued to rise in 1981 despite cancellation and postponement of several major contracts, because delivery of much previously contracted plant and equipment could not be stopped. Other machinery and equipment imports fell in 1981, however, due to the stabilization program. The lagged effect of the contract cancellations and suspensions finally became apparent in 1982, when the value of imports of complete plants and sets of equipment fell precipitously by almost 50%. Other reasons for the decline in imports in 1982 include delays in supplies of equipment already ordered and problems in obtaining high technology goods. Table 3.10: COMPOSITION OF IMPORTS, (current prices) Share of imports ($ billion) ---- () --- Machinery & Equipment of which: complete plant (0.5) (1.2) (2.5) (3.2) Raw & Intermediate Materials For heavy industry (4.2) (5.2) (3.9) (2.2) (38.2) (11.5) For light industry (2.1) (2.7) (4.7) (5.4) (19.4) (27.7) For agriculture (0.7) (0.9) (1.4) (1.4) (6.3) (7.2) Consumer Goods Total Imports Source: Statistical Appendix, Tables 3.2 and The dominant pattern in China's direction of trade in recent years has been recurrent large import surpluses with industrial market economies and large export surpluses with developing countries, as can be seen from Table The most striking change has been the sharp drop in the share of nonmarket industrial economies in both imports and exports. The share of the industrial market economies has risen considerably, while that of developing countries has fallen slightly in terms of China-s exports, risen slightly in terms of imports.

55 Table 3.11: DIRECTION OF TRADE, Share of Share of exports imports Industrial market economies Developing countries USSR and Eastern Europe Total Source: Statistical Appendix, Table 3.8. External Borrowing and Creditworthiness 3.33 China's approach to foreign borrowing and external debt management has been very conservative. After the initial post-1977 flurry of foreign contracts for plant and equipment imports (many of which were for cash rather than credit), the Government first became cautious about new commitments, then cut back on existing contracts. Reasons for this decision include the lack of complementary domestic resources of energy and infrastructure and the desire to avoid large balance of payments deficits and foreign debt. Poor project preparation was also a reason for the cancellation of certain contracts. The present government borrowing strategy is to obtain more long-term concessional assistance and make more use of subsidized export credits, while avoiding borrowing at high commercial rates of interest. The Government aims to keep the ratio of debt service payments to export earnings below 15% Efforts to promote direct foreign investment attracted net inflows of over $300 million in 1980 and In the same two years, China secured from Japan low interest loans totaling $895 million. The Government has expanded use of export credits but remains very cautious. China has used only $349 million out of total authorized credits of over $13 billion. In 1980 and again in 1981 the Government cutback sharply on interbank borrowing and also took advantage of the unexpectedly strong current account position to repay large amounts of commercial bank and other loans. As a result, total debt outstanding increased by only $255 million to $5,696

56 million in At the end of 1981, total reserves excluding gold were $5.0 billion, equivalent to 3 months of 1981 f.o.b. imports. The ratio of debt service payments to exports of goods and nonfactor services increased from 5.0% in 1980 to 7.8% in 1981, due in part to the accelerated repayment of commercial bank and other loans. There was a further build up of reserves during 1982: by the end of the third quarter of 1982 reserves excluding gold had reached $9.4 billion. Institutional and Policy Changes in the External Sector 3.35 China has introduced a number of changes designed to promote the growth of exports and economize on the use of foreign exchange for imports. Three related and mutually reinforcing changes in particular appear to have influenced export growth in the past three years: the introduction of a new "internal settlement rate for foreign exchange transactions; devolution of authority to conduct foreign trade; and the introduction of a foreign exchange retention scheme. Attempts have also been made to utilize foreign capital for increasing exports and modernizing domestic technology One important policy change was the introduction in January 1981 of an internal settlement rate for all trade. This was fixed at Y 2.8 per US dollar, which represented about a 75% premium over the official rate at that time./l This change should not have affected trade conducted by the central foreign trade corporations, because enterprises receive the normal domestic price for exports and pay the domestic price for imports, with profits and losses balanced by the trading corporations and net balances settled by the Ministry of Foreign Trade. However, the higher internal settlement rate has affected the growing share of trade conducted by decentralized trading corporations and enterprises Decentralization of foreign trade is a second important change which has occurred. The monopoly of the Ministry of Foreign Trade over foreign trade transactions (exercised through its subordinate Foreign Trading Corporations) has been effectively ended. Ministries, new territorially based trading companies and, in many cases, enterprises themselves can now export and import. Within the trading system under the Ministry of Foreign trade itself, the powers of local and provincial branches of the Foreign Trading Corporations (FTCs) appear to have been substantially increased. Authority to conduct foreign trade independently /1 The official exchange rate is pegged to a basket of currencies whereas the internal settlement rate is pegged to the US dollar. The official rate was Y 1.6 per US dollar in January 1981 but had risen to Y 1.94 per US dollar by the end of The premium has thus declined to about 44%.

57 is greatest in Guangdong and Fujian Provinces, and in designated Special Economic Zones (SEZs), which have more flexible regulations on foreign trade, foreign currency transactions and direct foreign investment activities. Although in 1981 trading organizations not directly under the central government accounted for only 8% of exports and 13% of imports (up from 2% and 8%, respectively, in 1980), the amount of trade conducted by provincial FTC branches acting independently of central supervision was much greater This devolution of decision-making authority has been accompanied by the introduction of material incentives; provinces, large organizations and in some cases lower-level territorial government units may retain part of their foreign exchange earnings. The proportions vary for different types of products according to the need for encouraging or discouraging exports of those goods. Units do not actually hold foreign exchange (as cash or in bank accounts), but earn foreign exchange retention quotas, which entitle them to obtain foreign exchange from the BOC to purchase imports under certain specified conditions. The total value of unused foreign exchange quotas grew from $1.5 billion at the end of 1979 to $2 billion at the end of 1980 and just under $4 billion at the end of Given the attractiveness of foreign exchange in China, this rapid growth suggests that informal restrictions on the use of foreign exchange quotas may have been imposed by the BOC, in the interest of balance of payments stability. The scope of the foreign exchange retention system was expanded in 1981 but has been scaled down 'n 1982, and many types of products considered essential in the domestic economy no longer earn foreign exchange retention quotas. For other goods, the retention quotas now vary between 8% and 15% (compared with 20-40% previously). Producers themselves are rarely if ever entitled to share directly in the proceeds of their exports; foreign exchange is retained and allocated only at higher levels in the economic system A limited and tightly controlled foreign exchange market has been instituted by the BOC, in which enterprises with unneeded foreign exchange quotas sell them to enterprises that require but do not have access to foreign exchange. In 1981 some 1,500 transactions worth a total of $217 million took place under this so-called "foreign exchange coordination system." 3.40 China has encouraged the inflow of foreign capital in the form of joint ventures, /1 compensation trade and processing and assembly contracts. /1 Joint ventures involve joint management of operations by the Chinese and foreign partner (both of which are represented on the Board of Directors), as well as contributions of resources (in the form of equity investment or in other forms) and sharing of benefits by both parties.

58 Some of these new methods mix true direct foreign investment with activities intended simply to economize on the use of foreign exchange in the trading process. Results have been mixed; China has attracted some direct foreign investment but less than was originally hoped for. As of 1982, 40 equity joint venture contracts involving a total of $88 million in foreign investment had been signed and approved by the Chinese Government. In addition, 390 contractual joint venture agreements involving cooperation on a temporary basis have been signed. The foreign capital component of these contracts amounts to $1.8 billion, but only a small part has been paid up and only a few projects so far have a distinct legal personality. Compensation trade deals are also important in the aggregate, though on the average each item is much smaller. In 1980 alone over 350 compensation trade agreements were signed, involving imported equipment worth $187 million. Processing and assembly activities also have increased. More rapid expansion of all these types of activities has been held back by the Government's concern to avoid unfavorable agreements, by the lack of detailed regulations on many aspects of foreign investment'and by the multiplicity of organizations potential foreign investors in China are forced to deal with. Nevertheless, the Government remains firmly committed to encouraging growth of these types of activities and their future potential is great Foreign trade policy changes and reforms have been partly responsible for the impressive growth of exports in the past several years, which has occurred despite relatively poor international market conditions. But they have also had other consequences which led the Government to impose additional restrictions in The export incentives introduced in the form of the foreign exchange retention system appear to have worked too well in some ways. Provinces and organizations have striven to increase their exports, even if this meant undercutting the exports of other provinces and units. Where markets are limited, especially in Hong Kong, this may have caused a deterioration in China's export prices. In addition, some provinces appear to have increased their exports by exporting basic consumer and producer goods that are in short supply domestically, exacerbating problems with domestic shortages. Finally, greater access to foreign exchange resulting from the reforms has allowed imports of certain types of commodities which might not have been permitted under a more centralized system To deal with these complications, the Government introduced export quotas as of February 1, They apply to 78 commodities in 12 categories of goods, ranging from coal, oil and various metallurgical industrial products, to building materials, nonferrous metals and agricultural products like rice, soybeans, corn, sugar, cotton and tobacco. From June 1, 1982, export duties have been levied on rice, soybeans, sugar, coal, pig iron and other raw materials. The rate is Y 40 per metric ton of coal exported, and varies between 10% and 60% ad valorem for the other commodities. Changes have also been introduced on the import side. Imports of

59 automobiles, motorcycles, television sets and other electronic products were restricted in 1981 to protect local industry, and in 1982 local authorities were prohibited from importing consumer goods not included in the state import plan. There were also several changes in the tariff structure in 1981 and Tariffs were lowered on some raw materials and machinery and raised on other equipment and consumer durable imports that were adversely affecting domestic production. Pending major price reform such measures are required to offset some of the effects of domestic price distortions.

60 SECTORAL POLICIES AND REFORMS 4.01 Sectoral policies and reforms have been an integral part of the Government-s overall programs of reform and adjustment. For example the adjustment between consumption and investment needs to be accompanied by a good performance of agriculture, because 800 million people depend on it for their livelihood. Rising incomes elsewhere in the economy and the requirements of light industry have also placed new demands on agriculture. Emphasis on light industry is needed to provide more consumer goods to match the higher incomes resulting from greater rural production and higher agricultural procurement prices. Moreover, light industry can be expanded with less new investment, offers the best prospects for expanding exports to pay for imports of new technology and is far less energy intensive than heavy industry. The continued rapid development of both sectors is dependent, however, on reforms and efficiency improvements within those sectors and in complementary sectors such as transport and commerce. A. Agriculture 4.02 Agricultural growth in China has been constrained by several factors: the cultivated area per worker has been declining; there is already much multiple cropping; important yield augmenting technologies have already been widely adopted; and yields of several crops are significantly above the averages for other countries. In these circumstances, increases in production have had to come from careful selection of agricultural production systems, and crops and inputs that produce the best possible results, i.e., from improvements in yields and efficiency. Agricultural policies and reforms have been aimed at such improvements, and the sector s performance in recent years suggests that they have already met with much success. Agricultural Growth and Adjustment 4.03 Between 1978 and 1982, gross agricultural output at constant prices increased by 6.0% per year; despite poor weather conditions in 1980, the growth rate was 2.7%; in 1981, when China was again affected by serious floods and droughts, the growth rate rose to 5.7%; and in 1982 the growth rate was estimated to be 7.0% (Table 4.1). There has also been a substantial diversification of the agricultural sector, with the share of crops in total agricultural output and the share of grain in total crop output both falling steadily.

61 Table 4.1: GROSS AGRICULTURAL OUTPUT, Annual growth % share (constant prices) (current prices) (prelim.) Crops n.a (of which grain) n.a. n.a. Forestry n.a. 2 4 Animal husbandry n.a Fisheries n.a. 1 2 Sideline production n.a Total Source: Statistical Appendix, Tables 2.5, 7.2 and Food Supplies. Although the diversification of agriculture has been encouraged, the need to provide minimum foodgrain supplies for a growing population is still a key component of agricultural development strategy. Following favorable weather and record harvests in 1978 and 1979 grain production fell by 3.5% in 1980 and increased by only 1.4% in 1981, partly due to poor weather conditions (Table 4.2). In 1982 however grain production grew by an estimated 5%, reaching at least 340 million tons. Grain yields have been increasing steadily and there has been an expansion in the use of hybrid rice varieties, but these trends have been offset in part by a fall in the area devoted to grain crops of 4.7% between 1978 and 1981 (from million ha to million ha). Meanwhile annual direct grain consumption has been increasing from 192 kg of milled grain per person in 1977 to 219 kg in It has therefore been necessary to supplement domestic production with an expanded import program: after increasing sharply to 7 million tons in 1977, grain imports have since doubled, and long-term agreements signed with major exporting countries imply annual grain imports of at least 14 million tons for the next few years. However, this is still less than 5% of total domestic production.

62 Table 4.2: FOODGRAIN BALANCE, /a Supply (million tons unmilled) Domestic production Imports Total Utilization (million tons unmilled) Exports /b Domestic consumption: Direct /c Residual Id Total /a Includes tubers converted to grain equivalent at a ratio of 5:1. /b Rice exports are recorded in paddy terms using a conversion ratio of 0.7 to make them comparable with other data. /c Based on information on milled grain consumption per capita from table 2.4 and using a conversion ratio of /d Residual: includes seed, feed and other uses and changes in stocks. Source: Statistical Appendix, Tables 3.4, 3.6 and Other Production. While the area under grain crops has been declining in recent years, the area planted to other crops has increased significantly, as has their production. Of particular importance has been the rapid growth in oilseed, cotton and sugar production; all achieved record outputs in both 1980 and 1981, due partly to expanded planted area but mostly to higher yields. These yield improvements have apparently resulted both from greater use of inputs and from regional specialization and the concentration of production in the most suitable zones. As a result of increased production, China has been able to stabilize and even reduce

63 imports of these commodities. Livestock production has continued to expand, there has been an increase in the slaughter rate and more households are now specializing in livestock rearing. Sideline production (which includes the output of brigade and team industries as well as other agricultural activities) has grown more than other agricultural subsectors, reflecting the encouragement being given to both sideline activities of brigades and teams and domestic sideline activities of commune members Agricultural Inputs. The increased availability of modern inputs, including fertilizer and power irrigation, has been an important element in recent agricultural growth. But in 1981 the use of such inputs did not increase as rapidly (see Table 4.3), and more emphasis has begun to be placed on increasing the efficiency with which these inputs are used. For example, the mix of fertilizer has been shifted towards more emphasis on phosphate and potassium. The new production responsibility systems have made peasants more aware of the relative costs and benefits of various inputs: they are more cautious about purchasing irrigation and drainage equipment, they have reduced the amount of land subject to machine plowing, they are more concerned about the quality of equipment and other inputs and they increasingly prefer small tractors suitable for use by one household or a group of households to large tractors. Moreover, some of the increase in tractor demand reflects growing transport requirements rather than increased cultivation requirements. In 1981 and 1982 production of large and medium tractors dropped greatly (see Table 4.4). Table 4.3: USE OF MANUFACTURED INPUTS IN AGRICULTURE, Chemical fertilizer (mln tons nutrient weight) Large and medium tractors ('000) Small and walking tractors ('000) 1,090 1,373 1,671 1,874 2,037 Power driven irrigation and drainage equipment (mln HP) Machine plowed area (mln ha) Source: State Statistical Bureau Adjustment Policy. The strong performance of agriculture in recent years is due in part to policies and programs that ensured that additional inputs were available. The additional resources allocated to agriculture by the Government, especially in 1978 and 1979, may also have

64 played a role. Since then, however, both the absolute amount of state agricultural construction and its share in total state capital construction have declined, and a similar pattern of cutbacks has occurred in state budget expenditures on agricultural support. Of much greater importance have been the major improvement in the terms of trade for agriculture (see para. 3.05), the reduction in quota requirements and other policy interventions aimed at encouraging local and institutional specialization according to comparative advantage. Provinces and counties have been given a greater role in agricultural planning and surveys have been carried out to identify appropriate crops and cropping systems. The Government has agreed to supply foodgrains to areas and teams that specialize in cash crop production, and new marketing channels have been opened up (see para. 4.49) The differing but complementary roles of collective, state farm and household plot agriculture have also been recognized. Collective agriculture continues to account for most production, but state farms are now seen as having a critical role to play in meeting the growing demand for marketable grain and in developing certain specialized agricultural activities (such as tree crops and large livestock). The importance of household plot agriculture has been recognized for specialized activities such as vegetable growing and small livestock production. In some areas teams may now allot up to 15% of their land for household plots;/l in other areas household plot agriculture is being encouraged as part of more wide-ranging reforms in the organization and management of rural collectives. Production Responsibility Systems 4.09 The changes now under way in the organization and management of rural collectives are one aspect of the Government s overall program of economic reform. The changes are based on two of the principles that have characterized the program as a whole, namely greater decentralization and autonomy for lower level collective units, and more direct linkage between rewards and the work and efforts of households and individuals. It has also been recognized that conditions vary greatly between areas and that systems should be developed to suit differing agro-climatic and economic conditions, although the collective system of land ownership must be maintained./2 Changes were first introduced in 1979, when collective units at all levels were encouraged to implement the principle of distributing income in proportion to work done. But the movement accelerated in 1980 when the /1 It is estimated that in 1980 household plots accounted for 13.3% of the cultivated area. /2 This applies throughout China, except for isolated areas of Tibet where households are officially permitted to have no obligations to collective units.

65 system of assigning responsibility for production to households was officially accepted as being suitable for certain areas of China./l 4.10 The emphasis on designing systems to suit specific local conditions (in terms of terrain, type of agricultural development, level of management expertise, etc.) has resulted in a great range of systems, which vary in terms of both remuneration and assignment of production responsibilities. In some areas where rural development is relatively advanced in terms of systems and technologies, the collective economy well established and economies of scale probably quite significant, collective farming is still being retained but with an emphasis on specialized contracts and compensation being linked to output. Under such a system, teams, groups, households or individuals enter into a contract with higher level collective units that stipulates labor contributions, area to be cultivated, expenditures and output targets. Workpoints are set for the contracted output and there are bonus or penalty workpoints for surpluses or shortfalls, but accounting and distribution remain collectivized Another type of system is in use in some of the intermediate areas, where grain production is the major activity but development is not as advanced and the collective economy may not be as strong. In such cases emphasis is placed on dividing the land into small plots for farming by individual households, and contracts are signed to cover output targets, inputs and work points. There may be bonuses or fines for surpluses or shortfalls, but accounting and distribution are still effectively collectivized Yet another system (sometimes called the household total responsibility system) is in use in many other areas, especially the poorer areas. Fields and sometimes draft animals and implements are all divided among households, frequently according to household size and usually for a specified period. Households may farm the land as they wish but must guarantee to contribute agreed amounts to the state (in the form of taxes and state procurement) and to the collective (for welfare and other expenses). There is no system of unified distribution, and households retain whatever they produce beyond their obligations to the state and to their collective. Such obligations now account for about one third of a household's total production The proportion of teams implementing different types of system varies greatly among provinces, among counties within a province, and even among the communes and teams within a county. At the end of 1982, 92% of /1 See Document No. 75 of September 1980 entitled "Certain Problems Concerning Further Strengthening and Improvement of the Responsibility Systems for Agricultural Production."

66 all production teams in China had implemented some form of production responsibility system and 78% of teams had implemented some form of household responsibility system (i.e., some form of the second or third type of responsibility system discussed above) It is difficult to separate the effects on production of such changes in the collective system from the effects of other changes in agricultural policy, and much experimentation with responsibility systems is still taking place. But there is widespread agreement that the changes have already had a significant and positive effect on agricultural production. The reduction in the size of work units has eased some of the serious management problems that many communes faced and work incentives have been substantially improved The introduction of such changes in the economic system in rural areas has not, however, been without its problems. Certain issues have emerged that the Government will need to address. One important issue is how to preserve some of the strengths of the traditional commune system in terms of provision of basic needs and other services and mobilization of labor for construction and maintenance of community infrastructure. With the delegation of more autonomy to individual households to produce what they want and the increase in the share of individual household income in total rural income, there is a danger that there will be insufficent collective resources to finance good social services and to care for families without able-bodied workers or those who have been affected by natural disasters. Provision of input services including irrigation will also be more difficult in areas where farmers are growing a variety of different crops and using different techniques. In addition, it may be more difficult to mobilize labor and other resources for construction and maintenance of irrigation schemes, maintenance of rural roads, pest control, etc A second issue concerns the possible effects of the new systems on population growth and employment. In areas where there is no collective grain distribution or where land is being allocated to households according to household size or the number of able-bodied workers, family planning and population control programs have apparently become more difficult to implement. There is also the phenomenon of surplus labor (which would previously have been hidden because everyone was obliged to work in the fields, even if they were contributing little to increased production) now becoming more open. Some of this surplus labor will probably find employment or set up individual enterprises in rural areas, but the incentives and pressure for rural workers to migrate to urban areas will

67 both be increased./l Migration may not be a negative development; in fact from an overall welfare and income distribution perspective it may be very beneficial. But policies and programs will have to be developed to address such issues In addition to these issues some government officials are concerned about the possibility of abuse of land, water and timber resources in pursuit of short-term income gains. The existence of all these issues should not, however, be taken as an indication that reforms should be rescinded; rather ways need to be found to address them without reversing the direction or intent of the rural reforms. The Government has in fact already taken some steps in this direction. For example, new guidelines on agricultural policy issued in April 1982 suggest that where the household responsibility system is being introduced, land should be allocated not only according to the size of the family and the number of workers, but also according to the household s performance in family planning (one child families would get more land than families with more than one child). B. Industry 4.18 Despite one of the highest long-term rates of industrial growth in the world (gross industrial output at constant prices increased by 9.4% p.a. between 1957 and 1981), Chinese industry has suffered from several fundamental weaknesses, which became prominent by the end of the 1970s: inefficiency in the use of capital, labor, raw materials and energy; poor product quality; and an imbalance in capacity. These were the result of overemphasis on heavy industry; neglect of medium-term planning; /1 This will be further facilitated by the availability of grain at urban and rural free markets, which greatly weakens what was one of the strongest deterrents to rural-urban migration in China - the ration coupon system for grain and other basic foodstuffs.

68 technological backwardness due to prolonged international isolation; and insufficient incentives to conserve inputs, improve product quality, or properly prepare and evaluate investment projects. In industry, the current policy of adjustment and reform is largely motivated by a desire to correct these shortcomings, while at the same time maintaining a reasonable rate of growth. Adjustment in Industry 4.19 Adjustment in industry is intended to correct structural imbalance and lay a sounder base for sustained long-term economic growth. The principal elements of the adjustment policy, introduced in 1979, were: (a) increased emphasis on light and consumer goods industry rather than heavy industry; (b) promotion of manufactured exports; (c) stress on modernization of existing enterprises, particularly through importation of new technology, rather than on new capital construction projects; and (d) energy conservation./l 4.20 Structure of Production. The dramatic reversal in emphasis between light and heavy industry is shown in Table 4.4. Between 1979 and 1981, light industrial output increased by 35% while heavy industrial output fell by over 3%. In 1982, however, heavy industry grew considerably faster than light industry. There have also been substantial differences in the growth of industrial subsectors. Light industrial durable consumer goods have grown most rapidly. Between 1978 and 1982 production of bicycles and sewing machines more than doubled; production of cameras increased five fold; and production of television sets increased ten fold. Within heavy industry, the production of certain kinds of machinery saw the greatest decline, reflecting the cutback in investment and the reorientation toward modernization of light industry. Primary energy production, which accounts for over 20% of heavy industry's gross output, fell by 2% between 1979 and 1981 (see para. 4.32), but grew by an estimated 3.8% in Production of cement and plate glass grew in line with increased housing investment, while production in some contracting sectors, such as rubber tires, was reoriented toward consumer goods (bicycle tires). /1 Energy conservation will be covered in Section C.

69 Table 4.4: INDUSTRIAL GROWTH: PERCENTAGE CHANGE PER YEAR IN GROSS OUTPUT (Constant prices) (prelim.) Heavy Industry Light Industry Total Industry Selected Heavy Industry Products Crude. coal Crude oil <1.0 Electricity Steel Cement Chemical fertilizer Machine tools Motor vehicles Tractors Selected Light Industry Products Cotton cloth Chemical fibers Television sets Cameras Bicyles Sewing machines Machine-made paper and paperboard Source: Statistical Appendix, Tables 2.5 and 8.1.

70 The general direction of change was planned, but actual growth rates differed markedly from planned growth. For example, in 1981 even though production declines in several heavy industry products were planned and 56 out of 65 major production targets in heavy industry were reached or surpassed, total output of heavy industry declined by 4.7% instead of increasing by 4.4% as originally planned. More remarkably, growth in light industry was twice as high as the 8% growth targets in 1980 and In heavy industry, the discrepancy appears to be due to: (a) an inability to expand energy production, which reduced growth directly and also limited the growth of some energy-intensive heavy industries; and (b) failure to anticipate the full effect of the cut in capital construction on heavy industry output./l Much of the extra growth in light industry may have come from increased output of rural and urban collective enterprises and various types of joint ventures, all of which are less subject to control by the planning system Export Production. Manufactured exports more than doubled in value between 1978 and 1981 (Table 4.5). Although price indices are not available, an estimated 75% of the increase in value is due to a higher volume of exports. All categories of manufactured exports grew rapidly. Light industry exports (including textiles) contributed the greatest amount of incremental value because of their high initial share, but the most remarkable growth was in machinery and transport equipment exports, which increased in value five fold over three years. The share of exports in gross output also rose for both heavy and light industry, but manufactured exports in 1981 still accounted for only about 4% of gross industrial output, excluding energy and valued at the official exchange rate. /1 This last effect was reversed, however, with the late-1931 increases in capital construction.

71 Table 4.5: GROWTH OF MANIUFACTURED EXPORTS, (Current prices) Sector share of Share of Average manufactured incremental annual exports (%) exports growth rate (%) Heavy Industry /a Chemical and related products Machinery & transport equipment Other heavy industry products Light Industry Textiles Other light industry products Total Manufactured Exports /a The trade classifications do not correspond exactly to the industrial classifications. Exports of heavy industry products may be overstated. Source: Statistical Appendix, Table Investment in Industry. Changes in the industrial investment program appear to have been slower and less pronounced than the shift in the structure of industrial output. State capital construction in heavy industry other than energy was not markedly reduced until Moreover, while capital construction in light industry has grown, heavy industry (excluding energy) still accounts for twice as much capital construction. Few figures are available on the growth of investment to modernize and rehabilitate existing industrial enterprises. Modernization investment in all sectors was Y 24 billion in 1981 and was reported to reach nearly Y 28 billion in This implies that modernization investment now exceeds new capital construction in industry. Total fixed investment in industry may therefore have grown substantially during the past three years. Attempts to control both the level and the composition of industrial investment have been partly thwarted by the growing importance of other sources of finance than the central budget.

72 Imports of equipment and machinery have also increased since 1978, but were reduced somewhat in 1981 (Table 4.6). Assuming that all imports of complete sets of equipment were for state capital construction in industry (including energy) and that imported equipment is valued at the official exchange rate, then imports as a share of capital construction in industry rose from 3% in 1978 to 24% in 1981 before declining in However, the import content of modernization investment has probably not grown to the same extent. Table 4.6: IMPORTS OF MACHINERY AND EQUIPMENT, ($ billion) Complete sets of machinery and equipment Other machinery and equipment Total Source: Statistical Appendix, Table 3.5 and Ministry of Foreign Trade. Institutional and Policy Changes 4.25 Reform has proceeded more slowly in industry than in agriculture, and administrative controls may have been tightened as problems have emerged. But important changes have occurred in five areas: profit retention, capital charges, marketing and pricing arrangements, payment and employment practices, and industrial organization. Capital charges and pricing have already been discussed (paras. 2.30, 3.07, and 3.09) and marketing arrangements are discussed in paras Profit Retention. Profit retention schemes have been widely introduced for state industrial enterprises. In 1978 the Government reinstated an enterprise fund scheme in which some enterprises fulfilling plan targets were allowed to retain profits amounting to 5% of their wage bill. Starting in 1979, some experimental enterprises in industry and transport were permitted to keep a share of base profits and a larger share (10-30%) of incremental profits. The retention rates varied by industry and even by firm, depending on overall profitability, and there were fewer restrictions on use of these funds. By mid-1980, experimental enterprises numbered about 6,600, and they accounted for 44% of state industrial output and 57% of profits. In the past two years, other schemes have been

73 introduced to permit partial retention of the value saved when enterprises reduce losses, retention of a large share of profits above a target quota, profit sharing controlled by a bureau (e.g. the Shanghai Textile Bureau) rather than by individual enterprises, and a scheme in which 460 state-owned enterprises pay taxes rather than sharing profits. By the end of 1981, over 80% of all state industrial enterprises were under some form of "economic responsibility system." Altogether, the various schemes have allowed state enterprises in all sectors to retain over Y 28 billion during The amount of such retained funds reportedly reached Y 17 billion in 1982 alone, indicating a rapid growth over time. In addition, enterprises have been allowed to retain a larger share of depreciation funds. Depreciation funds accruing to state enterprises in all sectors now amount to over Y 20 billion per year Payment and Employment. Chinese industrial enterprises face conflicting pressures to provide employment and to raise labor productivity. In the past two years government policy has increasingly stressed productivity increases. Piece rates have been widely advocated and bonus payments have become a more important part of labor compensation. Enterprises reaching targets with respect to output, profits, quality, consumption of raw materials and labor productivity have been permitted to pay bonuses. Bonuses now average more than one month's pay for workers in state enterprises and are restricted to two months' pay normally, or three months' pay in exceptional circumstances. Bonus payments are normally a percentage of base pay rather than an equal absolute amount as in the past, but bonuses still usually depend on performance of the firm rather than that of the individual worker. However, the Government is planning to link future bonuses more closely to labor productivity and to smaller work units within the enterprise. Employment policy is also shifting. The state no longer guarantees employment for new entrants to the labor force, and enterprises will be allowed to fire unproductive or undisciplined workers. Despite these changes, widespread overmanning in industry persists and it remains to be seen to what extent the past emphasis on job security regardless of performance will be reversed Industrial Organization. There has been extensive experimentation with new forms of industrial organization in China over the past two or three years. In addition to experiments involving foreign partnerships (see para. 3.40), four other experiments are particularly significant. First, collective enterprises have been encouraged and individual enterprises with up to two employees and five apprentices have been allowed; these have contributed significantly to incremental employment (see para. 2.21). A second change has been the closure of some inefficient industrial enterprises. Press reports suggest that some enterprises with prolonged losses, shortages of raw materials, or high energy consumption have been closed, but little information is available on the numbers involved or the criteria for closure. A third institutional change has been the development of joint ventures that involve urban state industrial enterprises and rural

74 collectives. Shanghai enterprises have been especially active in promoting joint ventures, which, by subcontracting labor-intensive operations, help expand rural industry, link rural and urban areas, and reduce pressures for rural-urban migration. The fourth change has been the creation of industrial corporations with authority over a group of enterprises producing similar output. Most corporations operate at the provincial level but some national corporations (e.g. in shipbuilding) are also being formed. Some decision-making authority and profit retention privileges have devolved to corporations rather than to enterprises In general, the reforms have succeeded in increasing enthusiasm to expand output, profits and investment. But there have also been unintended side effects, which may have offset some of the efficiency gains and which reflect an absence of complementary reforms in other parts of the economic system., First, with increased access to retained profits, depreciation allowances and multiple sources of loans, enterprises have wanted to invest far more than deemed appropriate by central authorities. This has resulted in partial loss of control over the level of industrial investment on the part of the central government, which has made macroeconomic management more difficult. Second, control over the composition of investment has also been weakened. A commonly cited problem is that some localities which provide agricultural raw materials to urban factories have set up their own processing facilities. Increased provincial autonomy also exacerbates the tendency to duplicate investment. Finally, there have been other unwelcome side effects. Some factories have granted large bonuses to their employees, some provincial and local authorities have restricted sales of products from other regions in order to protect local industries, and some negotiated prices have been increased more than the central government wanted Many of these problems are a result of partial reform. Overinvestment will always be a problem so long as firms bear no responsibility for losses due to unwise investments. Experience in the Soviet Union and Eastern Europe has shown that capital charges will do little to restrain overinvestment without more fundamental change in the responsibility of enterprises. Similarly, so long as prices do not reflect scarcity or full production costs, the interests of enterprises and localities may not coincide with the national interest. Decentralized decision-making with distorted prices can lead to distorted production and investment decisions Given the difficulties entailed in implementing comprehensive price reform (see para. 3.09), the Government has decided to postpone this task until after Instead, industrial reforms are now focussing on expansion of the experiment replacing enterprise profit remittances with

75 tax payments and revamping and streamlining the system of industrial administration at lower levels. The government has also imposed restrictions on the use of retained profits for investment, obliged enterprises to buy Treasury Bonds, issued new guidelines on bonuses, and placed stricter limits on negotiated prices. C. Energy 4.32 China is the fourth largest producer and third largest consumer of commercial energy in the world. Coal is by far the most important source of commercial energy (70% of total production), but oil production has increased rapidly since 1972 to become an important source of primary commercial production (24% in 1980) and of export revenue (it accounted for about one quarter of total exports in 1980). Natural gas and hydroelectric power supply the remaining commercial energy. Noncommercial energy sources supply energy equivalent to about 40% of commercial production. Commercial energy production grew at 10.5% p.a. from , but the growth rate has fallen since then and between 1979 and 1981 total production actually declined by 2%. This trend was reversed in 1982, when there was a 3.8% rise in commercial energy production. About 20% of oil production and 1% of coal production is exported China's coal and hydroelectric potential is enormous. At the current rate of production, coal reserves would last for about 1,000 years, while less than 4% of total estimated hydro potential has been developed. Although proven recoverable reserves of petroleum would last less than 20 years and natural gas reserves less than 10 years at current production rates, ultimate possible and probable reserves of oil are estimated to be 5-10 times proven reserves and China also has large reserves of oil shale. Unfortunately much of this energy potential lies in remote areas or requires very advanced technology for development. Not only will direct capital costs of coal and hydro development be high, but indirect costs for transportation and transmission will also be heavy. Hopes for major new finds of petroleum are centered on offshore areas and remote onshore areas. These are very promising but will be technologically difficult to develop and will not come onstream until the end of the 1980s By the end of the 1970s, several problems had emerged in energy sector policy and management: China's very high energy consumption, the lack of incentives to either reduce consumption or switch from oil to coal, planners' excessive concern with short-term production and regional imbalances and transport bottlenecks which prevent available energy resources from being fully utilized. These problems persist despite the attention given to them in recent years.

76 Energy Consumption 4.35 China's commercial energy consumption per dollar of GDP in 1978/79 was approximately 2.5 times that of other developing countries or industrialized market economies and about 1.5 times the average for nonmarket industrial economies. Micro-level energy intensity comparisons on a physical basis also point to inefficient energy use in China. In the steel industry, which consumes 12% of total commercial energy, energy consumption per ton in large integrated Chinese plants is roughly twice that achieved in best international practice, while energy consumption in small and medium-sized plants is 25% greater yet. In nitrogenous fertilizer, cement and brick manufacturing, China's large-scale plants are closer to the international norm, but a large share of production in these sectors is carried out in small plants using outmoded, energy-intensive techniques Since 1979 the supplies of energy available for domestic use have been squeezed by stagnation of output and continued exports. Between 1979 and 1982 the supply of primary energy available for domestic use grew by less than 1%. Though information on energy consumption is not as reliable as the data on production and exports, consumption probably did not increase much faster than supplies in , while NMP rose by 14-15%. As a result, energy consumption per unit of output has fallen significantly. According to Government estimates energy savings totalled 35 million tons of standard coal equivalent in 1980 and 26.5 million tons in 1981./1 Energy savings in 1982 are expected to be less than in 1980 or 1981 because of the relatively rapid growth of heavy industry. Energy savings are divided into two main categories: (a) those due to structural changes and (b) those resulting from improvements in the efficiency of energy utilization in the production of particular types of products. The first category is broadly defined, and includes savings from: changes in the proportions of heavy and light industry in gross industrial output value (heavy industry consumes about four times as much energy per unit of output as light industry);/2 changes in product structure within heavy and light industry (including changes from more energy-intensive to less energy-intensive products within the same product category); and changes in enterprise structure, mainly the closing down of inefficient plants or the shifting of production to energy-efficient factories. Conversely, energy savings due to efficiency improvements are narrowly defined since changes in product mix are mostly put in the first category. Savings of 13 million tons of coal in 1980 (37% /1 Calculated at the rate of 1 kg of coal equivalent = 7,000 kilocalories. These savings are derived by comparing the growth rate of energy production or consumption with that of gross indsutrial and agricultural output value. /2 In addition all energy savings within agriculture are attributed to structural change rather than efficiency improvements, because of the difficulty of measuring the latter.

77 of total savings) and about 6 million tons in 1981 (23% of total savings) are attributed to efficiency improvements. Improvements in energy utilization rates have apparently been greatest in the following industries: iron and steel; non-ferrous metals; chemical products; and thermal power plants. Most of these industries as well as the chemical fertilizer industry still have great potential for further energy-saving efficiency improvements. Incentives for Energy Conservation, Substitution, and Production 4.37 Prior to 1979 there were few price or administrative incentives for enterprises to conserve energy. In 1979 the price of coal was increased by 29% and. that of natural gas by 25%, and more recently subsidies on diesel fuel were eliminated and the price of coal for industrial use was raised by Y 2.00 per ton. However, the price structure is still not conducive to energy conservation. Although the prices of gasoline and kerosene are above international levels, most industrial fuels are priced well below world levels. Equally important, the relative prices of coal and heavy oil have favored the use of heavy oil./l At the same time, the profitability of coal mining is low and many mines operate at a loss because of low producer prices. The adverse budgetary implications of expanding coal production may have affected investment both in the many small mines run by counties, communes and brigades (accounting for 45% of total output) and in large mines run by the central government./2 An increase in the price of coal and a larger increase in the price of petroleum products for industrial users are needed to encourage increased coal production and a switch to coal consumption. Higher industrial electricity rates would also encourage conservation and provide resources for capacity expansion, thereby helping eliminate the chronic shortage of electricity. In the Northeast, North, and East China grids, losses in industrial production due to power shortages are estimated to have been as high as 20% The Government has been more active in pursuing energy conservation through tighter planning and other administrative measures. Cutbacks in allocations of energy supplies to users appear to have been the main /1 To correct this problem a special tax has been introduced to encourage enterprises to use coal rather than oil. The charge will vary between Y 40 and Y 70 per ton of crude oil burned and is Y 70 per ton of heavy oil burned. /2 To ameliorate this problem the Government is providing subsidies to smaller coal mines and allowing most of their coal output to be used in the locality where it was mined.

78 factor promoting energy conservation during the past several years. Energy consumption norms have been reduced and more strictly applied. Enterprises have been encouraged to switch from oil to coal. Some very energyinefficient plants have been closed down. The Government has established 55 energy conservation centers which provide enterprises with technical assistance in evaluating and improving energy efficiency. In the Chinese economic system administrative measures have a significant influence on energy production and use. But it is recognized that as economic reforms proceed further, the role of pricing in energy conservation will become more important. Short- and Long-term Energy Planning 4.39 Coal and petroleum planning, like most planning in China, is in effect on an annual basis. This has sometimes led to neglect of long-term development in favor of maintaining short-term production levels. In coal mines tunneling has been neglected in the past and oil fields have sometimes been depleted at a rate that threatens ultimate recovery potential. The present stagnation of energy output is largely attributable to inadequate long-term planning, but in the past two years the Government has given more attention to long-term production issues in coal and oil. It has also tried to accelerate petroleum development by inviting foreign oil companies to explore and help develop both offshore areas and selected onshore areas with difficult drilling conditions Even though energy is a priority sector, it was still affected by the large investment reductions in Capital construction investment in energy decreased in absolute terms by over 20% in 1981, following a small increase in Several coal and hydropower projects were postponed in Some of these projects were revived in 1982 and investment in energy began to expand again in line with the overall increase in state capital construction investment. D. Transport and Commerce 4.41 Growth and diversification of the agricultural and industrial sectors and improvements in living standards depend crucially on comprehensive and efficient transportation and commercial systems. In the mid-1970s, however, China-s domestic commercial system was characterized by great inefficiency and waste, reflected most prominently in excessively high inventories. The state-owned commercial system, which dominated most trading, was highly bureaucratic and subject to many administrative controls. Collective and individual commercial activities were discouraged and strictly regulated. Domestic commerce has therefore been an important target of the adjustment and reform programs. The transport sector remains a major bottleneck constraining economic growth. Economic reforms, rising

79 personal incomes and greater regional specialization are stimulating rapid increases in the demand for transportation services. This can be met by a combination of increased investment and, in certain modes, improved management and coordination. Transport 4.42 Growth in the volume of freight transport slowed greatly in 1980; in 1981 there was virtual stagnation (see Table 4.7). However, in 1982 an increase in freight transport appears to have occurred with the tonnage carried by the railway system rising by nearly 6%. The share of water-ways in freight transport rose from 36% in 1977 to 45% in 1981, while that of railways declined from 59% to 50% during the same period./l The slow growth of freight volume reflects capacity constraints and bottlenecks as well as the slowdown in the growth rate of the economy and the changing composition of output. On the other hand, freight transport by traditional and unofficial means has probably expanded rapidly with the proliferation of free markets in rural and urban areas. The volume of cargo handled at major sea ports grew extremely slowly in 1980 and This is puzzling in view of the large increases in China's foreign trade during this period; perhaps the amount of cargo handled at small ports has grown rapidly. Passenger transport volume consistently grew faster than freight volume after The share of highways has risen (from 28% of the total in 1977 to 34% in 1981), while that of railways has fallen (from 64% to 59% during the same period). Table 4.7: CHANGES IN MAIN TRANSPORTATION INDICATORS, (% increase) Volume of Goods Transport /a Railway Highway Water Air Pipelines Cargo handled at major sea ports Volume of Passenger Transport Railway Highway Water Air /a Growth rates for 1978 and 1979 exclude highway freight transport by vehicles owned by units other than specialized transport departments. Those for 1980 and 1981 include this category. Source: Statistical Appendix, Table /1 Proportions of total freight volume excluding highway transport.

80 The transportation system carries a heavy burden during this period of adjustment, reform and stabilization. The shift in the composition of production away from heavy industry toward consumer goods necessitates a corresponding adjustment in the composition of freight transport. Rising personal incomes generate additional demand for passenger transport. Market-oriented reforms and greater regional specialization call for an overall expansion of the transport sector, with particular emphasis on shorthaul road transport and carriage of often perishable nonstaple agricultural commodities. The main problem areas that continue to hinder development of the sector are: shortages of capacity; a weak statistical system; poor horizontal coordination among different modes; an inappropriate price structure; and high energy consumption (related to the high proportion of steam locomotion in the railway system)./l China's energy and transport constraints reinforce each other because the latter is a principal bottleneck preventing more rapid growth particularly of coal output. The sharp reduction in state capital construction investment in transport in 1981 (see para. 2.28) may have exacerbated China's transport problems (especially the 53% reduction in capital construction investment in the railway system). In 1982, however, investment in the transport sector has been increased In addition to capacity-increasing investments which usually have a long gestation period, improvements in organizational and managerial efficiency are a means of easing constraints originating in the transport sector. Enterprise-level reforms similar to those in state industry (see paras ) are also being implemented in state-owned transportation enterprises. Attempts are being made to eliminate inefficient patterns of transport caused by local and regional administrative boundaries. Commercial Sales and Inventories 4.45 In line with the spectacular growth of light industrial output, the real value of total retail sales of commodities in China rose steadily in , showing increases of over 12% in both 1979 and 1980 and over 7% in 1981./2 The nominal value of retail sales is estimated to have increased by 9% in These figures underestimate the growth of domestic trade in consumer goods, agricultural products, and agricultural inputs (the categories of goods handled by the commercial system) since they do not include transactions among peasants at rural free markets, which grew even more rapidly. Inventories of state-owned commercial units have also grown steadily, rising by 11.6% in 1979, 9.2% in 1980, and 10.8% in /1 Detailed information about the problems faced by China's transport sector is available in Report No CHA, Annex F. /2 Statistical Appendix Table 11.3 provides more information on developments in retail sales.

81 The inventory-sales ratio for state commercial units appears to have risen by over 6% in 1981,/1 following smaller increases in the previous two years. This rise could be explained by several factors: (a) the relatively good agricultural harvest of 1981, which resulted in higher year-end stocks; (b) changes in consumers tastes, due to higher incomes and the increased availability of basic consumer goods; (c) increased stocks of marketable commodities, which provide benefits in terms of consumer convenience; and (d) expansion of the commercial network, which might require a higher inventory-sales ratio but again provides important benefits to consumers. The increase in the inventory-sales ratio of the state commercial sector has been counterbalanced by the rapid growth of collective and individual commerce, which apparently uses inventories more efficiently. Difficulties in matching supplies of consumer goods with consumer demand have been endemic in China. However more attention is now being focussed on this long-standing problem Trade in industrial producer goods in China is handled primarily by the material supply system, though enterprises can increasingly obtain material inputs directly from other enterprises or by market purchases. Indicators such as inventory levels, inventory-output value ratios, and utilization rates of circulating capital funds by state-owned enterprises show that great inefficiencies exist, but as with the commercial system, there is little or no evidence of deterioration in the past several years. For instance, the total value of machinery and electrical product inventories was reported to be Y 61.9 billion at the end of June 1980 and Y 60.3 billion at the end of June 1981./2 The total amount of rolled steel products in stock reached 20 million tons as early as 1980, but appears not to have increased sharply from that level. Indeed, by late 1982 there apparently had been some improvement in the situation, with inventories of machinery and electrical products falling to Y 58 billion, and rolled steel stocks declining to 18 million tons./3 /1 Based on a report that retail sales by state-owned commercial units increased by 4.2% in 1981 (New China News Agency, 4/4/82). /2 Wen Hui Bao, 1/29/81, p. 3 (translated in JPRS 77592, Economic Affairs No. 120, 3/16/81. p.11), and Renmin Ribao, 4/10/82, p.l. /3 Report by Finance Minister Wang Bingqian at the Fifth Sesion of the Fifth National People's Congress, 12/10/82.

82 Commercial Reforms 4.48 The primary orientation of commercial reforms during the past three years has been expansion of the role of markets and market-like institutions in resource allocation. At the same time, the state commercial system has been decentralized and made subject to financial incentive schemes similar to those instituted in state-owned industry. Collective and individual commercial activities have been permitted to proliferate, filling gaps left by the state commercial system, forcing improvements in the latter (by competing with it for customers) and creating jobs. The organizational structure of the commercial system has also been drastically simplified, with the total number of personnel and administrative units significantly reduced A significant, steady increase in the proportions of industrial and agricultural output allocated by voluntary, outside-of-plan means has taken place. According to preliminary estimates, in 1980 about 15% of gross industrial output value was allocated by the market or market-like mechanisms, compared with about 10% in In 1980, 11% of total sales of steel were realized through the market mechanism, as were 46% of the total sales of enterprises under the First Ministry of Machine Building. These represent dramatic increases over the pre-reform situation. Attempts have also been made to increase the number of producer goods previously subject to planned allocation that are now supplied freely by the material supply system. The rapid increase in the number of markets at which peasants can freely trade commodities is a prominent feature of rural reforms The expansion of the role of the market in China has already had visible benefits. Managers have become more aware of the need to take market forces into account in making production decisions. For certain kinds of goods, the previously prevailing "seller-s market" characterized by chronic supply shortages has been transformed into a "buyer's market" where production is to some extent demand-determined. Horizontal ties between producers and consumers, sellers and buyers have become more important, supplementing the vertical channels of command planning. Perhaps most important, use of the market mechanism has facilitated the massive structural changes that have occurred in the economy during the past three years. However, commercial enterprises in many cases still may not have the power to refuse delivery of substandard or unmarketable products sent to them by inefficient producers. Although commercial services and the availability of many goods have improved in both urban and rural areas, there still appears to be a gap between supply and demand in rural areas Partly because of their recent emergence, markets are fragmented, vulnerable to administrative intervention, and weak in terms of their institutional basis. A serious threat to their efficacy and viability is the internal trade restrictions imposed by territorial and departmental

83 government authorities to "protect" backward, inefficient producers under their jurisdictions. A recent State Council circular has strictly prohibited such "internal protectionism." A related difficulty stems from the combination of China's territorially decentralized economic management and fiscal systems and the new emphasis on profits as the primary performance indicator. Given the distorted structure of relative prices, which greatly increases the profitability of processing and manufacturing activities but reduces that of agriculture and mining, provinces have a strong incentive to build up the former in their own territories. They do so by constructing small, often inefficient plants, which utilize local raw materials that were previously sent to factories outside the province. As a result, large and technologically advanced factories in the more developed areas are faced with shortages of raw material supplies, and aggregate efficiency suffers.

84 ECONOMIC PROSPECTS A. Constraints and Options 5.01 In view of the still low levels of income in China, a major Government objective during the rest of the s remains improvement of living standards and further reduction of urban-rural disparities. Achievement of these objectives is constrained by a number of factors, including shortages of skilled manpower, limited agricultural land, slow growth of energy production, industrial inefficiency and insufficient infrastructural development, as well as by institutional constraints. On the other hand, the strong performance of the economy in recent years, the low population growth rate, the renewed emphasis on economic reform and the more open attitude towards use of foreign technology and capital are all encouraging and positive developments. These various features of the Chinese economy were analyzed in detail by the World Bank in its 1981 report /1 and are only briefly reviewed and updated in the following paragraphs. Human Resources 5.02 The Government s intensive campaign to control population growth during the s has had remarkable results, reducing the birth rate from 33.6 per thousand in 1970 to 17.9 per thousand in However population estimates based on household registration data and the preliminary results of the 1982 population census suggest that an upward trend in the population growth rate may have emerged in the last two years. One major reason for this is a rise in the number of marriages, as the 1980 Marriage Law had the effect of voiding local regulations which had kept the marriage age substantially higher. In addition, the new responsibility systems in rural areas have raised incomes and made it easier for people to afford having children. The Government is addressing such issues by encouraging local authorities and enterprises to promote the one-child family policy with economic incentives. But keeping the Chinese population down to 1,200 million by the year 2000 (which means an average population growth rate of 1% p.a.) will still not be easy to achieve. The continuation of slow population growth remains, however, a critical element in ensuring future welfare gains and improved living standards During the s the working age population will be growing at almost 2% p.a. In addition, economic reforms in rural areas have made hidden underemployment and unemployment more open, and pressures and incentives to find new jobs and to migrate to urban areas have increased. Full employment remains a major objective of the Government, but finding /1 Report No CHA, main text and annexes.

85 productive employment opportunities for all these people will be a difficult task. There have been pressures on state enterprises to employ more people than they really require, but this is only a short-term palliative, and it will make the task of improving efficiency in the state enterprise sector more difficult. On the other hand, collective employment and self-employment have considerable potential as sources of productive employment opportunities and are now being encouraged. More generally, the pace and pattern of economic growth will have a critical bearing on the country-s ability to expand employment opportunities The pace at which China can develop remains constrained by the availability of hign-level trained manpower. Moreover, current enrollment in both universities and technical and vocational schools is one quarter of the average for other developing countries. It will take many years to alleviate this constraints In the meantime, emphasis is being placed not only on the expansion of formal undergraduate and postgraduate education, but also on nonformal tertiary education, on technical and vocational education, and on training programs of all types. Agriculture 5.05 The performance of agriculture in recent years has been very good. Despite a decline in the total cultivated area, gross agricultural output at constant prices increased by 5.7% per year between 1978 and 1981 (4.3% per year if brigade and team industry is excluded)./l Much of this increase derives from the major improvement in relative prices for agriculture and the new rural responsibility systems; thus continuation of such high growth rates is unlikely. But a reasonable growth rate of agriculture is critical: 800 million people live in rural areas and most will continue to depend on agriculture for some time to come; and rising incomes elsetwhere in the economy and the requirements of light industry will place substantial new demands on agriculture Food security and growth of domestic foodgrain production will remain critical elements in China-s agricultural strategy. The World Bank-s 1981 review of the technical possibilities implied that foodgrain production could be expanded by about 2.4% per year during the remainder of the 1980s. This figure was based on the assumption that grain yields could be increased (from 2.8 tons/ha to 3.5 tons/ha) and that there would be no further declines in the area planted to foodgrains. Since then grain yields have increased but planted area has fallen. Insufficient information is available to accurately estimate foodgrain consumption but it appears to have been growing more rapidly than projected. In these circumstances the objective of meeting both direct foodgrain requirements and a moderate /1 In this section and in the projections agriculture is defined to exclude brigade and team industry.

86 expansion in other requirements (including grain for feed) without any increase in net imports will be a very difficult task. Nongrain agriculture is likely to expand more rapidly, but an overall 3-4% growth rate for agriculture during the remainder of the 1980s will still not be easy to achieve With no possibilities for expanding the cultivated area, increases in agricultural production will have to come from improvements in agricultural systems and yields. These improvements could be brought about by increased allocations of inputs - including fertilizers, energy and equipment - to the sector, but the availability of many of these inputs and particularly energy is also constrained. The present emphasis on improved policies and management will, therefore, have to continue. Energy 5.08 The World Bank's 1981 projections of energy production and consumption showed a reduction in China's net energy exports during the remainder of this decade unless GDP growth is about 4% p.a. from 1980 to 1985 and 5% from 1985 to 1990 and energy savings are high (resulting in 1% p.a. growth of energy consumption during and 3% during ). Faster growth, even with high energy savings, would reduce energy exports and lead to net imports of energy before 1990, while with only moderate energy savings, even low growth of GDP would require energy imports before During the past three years, China appears to have slightly exceeded Bank projections of faster growth and high energy savings. GDP has probably grown somewhat faster than the 5% faster growth scenario for and commercial energy consumption has grown at only % per year, compared to a projected 2.1% per year for under faster growth and high energy savings This commendable performance suggests that China might be able to continue to attain rapid growth, but it does not alter the basic conclusion that domestic supplies of energy will be insufficient to support faster growth throughout the remainder of the decade. This conclusion is reinforced by considerations on both the supply and demand sides. Recent performance and new information on production indicate that previous energy production projections should be scaled down. The Government forecasts coal output of 700 million tons in 1985, compared to earlier projections of 727 million tons. Oil output is projected by the Government to remain at 100 million tons through 1985 and, in the projections, is assumed to fall to 95 million tons by It is also difficult to assess the degree of success in restraining demand for energy. Although consumption of energy per unit of output appears to have fallen, the key question is how much of this is due to improved energy coefficients within sectors. Faster growth of GDP in the

87 past three years has mostly come from faster growth of light industry and agriculture. Heavy industry, which is much more energy intensive, has grown roughly in line with the Bank's earlier moderate growth projections. Thus, while growth of energy consumption appears to have been very slow, much of the success in improving energy efficiency may have been due to structural change in the economy./l It remains to be seen whether efficiency improvements within sectors have been adequate to maintain high energy savings when heavy industry grows more rapidly Energy availability thus will continue to constrain growth throughout the 1980s. Since major new oil supplies will not be available until at least the end of the decade and since there is a long lead time for production of coal and hydroelectricity, overall growth of the economy will depend critically on continued success in energy conservation. Several useful initiatives to conserve energy have already been taken. These need to be supplemented by more extensive price changes to reinforce administrative measures and by development of a plan to phase out very energy-intensive production techniques in heavy industry. Industry 5.12 Industrial growth will be constrained in the future by limited supplies of energy and raw materials. Heavy industry will be more affected by the energy constraint than light industry, since its consumption of energy per unit of output is about four times greater. The supply of other raw materials, especially agricultural raw materials, will have a relatively greater impact on light industry. To the extent that manufactured exports can be increased to pay for additional imports of energy and raw materials, industrial growth also can be increased. China has recently been very successful in expanding manufactured exports, especially in the face of the world recession, and it should be able to attain the moderate export growth projections assumed by the World Bank in 1981: textiles subject to quota should be able to expand at 9% per year through 1985 and at 7% per year during , while other manufactures should be able to grow at 10% per year throughout the decade It may be difficult for light industry to continue to grow at the rapid rate of the recent past, but it should be possible to sustain a 7% growth rate throughout the remainder of the decade without running into domestic or import constraints. Heavy industry will have to grow more /1 On average, each 1% reduction in heavy industry output saves $600 million worth of energy valued at world prices, whereas each 1% expansion of light industry output uses only $175 million worth of energy. Of course, some light industries, such as sugar and paper, are more energyintensive than some heavy industries, such as machinery. Energy saving through structural change therefore requires attention to narrower categories than light and heavy industry.

88 slowly unless China can achieve high energy saving. With only moderate energy saving, and with the growth of manufactured exports projected above, heavy industry could expand at 2.5% per year through 1985 and at 5% per year from 1985 to Overall industrial growth would thus be about 4.5% through 1985, rising to about 6% in the latter half of the decade - well below historical growth rates. Higher rates of industrial growth are certainly possible but wil be dependent on a relaxation of the energy constraint, and to a lesser extent the raw material constraint. Infrastructure 5.14 The inadequate transport and commercial infrastructure is acting as an increasingly important constraint on economic development. The rapid overall economic growth of recent years would in any event have strained the capacity of transport and commercial facilities. But as a result of the Government-s reform and adjustment programs, growth has been accompanied by increased regional specialization and more emphasis on foreign trade, which together have made infrastructure constraints more acute. The port system is now operating at maximum capacity, short-haul road transport is assuming much greater importance, and there is a much increased demand for storage and marketing facilities. Alleviating these constraints and developing an adequate and efficient transportation and commercial system will require priority attention if future growth and income gains are to be realized. Financial Resources 5.15 Maintenance of a satisfactory rate of growth in the late s and s requires major investments in energy and transport and modernization and efficiency improvements in industry. At present however investments in many of these key productive areas are caught between the Government-s desire to reduce the overall investment rate (in order to accelerate consumption), the competing claims of sectors such as housing and decentralization of financial resources and decision making, without other systemic changes, which has resulted in a loss of control by the central government over part of the investment program and in resources being used for relatively low priority projects. Institutional and policy measures to address these issues and improve the composition of the investment program need to be developed. China also has the option easing some of the constraints on the investment program by making more use of foreign financial resources. In addition to the resources available as a result of the current account surpluses of the last two years, China can expect to receive some concessional assistance from Japan, from the World Bank Group and from certain other multilateral and bilateral donors as well as being able to borrow from commercial sources.

89 The Sixth Five Year Plan ( ) B. Macroeconomic Prospects 5.16 Covering the period , China's Sixth Five Year Plan was officially promulgated in December 1982, after a lengthy period of preparation. The abridged version of the plan, published during the Fifth Session of the Fifth National Peoples Congress, takes account of the constraints and strengths of the Chinese economy. Targets are set for all sectors of the economy and include efficiency objectives and financial goals as well as detailed physical production plans. The plan emphasizes continuation of the program of "adjustment, reform, consolidation and improvement of the national economy." With the exception of energy output most of the goals set are very modest relative to the economy's performance in recent years (Table 5.1). Table 5.1: SELECTED SIXTH FIVE YEAR PLAN TARGETS (% growth per annum) Sixth five year Actual result Item plan target /a ( ) National income /b Gross industrial output value Gross agricultural output value Grain output Coal output Crude oil output Electricity output Yarn Sugar Bicycles Television sets Steel Chemical fertilizer Cement Machine tools /a Based on preliminary figures for J Assumes a 6.0% growth rate of national income in Source: Sixth Five Year Plan and State Statistical Bureau.

90 The target growth rates for national income and agricultural /1 and industrial production at constant prices are all 4% per year. Consumption is expected to rise faster than investment, major efforts will be made to keep the population growth rate under 1.3% per year, and per capita consumption is targeted to rise by 4.1% per year. In keeping with the continued emphasis on reducing urban-rural disparities, people living in cities and towns will get an average annual increase of 3.2% and those in the countryside 4.2%. Within agriculture cash crops, livestock and rural industry and sideline production are expected to grow the most rapidly, while the target growth rate for grain production is 2.4% per year. With chemical fertilizer production not expected to expand as rapidly as in the 1970s, emphasis will continue to be placed on improvements in efficiency of input use and better economic results. Industrial growth may be constrained because energy output cannot be increased significantly in the near future (the target annual growth rate is only 1.4%) and the pressures on the transport system will take some time to relieve. Heavy industry is targeted to grow by 3% per year and light industry by 5% per year; as in agriculture major emphasis will be placed on efficiency improvements, especially energy conservation During the Sixth Plan period total fixed investment by the state sector is targeted at Y 360 billion, of which Y 230 billion (or Y 46 billion per year) would be capital construction investment and Y 130 billion (Y 26 billion per year) would be investment in the renovation and modernization of fixed assets. The proportion of total state investment accounted for by renovation and modernization investment is much higher than in previous plan periods and reflects the priority being given to industrial transformation. Within state capital construction energy and transport are the priority sectors and the shares of resources going to them have been increased slightly over earlier years (see Table 5.2). Housing investments will also continue to receive priority. On the other hand, the shares of agriculture and light industry are projected to fall somewhat To help finance these and other priority expenditures the plan forecasts a reversal in the recent downward trend in state revenues. The target for annual budgetary revenue growth in is 3.3%, for expenditure growth 1.5%. In addition to capital construction expenditures the plan emphasizes increased expenditures on education, science and public health and special programs for minority nationality and economically underdeveloped areas. Through increased revenues as well as strict control of expenditures the plan is to keep the annual budget deficit below Y 3 billion. Though some revisions in prices are expected to take place, the objective will be to keep the general level of market prices basically stable. Emphasis will continue to be placed on expanding foreign trade: in /1 The plan target for agriculture includes the output of brigade and team industry.

91 Table 5.2: STATE CAPITAL CONSTRUCTION INVESTMENT BY SECTOR (% of total) Sector (actual) (actual) (plan) (actual) Energy /a 21.2 of which: power Coal Petroleum Other Heavy Industry of which: Metallurgy Chemicals Light Industry of which: Textiles n.a. 4.6 Food n.a. 2.2 Transport & Communications of which: Railways Agriculture, etc Other Total /a Includes an allocation for major energy savings measures; data on this item is not available separately for Source: Sixth Five Year Plan and State Statistical Bureau. real terms exports are expected to grow by 8.1% p.a. and imports by 9.2% p.a. over the plan period. Efforts to use foreign loans efficiently and to encourage direct foreign investment and the setting up of joint ventures will also be continued and the role of coastal provinces and cities, including Shanghai and Tianjin as well as Guangdong and Fujian, in expanding foreign trade will be stressed.

92 The Government views the Sixth Plan Period has an interim period during which important readjustments and reforms of the economy will be undertaken. These will lay the foundation for more rapid economic development during subsequent plan periods. Despite the very strong performance of the economy in 1982 the Government recognizes that major inefficiencies remain and that priority should continue to be given to improving efficiency rather than maximizing gross production. Accordingly the overall targets for the Sixth Plan Period will not be revised, but there is every expectation that, with continued progress on adjustment and reform, many of the targets will be exceeded. Scenarios for the 1980s 5.21 An attempt has been made to simulate some of the options facing the Government during the remainder of the 1980s by applying the Bank's revised minimum-standard model to China./l Many simplifying assumptions have had to be made, and the projections should be viewed as providing indications only of broad magnitudes and trends. Of crucial importance for the projections are the assumptions about growth of manufactured exports, energy production and conservation and the pace at which imports of capital and intermediate goods will be permitted to rise. Table 5.3 presents selected indicators assuming low growth and moderate energy savings. GDP is assumed to grow at 4% per year throughout the rest of the Sixth Five Year Plan period and by 5% per year after Agriculture (excluding brigade and team industry) is projected to grow at only 3% per year throughout the remainder of the decade, while light industry would continue to grow more rapidly than heavy industry. The share of investment in GDP would decline steadily from 29% in 1981 to 27.5% in 1985 and 25% in The overall efficiency of investment, as measured by incremental capital-output ratios might worsen initially as a result of the growing share of nonproductive investment but would then improve. Overall export growth would be low due to a decline in energy exports, but textile and other manufactured exports would continue to grow rapidly. Imports of energy would begin in about 1988 and increase rapidly until The result would be an overall growth rate of 4-5% per year and a somewhat faster rate of growth of consumption. The current account would move into deficit, due mainly to the change in the net energy situation, but the debt service ratio would remain quite low due to the large balance of payments surplus and low debt which presently exist. /1 This model is essentially an accounting framework for the national accounts and the balance of payments, with special attention to flows resulting from foreign borrowing. It is not designed to address many of the major domestic issues, such as urban-rural imbalances. Annex 2 provides information on the assumptions made by the World Bank in converting Chinese data from the system of material production to the UN system of national accounts.

93 Table 5.3: EFFECTS OF LOW GROWTH AND MODERATE ENERGY SAVINGS, Total GDP growth (% p.a. constant prices) Agriculture /a 4.3/b Light industry 14.o7b Heavy industry 1.47b Consumption growth (% p.a. constant prices) Investment growth (" ) Incremental capital-output ratio 5.4 /c 5.7 /d 5.3 /d Export growth (% p.a. constant prices)/e Import growth (% p.a. constant prices)7e Resource gap ($ billion) /f Current account ($ billion)/f Current account (% GDP)/f Debt service ratio (% of exports of goods and services)/f /a Excluding brigade and team industry. 7T Rate of growth of gross output. 7W For period W Five year averages. 7e Includes both goods and nonfactor services. 77 In final year of the period Could China afford to aim for a higher overall rate of economic growth and a more rapid increase in living standards throughout the remainder of the 1980s? Without substantial efficiency improvements (especially in energy consumption) and other policy changes the answer is probably no. As Table 5.4 demonstrates, even 1% per year higher growth would, on its own, mean an increased demand for energy and a rapid deterioration in the balance of payments. Without major increases in concessional assistance beyond what is now being forecast (a most unlikely event),/l the debt service situation would rapidly become unsustainable. /1 The projections are based on the assumption that concessional assistance commitments would total $1.3 billion in 1985 and $1.8 billion in 1990.

94 Table 5.4: EFFECTS OF MODERATE GROWTH AND MODERATE ENERGY SAVINGS, Total GDP growth (% p.a constant prices) Agriculture /a 4.3/b Light industry 14.0/b Heavy industry 1.4/b Consumption growth (% p.a. constant prices) Investment growth (% p.a. constant prices) Incremental capital-output ratio 5.4 /c 5.1 /d 4.4 /d Export growth (% p.a. constant prices)/e /g 7.8 Import growth (% p.a. constant prices)/e Resource gap ($ billion) /f Current account ($ billion)/f Current account (% GDP)/f Debt service ratio (% of exports of goods and services)/f /a Excluding brigade and team industry. /b Rate of growth of gross output. 7c For period /d Five year averages. /e Includes both goods and nonfactor services. /f In final year of the period. /g This figure is much below the corresponding figures in Table 5.3 because of a more rapid decline in energy exports In recent years, however, China has been achieving average GDP growth rates of over 5% and the Government has demonstrated its capacity to successfully implement adjustment and reform measures that have increased efficiency and facilitated growth while maintaining overall stability. As Table 5.5 shows, further efficiency improvements, particularly continued increased efficiency in energy use at the rate apparently achieved in the past three years, would permit the economy to grow at 6-7% during the remainder of the 1980s while still maintaining a debt service ratio below 15%. A sustained rate of efficiency improvement would however require a major effort on the part of the Government in accelerating the program of adjustment and reform. A large part of the efficiency improvement to date has come from the

95 restoration of economic management after many years of disruptions and from easier means of energy saving such as adjusting the ratio between light and heavy industry. Such opportunities for improvement are being quickly exhiausted and further improvement will have to come from greater efficiency within subsectors and enterprises. Table 5.5: EFFECTS OF HIGH GROWTH AND HIGH ENERGY SAVINGS, Total GDP growth (% p.a constant prices) Agriculture /a 4.3/b Light industry 14.07b Heavy industry 1.4/b Consumption growth (% p.a. constant prices) Investment growth (% p.a. constant prices) Incremental capital-output ratio 5.4 /c 4.6 /d 3.8 /d Export growth (% p.a. constant prices)/e Import growth (% p.a. constant prices)7e Resource gap ($ billion)/f Current account ($ billion)/f Current account (% GDP) /f Debt service ratio (% of exports of goods and services)/f /a Excluding brigade and team industry. /b Rate of growth of gross output. /c For period T Five year averages. / e Includes both goods and nonfactor services. /f In final year of the period.

96 Whatever the actual pace of import expansion and overall growth China's requirements for foreign capital can be expected to increase greatly during the remainder of the 1980s. Current account deficits should remain low as a percentage of GDP (1-2% by 1990) but they will be high in absolute terms ($3 billion in 1985 rising to $7 billion in 1990 under a scenario of low growth and moderate energy savings and $4 billion in 1985 rising to $16 billion in 1990 under a scenario of high growth and high energy savings). To finance such deficits total foreign borrowing commitments will need to increase from $5 billion in 1985 to $11 billion in 1990 under low growth and moderate energy savings and from $6 billion in 1985 to $22 billion in 1990 under high growth and high energy savings. Given the constraints on concessional assistance most of the expansion in foreign borrowing will have to come from commercial sources The three scenarios also demonstrate the fragility of China's overall balance of payments situation and its sensitivity to assumptions about economic trends and policy developments. Even very small changes in assumptions about production and consumption of energy, for example, can make a very large difference to energy import requirements and the current account deficit, as the moderate growth and moderate energy savings scenario demonstrates. In these circumstances the Government will need to remain cautious in its import and foreign borrowing strategy during the remainder of the 1980s. The present situation of current account surpluses can be expected to change quickly to one of moderate current account deficits as imports of capital and intermediate goods are expanded. By the late 1980s some imports of energy also appear to be necessary before new domestic production capacity is established. However, the overall rate of import expansion and the overall rate of economic growth are crucially dependent not only a continued good performance of manufactured exports (which are assumed to grow at nearly 10% p.a. in real terms through the remainder of the 1980s) but also on the rate at which efficiency, especially energy efficiency, can be improved. The Government will need to monitor developments in these areas closely and adjust its import and foreign borrowing strategy accordingly. A high rate of economic growth (6-7% p.a.) will probably only be feasible if major improvements in energy efficiency continue to be achieved. C. Prospects for Economic Reform 5.26 The brief review of macroeconomic prospects shows clearly that improvements in the efficiency with which inputs are converted into outputs can ease some of the short- and medium-term constraints to development, thereby helping China to achieve a higher rate of economic growth and a more rapid improvement in living standards. The same is true of measures that bring about stronger links between demand and supply and alleviate market disequilibrium. The primary goal of China's economic reform program is to improve efficiency at both micro and macro levels, which would allow higher growth rates and higher living standards.

97 Based on efficiency criteria, the reforms implemented to date appear to have been most successful in agriculture and the rural sector. But it remains to be seen whether the strengths of the commune system in terms of meeting basic needs can be retained while further efficiency improvements are promoted (see paras ). In other sectors progress appears to have been somewhat slower and difficulties have emerged because of the absence of certain key reforms. In industry, there have been difficulties in achieving appropriate levels and structures of investment and in ensuring responsible use of enterprise funds (see paras ). In commerce, the expansion of the role of the market has had beneficial results, but improvements in efficiency have been hampered by distorted relative prices and by administrative interference (see paras ). In foreign trade, reforms have played an important role in increasing exports over the past several years, but this may have resulted in some suboptimal patterns of trade (see paras ). In government finance, the 1980 budgetary devolution has provided additional incentives to provincial and local governments, but there have also been imbalances in central-local finances (see paras ), as well as increasing difficulties in controlling locally-financed investments. In the area of overall investment planning there is still inadequate analysis of major projects, and credit financing of investment has not yet resulted in major efficiency improvements. It also appears that the banking system has not yet been given the de facto authority and responsibility it needs for its role in a post-reform situation (see paras ) The emergence of these and other problems during reform implementation by no means signifies that reforms should be rescinded or significantly weakened. Rather, it supports the Government's emphasis on more careful study of the crucial linkages among reforms in different sectors and on correct timing in the introduction of new reforms. In some areas, partial reforms can proceed independently, while in others they must await successful implementation of reforms elsewhere in the economy The Government's strong commitment to economic reforms is evident in recent policy pronouncements. Reform implementation in some areas is to be speeded up during the next three years. Future measures will build upon the experience gained during the initial stages of reform. Successful reforms will be continued, expanded and consolidated, while in sectors where reforms so far have been less successful, widespread experimentation will be encouraged to help determine which policy measures are likely to prove most effective. All in all reform implementation will continue to move forvward in the near future, rapidly in a few selected areas, cautiously and on a step-by-step basis in other areas Building on their earlier success, rural reforms are to be broadened and strengthened. Production responsibility systems will be extended to new spheres of activity. Combinations (formed by small groups of peasants pooling their assets) and joint ventures between rural collectives or individuals and urban state-owned enterprises will be encouraged. Finally, the people's communes will be transformed into

98 purely economic entities and their governmental functions will be transferred to village-level government administrative bodies. This should help minimize bureaucratic intervention in rural economic decision making In state-owned industry the Government's strategy reflects the fact that earlier reforms have not been as successful as those in agriculture and that certain problems have emerged. Among the numerous financial incentive schemes tried out during the past few years (see para. 4.26), the various experiments replacing enterprise profit remittances to the state budget with tax payments are deemed to have been the most successful. In modified form they will be greatly expanded in scope during the rest of the Sixth Five Year Plan period. Universal implementation of a progressive income tax system for state enterprises will have to await comprehensive price reform, however. To improve coordination, the system of industrial administration will be revamped and streamlined. Most industrial enterprises will be placed under the jurisdiction of the city in which they are located, and the number of layers of higher-level supervisory management will be reduced. More forceful attempts will be made to close down inefficient plants and make enterprises take more responsibility for their decisions, and great stress is put on technological modernization of Chinese industry, primarily by means of more extensive and long-term planning and large imports of foreign technology./l 5.32 The commercial system received less attention than production sectors in the early stages of reform implementation. But it is now recognized that an unreformed commercial system can render reforms in both industry and agriculture less effective. An independent, efficient and flexible commercial system can force industrial enterprises to take the consequences of their decisions (both good and bad) and bear more responsibility for the quality and marketability of their products. In the light of these considerations, the commercial sector will be a focus of reform activities during the next three years. The state commercial system will be streamlined and more extensive commodity flows will be encouraged. Development of collective and individual commerce, particularly in rural areas, will be promoted. The commercial system will also try to improve its market forecasting in order to ensure smoother adjustments to changes in demand and supply conditions The stimulation of excessive investment demand on the part of local governments and enterprises has perhaps been the worst adverse side effect of administrative and fiscal decentralization. A related problem is continuing inefficiency of investment. In the short term the Government plans to deal with these problems primarily through more effective implementation of administrative regulations: all investment in fixed assets will be subject to overall balancing by the State Planning Commission (with large and /1 The State Economic Commission has already drawn up a plan for importing 3,000 items of advanced technology in the next three years to further technical transformation of existing enterprises, particularly small- and medium-sized ones.

99 medium-sized capital construction projects requiring direct SPC approval); no projects will be permitted to start construction or even be included in annual plans without prior feasibility studies and technical and economic appraisal; and the use of capital construction funds will be closely supervised by the People's Construction Bank of China. But improving the structure and efficiency of investment will be a long and difficult process, very much dependent on progress on other aspects of reform. Pending price reform it is especially important that planning agencies and banks at national and local levels undertake formal economic analysis of investment projects (using shadow prices) as well as financial analysis. Attention also needs to be paid to the relative responsibilities of administrative and producing units in investment decision-making at the local level: administrative units may sometimes have a broader prospective than producing units, but producing units can be made more economically and financially responsible for their decisions through appropriate pricing and incentive systems It is well recognized in China that many of the problems encountered by reforms are caused by the still largely unreformed price system. Reform efforts so far have stressed decentralization of decision-making authority and greater use of financial incentives. But with decentralized decision making it is important that prices reflect relative scarcity values in the economy so that the information enterprises use in making decisions is accurate. Material incentives also need to bear some meaningful relationship to actual effort and the efficiency of decisions taken. Inappropriate relative prices, through their effects on profits, can cause inequities in material rewards for different types of economic activities, with consequent harm to the incentives that are supposed to be fostered by reforms. In addition markets do not function well in disequilibrium, and some price flexibility is needed to achieve demand-supply balance. Given the complexities of price reform, the magnitude of the changes that will be needed and the importance of extensive preparatory work, the Government has decided that it will not be possible to implement comprehensive price reform until after However, appropriate upward or downward adjustments in the most distorted prices can and will be made and the prices of many minor commodities will be allowed to fluctuate according to market conditions. These are all steps forward in what is likely to be a gradual process of price reform that will need to take account of the scope for "unfreezing" of prices and how state determined prices should relate both to domestic costs and to world prices. D. Concluding Remarks 5.35 The 1980s is a difficult period of transition for China. But during the past few years the Government's programs of adjustment, reform and stabilization have achieved very significant results. In fact in terms of production and growth, efficiency improvements and stability (as measured by budgetary and current account deficits) the achievements have generally been greater than expected. Nonetheless China is still a very poor country and its investment and modernization requirements are enormous. To help meet

100 these requirements and ensure continued growth and improvements in living standards it is important that the Government continue with its program of structural adjustment (including an expansion in foreign trade and borrowing), and with its program of economic reform that will help improve the overall efficiency of the Chinese economy. Continued effective implementation of these programs should help ensure a reasonable rate of growth during the remainder of the s while helping set the stage for more rapid growth and development in the l 9 9 0s.

101 ANNEX 1 Page 1 RESTRUCTURING OF THE COMMISSIONS AND MINISTRIES OF THE STATE COUNCIL New Organizations Former Organizations Ministry of Foreign Affairs Ministry of National Defense State Planning Commission State Economic Commission Ministry of Foreign Affairs Ministry of National Defense State Planning Commission State Economic Commission State Agricultural Commission State Machine Building Industry Commission State Energy Commission Ministry of Building Materials Industry State Administration of Standards State Bureau of Metrology and the Patent Bureau State Commission for Restructuring the Economic System State Scientific and Technological Commission State Nationalities Affairs Commission Ministry of Public Security Ministry of Civil Affairs Ministry of Justice Ministry of Finance State Scientific and Technological Commission State Nationalities Affairs Commission Ministry of Public Security Ministry of Civil Affairs Ministry of Justice Ministry of Finance

102 _ 86 - ANNEX 1 Page 2 New Organizations Former Organizations People's Bank of China Ministry of Commerce Ministry of Foreign Economic Relations and Trade Ministry of Agriculture, Animal Husbandry and Fishery Ministry of Forestry Ministry of Water Conservancy and Power Ministry of Urban and Rural Reconstruction and Environmental Protection Ministry of Geology and Minerals Ministry of Mettalurgical Industry Ministry of Machine Building Industry Ministry of Nuclear Industry Ministry of Aviation Industry People's Bank of China Ministry of Commerce, All-China Federation of Supply and Marketing Cooperatives and the Ministry of Food State Administrative Commission on Import and Export Affairs Ministry of Foreign Trade, Ministry of Economic Relations with Foreign Countries and State Foreign Investment Commission Ministry of Agriculture, Ministry of State Farms and Land Reclamation and the State Administration of Aquatic Products Ministry of Forestry Ministry of Water Conservancy, Ministry of Power Industry State Capital Construction Commission State Administration of Urban Construction General Administration of Building Construction and the National Bureau of Surveying and Mapping Ministry of Geology Ministry of Metallurgical Industry First Ministry of Machine-Building, Ministry of Agricultural Machinery State Bureau of Instruments and Meters Industry and National Bureau of Equipment for Complete Industrial Plants Second Ministry of Machine-Building Third Ministry of Machine-Building

103 ANNEX 1 Page 3 New Organizations Former Organizations Ministry of Posts and Telecommu- nications Ministry of Electronics Industry Ministry of Ordnance Industry Ministry of Space Industry Ministry of Coal Industry Ministry of Petroleum Industry Ministry of Chemical Industry Ministry of Textile Industry Ministry of Light Industry Ministry of Railways Ministry of Communications Ministry of Posts and Telecommunications Ministry of Labor and Personnel Ministry of Culture Ministry of Radio and Television Fourth Ministry of Machine-Building National Bureau of Radio and Television Industry State Administration of Computer Industry Fifth Ministry of Machine-Building Seventh Ministry of Machine-Building Ministry of Coal Industry Ministry of Petroleum Industry Ministry of Chemical Industry Ministry of Textile Industry Ministry of Light Industry Ministry of Railways Ministry of Communications State Bureau of Labor State Bureau of Personnel Bureau of Scientific and Technological Personnel under the State Council Commission on the Composition of Government Organizations Ministry of Culture Commission for Cultural Relations with Foreign Countries National Publishing Administration State Administration of Museums and Archaeological Data Foreign Language Publishing and Distribution Administration Central Broadcasting Administration

104 - 88 ANNEX 1 Page 4 New Organizations Former Organizations Ministry of Education Ministry of Public Health State Physical Culture and Sports Commission State Family Planning Commission Ministry of Education Ministry of Public Health State Physical Culture and Sports Commission State Family Planning Commission

105 ANNEX 2 CHINA COUNTRY ECONOMIC MEMORANDUM Conversion of Macroeconomic Statistics This annex contains a set of working tables which have formed the basis for some of the analysis in the main text. The tables have been compiled using information from the Statistical Appendix and other information and assumptions as footnoted. As working tables, they provide only rough orders of magnitude and indications of trends and are much less reliable than most of the tables in the Statistical Appendix itself. Most of the assumptions made are similar to those made in the World Bank's first economic report (Report No CHA, Annex A).

106 ANNEX 2 Table I CHINA COUNTRY ECONOMIC MEMORANDUM Gross and Net Output at Current and Constant Prices (Y billion; 1970 = base) Agriculture Gross output at constant prices Net output at current prices Gross output at current prices /a Inputs at current prices Inputs at constant prices /b Net output at constant prices (double deflation) Net output at constant prices (single deflation) Net output as % of gross output (at current prices) Industry Gross output at constant prices Net output at current prices Gross output at current prices /a Inputs at current prices Inputs at constant prices /b Net output at constant prices (double deflation) Net output at constant prices (single deflation) Net output as % of gross output (at current prices) Other Sectors Net output at current prices Net output at constant prices /c Net output at constant prices Total NMP Net output at current prices Net output at constant prices /a Data for 1970 and 1980 from Statistical Appendix, Table 2.5; data for other years based on estimates of the relationship between net and gross output at current prices. /b For information on deflators see Annex 2, Table 2 7T Residual after taking account of agriculture and industry (both double deflated). /d Residual after taking account of agriculture and industry (both single deflated.

107 ANNEX 2 Table 2 CHINA COUNTRY ECONOMIC MEMORANDUM Implicit Deflators (1970 = 100) Agriculture Gross output/a /d InpuLs /b Net output Industry Gross output /a /e Inputs /c Net output NMP Deflator /a From Annex 2, Table 1 or other assumptions, as noted. /b Combination of gross output deflators for agriculture and industry with weight attached to industry deflator of /c Combination of gross output deflators for agriculture and industry with weight attached to agriculture deflator of /d Increase based on change in agricultural procurement price index. /e Based on assumption of no change in prices between 1980 and 1981.

108 ANNEX 2 Table 3 CHINA COUNTRY ECONOMIC MEMORANDUM Net Material Expenditure at Current Market Prices (Y billion) Net fixed investment n.a. Circulating assets n.a. Total net investment Material consumption Investment and consumption Foreign material trade /a balance NMP estimated from expenditure side Residual error /b Net material product /a Exports of goods - imports of goods. /b This is included with consumption when consumption growth rates are calculated in the main text.

109 ANNEX 2 Table 4 CHINA COUNTRY ECONOMIC MEMORANDUM Net Material Expenditure at Constant Prices (1978 = base) (Y billion) Total net investment /a Material consumption /b Investment and consumption Foreign material trade balance /c NMP estimated from expenditure side Residual error /d Net material product /a Deflator for :Lnvestment:gross output deflator for industry. lb Residual. /c Deflator for foreign material trade balance: NMP deflator. /d This is included with consumption when consumption growth rates are calculated in the main text.

110 ANNEX 2 Table 5 CHINA COUNTRY ECONOMIC MEMORANDUM Breakdown of Material Consumption at Current Prices (billion yuan) Total material consumption Government /a Rural private /b Urban private lb /a Assumed to decline from 10% of material consumption in 1978 to 8.5% in /b Based on 1979 breakdown between rural and urban of 0.74 and 0.26 (urbanrural income ratio of 2 and rural and urban population shares of 87% and 13%); urban consumption changes based on per capita income changes in urban areas and assuming a small increase in the proportion of the population in urban areas; rural consumption is the residual.

111 ANNEX 2 Table 6 CHINA COUNTRY ECONOMIC MEMORANDUM Breakdown. of Material Consumption at Constant Prices (Billion Yuan) (1978 = Base) Total material consumption Government /a Rural private /b Urban private 7S Deflators (1978 = 100) Total material consumption Rural consumption Urban consumption /a Deflator assumed to be same as for material consumption. /b Urban deflaltor assumed to be retail price index: residual is rural deflator.

112 ANNEX 2 Table 7 CHINA COUNTRY ECONOMIC MEMORANDUM Alternative Estimates of Growth of Per Capita Rural Incomes, Annual % change, National Accounts Total rural consumption /a (current prices) 14.2 (constant prices) 8.3 Total rural savings /b (current prices) (constant prices) Total rural population /c 0.8 Per capita rural incomes /d (current prices) 17.7 (constant prices) 12.1 SSB Survey of Rural Incomes Per capita income at current prices 15.5 Rural consumption deflator /e 5.5 Rural expenditure deflator - Cash /f Kind /g Total /h 6.6 Real per capita rural income (using consumption deflator) 12.3 (using expenditure deflator) 11.3 Rural Production and Terms of Trade Total agricultural production (constant prices) 5.7 Total rural production (constant prices) /i 7.0 Per capita rural production (constant prices) 6.2 Income deflator /j 11.5 Expenditure deflator 6.6 Terms of trade change /k 4.6 Real per capita rural income 11.1 /a Based on data on material consumption in Tables 5 and 6. /b Includes both increase in savings deposits and increase in cash in circulation. /c Based on total population estimates and on small increase in the share of urban population in total population from 12.5% in 1978 to 13.9% in /d Assuming that consumption accounts for about 95% of income. /e From Table 6. /f Rural market price index. Tg Agricultural procurement price index. /h Using weights of 0.48 and 0.52 for cash and kind expenditures respectively. /i Takes account of rapid output growth of commune enterprises which are not included in agricultural production. /j Agricultural procurement price index. /k Income deflator divided by expenditure deflator.

113 ANNEX 2 Table 8 CHINA COUNTRY ECONOMIC MEMORANDUM Investment at Current Prices (Y billion) Net investment Depreciation /a Minus defense investment /b = Gross investment Gross fixed investment n.a. Changes in stocks /c n.a. /a Includes rural housing; the ratio of depreciation to NMP is assumed to rise from 5.8% in 1970 to 6.4% in 1977 and then remain at 6.4% through /b Assumed to be half of reported defense expenditures in Statistical Appendix Table 5.6. /c Changes in stccks: based on assumption that defense investment has same ratio of stocks to fixed investment as total net investment; residual is gross fixed investment.

114 ANNEX 2 Table 9 CHINA COUNTRY ECONOMIC MEMORANDUM State Budget Accounts, (Y billion) (preliminary) Revenue Official accounts Less revenue derived from foreign loans /a Less revenue from Treasury bond sales Plus revenue used for subsidies n.a Total Domestic Revenues n.a Expenditures Official accounts Less repayments on foreign loans Less interest payments on loan from PBC /b Plus expenditures on subsidies n.a Total Domestic Expenditures Budget Deficit Official accounts Deficit after elimination of financing items /a Before 1980, income from foreign loans was valued at the official foreign exchange rate was a transitional year in which a number of different exchange rates were used (the average was Y2 to US$1), while in 1981, the internal settlement rate (Y2.8 to US$1) was used. On the expenditure side, the corresponding item "expenditures on capital construction from foreign loans" is valued at cost to recipient before 1981, and at the internal settlement rate in Therefore, the expenditure figures before 1981 include some profits and taxes generated in the foreign trade and commercial systems, which on the revenue side are put in the various domestic revenue items. Since these "revenues" would not have existed in the absence of the foreign borrowing and associated import of capital goods, it is appropriate to subtract them from the revenue figures in the official accounts. This is done by evaluating the income from foreign borrowing at the amount of the corresponding expenditure item. This mode of calculation results in consistency between the 1981 accounts and those of earlier years. /b It is assumed that such payments started only in 1981 and applied only to the 1980 bank loan of Y 8 billion (at 6% annual interest), not the overdraft of 1979.

115 ANNEX 2 Table 10 CHINA COUNTRY ECONOMIC MEMORANDUM Reconciliation of Trade Data ($ million) Exports Bank of China basis /a 9,512 13,123 17,509 20,558 Compensation trade ,250 Adjustment 1.0% Customs Exports 9,607 13,658 18,492 22,027 Imports Bank of China basis /a 11,399 16,169 21,675 19,998 Compensation trade ,250 Joint venture and grants Minus cancellation fees Subtotal 11,399 16,569 22,535 21,517 Adjustment 2.8% Customs Basis, c.i.f. 11,718 17,033 23,166 22,129 C.i.f. factor 8.3% 973 1,414 1,923 1,837 Of which, paid to residents (438) (636) (887) (823) Customs Basis, f.o.b. 10,745 15,619 21,243 20,292 /a From foreign exchange balance. Sources: Bank cf China and IMF estimates.

116 ANNEX 2 Table 11 CHINA COUNTRY ECONOMIC MEMORANDUM Invisibles ($ million) Shipment of freight Credit Debit ,187-1,181 Other transportation Credit Debit Insurance Credit Debit Port dues, ship chandlering, etc. Credit Debit Travel receipts Credit Debit Bank interest and charges Credit Debit Other services /a Credit Debit Total Services Credit 999 1,693 2,409 3,130 Debit -1,167-1,963-2,703-3,336 Net Private unrequited transfers Credit Debit Public unrequited transfers Credit Debit Net Unrequited Transfers Net Invisibles /a 30% of these services are assumed to be factor services. Sources: Bank of China and IMF estimates.

117 ANNEX 2 Table 12 CHINA COUNTRY ECONOMIC MEMORANDUM Capital Account ($ million) Credit Debit Net Credit Debit Net Long-Term Capital Direct investment Stocks and bonds _ - -_ -9 Official loans Energy loans Buyers credit Interbank loans - 1, Deferred payments Nonbank borrowing Due payments for processing, etc Foreign credit extension Repayment Others Total credit 70 1,435 2,524-2,524 1,637-1,637 Total debit ,431-1,431 Long-Term Capital (Net) , Short-Term Capital Deferred payments (net) Deferred receipts (net) Short-term bank borrowing (net) 173 1, Bilateral payments assets Short-Term Capital (Net) , Total Capital -1,071 2,376 1, Sources: Bank of China and IMF estimates.

118 ANNEX 2 Table 13 CHINA COUNTRY ECONOMIC MEMORANDUM Gross Value of Agricultural Output at Constant 1970 Prices by Subsector (billion yuan) Crops Forestry Animal husbandry Fisheries Subtotal Sideline production Total

119 ANNEX 2 Table 14 CHINA COUNTRY ECONOMIC MEMORANDUM Brigade and Team Industry (Y billion) Gross Output Constant pric:es /a Current prices lb Net Output Current prices /c /a Data provided by SSB. /b Based on information supplied by SSB for and an implicit gross output deflator for industry for Same deflator used in 1981 as in /c Gross outpujt at current prices multiplied by 0.3 (ratio applied by SSB in estimating net output of commune industry).

120 ANNEX 2 Table 15 CHINA COUNTRY ECONOMIC MEMORANDUM From NMP to GDP at Market Prices (Y billion) /a 1977 Non- Brigade Social Depre- material NMP ind. services ciation services Rent GDP Agriculture Industry Construction Transport Commerce Nonmaterial services Total /a For information on the assumptions made in converting NMP data to GDP in this and subsequent tables see Report No CHA, Annex A.

121 ANNEX 2 Table 16 CHINA COUNTRY ECONOMIC MEMORANDUM From NMP to GDP at Market Prices (Y billion) 1978 Non- Brigade Social Depre- material NMP Ind. services ciation services Rent GDP Agriculture Industry Construction Transport Commerce Nonmaterial services Total

122 ANNEX 2 Table 17 CHINA COUNTRY ECONOMIC MEMORANDUM From NMP to GDP at Market Prices (Y billion) 1979 Non- Brigade Social Depre- material NMP Ind. services ciation services Rent GDP Agriculture Industry Construction Transport Commerce Nonmaterial services Total

123 ANNEX 2 Table 18 CHINA COUNTRY ECONOMIC MEMORANDUM From NMP to GDP at Market Prices (Y billion) 1980 Non- Brigade Social Depre- material NMP Ind. services ciation services Rent GDP Agriculture Industry Construction Transport Commerce Nonmaterial services Total

124 ANNEX 2 Table 19 CHINA COUNTRY ECONOMIC MEMORANDUM From NMP to GDP at Market Prices (Y billion) 1981 No n- Brigade Social Depre- material NMP Ind. services ciation services Rent GDP Agriculture Industry Construction Transport Commerce Nonmaterial services Total

125 ANNEX 2 Table 20 CHINA COUNTRY ECONOMIC MEMORANDUM GDP by Sector at Current Prices (Billion Yuan) Agriculture Industry Construction Transport Commerce Nonmaterial services Total

126 ANNEX 2 Table 21 CHINA COUNTRY ECONOMIC MEMORANDUM GDP by Sector at Constant Prices (Billion Yuan; 1978 = Base) Agriculture Industry Other Total Deflators (1978 = 100) Gross domestic product /a Agriculture /b Industry /c Other sectors /d /a Implicit NMP deflator. /b Net output deflator for agriculture from Annex, Table 2. /c Net output deflator for industry from Annex 2, Table 2. /d Residual.

127 - ill - ANNEX 2 Table 22 CHINA COUNTRY ECONOMIC MEMORANDUM National Accounts Summary in Constant Yuan (Y billion; 1978 = Base Year) Gross domestic product Terms of trade effect Gross domestic income Resource gap (5-6) Import (g + nfs) Capacity to import (Exports (g + nfs)) Total Expenditures Consumption General Government n.a. n.a. n.a. n.a. 11. Private n.a. n.a. n.a. n.a. 12. Investment Fixed investment n.a. n.a. n.a. n.a. 14. Changes in stocks n.a. n.a. n.a. n.a. 15. Domestic savings Net factor income Current transfers National savings Yuan deflators (1978=100) 19. Gross domestic product /a Imports (g + nfs)/b Exports (g + nfs)/c Total expenditures /d Consumption /e Investment If /a Implicit NMP deflator. /b Import pric:e index (chain). /c Export price index (chain). /d Combination of 19, 20 and 21. 7Te Residual. If Gross outpult deflator for industry from Annex 2, Table 2.

128 ANNEX 2 Table 23 CHINA COUNTRY ECONOMIC MEMORANDUM Estimates of GNP (Y billion at current prices) GDP. (current prices) Net factor income from abroad GNP (current prices) Implicit NMP deflator (1978 = 100) GNP (constant 1978 prices) Exchange rate

129 STATISTICAL APPENDIX Table of Contents Table No. SECTION I - POPULATION, EMPLOYMENT, INCOMES 1.1 Population and Vital Statistics, Population by Province, Birth and Death Rates for Urban and Rural Areas, Percent of Population in Cities, by Province, Labor Force and Employment, Wages of Staff and Workers, Employment and Wages by Branch of (State-Owned) Industry, Distribution of Collective Income, Distribution of Collective Foodgrains, 1979/ Average Distributed Collective Income, SECTION II - NATIONAL ACCOUNTS 2.1 National Accounts Summary in Current Prices 2.2 National Accounts Summary in Constant Prices 2.3 Net Material Product, Net Material Expenditure Shares, Sectoral. Gross Output at Constant Prices, Composition of State Capital Construction Expenditure, Capital Construction by Sources and Uses at Current Prices, SECTION III - BALANCE OF PAYMENTS 3.1 Balance of Payments 3.2 Total Merchandise Exports and Imports and Balance of Trade, Merchandise Exports by Broad SITC Categories, Major Exports by Volume and Value, Imports by Broad End-Use Categories, Major Imports by Volume and Value, Total Merchandise Exports and Imports to and From Centrally Planned and MaLrket Economy Countries, Direction of Trade, Export and Import Price Indices 3.10 Exchange Rate, SECTION IV - EXTERNAL DEBT 4.1 External Debt by Type of Credit,

130 Table No. SECTION V - PUBLIC FINANCE 5.1 State Budget Revenues, Budget Revenues from State-Owned Enterprises by Sector, Budget Revenues: Shares of Central and Local Government, Revenue Sharing by Provinces, State Budget Expenditure by Broad Purpose, State Budget Expenditure by Activity, Breakdown of State Budget Expenditure on Capital Construction, Education and Health, Breakdown of State Budget Expenditure on Agriculture, Budget Expenditure: Shares of Central and Local Government, SECTION VI - MONETARY STATISTICS 6.1 Money Supply, Consolidated Balance Sheet of the State Banking System, Deposits and Loans by Rural Credit Cooperatives, Interest Rates on Loans 6.5 Interest Rates on Individual Deposits 6.6 Interest Rates on Deposits of Organizations SECTION VII - AGRICULTURE 7.1 Arable and Cropped Area, Gross Output of Agricultural Subsectors, Foodgrain Production, Production of Oilseeds, Production of Cash Crops, Livestock Population, Production From Marine and Freshwater Fisheries, Output of Marine Products, Commune and Brigade Enterprises, Commune and Brigade Enterprises by Sector, Agricultural Statistics by Province, 1979 SECTION VIII - INDUSTRY 8.1 Output of Major Industrial Products, Number of Enterprises and Gross Value of Output by Branch of Industry, Capital Construction by Branch of Industry, Electricity Consumption by Branch of Industry, Key Industrial Statistics by Ownership, Key Industrial Statistics for Light and Heavy Industry, 1979

131 Table No. 8.7 Gross Industrial Output by Province, Components of Value Added in Industry (Current Prices), SECTION IX - ENERGY 9.1 Growth of Energy Production, Crude Oil Production by Region and Major Field, Electricity Generation and Installed Generating Capacity, Hydro and Thermal Installed Capacity by Region, Electricity Sales by Consumer Category, Electrification of Communes and Brigades by Region, 1979 SECTION X - OTHER SECTORS 10.1 Transportation Indicators, EducaLtion: Number of Pupils Enrolled, Health Service Indicators, Miscellaneous Socioeconomic Indicators, SECTION XI - PRICES AND SALES 11.1 Pricet Indices, Procurement Prices, Ex-factory Prices and Retail Prices, Purchlases of Commercial Departments and Retail Sales,

132 Table 1.1: POPULATION AND VITAL STATISTICS, Rate of Year-end natural Crude birth Crude death population increase rate per rate per Year (millions) per thousand thousand thousand n.a. n.a. n.a n.a. n.a. n.a. Source: State Statistical Bureau.

133 Table 1.2: POPULATION BY PROVINCE, (Millions) Year-end National TotaL Southeast Region Sichuan Guizhou Yunnan Xizang Northwest Region Shaanxi Gansu Qinghai Ningxia Xinjiang Central South Region Henan Hubei Hunan Guangxi Guangdong East Region Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong North Region Beijing Tienjin Hebei Shanxi Nei Monggol /a Northeast Region Liaoning Jilin Heilongjiang /a The boundaries of Nei Monggol were redrawn in 1979 with new boundaries including what had been portions of five adjoining provinces; hence the dramatic population increase. The same boundary adjustment accounts, of course, for population declines in the nearby provinces. Source: State Statistical Bureau.

134 Table 1.3: BIRTH AND DEATH RATES FOR URBAN AND RURAL AREAS, Urban Rural Total CBR /a CDR /b CBR /a CDR /b CBR /a CDR /b n.a. n.a. n.a. n.a /a Crude birth rate (per thousand). lb Crude death rate (per thousand). Source: State Statistical Bureau.

135 Table 1.4: PERCENT OF URBAN POPULATION BY PROVINCE, /a National Total Southwest Region Sichuan Guizhou Yunnan Xizang Northwest Region Shaanxi Gansu Qinghai Ningxia Xinjiang Central South Region Henan Hubei Hunan Guangxi Guangdong East Region Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong North Region Beijing Tianjin Hebei Shanxi Nei MonTggol Northeast: Region Liaoning Jilin Heilongjiang /a Includes the population of cities, county towns and some towns below the county level. However, the agricultural population of these cities and towns is counted as rural rather than urban. Source: State Statistical Bureau.

136 Table 1.5: LABOR FORCE AND EMPLOYMENT, (Millions) Total Labor Force /a Employment by Economic Sector Agriculture /b n.a n.a Industry /c n.a n.a Other, of which: /a, /d n.a n.a Construction, transport, commerce /a, /d n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a Other services n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a Employment by Institutional Sector Workers and staff, of which: State organizations /b n.a n.a Urban collectives n.a n.a Commune workers Urban self-employed n.a. n.a /a Includes those awaiting permanent jobs, most of whom are in temporary jobs. 7W Includes state farms. 7c Includes commune but not brigade industry. Industry defined as mining, manufacturing and power. 7W Derived residually. Source: State Statistical Bureau.

137 Table 1.6: WAGES OF STAFF AND WORKERS, Total wage bill (billion yuan) n.a. n.a. n.a. n.a. n.a State-owned enterprises (6.75)(16.64)(23.50)(27.80)(36.60)(42.57)(46.90)(52.94)(62.80)(66.00) Urban collectives n.a. n.a. n.a. n.a. n.a. (8.90)(10.02)(11.72)(14.50)(16.00) Average wage (yuan) n.a. n.a. n.a. n.a. n.a. n.a State-owned enterprises Urban collectives n.a. n.a. n.a. n.a. n.a. n.a Source: State Statistical Bureau.

138 Table 1.7; EMPLOYMENT AND WAGES BY BRANCH OF (STATE-OWNED) INDUSTRY, /a Number of workers and staff /b Wage bill of workers and staff (-000 persons) (million yuan) Basic metallurgy 3,017 3,068 3,012 3,021 3,123 1, , , , ,875.0 Electric power Coal 3,653 3,728 3,770 3,813 3,867 2, , , , ,962.4 Petroleum Chemicals 2,765 2,825 2,815 2,898 2,991 1, , , , ,410.9 Machinery & metal products 9,107 9,247 9,175 9,296 9,951 5, , , , ,140.5 Building materials 1,836 1,848 1,857 1,913 1,939 1, , , , ,573.2 Timber & wood products 1,215 1,181 1,200 1,222 1, , , ,248.7 Food, beverages & tobacco 1,970 1,937 2,006 2,132 2,349 1, , , , ,819.4 Textiles 2,576 2,651 2,740 3,119 3,590 1, , , , ,827.7 Paper & pulp Others 1,864 1,770 2,132 1,855 1,958 1, , , , ,531.7 Total 29,566 29,868 30,381 31,048 32,947 18, , , , ,058.7 /a State-owned units only. Excludes urban and rural collectives. /b Average number during year. Source: State Statistical Bureau.

139 Table L.8: DISTRIBUTION OF COLLECTIVE INCOME, /a Range of annual per capita distributed % of production teams collective income yuan or below yuan yuan yuan yuan or above Total /a See also Table 7.11 (which includes data on distributed collective income by province), and notes to Table Source: State Statistical Bureau.

140 Table 1.9: DISTRIBUTION OF COLLECTIVE FOODGRAINS, 1979/80 Range (amount of unprocessed grain % of production teams per capita)/a Below 300 jin /b jin jin jin jin More than 501 jin Total /a Distributed by production teams to their members as collective income in kind. /b 1 jin equals 0.5 kg. Source: State Statistical Bureau.

141 Table 1.10: AVERAGE DISTRIBUTED COLLECTIVE INCOME, Annual distributed collective income per capita (yuan) /a /b /b /a Distributed collective income is income distributed, in cash or in kind, to production team members out of net income of the team. It excludes income earned by team members from noncollective sources - private plots and other activities - as well as income from sales of manure by households to the collective and those wages in collective enterprises that are paid directly in cash to individual workers. lb Income in kind valued at 1978 prices. Source: State Statistical Bureau.

142 Table 2.1: NATIONAL ACCOUNTS SUMMARY IN CURRENT PRICES (Billion Yuan) Gross domestic product Resource Gap (M - X) Imports (g + nfs) Exports (g + nfs) Total Expenditures Consumption General government n.a. n.a. n.a. n.a. 8. Private n.a. n.a. n.a. n.a. 9. Investment Fixed investment n.a. n.a. n.a. n.a. 11. Changes in stocks n.a. n.a. n.a. n.a. 12. Domestic savings Net factor income Current transfers National savings Average exchange rates 16. Yuan per US$ Yuan per SDR Source: World Bank estimates.

143 Table 2.2: NATIONAL ACCOUNTS SUMMARY IN CONSTANT PRICES (US$ billion at constant 1978 prices) Gross domestic product Terms of trade effect Gross domestic income Resource gap (5-6) Imports (g + nfs) Capacity to import [Exports (g + nfs)] Total expenditures Consumption General government n.a. n.a. n.a. n.a. 11. Private n.a. n.a. n.a. n.a. 12. Investment Fixed investment n.a. n.a. n.a. n.a. 14. Changes in stocks n.a. n.a. n.a. n.a. 15. Domestic saving Net: factor income Current transfers National saving Yuan deflators (1978=100) 19. Gross domestic product Imports (g + nfs) Exports (g + nfs) Tota:L expenditures Consumption Investment Exchange rate index (US$ per yuan) Source: World Bank estimates.

144 Table 2.3: NET MATERIAL PRODUCT, Net material product at current prices (billion yuan) Shares in NMP at Current Prices (%) Industry n.a Agriculture n.a Construction n.a Transport n.a Commerce n.a Total n.a * OD Net material product at constant prices (index, 1949=100) Source: State Statistical Bureau.

145 Table 2.4: NET MATERIAL EXPENDITURE SHARES, (billion yuan) Available national income at current prices (billion yuan)/a Of which: Accumulation Consumption Composition of accumulation (%) Fixed investment n.a n.a. Circulating assets n.a n.a. Productive investment n.a. n.a. n.a. n.a. 73 n.a Nonproductive investment n.a. n.a. n.a. n.a. 27 n.a H la Available national income is defined as investment plus material consumption; it is not equal to national income because of the difference between imports and exports and because of statistical discrepancies. Sources: State Statistical Bureau.

146 Table 2.5: SECTORAL GROSS OUTPUT AT CONSTANT PRICES, (Billion yuan except where otherwise specified) Agriculture and Industry 1952 prices prices prices S 1980 prices Index (1952=100) n.a Agriculture /a 1952 prices /b 1957 prices 53.7/b prices C 1980 prices Index (1952=100) n.a Light and Heavy Industry 1952 prices prices prices prices Index (1952=100) n.a. 1, , , , , ,962.7 Light Industry /c 1952 prices prices prices ' 1980 prices Index (1952=100) n.a , , ,433.3 Heavy Industry /c 1952 prices prices prices prices Index (1952=100) ,290.0 n.a. 2, , , , , ,890.9 /a For a breakdown of agricultural output, see Table 7.2. /b In 1957, there was a substantial change in the coverage of "agriculture." The difference between these two figures reflects this, in addition to the change in prices between 1952 and /c For a more detailed breakdown of industrial output, see Table 8.8. Source: State Statistical Bureau.

147 Table 2.6: COMPOSITION OF STATE CAPITAL CONSTRUCTION EXPENDITURE (CURRENT PRICES), (Million yuan) Industry & Construction /a 1,90o 7,900 9,400 19,100 23,700 22,500 29,400 28,200 28,529 22,447 Of which: Light (400) (800) (700) (1,200) (3,400) (2,500) (2,700) (3,000) (n.a.) (n.a.) Heavy (1,500) (7,100) (8,700) (17,900) (20,300) (20,000) (26,700) (25,200) (n.a.) (n.a.) Transport & commlnications 800 2,200 3,400 6,100 7,400 5,300 7,200 6,600 6,234 4,047 Agriculture, etc ,300 2,500 2,600 4,200 4,500 5,600 6,300 5,203 2,921 Commerce, food distribution, trade ,300 1,300 1,500 1,900 2,857 2,801 H Culture, health, education, research, etc ,000 1,000 1,400 2,100 4,429 4,363 Public utilities ,400 2,700 3,381 3,185 Others ,500 2,200 3,306 3,025 Total 4,400 13,800 17,100 29,500 39,200 36,400 48,000 50,000 53,939 42,789 /a For a more detailed breakdown of industrial investment, see Table 7.3. Source: State Statistical Bureau.

148 Table 2.7: CAPITAL CONSTRUCTION BY SOURCES AND USES AT CURRENT PRICES, (Million yuan) Value of completed state capital constuction 3,114 12,922 15,993 19,257 25,053 26,031 35,637 41,827 42,664 37,117 State capital construction expenditure 4,356 13,829 17,089 29,499 39,186 36,441 47,955 49,988 53,939 42,789 State budget (3,711) (12,645) (15,437) (25,517) (31,812) (29,439) (39,593) (39,497) (28,061) (20,760) Locally financed (645) (1,184) (1,652) (3,982) (7,374) (7,002) (8,362) (10,491) (16,390) (14,090) Other - _, _ (9,488) (7,939) Proportion for productive purposes Proportion for nonproductive purposes Of which housing Source: State Statistical Bureau.

149 Table 3.1: BALANCE OF PAYMENTS (US$ million at current prices) Exports (g + nfs) 10,370 14,983 20,324 24, Merchandise (f.o.b.) 9,607 13,658 18,492 22, Nonfactor services 763 1,325 1,832 2, Imports (g 4 nfs) 11,668 17,137 23,252 22, Merchandise (f.o.b.) 10,745 15,619 21,243 20, Nonfactor services 923 1,518 2,009 2, Resource balance -1,298-2,154-2,928 1, Net factor income Factor receipts Factor payments (M&LT interest paid) n.a. n.a. n.a. n.a. 12. Net current transfers Transfer receipts Transfer payments Current balance ,575-2,405 1, Direct investment Official grant aid Net M&LT loans (DRS) , Disbursements 70 1,435 2,102 1, Repayments Other M&LT ( net) Net credit f-rom IMF Disbursements Repayments Net short-term capital , Capital flows NEI Errors and omissions 1, , Change in net reserves ,243 (- indicates increase) Source: Bank of China and IMF and World Bank estimates.

150 Table 3.2: TOTAL MERCHANDISE EXPORTS AND IMPORTS AND BALANCE OF TRADE, (US$ million) Year Total trade Exports Imports Balance , ,368 1,022 1, ,103 1,597 1, ,663 1,490 1, ,614 2,366 2, ,586 2,260 2, ,750 7,264 7, ,433 6,855 6, ,804 7,590 7, ,638 9,745 10,893-1, ,333 13,658 15,675-2, ,822 18,272 19,550-1, ,375 20,893 19,482 1,411 Source: Ministry of Foreign Trade.

151 Table 3.3: MERCHANDISE EXPORTS BY BROAD SITC CATEGORIES, (In US$ million) Value Share Value Share Value Share Value Share Value Share Value Share (X) (X (X MZ (%) (X) Total Value of Exports 6, , , , , , Primary products: 3, , , , , , Food and animal products mainly for use as food (1,661) (24.2) (1,797) (23.7) (2,316) (23.8) (2,701) (19.8) (3,154) (17.3) (3,071) (14.7) Beverages and tobacco (62) (0.9) (71) (0.9) (71) (0.7) (86) (0.6) (92) (0.5) (85) (0.4) Nonedible raw materials (excluding fuels) (1,038) (15.2) (1,088) (14.3) (1,417) (14.5) (1,804) (13.2) (1,868) (10.2) (2,062) (9.9) Mineral fuels, lubricants and related raw materials (942) (13.7) (1,068) (14.1) (1,345) (13.8) (2,654) (19.5) (4,588) (25.1) (5,054) (24.2) Animal and vegetable oil, fats and wax (41) (0.6) (41) (0.6) (67) (0.7) (70) (0.5) (60) (0.3) (88) (0.4) Industrial products: 3, ,, , , , , Heavy and chemical industrial products , , , , Chemical and related products (198) (2.9) (184) (2.4) (234) (2.4) (424) (3.1) (630) (3.4) (699) (3.4) -Machinery and transport equipment (238) (3.5) (296) (3.9) (332) (3.4) (464) (3.4) (851) (4.7) (1,777) (8.5) -Other heavy industrial products (372) (5.4) (371) (4.9) (444) (4.6) (609) (4.4) (876) (4.8) (1,322) (6.3) Light industrial and textile products 2, , , , , , Textiles n.a. n.a. n.a. n.a. (1,780) (18.3) (2,450) (17.9) (2,908) (15.9) (3,553) (17.0) Source: Ministry of Foreign Trade.

152 Table 3.4: MAJOR EXPORTS, BY VOLUME AND VALUE, Volume Value (in US$ million) Total 7,590 9,745 13,658 18,271 20,893 Cereals (O000 tons) 1, , , , , , Rice ('000 tons) , , , , Soybeans ('000 tons) Beans ( 000 tons) Other cereals ( 000 tons) Peanut oil ( 000 tons) Peanut kernel ('000 tons) Fresh eggs ( 000 jin) 69,700 67,620 81,170 99, , , Live hogs ('000 head) 2, , , , , , Frozen pork ( 000 tons) Frozen rabbit meat ( 000 tons) Aquatic products ('000 tons) Frui,t ('000 tons) o 75 Canned fruit ( 000 tons) Beer ('000 tons) Cotton yarn ('000 bales) Cotton cloth (mln. meters) , , , , Filature silks (tons) 6,483 5,022 8,739 9,040 7,731 5, Silk and satin materials (mln. meters) Woolen materials (mln. meters) Tea (-000 tons) Resin ('000 tons) Jute bags (-000) 27,800 24,200 37,550 52, , , Bristles ('000 cases) Bristle brushes ('000 dozens) 2, , , , ,781 9, Camel hair (tons) , Rabbit hair (tons) 1,970 1,876 2,250 2,675 4,242 4, Carpets, superior quality handmade ( 000 square meters) , Goat skin ('000 hides) 5,304 6,841 8,160 11,010 9,675 15, Fur mattresses ('000 pieces) 4, , , , , , Paper ('000 tons) Sewing machines (-000 units) Bicycles ('000 units) , Porcelain (min. pieces) Tin ( 000 tons) Antimony ('000 tons) Tungsten (U000 tons) Coal ('000 tons) 2,270 2,633 3,120 4,630 6,317 6, Crude oil (U000 tons) 8, ,107 11,310 13,430 13,309 13, ,750 3,012 3,287 Paraffin wax ( 000 tons) Tires ('000 sets) Machine tools (pieces) 4,366 4,296 4,805 6,556 7,656 7, Source: Ministry of Foreign Trade.

153 Table 3.5: IMPORTS BY BROAD END-USE CATEGORIES, (% of total) Producer goods Machinery & equipment n.a. n.a. n.a Raw materials, of which: n.a. n.a. n.a For heavy industries n.a. n.a. n.a. (33.7) (32.0) (38.2) (32.9) (19.8) (11.5) For light industries n.a. n.a. n.a. (16.5) (19.6) (19.4) (17.3) (24.3) (27.7) For agriculture n.a. n.a. n.a. (5.7) (6.8) (6.3) (5.9) (7.3) (7.2) Consumer goods Sources: State Statistical Bureau, Ten Great Years (Peking, Foreign Languages Press, 1960), p. 176, and Ministry of Foreign Trade.

154 Table 3.6: MAJOR IMPORTS, BY VOLUME AND VALUE, Volume Value (in US$ million) Total ,214 10,893 15,675 19,550 19,482 Trucks /a (units) 18,248 14,916 21,872 24,768 22,015 9, Ships & vessels (units) Airplanes (units) Steel products (mln. tons) ,477 2,698 3,522 2,240 1,362 Copper ('000 tons) Aluminum ('000 tons) Pig iron (mln. tons) Iron ore (mln. tons) 1, Natural rubber (00O tons) Chemical fertilizer (mln. tons) ,065 1,092 Chemicals n.a. n.a. n.a. n.a Agricultural chemicals ('000 tons) Wood pulp ('000 tons) Paper ('000 tons) Watches (mln. units) Televisions ('000 units) n.a ,605 1, Tape recorders ('000 units) n.a. n.a. n.a n.a. n.a Cotton ('000 tons) ,420 1,456 Acrylic fibers ('000 tons) Polyester fibers ('000 tons) Polyamide fibers ('000 tons) Cereals (mln. tons) ,485 2,118 2,736 Soybeans ('000 tons) Animal fats & oilseeds ('000 tons) /b Sugar (mln. tons) Timber /c ('000 cu m) ,804 1, Cocoa ('000 tons) Coffee ('000 tons) /a Includes chassis, trucks, jeeps, trailers, cabs, etc. 7h In oil equivalent. /c Timber refers to lumber only and does not include other kinds of wood. Source: Ministry of Foreign Trade.

155 Table 3.7: TOTAL MERCHANDISE EXPORTS AND IMPORTS TO AND FROM CENTRALLY PLANNED AND MARKET ECONOMY COUNTRIES, (Us$ million) Total trade Exports Imports Balance To To To To centrally To countries centrally To countries centrally To countries centrally To countries planned with market planned with market planned with market Over- planned with market Year Total countries economy Total countries economy Total countries economy all countries economy , ,368 1, , , ,103 2,065 1,038 1,597 1, , ,663 1,180 1,483 1, , qa ,614 1,014 3,600 2, ,792 2, , , ,847 2, ,785 2, , ,750 2,269 12,481 7,264 1,267 5,997 7,486 1,002 6, ,433 2,140 11,293 6,855 1,039 5,816 6,578 1,101 5, ,804 2,276 12,528 7,590 1,321 6,269 7, , ,638 2,836 17,802 9,745 1,495 8,250 10,893 1,341 9,552-1, , ,332 3,566 25,766 13,658 1,664 11,994 15,674 1,902 13,772-2, ,778 Source: Ministry of Foreign Trade.

156 Table 3.8: DIRECTION OF TRADE, (US$ milllion) Exports Imports Industrialized Countries.... 3, , , , , , , ,911.5 United States , , , ,282.5 Canada ,046.8 Australia , Japan 1, , , , , , , , , ,380.9 New Zealand Austria Belgium Denmark Finland France Germany , , , ,539.4 Iceland Ireland Italy Luxembourg Netherlands Norway Spain Sweden Switzerland United Kingdom Developing Countries and Areas... 5, , , , , , , ,622.1 Africa /a Egypt I Libya Mozambique Nigeria Sudan Tanzania Zambia Asia /a, /b , , , ,127.1 Hong Kong /c 2, , , , , ,018.6 Indonesia Iran Iraq Kuwait Malaysia Pakistan Philippines Saudi Arabia Singapore Sri Lanka Thailand Viet Nam Europe /d Greece Malta Romania Yugoslavia Western Hemisphere Argentina Brazil Chile Guatemala Mexico Nicaragua Peru USSR, Eastern Europe, etc , , , , , , Albania Bulgaria Cuba Czechoslovakia German Democratic Republic Hungary North Korea Mongolia Poland USSR Total (Direction of trade) 7, , , , , , , , , ,412.0 (All trade) 7, , , , , , , , , ,482.0 /a Including some Middle East. /b Including Turkey. /c For , imports from Hong Kong include those from Macao. 7d Excluding Turkey. Source: Ministry of Foreign Trade.

157 Table 3.9: EXPORT AND IMPORT PRICE INDICES (1978 = 100) Terms of Terms of Exporl:s Exports Imports Imports trade trade (1) (2) (1) (2) (1) (2) Note: Indexes (1) are computed on the basis of 1970 weights and reset at 1978 = 100. Indexes (2) use the previous years' weights as base and are linked in a chain fashion. Source: Ministry of Foreign Trade.

158 Table 3.10: EXCHANGE RATE, (Y per US$) Period average /a Year Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. Q1 Q2 Q3 Q4 Ann h /a Months are period end. Quarters and years are averages of monthly and quarterly data, respectively. Source: Bank of China.

159 Table 4.1: EXTERNAL DEBT BY TYPE OF CREDIT, 1980/81 (In US$ million) Outstanding at the end of the year Official intergovernmental loans Energy credits Export credits Deferred payments 1,038 1,108 Bank borrowing /a 3,612 2,277 Nonbank borrowing Total Disbursements 5,441 4,812 Fund lending: Credit tranche Trust fund Overall Total 5,441 5,696 /a Including some short-term debt. Source: Bank of China.

160 Table 5.1: STATE BUDGET REVENUES, (Billion yuan) (estimate) Total revenue Enterprise profits Tax revenue Taxes on industry and commerce (2.36) (11.31) (16.55) (40.09) (45.13) (47.27) (50.14) (53.84) (60.05) Taxes on salt (0.27) (0.63) (0.73) (1.18) (1.08) (0.96) (0.92) (0.91) (0.90) Customs duties (0.36) (0.58) (0.57) (2.62) (2.88) (2.60) (3.35) (5.40) (4.30) Taxes on agriculture (1.91) (2.97) (2.58) (2.94) (2.84) (2.95) (2.77) (2.54) (2.70) Foreign borrowing /a , Other revenues /b /a Under Chinese budgetary accounting procedures, receipts from foreign loans are included as a revenue Item. The US dollar equivalents of these loans were $2.25 billion in 1979, $1.8 billion in 1980 and $2.85 billion in /b Including the following amounits of depreciation funds turned over to central authorities: Y 2.46 billion in 1979, Y 2.67 billion in 1980, Y 2.56 billion and 1981 and an estimated Y 2.2 billion in An estimated Y 4.2 billion in receipts from sales of Treasury Bands is also included in the figure for Source: Ministry of Finance.

161 Table 5.2: BUDGET REVENUES FROM STATE-OWNED ENTERPRISES, BY SECTOR, (Billion yuan) Enterprises incomes Total Industry Rail- Trans- Civil income Total Heavy Light road port aviation 1957 Total Taxes Profit Total Taxes Profit Total Taxes Profit Total Taxes Profit Total Taxes Profit Total Taxes Profit Total Taxes Profit Source: Ministry of Finance.

162 Table 5.3: BUDGET REVENUES: SHARES OF CENTRAL AND LOCAL GOVERNMENT, Absolute value (billion yuan) National total Central Local Ratio (%) National total Central Local Source: Ministry of Finance.

163 Page 1 of 2 Table 5.4: REVENUE SHARING BY PROVINCES, 1980 Percentage retained by province out of revenues other than industrial and commercial taxes Percentage of industrial and commercial tax revenue retained by province Hebei (0) Liaoning (0) Sichuan Shaanxi Gansu Henan Hubei Hunan Zhejiang Anhui Shandong Shanxi Annual transfer from central government to province (million yuan) Jiangxi 138 Jilin 300 Heilongjiang 886 Guizhou 478 Yunnan 300 Xizang Autonomous Region 438 Xinjiang Autonomous Region 827 Qinghai Autonomous Region 365 Guangxi Autonomous Region 270 Ningxia Autonomous Region 273 Nei Monggol Autonomous Region 1,062

164 Page 2 of 2 Table 5.4: (continued) Percentage of total revenues retained by province Jiangsu 39.0 Annual transfer from province to central government (+) or subsidy from central gov't to province (-) (million yuan) Guangdong + 1,000 Fujian Percentage of total revenues retained by municipality /a Beijing 36.5 Tianjin 31.2 Shanghai 11.2 /a Retention ratios are revised yearly; these percentages are for Source: Ministry of Finance.

165 Table 5.5: STATE BUDGET EXPENDITURE BY BROAD PURPOSE, (Billion yuan) Total expenditure Economic Social, cultural and educational Defense Administration and management Debt payment Other Source: Ministry of Finance.

166 Table 5.6: STATE BUDGET EXPENDITURE BY ACTIVITY, (Billion yuan) Total expenditure Of which: Capital construction /a Modernization investment Working capital n.a Product development n.a Geological survey n.a Industry, transport and commerce n.a Agricultural support n.a Education, culture and health Defense Administration n.a Other /b n.a /a Including the following amounts of capital construction expenditures financed with foreign loans: Y 7.09 billion in 1979; Y 7.3 billion in 1980; and Y 7.31 billion in /b Residual includes items like repayments of interest and principal on foreign loans and interest on the Ministry of Finance's overdraft with the People's Bank of China, as well as certain reserve funds. Source: Ministry of Finance.

167 Table 5.7: BREAKDOWN OF STATE BUDGET EXPENDITURE ON CAPITAL CONSTRUCTION, EDUCATION AND HEALTH, (billion yuan) Total expenditures Of which: Capital construction Of which: Heavy industry n.a n.a. n.a. Light, textile industries n.a n.a. n.a. Agriculture, forestry, water conservancy, meteorology n.a Railroad, transport, post, civil n.a. aviation n.a Commerce, foodgrains, foreign n.a. n.a n.a. n.a. Education n.a n.a. n.a. Health n.a n.a. n.a. trade, banking n.a Culture, education and health Of which: Education Health Source: Ministry of Finance. I-. l-

168 Table 5.8: BREAKDOWN OF STATE BUDGET EXPENDITURE ON AGRICULTURE, (Billion yuan) Total Opening up of new land } Agriculture, animal husbandry } Forestry } } Water conservancy } Aquaculture, fishery } Meteorology } Commune support Agricultural mechanization Other agricultural support Source: Ministry of Finance.

169 Table 5.9: BUDGET EXPENDITURE: SHARES OF CENTRAL AND LOCAL GOVERNMENT, Absolute value (billion yuan) National total Central Local Ratio (%) National total Central Local Source: Ministry of Finance.

170 Table 6.1: MONEY SUPPLY, (Billion yuan year-end levels) Currency in circulation Individual demand deposits Urban (3.6) (5.4) (6.5) Rural /a (3.5) (5.0) (7.0) 3. Individual time deposits Urban (16.7) (22.8) (28.9) Rural /a (6-1) (9.5) (13.5) 4. Enterprise deposits /b Deposits of rural collectives Monetary Aggregates Ic Ml (1 + 2) M2 (Ml + 3) M3 ( M ) /a Sum of individual savings deposits at RCCs and at the ABC. In % of individual savings deposits at RCCs were time deposits. It is assumed that the corresponding ratios for 1980 and 1979 are 62% and 60% respectively. In 1980 individual savings deposits at the ABC consisted of Y 0.55 billion in demand deposits and Y 2.22 billion in time deposits. In 1979 and 1981 the amount of individual savings deposits at the ABC was derived by subtracting RCC deposits at the ABC from deposits in rural areas in the consolidated balance sheet. It is assumed that 80% of these deposits are time deposits in both 1979 and /b Sum of enterprise deposits in the consolidated balance sheet and deposits of commune- and brigade-run enterprises at the RCCs. Does not include enterprise deposits at the PCBC, which may be quite significant. /c Classified in terms of decreasing liquidity. Ml consists of cash plus deposits that can be freely withdrawn and used. M2 adds individual time deposits, while M3 includes enterprise and rural collective deposits, which are subject to bank supervision in disbursement and use. None of these aggregates should be precisely equated with those used in market economies however. Source: People's Bank of China and Agricultural Bank of China and World Bank estimates.

171 Table 6.2: CONSOLIDATED BALANCE SHEET OF STATE BANKI.NG SYSTEM, /a (Billion yuan, year-end levels) Assets Loans To indlistrial enterprises (36.309) (43.158) (50.885) To industrial supply and marketing units (24.212) (23.603) (24.124) To state commerce ( ) ( ) ( ) Short- and medium-term equipment purchase loans (0.792) (5.550) (8.375) To collective and individual industry and commerce (5.751) (7.829) (9.915) For advance purchases (0.698) (0.788) (0.739) To state farms (0.686) (0.940) (1.675) To rural coumunes and production brigades (12.290) (15.860) (16.841) Cold holdings Foreign exchange holdings Balances with the IMF Money advanced to the Ministry of Finance Total Assets Liabilities Depositsl By enterprises (46.891) (57.309) (70.146) By the Treasury (14.868) (16.202) (19.494) By government departments and organizations (18.488) (22.945) (27.488) Capital construction funds /b (13.130) (17.175) (22.915) Deposits in rural areas /c (20.371) (23.984) (27.840) Individual savings deposits in cities and townis (20.256) (28.249) (35.414) Deposits by international monetary institutions Currency in circulation The banlk's own funds The banlc's surplus Other llabilities Total Liabilities la Includes the People's Bank of China (PBC), Agricultural Bank of China (ABC), and Bank of China (BOC) (domestic currency operations only). Excludes Rural Credit Cooperatives (RCCs - see Table 6.3) except for their deposits at the ABC, which are included in the category "rural deposits." Also excludes the People's Construction Bank of China (PCBC), except for its deposits at the PBC, which comprise at least 95% of the item "capital construction deposits" in the consolidated balance sheet. /b Consists almost entirely of deposits by the PCBC with the PBC. /c Consists of individual savings deposits at the ABC and RCC deposits with the ABC. Source: People's Bank of China.

172 Table 6.3: DEPOSITS AND LOANS BY RURAL CREDIT COOPERATIVES, (Billion yuan, year-end levels) Total Deposits Deposits by communes and production brigades (9.833) (10.548) (11.324) Deposits by commune- and brigade-run enterprises (2.193) (2.947) (2.973) Savings deposits by individual commune members (7.843) (11.703) (16.955) Others (1.719) (2.036) (0.709) Total Loans Agricultural loans to communes and brigades (2.254) (3.454) (3.571) Loans to commune- and brigade-run enterprises (1.415) (3.111) (3.546) Loans to individual commune members (1.085) (1.599) (2.521) RCC Deposits with the ABC Source: People's Bank of China and Agricultural Bank of China.

173 Table 6.4: INTEREST RATES ON LOANS (percent per annum) Before After 01/01/82 01/01/82 Industrial and Commercial Loans /a Circulating capital loans Loans for equipment and major repairs Up to 1 year term years years Agricultural Loans Loans to state farms - for production expenses for equipment Loans to communes and brigades - for production expenses for equipment Loans to communes and brigade enterprises for farming and animal husbandry activities/b - for production expenses for equipment Special item loans for agricultural equipment Loans for advanced purchases of agricultural products Loans to individual peasants - natural disasters other Other Inter-branch loans within the banking system and RCC deposits at the ABC 3.24 n.a. ABC loans to RCCs 2.16 n.a. Capital construction loans by the PCBC /c /a These rates apply to both state-owned and collective enterprises, as well as individual enterprises in the case of circulating capital loans. Overdue loans carry a penalty interest rate 20% higher than the listed one; the rate for loans that are diverted for uses other than those originally stipulated is 50% above the listed rate. /b LoELns to commune and brigade enterprises engaged in industrial or commercial activities carry the same interest rate as the corresponding industrial cotmmercialoans. /c These originally carried a uniform rate of 3.0% p.a., 6% for overdue loans and 9% for loans whose funds are misused for purooses not in accordance with the plan. Source: People's Bank of China, Agricultural Bank of China, People's Construction Bank of China.

174 Table 6.5: INTEREST RATES ON INDIVIDUAL DEPOSITS (Simple interest, in percent per annum) Before Type of Deposit 04/01/79 04/01/79 04/01/80 04/01/82 Demand deposits /a 2.88 Fixed term time deposits (lump sum deposit and withdrawal) 6 month n.a year year n.a year n.a year n.a. n.a. n.a Installment deposit and lumpsum withdrawal 1 year year n.a. n.a year n.a. n.a Lump sum deposit and withdrawal by installments 1 year n.a. n.a year n.a. n.a year n.a. n.a Lump sum deposit with monthly withdrawal of interest earned 1 year n.a. n.a year n.a. n.a year n.a. n.a Deposits in RMB by Overseas Chinese (fixed term time deposits) 1 year year year /a For demand deposits the adjustment was made as of July 1, Source: People's Bank of China.

175 Table 6.6: INTEREST RATES ON DEPOSITS OF ORGANIZATIONS (simple interest, in % p.a.) Before Atter 01/01/82 01/01/82 Demand deposits (enterprises and rural collectives) Time deposits (enterprises, nonprofit institutions, and government departments) 1 year /a year /a year /a 5.04 /a Time deposits for units did not exist before January 1, Source: People's Bank of China.

176 Table 7.1: ARABLE AND CROPPED AREA, (Million ha) Arable area n.a. n.a. Cropped area n.a Cropping index n.a n.a. n.a. Source: Ministry of Agriculture.

177 Table 7.2: GROSS OUTPUT OF AGRICULTURAL SUBSECTORS, /a Crops Forestry Animal husbandry Fisheries Sideline occupations Of which brigade and teamrun industrial enterprises (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (11.7) (12.5) (14.5) (15.0) Total /a Data for are at constant 1957 prices; data for other years are at constant 1970 prices. The percentage breakdown for 1981 at constant 1970 prices is substantially different from the corresponding breakdown at constant 1980 prices which is crops 64.4, forestry 4.1, animal husbandry 15.4, fisheries 1.8 and sideline occupations 14.3 (of which brigade and team-run industrial enterprises account for 11.9). Source: State Statistical Bureau.

178 Table 7.3: FOOD GRRAIN PRODUCTION, Rice (Paddy) Area (million ha) Yield (tlha) Production (mln t) 68.45(41.7%) 86.80(44.5%) 87.70(45.1%) (45.7%) (43.9%) (45.5%) (44.9%) (43.3%) (43.6%) (44.3%) Wheat Area (million ha) Yield (t/ha) Production (mln t) 18.15(11.0%) 23.65(12.1%) 25.25(13.0%) 29.25(12.2%) 50.35(17.6%) 41.10(14.5%) 53.85(17.7%) 62.73(18.9%) 55.20(17.2%) 59.65(18.4%) Corn Area (million ha) Yield (t/ha) Production (mln t) 16.85(10.3%) 21.45(11.0%) 23.65(12.2%) 30.65(12.8%) 48.15(16.8%) 49.40(17.5%) 55.95(18.4%) 60.04(18.2%) 62.60(19.5%) 59.20(18.2%) Sorghum Area (million ha) Yield (t/ha) Production (mln t) 11.10(6.8%) 7.65(3.9%) 7.10(3.6X) 8.20(3.4%) 8.70(3.0%) 7.70(2.7%) 8.05(2.6%) 7.66(2.3%) 6.75(2.1%) 6.65(2.0%) H Soybean Area (million ha) Yield Ct/ha) Production (mln t) 9.50(5.8%) 10.05(5.2%) 6.15(3.2%) 9.20(3.8%) 6.65(2.3%) 7.25(2.6%) 7.55(2-5%) 7.45(2.2%) 7.95(2.5%) 9.30(2.9%) Millet Area (million ha) Yield (t/ha) Produietion (mln t) 11.55(7.0%) 8.55(4.4%) 6.20(3.2%) 8.80(3.7%) 5.55(1.9%) 6.15(2.2%) 6.55(2.1%) 6.15(1.9%) 5.45(1.7%) 5.75(1.8%) Tuibers /a Area (million ha) Yield (t/ha) Production (mln t) 16.35(10.0%) 21.90(11.2%) 19.85(10.2%) 25.50(10.6%) 26.65(9.31%) 29.65(10.5%) 31.75(10.4%) 28.45(8.6%) 28.70(8.9%) 25.95(8.0%) Total /b Area (million ha) Yield (t/ha) Produetion (mln t) /a Expressed as grain equtivalent on the basis of one fifth the wet weight (one fourth prior to 1965). 7T Incltudes other miscellaneotis coarse grains. Notes: (a) Area represents sown area. (b) Figttre in parenthesis on prodturtion line expresses the amount as a percentage of total grain production. Source: Ministry of Agricultutre.

179 Table 7.4: PRODUCTION OF OILSEEDS, Peanut Area (million ha) Yield (t/ha) Production (mln t) Oil equiv. (mln t) Sesameseeds Area (million ha) Yield (t/ha) Production (mln t) Oil equiv. (mln t) Rapeseeds Area (million ha) Yield (t/ha) Production (mln t) Oil equiv. (mln t) Other Oilseeds Area (million ha) Yield (t/ha) Production (mln t) Oil equiv. (mln t) Total Area (million ha) Production (mln t) Oil equiv. (mln, t) Source: Ministry of Agriculture.

180 Table 7.5: PRODUCTION OF CASH CROPS, Cotton Area (million ha) Yield (t/ha) /a Production (mln t) Jute Area (million ha) Yield (t/ha) Production (mln t) Mulberry Area (million ha) n.a. n.a Yield (t/ha) (cocoon) n.a. n.a Production (mln t) Tussah Area (million ha) n.a n.a. n.a Yield (t/ha) n.a n.a. n.a Production (mln t) Tea Area (million ha) Yield (t/ha) Production (mln t) Sugarcane Area (million ha) Yield (t/ha) Production (mln t) Sugarbeet Area (million ha) Yield (t/ha) Production (mln t) Fruits Area (million ha) n.a. n.a Yield (t/ha) n.a. n.a Production (mln t) n.a Vegetables Area (million ha) n.a n.a /a Yield expressed as ginned weight. Source: Ministry of Agriculture.

181 Table 7 6: LIVESTOCK POPULATION (Million head) Large animals Cattle Buffalo Horses Donkeys Mules Camels Pigs Goats Sheep Note: The total for large animals includes dairy cows prior to Source: Ministry of Agriculture.

182 Table 7-7 PRODUCTION FROM MARINE AND FRESHWATER FISHERIES ('000 tons) Marine Freshwater Year Capture Farming Subtotal Capture Farming Subtotal Total ,060-1, , , ,179 3, , , , , , , , , ,056 4, , , ,076 4, , , ,058 4, , , ,116 4, , ,240 4, , , ,014 1,373 4,605 Source: General Bureau of Aquatic Products.

183 Table 7.8: OUTPUT OF MARINE PRODUCTS, (Tons) Year Fish Shrimps & crabs Shellfish Seaweed , , ,336 7, ,373, , ,593 19, ,595, , ,798 32, ,254, , , , ,611, , , , ,652, , , , ,560, , , , ,312, , , , ,341, , , , ,317, , , ,000 Sources: General Bureau of Aquatic Products and State Statistical Bureau.

184 Table 7.9: COMMUNE AND BRIGADE ENTERPRISES, Number of Enterprises (-000) 1,115 1,392 1,524 1,480 1,425 1,338 Of which: Commune n.a. n.a. (320) (320) (338) (336) Brigade n.a. n.a. (1,204) (1,160) (1,087) (1,002) Employment ('000) 17,919 23,284 28,265 29,093 29,997 29,696 Of which: Commune n.a. n.a. (12,576) (13,144) (13,938) (14,176) Brigade n.a. n.a. (15,689) (15,949) (16,059) (15,520) Gross Output (Y billion) Of which: Commune n a. n.a. (23.97) (26.99) (33.22) (37.90) Brigade n.a. n.a. (19.17) (22.12) (26.39) (29.14) Total Profit (Y billion) n.a Of which allocation for: Reinvestment n.a. n.a. (3.09) (4.06) (4.70) (4.30) Support to agriculture n.a. n.a. (2.63) (2.69) (2.27) (1.70) Collective welfare n.a. n.a. (0.40) (0.49) (0.68) (0.70) Taxes (Y billion) n.a. n.a Sources: Bureau of Commune and Brigade Enterprises, Ministry of Agriculture and State Statistical Bureau.

185 Table 7.10: COMMUNF AND BRIGADE ENTERPRISES BY SECTOR, No. of No. of No. of No. of enter- Employ- Gross enter- Employ- Gross enter- Employ- Gross enter- Employ- Gross prises ment output prises ment output prises ment output prises ment output ---- (-000) --- (Y bln) ---- (-000) --- (Y bln) ---- (-000) --- (Y bln) ---- (-000) --- (Y bln) Agriculture 495 6, , , , Industry , , , , Transport 65 1, , , , > Construction 46 2, , , , Others 124 1, , , , Total 1,524 28, ,480 29, ,425 29, ,338 29, Sources: Bureau of Commune and Brigade Enterprises, Ministry of Agriculture and State Statistical Bureau.

186 Table 7.11: AGRICULTURAL STATISTICS BY PROVINCE, 1979 Communes, brigades and production teams Livestock No. of Commune Arable Irrigated Grain Cropping Sheep produc- housearea area output index Pigs & goats Cattle No. of No. of tion teams holds (amln ha) (mln ha) (mln tons) () (mln head) communes brigades (-000) (-000) Southwest Region Sichuan ,373 74, ,492 Guizhou ,732 24, ,789 Yunnan ,401 13, ,152 Xizang , Northwest Region Shaanxi ,522 30, ,910 Gansu ,370 15, ,010 Qinghai , Ningxia , Xinjiang , ,686 Central South Region Henan ,059 43, ,448 Hubei ,256 30, ,029 Hunan ,304 46, ,627 Guangxi , ,912 Guangdong ,927 26, ,651 East Region Shanghai , ,234 Jiangsu ,872 34, ,350 Zhejiang ,008 42, ,991 Anhui ,909 28, ,136 Fujian , ,166 Jiangxi ,650 23, ,287 Shandong ,092 83, ,149 North Region Beijing , Tianjin , Hebei ,645 50, ,541 Sbanxi ,887 30, ,912 Nei Monggol ,373 11, ,781 Northeast Region Liaoning ,149 15, ,911 Jilin , ,996 Heilongjiang ,075 13, ,705 Total , ,613 5, ,911

187 Table 7.11: (continued) Distributed Gross Commune & brigade enterprises Mechanization collective value of No. of Tractors Grain income agricultural enter- Gross (large & Hand Irrigation processing per capita output prises Employees output medium) tractors machinery machines (yuan) (Y bln) /a ('000) ('000) (Y bln) /a (000) (000 hp) ('000 units) Southwest Region Sichuan , , Guizhou Yunnan 6L Xizang Northwest Region Shaanxi , Gansu , Qinghai Ningxia Xinjiang Central South Region Henan , , Hubei , , Hunan , , Guangxi Guangdong , , East Region Shanghai iangsu , , Zhejiang , , Anhui , Fujian , Jiangxi , Shandong , , North Region Beiiing Tianjin , Hebei , , Shanxi , Nei Monggol , Northeast Region Liaoning , Jilin Heilongjiang Total ,480 29, ,671 71,221 2,912 /a In 1970 prices. Sources: State Agricultural Commission; Bureau of Commune and Brigade Enterprises, Ministry of Agriculture.

188 Table 8.1: OUTPUT OF MAJOR INDUSTRIAL PRODUCTS, Unit (preliminary) A. Heavy Industry Products Crude coal mln tons Crude oil mln tons Natural gas mln cu m ,112 2,870 8,850 12,120 13,730 14,510 14,270 12,740 n.a. Electricity bln kwh Pig iron mln tons Steel mln tons Rolled steel mln tons Coke (machine-made) mln tons ! Cement mln tons Plate glass mln std.cases Timber mln cu m n.a. Sulphuric acid '000 tons ,340 2,914 4,847 5,375 6,610 6,998 7,640 7,810 8,158 Soda ash '000 tons ,077 1,243 1,077 1,329 1,486 1,613 1,652 1,734 Caustic soda '000 tons ,289 1,386 1,640 1,826 1,923 1,923 2,070 Chemical fertilizer '000 tons of ,726 2,435 5,247 7,238 8,693 10,654 12,320 12,390 12,990 nutrients Chemical insecticides '000 tons Plastics '000 tons n.a. Ethylene '000 tons n.a. Calcium carbide '000 tons ,238 1,407 1,520 1,510 n.a. Rubber tires ,320 4,250 7,000 7,720 9,360 11,688 11,460 7,290 n.a. Power generating equipment MW ,918 4,965 3,181 4,838 6,212 4,193 1,395 n.a. Mining equipment '000 tons Machine tools ' Motor vehicles Tractors ' Hand tractors ' n.a. Internal combustion engines '000 hp ,790 7,330 23,480 27,410 28,180 29,080 25,390 20,040 n.a. Locomotives units Railway passenger wagons units ,002 1,159 n.a. Railway freight wagons n.a. Steel ships for civilian use '000 tons n.a. n.a. n.a n.a. ). Light Industry Products Yarn '000 tons ,300 2,052 2,108 2,230 2,382 2,635 2,930 3,170 3,360 Cloth bln m Woolen piece goods mln m n.a. n.a. n.a n.a Silk '000 tons n.a. n.a. n.a n.a. Silk textiles mln m n.a. n.m. n.a n.a sunny bags mln n.a. Chemical fibers -000 tons Television sets ,329 2,492 5,394 5,607 Radios ,108 9,356 10,494 11,677 13,810 30,040 40,570 17,036 Cameras ' Bicycles ,838 3,688 6,232 7,427 8,540 10,095 13,020 17,540 24,133 Sewing machines ' ,238 2,352 3,567 4,242 4,865 5,868 7,680 10,390 12,793 Wrist watches ' ,008 3,476 7,822 11,043 13,511 17,070 22,160 28,720 n.a. Washing machines '000 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a ,281 2,517 Refrigerators '000 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. Electric fans 000 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 7,241 10,500 n.a. Machine-made paper & paperboard ,730 2,410 3,410 3,769 4,387 4,929 5,350 5,400 5,698 Synthetic detergents '000 tons n.a. Light bulbs mln n.a. Sugar '000 tons ,460 1,350 1,740 1,815 2,267 2,500 2,570 3,166 3,335 Salt '000 tons 4,945 8,277 11,470 11,090 14,810 17,104 19,535 14,770 17,280 18,320 16,008 Beer '000 tons n.a. n.a. n.a. n.a. n.. n.a. n.a. n.a n.a. Sources: State Economic Commission, State Statistical Bureau and official submission to United Nations Statistical Office.

189 Table 8.2: NUMBER OF ENTERPRISES AND GROSS VALUE OF OUTPUT BY BRANCH OF INDUSTRY, /a Number of enterprises (end year) Gross value of output (million 1970 yuan) Industry names Basic metallurgy & metal mining 4,259 4,934 5,138 5,000 4,600 29,052 36,891 41,027 43,027 41,540 Of which: 1.1 Iron & steel (incl. mining) n.a. n.a. 2,828 n.a. n.a. n.a. n.a. 28,702 n.a. n.a. 1.2 Nonferrous metals (incl. mining) n.a. n.a. 2,310 n.a. n.a. n.a. n.a. 12,325 n.a. n.a. 2 Electric power 7,386 8,262 8,923 9,800 10,300 14,135 16,142 17,672 18,839 19,409 3 Coal mining, washing & dressing 8,887 9,389 9,172 8,700 8,500 10,312 11,685 12,818 12,401 12,205 Of which: 3.1 Coal mining 8,549 9,160 8,805 8,500 8,200 10,191 11,001 11,624 11,397 11,276 4 Petroleum extraction & refining ,680 23,329 24,957 25,231 24,537 Of which: 4.1 Petroleum and natural gas extraction ,394 9,480 9,803 10,224 9,874 5 Chemicals (incl. mining), plastic and rubber products 20,599 22,393 22,384 23,600 23,800 42,366 52,498 56,184 62,230 65,128 Of which: 5.1 Basic chemicals 1,854 2,300 2,570 2,700 2,600 5,161 6,167 7,221 7,578 7, Chemical fertilizers & insecticides 6,840 6,427 5,232 4,500 4,000 8,083 10,200 10,690 12,463 12, Rubber & plastic producer goods 3,909 4,642 4,876 n.a. n.a. 8,664 10,240 11,175 n.a. n.a. 5.4 Pharmaceuticals, photo film, fats & oil, soap & detergents 2,994 3,297 3,238 n.a. n.a. 8,785 9,981 10,011 n.a. n.a. 6 Machinery & metal products (incl. electronics & repairing) 94, , , , , , , , , ,617 Of which: 6.1 Agricultural equipment 9,768 11,158 9,608 8,400 7,200 10,676 11,588 10,913 8,658 6, Industrial machinery & equipment 7,139 7,636 7,786 7,700 7,600 22,992 25,541 24,027 22,465 19, Transport equipment (except bicycles) 2,409 2,610 2,842 2,800 2,700 11,183 12,720 14,542 14,955 12, Construction & road bldg. machinery n.a. n.a n.a. n.a. 6.5 Machinery for nonproductive use 1,465 1,715 1,871 n.a. n.a. 4,365 5,107 6,040 n.a. n.a. 7 Nonmetallic mineral building materials (incl. mining) 39,065 44,118 46,022 48,900 48,500 13,334 15,391 16,732 18,153 18,087 Of which: 7.1 Cement and cement products 6,554 7,669 9,927 11,200 11,600 4,122 4,877 6,003 6,759 6, Refractory materials, (ceramic, brick, lime, etc.) 30,045 33,700 32,941 32,500 32,000 6,964 8,071 8,119 7,172 7, Glass ,056 1,167 1,278 1,383 1, Nonmetallic mineral mining 1,944 2,196 2,527 n.a. n.a. 1,192 1,276 1,332 n.a. n.a. 8 Timber, wood products &.furniture 10,419 12,128 14,252 16,800 17,500 7,000 7,741 8,475 8,665 8,616 Of which: 8.1 Logging & transport of timber 1,398 1,412 1,569 1,700 1,700 2,703 2,805 2,976 3,016 2, Food, beverages and tobacco (incl. salt mining) 37,058 40,953 44,682 51,800 55,600 43,574 47,171 51,872 56,796 64, Textiles 11,305 12,145 13,036 15,300 17,100 46,065 52,909 59,306 73,546 86,825 Of which: 10.1 Synthetic fiber production ,265 3,129 3,781 5,349 6, Paper, pulp and paperboard 2,977 3,648 4,105 4,400 4,700 4,754 5,384 6,030 6,414 6, Other industries (incl. piped water) 85,762 86,474 83,228 n.a. n.a. 35,846 38,388 40,523 n.a. n.a. Of which: 12.1 Clothing, footwear & leather products n.a. n.a. 23,551 n.a. n.a. n.a. n.a. 13,880 n.a. n.a Paper products, printing, cultural, educational & sport goods n.a. n.a. 11,256 n.a. n.a. n.a. n.a. 9,650 n.a. n.a. Total 322, , , , , , , , , ,883 /a Excludes brigade and team industrial enterprises. Sources: State Economic Commission, State Statistical Bureau and data provided by Chinese authorities to UN Statistical Office.

190 Table 8.3: CAPITAL CONSTRUCTION BY BRANCH OF INDUSTRY, /a Value in million current yuan Industry names Basic metallurgy & metal mining 4,273 4,648 3,472 3,248 2,735 2 Electric power 3,472 5,091 5,099 4,814 4,014 3 Coal mining, washing & dressing 2,258 3,180 3,186 3,347 2,315 Of which: 3.1 Coal mining 2,247 3,167 3,119 3,308 2,285 4 Petroleum extraction & refining 2,076 3,160 2,707 3,338 2,795 Of which: 4.1 Petroleum & natural gas extraction 1,488 2,347 2,085 2,695 2,314 5 Chemicals (incl. mining), plastic & rubber products 2,905 3,134 2,946 2,961 1,902 Of which: 5.1 Basic chemicals 668 1,196 1,318 n.a. n.a. 5.2 Chemical fertilizers & insecticides 1,907 1,500 1, Rubber & plastic producer goods Pharmaceuticals, photo film, fats & oil, soap & detergents n.a. n.a. 6 Machinery & metal products (incl. electronics & repairing) 3,252 4,081 3,624 3,775 2,439 Of which: 6.1 Agricultural equipment Industrial machinery & equipment 940 1, Transport equipment (except bicycles) Construction & road bldg. machinery Machinery for nonproductive use Nonmetallic mineral building matls. (incl. mining) ,244 1, Of which: 7.1 Cement & cement products Refractory materials, (ceramic, brick, lime, etc.) n.a. n.a. 7.3 Glass Nonmetallic mineral mining Timber, wood products & furniture Of which: 8.1 Logging & transport of timber Food, beverages & tobacco (incl. salt mining) Textiles 1,496 1,338 1,412 2,330 1,986 Of which: 10.1 Synthetic fiber production 1, Paper, pulp & paperboard Other industries (incl. piped water) Total 21,736 27,316 25,685 27,398 21,526 /a Includes investment in the state budget and by various localities, state enterprises and industrial departments. Does not include renewal and replacement of fixed assets, or investment of collectives. Sources: State Statistical Bureau and data provided by Chinese authorities to the UN Statistical Office.

191 Table 8.4: ELECTRICITY CONSUMPTION BY BRANCH OF INDUSTRY,/a (in million kwh) Basic metallurgy 34,913 42,333 45,631 Electric power 35,320 39,573 42,629 Coal 13,871 15,162 16,903 Petroleum 6,133 7,410 8,203 Chemicals 35,817 43,228 48,338 Machinery and metal products 16,161 17,692 19,643 Building materials 6,902 8,034 9,405 Food, beverages and tobacco 3,453 3,734 4,565 Textiles 7,774 8,646 9,981 Paper & pulp 3,668 4,353 4,950 Others /b 13,999 15,495 15,868 Total 178, , ,107 /a Independent (state and collective) accounting units only. Excludes brigade and team industrial enterprises. See Table 7.2 for more details of sectoral classification. /b Includes timber and wood products. Source: Data provided by Chinese authorities to UN Statistical Office.

192 Table 8.5: KEY INDUSTRIAL STATISTICS BY OWNERSHIP, 1979 Industrial enterprises Collective Total Urban enter- State- Sub- collec- Rural prises owned total tive commune All Industrial Enterprises /a No. of enterprises (end of year) 355,013 83, ,176 99, ,497 Gross output (Y billion 1970) Net output (Y billion current) Employment (thousands, end of year) 53,400/b 31,091/c 22,300/b 13,277 9,000/b Wages and salaries (Y billion current) n.a /d n.a n.a. Independent Accounting Units Only Gross fixed assets (Y billion, end of year) Net fixed assets (Y billion, end of year) Circulating funds (Y billion, average) Net fixed assets plus circulating funds Profits and taxes (Y billion current) /a All industrial enterprises except those in rural production brigades and production teams. /b Approximate. /c Average during the year was 30,381. For the breakdown among industrial branches, see Table /d For the breakdown among industrial branches, see Table Source: State Economic Commission.

193 Table 8.6: KEY INDUSTRIAL STATISTICS FOR LIGHT AND HEAVY INDUSTRY, 1979 Percentage Shares Light Heavy Light Heavy industry industry Total industry industry All Industrial Enterprises Number 207, , , Gross output (bil 1970 yuan) Net output (bil current yuan) Independent Accounting Units Only Gross fixed assets (Y billion) Net fixed assets (Y billion) Circulating funds (Y billion) N.F.A. plus C.F. (Y billion) Profits and taxes (Y billion) Source: State Economic Commission.

194 Table 8.7: GROSS INDUSTRIAL OUTPUT BY PROVINCE, (% of national total) Total Light Heavy Total Northeast Region Liaoning Jilin Heilongjiang North Region Beijing Tianjin Hebei Shanxi Nei Monggol East Region Shandong Anhui Shanghai Jiangsu Zhejiang Jiangxi Fujian Central South Region Henan Hubei Hunan Guangxi Guangdong Northwest Region Shaanxi Gansu Qinghai Ningxia Xinjiang Southwest Region Sichuan Guizhou Yunnan Xizang /a /a /a /a Total /a Negligible. Source: State Economic Commission and State Statistical Bureau.

195 Table 8.8: COMPONENTS OF VALUE ADDED IN INDUSTRY (CURRENT PRICES), (unit: %) Wages and salaries, welfare fund and bonuses Taxes and profits Interest paid to banks Other Total Source: State Statistical Bureau.

196 Table 9.1: GROWTH OF ENERGY PRODUCTION, Electricity Hydro Coal Oil Natural gas Total primary (GWh) (% p.a.) (GWh) (X p.a.) (mln tons) (% p.a.) (mln tons) (% p.a.) (Bln cu m) (7 p.a.) (Mtce) (% p.a.) ,260 1, ,340 4, ,600 10, ,860 20, ,840 47, ,600 44, ,000 50, ,627 58, ,269 65, Notes: (1) Mtce (million tons of coal equivalent) coefficients based on tce of 7 million Kcal, with calorific values assumed as follows: coal 5,000 Kcal/kg; oil 10,200 Kcal/kg, natural gas 9,310 Kcal/cu m; hydroelectric power 2,954 Kcal/kWh. (2) Oil production includes shale oil. Source: Ministries of Electric Power, Coal and Petroleum Industry.

197 Table 9.2: CRUDE OIL PRODUCTION BY REGION AND MAJOR FIELD, (million tons) Northeast Daqing Others North Renqiu Dagang Others East Shengli Others Central-South Northwest Southwest Total Source: Ministry of Petroleum.

198 Table 9.3: ELECTRICITY GENERATION AND INSTALLED GENERATING CAPACITY, Total Installed generation capacity Year (GWh) (MW) ,310 1, ,260 1, ,340 41, ,800 13, ,600 15, ,860 23, ,360 26, ,450 29, ,760 33, ,850 38, ,840 43, ,130 47, ,400 51, ,550 57, ,950 63, ,627 n.a. Source: Ministry of Electric Power.

199 - 183 Table 9.4: HYDRO AND THERMAL INSTALLED CAPACITY BY REGION, (MW) North North Central Year Type East North West East South Southwest Total 1970 Hydro 1, ,328 1, ,235 Thermal 3,820 3,373 1,509 4,304 2,406 2,085 17,535 Total 5,128 3,627 2,421 5,632 4,170 2,754 23, Hydro 1, ,591 2,250 1,370 7,804 Thermal 3,986 3,489 1,625 4,748 2,473 2,151 18,478 Total 5,310 3,777 2,606 6,339 4,723 3,521 26, Hydro 1, ,231 1,718 2,640 1,499 8,700 Thermal 4,328 3,836 1,726 5,580 3,016 2,296 20,801 Total 5,663 4,113 2,957 7,298 5,656 3,795 29, Hydro 1, ,621 1,893 3,243 1,827 10,299 Thermal 4,611 4,621 1,928 6,655 3,363 2,431 23,626 Total 6,018 4,929 3,549 8,548 6,606 4,258 33, Hydro 1, ,964 2,198 3,872 1,988 11,817 Thermal 5,113 5,310 2,120 7,577 3,560 2,583 26,291 Total 6,569 5,649 4,084 9,775 7,432 4,571 38, Hydro 1, ,290 2,681 4,315 2,181 13,428 Thermal 6,036 6,026 2,274 8,516 4,484 2,608 29,978 Total 7,600 6,423 4,564 11,197 8,799 4,789 43, Hydro 1, ,543 2,846 4,787 2,477 14,655 Thermal 6,676 6,252 2,434 9,438 4,950 2,720 32,492 Total 8,251 6,680 4,977 12,284 9,737 5,197 47, Hydro 1, ,666 3,097 5,071 2,795 15,765 Thermal 7,253 7,182 2,504 10,327 5,560 2,848 35,686 Total 8,872 7,699 5,170 13,424 10,631 5,644 51, Hydro 1, ,833 3,341 5,841 3,032 17,277 Thermal 8,008 8,123 2,596 11,299 6,735 3,038 39,845 Total 9,666 8,696 5,428 14,640 12,576 6,070 57, Hydro 1, ,933 3,784 6,528 3,556 19,110 Thermal 7,919 9,582 2,936 12,688 7,517 3,210 43,906 Total 9,632 10,179 5,869 16,472 14,045 6,766 63,016 Source: Ministry of Electric Power.

200 Table 9.5: ELECTRICITY SALES BY CONSUMER CATEGORY, Energy sales (GWh) /a (% figures in parentheses) Residential Year & commercial Industrial Agricultural Transportation Others Total lb /c /d (14.2) 2,390(69.0) 20 (0.6) 20 (0.6) 540(15.6) 3,460(100) (13.1) 4,981(80.0) 43 (0.7) 59 (0.9) 327 (5.2) 6,227(100) ,975(11.9) 13,605(82.9) 108 (0.7) 70 (0.4) 649 (4.0) 16,407(100) ,839 (6.8) 47,723(84.0) 3,710 (6.5) 332 (0.6) 1,198 (2.1) 56,802(100) ,558 (4.5) 84,203(83.2) 10,433(10.3) 452 (0.4) 1,628 (1.6) 101,274(100) ,305 (4.3) 101,784(82.3) 12,989(10.5) 707 (0.6) 2,815 (2.3) 123,600(100) ,830 (4.3) 110,194(81.6) 15,823(11.7) 1,126 (0.8) 2,133 (1.6) 135,106(100) ,453 (4.7) 107,860(79.5) 17,982(13.3) 1,171 (0.9) 2,242 (1.6) 135,708(100) ,150 (4.6) 124,782(79.5) 20,877(13.3) 1,435 (0.9) 2,725 (1.7) 156,969(100) ,721 (4.7) 128,966(78.3) 23,154(14.1) 1,846 (1.1) 3,011 (1.8) 164,698(100) ,498 (4.7) 142,691(78.5) 24,834(13.7) 2,104 (1.2) 3,564 (1.9) 181,691(100) ,967 (4.3) 166,087(79.0) 28,742(13.5) 2,280 (1.2) 4,163 (2.0) 210,239(100) ,252 (4.8) 184,636(79.0)/e 32,493(13.9) 1,323 (0.6) 3,973 (1.7) 233,577(100) /a Excludes self-generation by industries and mini-hydro owned by communes and brigades. /b Urban areas only. /c For details of industrial electricity use, see Table 7.4. /d Includes rural residential and commercial use. /e Of which: 35,057 GWh to light industries and 149,579 GWh to heavy industries. Source: Ministry of Electric Power.

201 Table 9.6: ELECTRIFICATION OF COMMUNES AND BRIGADES BY REGION, 1979 % of communes % of brigades Region electrified electrified Northeast North Northwest East Central and South Southwest National Source: Ministry of Electric Power.

202 Table 10.1: TRANSPORTATION INDICATORS, Item Unit Railway line open to traffic thousand km Highway open to traffic Navigable inland waterway Civil aviation routes 11.4/a n.a. Total Volume of Goods Transport 1000 millon n.a. n.a. n.a. n.a. n.a. 1, , ,214.3 ton-km (Excluding highway freight transport by vehicles other than those owned by transport departments) (25.5) (76.2) (181.0) (796.9) (982.9) (1,090.7) (1,151.7) (1,161.6) Railway freight transport Highway freight transport /b n.a. n.a. n.a. n.a. n.a (Of which: handled by transport departments) (0.8) (1.4) (4.8) (25.1) (27.4) (26.8) (25.5) (25.3) Water cargo transport Air freight shipment.. n.a Oil and gas carried through pipelines a' Cargo handled at vmajor sea ports million ton Volume of Passenger Transport 1000 million person-km By railway By highway (handled by transport departments) /c By waterway By air la Figure for /b Figures exclude highway freight transport by traditional means, including hand tractors. 7T i.e. excludes passenger traffic by enterprise-owned vehicles and by traditional means. Source: State Statistical Bureau.

203 Table 10.2: EDUCATION: NUMBER OF PUPILS ENROLLED, /a (millions) Year Primary Secondary Tertiary Total /a Excludes, for example, TV university, factory-run and spare-time education, adult education, etc. Source: Ministry of Education and State Statistical Bureau.

204 Table 10.3: HEALTH SERVICE INDICATORS, Health Hospital beds ('000) ,105 1,598 1,777 1,856 1,932 1,982 2,017 Professional medical workers (000) ,039 1,532 1,453 2,057 2,341 2,464 2,642 2,798 3,011 Of which: Doctors - Traditional medicine ( 000) (276) (306) (337) (321) (225) (229) (240) (251) (258) (262) (290) Senior doctors - Western ('000) (38) (52) (74) (189) (221) (293) (329) (359) (395) (447) (516) Junior doctors - Western (-000) (49) (67) (136) (253) (256) (356) (409) (423) (435) (444) (436) Nurses ('000) (33) (61) (128) (235) (295) (380) (405) (407) (421) (466) (525) Barefoot doctors ('000) ,218 1,559 1,760 1,666 1,575 1,463 1,396 Source: State Statistical Bureau. co oo

205 Table 10.4: MISCELLANEOUS SOCIOECONOMIC INDICATORS, Unit Electricity consumed by ('000 mln n.a rural areas kwh) Post & telecommunication (mln yuan) ,114 1,165 1,255 1,334 1,402 transactions (at conrstant prices of 1970) Total number of tourists (thousands) n.a. n.a. n.a. n.a. 1,883 4,204 5,700 7,767 coming to China Feature films produced (number) n.a Film projection units (thousands) Performing art troupes (number) 1,000 2,084 2,884 2,941 3,150 3,482 3,533 3,483 Cultural centers (number) 896 2,430 2,748 2,644 2,748 2,892 2,912 2,893 Public libraries (number) ,256 1,651 1,732 1,787 Broadcasting stations (number) Television centers (number) Books produced (mln copies) ,275 3,308 3,770 4,072 4,593 5,578 Magazines (mln copies) ,184 1,125 1,462 Newspapers ('000 mln n.a copies) Source: State Statistical Bureau.

206 Table 11.1: PRICE INDICES, (1950 = 100) Retail price index Cost of living of staff and workers Ex-factory prices of industrial products Agricultural procurement price index Rural market price index n.a. n.a Industrial products sold in rural areas Services n.a. n.a. n.a. n.a. n.a List prices at state commercial units n.a. n.a Source: State Statistical Bureau.

207 Table 11.2: PROCUREMENT PRICES, P.X-FACTORY PRICES AND RETAIL PRICES (NATIONAL LEVFL), Mixed Average Procurement Prices of Major Agricultural Products (Y) Foodgrain (500 kg) Edible vegetahle oil (500 kg) n.a. n.a. n.a , , , Hogs (head) n.a. n.a. n.a Cattle (head) n.a. n.a. n.a Sheep (head) n.a. n.a. n.a Poultry (head) n.a. n.a. n.a Eggs (50 kg) n.a. n.a. n.a Tea (50 kg) n.a. n.a. n.a Sugarcane (O000 kg) n.a. n.a. n.a Sugar beets (000 kg) n.a. n.a. n.a Cotton (50 kg) n.a. n.a. n.a Jute and hemp (50 kg) n.a. n.a. n.a Tussah cocoons (50 kg) n.a. n.a. n.a Silkworm cocoons (50 kg) n.a. n.a. n.a Vegetables (50 kg) n.a. n.a. n.a Ex-Factory Prices - Agrochemicals and Machinery (Y) Tractor (East is Red 54/75, unit) 21, , , n.a. n.a. 14, n.a. n.a. Tractor (East is Red 28, urnit) 18, , , n.a. n.a. 9, n.a. n.a. Tractor (Iron Cow 40/55,.,nit) 18, , , n.a. n.a. 12, n.a. n.a. Hand tractor (Kung-Long 7/11, unit) 4, , , n.a. n.a. 2, n.a. n.a. Combined threshing machine (GT-4.9 model, unit) n.a. 22, , n.a. n.a. 13, n.a. n.a. (NH 4 ) 2 S04 (N 20.R%, ton) n.a. n.a n.a. n.a. Urea (N 46%, ton) 1, n.a. n.a n.a. n.a. NH 4 NO 3 (N 34%, ton) n.a. n.a n.a. n.a. Calcium superposphate (P 14-18%, ton) n.a n.a. n.a n.a. n.a. "Retail Prices of Industrial Goods in Rural Areas (Y) Chemical fertilizer (ton) n.a. n.a. n.a. n.a Pesticides (ton) n.a. n.a. n.a. n.a. 1, , , , Coal (ton) n.a. n.a. n.a. n.a Transistor radio n.a. n.a. n.a. n.a Bicycle n.a. n.a. n.a. n.a Watch n.a. n.a. n.a. n.a Clock n.a. n.a. n.a. n.a Thermos bottle n.a. n.a. n.a. n.a Chrome gold pen n.a. n.a. n.a. n.a Pencil n.a. n.a. n.a. n.a Sewing machine n.a. n.a. n.a. n.a Sources: State Agricultural Commission and State Statistical Rureau.

208 Table 11.3: PURCHASES OF COMMERCIAL DEPARTMENTS AND RETAIL SALES AT CURRENT PRICES, (billion yuan) Total purchases Of which: Manufactures (8.45) (24.76) (43.02) (61.18) (97.19) (113.92) (126.34) (140.56) (156.76) (168.51) Farm and side line (9.01) (1.765) (27.42) (31.40) (41.46) (41.33) (45.99) (58.68) (67.70) (76.47) Total retail sales /a n.a. n.a Of which: /b Urban (12.56) (23.84) (33.89) (40.00) (60.69) (68.79) (74.82) (81.52) (95.03) (102.60) Rural (15.12) (23.58) (33.14) (45.80) (66.42) (74.49) (81.04) (98.48) (118.97) (132.40) /a Excluding sales by peasants to the nonagricultural population. /b Including sales by peasants to the nonagricultural population. Source: State Statistical Bureau.

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