Information about Asia and the Pacific Asia y el Pacífico

I Introduction

David Burton, Wanda Tseng, Kalpana Kochhar, Hoe Khor, and Dubravko Mihaljek
Published Date:
September 1994
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Information about Asia and the Pacific Asia y el Pacífico
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China’s economic performance has been remarkable since the initiation of the reform process 15 years ago. Rapid growth has accompanied structural transformation. With real output increasing by 9 percent annually, the size of the Chinese economy has nearly quadrupled (Table 1). Productivity gains have permitted substantial improvements in real incomes and living standards and notable progress in reducing poverty. At the same time, many of the distortions and rigidities of the former central planning system have been eliminated or reduced, and economic agents have increasingly been allowed to make their own decisions, based on market signals. A vibrant nonstate sector has emerged as the leading sector, accounting for more than half of industrial output and two thirds of GDP. The economy has also become more open and integrated with the rest of the world through trade and investment.

Table 1.Selected Macroeconomic Indicators(Annual percent change, unless otherwise specified)
Real GNP7.94.48.810.414.712.88.110.911.
Real gross industrial output9.34.37.811.216.321.411.717.720.88.57.814.522.021.1
Real gross fixed investment2.9–12.528.014.722.727.313.314.710.4–
Retail prices
Period average6.
End of period22.
Broad money24.119.713.119.242.417.129.313.221.018.428.026.431.324.0
Domestic credit22.313.111.212.831.431.334.122.318.917.123.720.222.822.4
Net domestic assets33.921.520.718.324.125.032.725.4
Merchandise exports (percent change in U.S. dollar terms)33.720.5–4.0–
Merchandise imports (percent change in U.S. dollar terms)24.812.6–16.4–10.927.660.0–8.74.327.45.3–13.322.326.229.0
Trade balance (in billions of U.S. dollars)–1.3–14.8–12.0–3.8–7.7––12.2
(In percent of GNP)
Current account balance0.–4.0–2.60.1–1.0––2.5
Overall budgetary balance–3.3–1.3–1.4–1.7–1.5–0.5–2.0–2.2–2.4–2.3–2.1–2.5–2.5–2.1
Sources: China Statistical Yearbook, 1992; and Chinese authorities.
Sources: China Statistical Yearbook, 1992; and Chinese authorities.

Notwithstanding these achievements, important problems remain, reflecting the partial nature of the reform process through 1993.1 Among the most serious is the lack of an effective infrastructure (institutions and instruments) for macroeconomic management. As a result, the economy has been prone to “stop-go” cycles of macroeconomic instability (Chart 1), as economic stabilization has invariably had to rely on administrative measures that have imposed abrupt and at times excessive restraint on the economy, creating, in turn, countervailing pressures for relaxation. Additionally, efforts to restore economic stability usually have been accompanied by a slowdown of reforms. The continued poor performance of state-owned enterprises (SOEs) is another legacy of partial reforms; this has constrained the implementation of financial policies and hindered the development of the financial system. Moreover, the weak legal and regulatory framework has impeded the development of competitive markets and a clear delineation of the rights and obligations of market participants. The obstacles posed by these problems for maintaining sustainable growth have become increasingly evident with each macro-economic cycle, as have the risks of not dealing with them thoroughly.

Chart 1.Macroeconomic Cycles: Key Indicators1

(Twelve-month percent change, unless otherwise specified)

Sources: Chinese authorities; and IMF staff estimates.

1 Data for the first cycle, 1979–82, are not available.

2 Annual percent change.

The most recent cycle began in early 1992 when Deng Xiaoping toured the prosperous coastal areas and called on the whole country to accelerate growth and more vigorously pursue the policy of reforming and opening up the economy. The call was taken by local officials as a carte blanche for faster growth; in response, there was a boom in aggregate demand, especially fixed investment, leading to widening macroeconomic imbalances. Amid deepening concerns about intense demand pressures and the disorderly conditions that had emerged in financial markets, the authorities launched a package of stabilization measures in July 1993—widely reported as the “16-Point Program”

At the same time, rather than slow down reforms as in previous cycles, the authorities intensified their preparations to develop a comprehensive reform strategy directed at achieving a breakthrough in China’s efforts to transform its economy to a fully market-based system. The ideological groundwork for this breakthrough was laid in early 1992 during Deng Xiaoping’s southern tour, when he pronounced that the market mechanism was a tool for economic development and was consistent with socialism. His views were formally endorsed in October 1992 by the Fourteenth National Congress of the Chinese Communist Party (CCP), which set the establishment of a “socialist market economy” as a national goal. This goal was subsequently included in the country’s Constitution during the first session of the Eighth National People’s Congress in March 1993. A new reform strategy was adopted during the Third Plenum of the Fourteenth Central Committee in November 1993.2

Thus, a new phase of economic reforms has begun in China in 1994, aimed at tackling the problems left by partial reforms and establishing by the year 2000 a “socialist market economy,” in which market forces will play the primary role in resource allocation while public ownership (including in the form of corporatized enterprises and collectives) remains the mainstay of the economy.3 The strategy calls for fundamental changes in a broad range of important areas. A major theme of the strategy is to build the infrastructure necessary for indirect macro-economic management, which will require reforms in such areas as the exchange and trade system, central banking and the financial system, the tax system and intergovernmental fiscal relations, and the investment system. The building of a macro-economic policy infrastructure is intertwined with SOE reforms, which is another important focus of the new strategy. The objective is to transform the SOEs into “modem” enterprises that are autonomous, competitive, and legal entities with full accountability for profits and losses. The new strategy also includes an ambitious agenda to develop fully the legal and regulatory framework. The new reform program is comprehensive, bold, and ambitious, aiming to create an even, competitive environment in all sectors and throughout the country, so as to lay a solid foundation for the continued rapid development of the economy. The successful implementation of the reform program would bring about continued progress toward a full realization of the vast potential of the Chinese economy.

This paper discusses the current reform program, with particular focus on aspects relating to macroeconomic management. The following sections describe the working of the existing system in the various macroeconomic policy areas, analyze its main weaknesses, and assess the authorities’ reform plans. Section II discusses exchange and trade system reforms that encompass the establishment of a unified exchange rate, a national foreign exchange interbank market, more liberal access to foreign exchange for trade and trade-related transactions, and a reduction in trade restrictions. Section III discusses monetary policy and financial sector reforms that aim to strengthen the People’s Bank of China (PBC) as a central bank with greater autonomy, develop indirect instruments of monetary control, and commercialize the banking system. Section IV focuses on fiscal reforms that involve a fundamental overhaul of the tax system and a new revenue-sharing system between the central and local governments. Section V deals with the behavior of investment, its role in the macroeconomic cycles, and investment system reforms involving the introduction of risk mechanisms in investment decisions. Section VI covers SOE reforms, emphasizing the adoption of the shareholding system, or “corporatization,” which provides a clear separation between the ownership and management of enterprises.


See Bell, Khor, and Kochhar (1993) for a detailed analysis of the reform process during 1978–93. The process is best captured by the metaphor (attributed to Deng Xiaoping) of “crossing the river by feeling the stones under the feet.”


“Decision of the CCP Central Committee on Some Issues Concerning the Establishment of a Socialist Market Economic System,” Beijing Review, Vol. 36. No. 37 (November 22–28, 1993), pp. 12–31.


Appendix I provides a summary of the structural reforms.

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