## _op232 ## Source details **Canonical URL:** [_op232](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/op/232/_op232.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/op/232/_op232.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/op/232/_op232.pdf.json) --- ### I Overview: Growth, Trade, and Reform Phases - Rapidly expanding international trade and growth: - GDP growth averaging almost 8 percent over the last two decades. - Sixth largest economy in the world (at market exchange rates). - China’s share in world trade rose from less than 1 percent in 1979 to about 6 percent in 2003. - Exports and imports grown at an average rate of 15 percent each year since 1979; world trade grew 7 percent annually over the same period. - Per capita income: $1,060. - China accounted for about 24 percent of world growth during 2001–03 (using purchasing-power-parity-based GDP). - China is the third largest importer of developing countries’ exports after the United States and the European Union. - China is the world’s largest importer of copper and steel; among the largest importers of iron ore and aluminum. - Hong Kong SAR intermediated about 22 percent of the mainland’s trade during 2002–2003. - Adjusted U.S. trade surplus estimate with China (accounting for Hong Kong SAR reexports): "$74 billion." - Structural trade patterns and distributional effects: - China increasingly serves as a final processing and assembly platform within Asia; imports from other Asian countries for reexport to Western countries. - Bilateral shifts: increasing trade surpluses with Western industrial countries offset by rising trade deficits with many Asian countries. - Short-run distributional effects: exporters of capital- and resource-intensive products likely beneficiaries; countries specializing in labor-intensive exports similar to China likely adversely affected and face significant adjustment needs. - Domestic implications: potential for increased regional income disparities and social pressures from job dislocation and rising unemployment. - Five broad phases of reform (stylized chronology): - Phase 1 (1978–84): farming decentralization to household level; agricultural prices raised; some SOEs allowed to retain profits. - Phase 2 (1984–88): urban industrial reforms; enterprise taxation; breakup of monobank; fourteen major coastal cities opened. - Phase 3 (1988–91): inflation after price liberalization; recentralization of many price controls and sharp contractionary policies. - Phase 4 (1992–1997): 1992 formal embrace of a socialist market economy; acceleration of enterprise, financial, and social reforms. - Phase 5 (1998 to present as of paper): broader opening, comprehensive WTO-related commitments to open agricultural and services sectors. ### Price Dynamics and Inflation/Deflation Episodes - Price setting and market integration: - Prices increasingly market determined due to global integration and domestic price liberalization. - Traded goods’ prices achieved substantial convergence with international prices; not all prices are market determined. - Two mild deflation episodes: 1998–2000 and 2001–02 despite high output growth. - Supply-related determinants of recent price dynamics: - Transitory: declines in commodity prices at start of each episode; restraints on administrative price increases. - Longer-term: productivity gains from strong investment; tariff reductions; state enterprise reform; adoption of new technologies. - Large labor surplus in rural areas and excess capacity in some state enterprises kept costs and prices down. - Countervailing factor: - Strong growth of monetary aggregates supported price increases, particularly in 2003. ### Empirical Analysis of Inflation (Regression Results Q1:1996–Q4:2003) - Model specification: inf_t = f(lagged inf, prod_t, ygap_t, g_t, M2_{t-1}, comm_t, tariff_t, neer_t); dependent variable: four-quarter CPI inflation. - Sample period: Q1:1996–Q4:2003; Number of observations: 32. - Final OLS coefficient estimates (absolute t-statistics in parentheses): - Constant: 0.50 (0.41) - Lagged CPI inflation: 0.71 (22.15) - Implies strong persistence; shock spread across roughly two years, with two-thirds observed within first year. - Productivity growth: –0.34 (2.65) - A 1 percentage point increase in productivity growth lowers CPI inflation by more than 0.3 percentage point in the same quarter. - Changes in average tariff rates, lagged twice: 0.08 (2.60) - A 1 percentage point cut in the average tariff rate lowers inflationary pressures by 0.08 percentage point (text notes effect “close to 0.1 percentage point with a half-year lag”). - Output gap as percent of GDP: 0.51 (3.07) - A 1 percentage point increase in GDP growth above trend increases inflation by 0.5 percentage point. - Fiscal balance in percent of GDP: –0.09 (1.87) - A 1 percent of GDP increase in the fiscal deficit increases inflation by less than 0.1 percentage point. - Broad money growth, lagged once: 0.13 (4.68) - A 1 percentage point increase in broad money growth raises inflation by more than 0.1 percentage point. - Changes in world commodity price index: 0.05 (6.75) - A 10 percent increase in the world nonfuel commodity price index increases CPI inflation by 0.5 percentage point. - Regression diagnostics: - R-squared: 0.98. - Prob(F-statistic): 0.00. - Newey-West covariances used (lag truncation = 3). - Augmented Dickey-Fuller and Phillips-Perron tests rejected unit root in inflation rate. - Interpretation: - Structural factors (productivity growth, tariff cuts, world commodity price declines) materially contributed to deflationary episodes. - Demand-side factors (output gap, fiscal and monetary accommodation) had sizable first-round effects. - Nominal effective exchange rate was consistently insignificant and omitted from final equation. ### Exchange Rate: Regime, REER Determinants, and SVAR Analysis - Exchange rate regime: - China maintained a de facto fixed exchange rate regime; renminbi linked to U.S. dollar within a narrow trading band. - Equilibrium exchange rate estimation: - Extended relative PPP approach (1980–2003) estimated elasticities (nonlinear least squares, column (1) in Table 4.1): - TNT (relative productivity of tradable vs nontradable): coefficient 1.12 (t-statistic 3.46). - NFA (NFA/GDP): coefficient 0.90 (t-statistic 3.03). - Open (sum of exports and imports as share of GDP): coefficient –0.30 (t-statistic 0.75). - Macroeconomic balance approach (underlying current account average for 2000–2002: 2.10 percent of GDP): - Norm A (panel-based determinants): 3.10 percent of GDP. - Norm B (stabilize NFA/GDP at 2001 level): 0.98 percent of GDP. - Contrasting norms imply wide range of equilibrium REER outcomes; substantial uncertainty. - Structural VAR (annual data 1980–2002) identification: - Three shocks: relative supply, relative real demand, relative nominal demand. - Long-run restrictions: nominal demand shock has no long-run effect on REER; nominal and real demand shocks have no long-run effect on relative output. - Key SVAR findings: - Real demand shocks are the most important factor, accounting for about half of variance in exchange rate changes even in the long run. - Supply shocks also significant and their contribution rises over longer horizons. - Nominal shocks less important in explaining REER fluctuations. - Historical episodes: - 1993–1997: real demand factors rose sharply; sharp appreciation of renminbi. - 1998 onward: external demand fell due to Asian crisis, reducing relative demand factors. - 1997: supply factors (SOE restructuring) had temporary disruptive effects. - 2001: supply-side factors pushed up REER, linked to strong FDI inflows and productivity gains. - Conclusion: real shocks dominated REER fluctuations; medium-term path depends on structural reforms, openness, and capital account liberalization. ### Fiscal Policy: Current Metrics and Medium-Term Challenges - Current fiscal metrics (near-term): - Explicit government debt: 26 percent of GDP. - Budget deficit: 3 percent of GDP (overall budget deficit: 3 percent of GDP in 2003). - Recent fiscal developments and trends (1997–2003 series, percent of GDP): - Total revenue: 12.1, 13.0, 14.3, 15.3, 17.0, 18.3, 18.8. - Tax revenue: 11.1, 11.8, 13.0, 14.1, 15.7, 16.8, 17.1. - Taxes on income and profits (1997–2002): 2.1, 2.0, 2.3, 2.9, 4.0, 4.5, … . - Value-added tax on domestic goods: 4.4, 4.6, 4.7, 5.1, 5.5, 5.9, 6.2. - VAT and excises on imports: 0.7, 0.7, 1.2, 1.7, 1.7, 1.8, 2.4. - Nontax revenue: 1.1, 1.2, 1.3, 1.2, 1.3, 1.5, 1.6. - Tax revenue as share of total revenue (percent): 91.3, 90.7, 91.0, 92.0, 92.3, 91.9, 91.3. - Total expenditure and net lending: 14.0, 16.1, 18.3, 18.9, 20.1, 21.7, 21.6. - Current expenditure: 11.5, 12.6, 13.7, 14.7, 16.1, 17.3, 17.4. - Capital expenditure: 2.2, 2.6, 3.5, 3.3, 3.6, 3.9, 3.9. - Pensions and social welfare relief (1997–2002): 0.2, 0.2, 1.0, 1.7, 2.0, 2.5, … . - Primary expenditure: 13.2, 15.1, 17.6, 18.1, 19.3, 21.0, 20.8. - Medium-term fiscal risks and contingent liabilities: - Reported NPL stock at end-2003: 16 percent of GDP. - Preliminary assessment: potential losses from NPLs could amount to about 13 percent of GDP for the four big state commercial banks alone (assuming recovery rate equivalent to asset management companies of 21 1/2 percent). - World Bank estimate for transition to fully funded individual pension accounts: net present value of 70 percent of GDP (over next 75 years) if parameters unchanged; parametric reforms (e.g., raising retirement age to 65 and indexing pensions to inflation) could lower financing gap to about 7 percent of GDP. - OECD estimate: government primary expenditure would need to increase by at least an additional 2 percent to 3 percent of GDP over the next five to ten years to meet social needs and WTO-adjustment costs. - State ownership and valuation uncertainty: - State ownership in over 150,000 SOEs; more than 1,000 listed domestically or overseas. - Valuation ranges for net value of state equity in SOEs: from zero to 100 percent of GDP; many studies suggest 25 percent to 65 percent of GDP. - Book-value approach: SOEs worth about 50–75 percent of GDP; Ministry of Finance book value ~65 percent of GDP in nonfinancial enterprises plus 10 percent of GDP in financial and overseas enterprises; adjusting for “unhealthy assets” (~one-third of equity) lowers bound to about 50 percent of GDP. - Market-value adjustments: applying average market-to-book ratio of 1.6 yields estimated market value ≈ 80 percent of GDP. - P/E and price/sales approaches produce wide-ranging estimates: P/E = 20 → ~50 percent of GDP; P/E = 15 → ~35 percent of GDP; P/E = 40 → ~100 percent of GDP; H-shares/Red Chips price/sales ≈ 1.25 → ~100 percent of GDP; emerging market price/sales → ~70 percent of GDP. - Implications: divestiture of state assets could fund liabilities but realizable proceeds limited by competing claims, central–local splits, and domestic market absorption constraints; institutional reforms (e.g., State Assets Supervision and Administration Commission established March 2003) and greater disclosure recommended. ### Banking System: Structure, Reform Progress, and Remaining Challenges - Financial intermediation dominated by state-owned banks; capital markets underdeveloped (stock market thin; no corporate bond market). - Household saving estimated around one-third of total household income. - WTO-related opening increases urgency of reform; foreign banks to face domestic banks from 2006 under accession commitments. - Institutional developments: - China Banking Regulatory Commission (CBRC) established April 2003; near-term priorities: reduction of NPLs, reform of SCBs, reform of rural financial system (RCCs). - CBRC required all SCBs and JSCBs to adopt five-tier loan classification beginning 2004. - SCBs performance and indicators (end-2002 / 2003 data): - For four SCBs combined, stock of NPLs declined by RMB 170 billion in 2003 to RMB 1.9 trillion. - NPL ratio fell from 26 percent to 20 percent. - Special mention loans at end-2002: BOC 14 percent, CCB 19 percent, ICBC 12 percent. - Provisioning requirements (CBRC 2005 standards): general provisions 1 percent of all loans; specific provisions 2 percent of special mention loans, 20–30 percent of substandard loans, 40–60 percent of doubtful loans, 100 percent of loss loans. - At end-2002, only BOC met 8 percent CAR threshold; reported CARs boosted by smaller risk weights on SOE claims. - Profitability: SCBs’ profitability low by international standards; all four recorded positive net profits in 2001 and 2002. - Taxation: 33 percent corporate income tax and business tax on gross income; total taxes as share of adjusted profit >50 percent for ABC, CCB, and ICBC in 2001–2002; business tax reduced by 1 percentage point to 5 percent in 2003. - Banks cannot deduct specific provisions from income for tax purposes. - Capital injections and measures: - State Council authorized use of $45 billion of international reserves to boost capital of BOC and CCB at end-2003. - Each of BOC and CCB received $22.5 billion (equivalent to RMB 186 billion) capital injection. - Accompanying measures: upgrade internal management, improved auditing, more prudent provisioning, closer supervision. - Interest rate liberalization (December 2003): - Upper band on renminbi lending consolidated at 170 percent of benchmark rate; lower band at 90 percent. - Example benchmark: one-year loan rate 5.31 percent as of December 2003 → acceptable lending range 4.78 percent to 9.03 percent. - For RCCs, upper band raised to 200 percent of benchmark. - Deposit rates unchanged; example benchmark deposit rates as of December 2003: demand deposits 0.72 percent; three-month time deposits 1.71 percent. - Policy objectives: bring institutional and regulatory frameworks to international standards; improve balance sheets, modernize operations, and prepare for international competition to ensure a healthy banking system that supports macro stability and growth. ### Labor Market: Structure, Pressures, and Policy Directions - Key structural statistics: - Over 60 percent of population classified as rural (2000 census). - Population growth in 1990s averaged just under 1 percent a year; labor force grew about 1 1/2 percent a year. - Labor force participation rose to about 83 percent by late 1990s. - Urban job growth averaged 3 percent a year (6 1/2 million a year) since 1990. - Surplus labor estimates: rural sector about 150 million; SOEs about 10–11 million. - Migrant population estimates vary between 80 million and 150 million. - Private sector (including FFEs) created 25 million jobs during 1995–2002; unexplained increase of 80 million jobs over 1995–2002 partly attributed to informal-sector employment. - Unemployment measures and regional variation: - Urban registered unemployment (MOLSS) ~2 1/2–3 percent in 1990s; rose to 4 percent by 2002. - Including xiagang, registered unemployed and xiagang reached 5 1/3 percent of urban labor force by end-2002. - NBS new (ILO-consistent) estimates suggest urban unemployment ~4–5 percent. - Xiagang peak ~9 1/2 million at end-1999; declined to ~6.2 million by end-2002. - Regional registered unemployment (end-2002): Beijing 1.4 percent; Heilongjiang 6.5 percent; northeastern region almost 8 percent (including xiagang). - Employment outlook and scenario projections (central scenario assumptions and results): - Assumptions (numbering preserved): 1. Working age population grows by 11–12 million annually through 2006. 2. Labor force participation rate stays at 2002 level of 83 percent. 3. All new entrants seek nonagricultural jobs. 4. Nonagricultural GDP grows by 7½ percent annually through 2010 (implying overall GDP ~7 percent). 5. Elasticity of employment growth to output growth is 0.45. 6. Impact of wage growth on employment is minor. - Central scenario projections: - Nonagricultural employment end-2002: 357 (millions); 2010: 404. - New jobs (annual increase) 2004–2006: 12–13 (millions). - Total population 2002: 1,285; 2010: 1,315 (millions). - Working age population (15–64) 2002: 903; 2010: 951 (millions). - Increase of working age population (annual change): 9 (2002), 13 (2003 est.), 11 (2004), 12 (2005), 11 (2006), 8 (2010). - Increase of labor force (annual change): 9, 11, 9, 10, 9, 7. - New jobs less increase in labor force: −2 (2002), 3 (2003 est.), 3 (2004), 4 (2005), 8 (2006), 10 (2010). - Surplus labor seeking jobs (selected): 29, 97, 75, 25, 50 (millions across years shown in table). - SOE reemployment: 1, 33, 20, 8, 10 (millions across years shown). - Rural migrants: 1, 66, 55, 17, 40 (millions). - Change in urban unemployment (survey based): ... 4 6 6 3 −3 15. - Urban unemployment rate (percent): 4.5 (2002), 5.8 (2003 est.), 7.7 (2004), 9.7 (2005), 10.4 (2006), 9.0 (2010). - Scenario summary: with GDP growth averaging 7 percent and elasticity 0.5, unemployment could double over next three to four years to about 10 percent before declining as SOE reform completes. - Alternative scenarios (illustrative): - Optimistic: 8½ percent nonagricultural growth and elasticity 0.6 could absorb over 90 million surplus workers in 2004–10. - Pessimistic: 6½ percent growth and elasticity 0.30 suggests labor force growth outstrips job growth by 7 million in 2004–10. - Policy priorities for labor adjustment: - Create quality jobs via private-sector and service-industry growth. - Remove hurdles faced by private firms. - Further liberalize hukou system to permit migration and access to services. - Enhance worker skills through education and training. - Strengthen unemployment insurance, social safety nets, and active labor-market policies. - Improve labor market statistics and monitoring. ### WTO Accession: Commitments, Market Access, and International Impact - Commitments and timelines (preserved exact figures and wording): - China will further reduce its average tariff rate to 10 percent by 2005. - "All tariffs on imported goods are to be eliminated or reduced, mostly by 2004." - "Tariffs on industrial goods will be reduced to an average of 9 percent, and import quotas will be removed by 2005." - "Tariffs on agricultural goods will be lowered to an average of 15 percent." - Trade in services: staged access (end-2003, end-2004, end-2006) with banking commitments: foreign financial institutions permitted foreign currency business upon accession; local currency services to Chinese companies within two years (implemented at end-2003); services to all Chinese clients within five years (by end-2006). - Trading and investment regimes: removal of discriminatory measures; elimination of inconsistent export subsidies; TRIMs and TRIPs commitments. - Agricultural subsidies limited to 8.5 percent of the value of production; elimination of agricultural export subsidies upon accession. - Antidumping "nonmarket economy" provisions available to other members for 15 years following accession. - Transitional product-specific safeguard mechanism and special safeguard for textile and clothing exports. - Immediate benefits and adjustment: - Increased market access overseas; permanent MFN treatment granted. - Inclusion in ATC implies eventual unrestricted access to textile and clothing export markets. - Box 2.1 selected commitments preserve exact timing and magnitudes. - International impact and distribution: - Most studies agree China’s WTO accession entails overall welfare gain for China and world, though magnitude limited because tariffs already lowered substantially. - Gains/losses distributed in proportion to complementarity between trade patterns and China’s. - NIEs of Asia benefit from processing trade but may face competitive pressure as China moves up value chain. - ASEAN and South Asia: exports to China expanding rapidly; competition in labor-intensive products could force significant adjustments, especially in quota-dependent economies. - FDI diversion: ASEAN may face greater share of regional FDI going to China. - Empirical sectoral shifts: China’s world export market share in textile and clothing remained about 15 percent from 1990 to 2002; footwear market share rose from 7.3 percent in 1990 to 28.4 percent in 2000. - Policy recommendations for partners: - Increase economic flexibility through structural reforms to ease intersectoral mobility. - Advanced countries: shift to skill- and capital-intensive activities. - Middle-income developing countries: enhance labor flexibility and upgrade human capital. - Countries with large pools of less-skilled workers: speed up reforms, invest in training, and create employment opportunities. - Broader trade liberalization by advanced countries would aid adjustment. ### Fiscal Federalism and Local Government Risks (Audit Findings) - 1994 fiscal decentralization: raised government revenue and increased central share; stimulated provincial growth but widened income disparities. - Local fiscal risks and audit findings (2002 Audit Report): - Misuse of government loans and project failures: sewage projects costed at RMB 6 billion received RMB 2 billion; 15 projects unfinished; poor outcomes in airport audits (combined losses RMB 1.4 billion for major airports; RMB 1.5 billion for secondary-route airports in 2000–2001); Mianzhou airport achieved only 3 percent of design capacity. - Insufficient funding and arrears: at end-2001, 49 cities/counties had total debt RMB 1.6 billion (2.1 times disposable resources); as of September 2002, 42 counties/townships had RMB 1.8 billion in wage arrears. - Underlying causes: counties/townships rely on transfers for 60 percent of expenditures; many earmarked subsidies require counterpart funds; “improper attitudes toward fiscal management” and unfunded mandates—number of persons supported by public funds rose 22 percent vs total population increase 4.6 percent since 1994. - Policy implications: - Reform transfer system to better address regional disparities. - Clarify and fund local expenditure mandates, especially pensions. - Strengthen oversight of indirect local financing and monitor implicit liabilities. - Centralized monitoring of subnational operations to detect contingent liabilities early. ### Key Quantitative Points and Exact Figures (selected) - Average tariff rate target: 10 percent by 2005. - Tariffs on industrial goods target: an average of 9 percent. - Tariffs on agricultural goods target: an average of 15 percent. - Agricultural subsidy limit: 8.5 percent of the value of production. - Antidumping "nonmarket economy" provision duration: 15 years following accession. - Outbound tourism growth: "outbound tourism grew by 37 percent in 2002." - Hong Kong SAR intermediation share: "During 2002–2003, Hong Kong SAR intermediated about 22 percent of the mainland’s trade." - Adjusted U.S. trade surplus estimate with China: "$74 billion." - Reported NPL stock at end-2003: 16 percent of GDP. - Potential NPL losses for four big SCBs (preliminary): about 13 percent of GDP (assuming recovery rate of 21 1/2 percent). - State equity valuation ranges: 25 percent to 100 percent of GDP (various methods produce estimates including about 50–75 percent of GDP book values, market-adjusted ≈ 80 percent of GDP). - Capital injection for BOC and CCB at end-2003: $22.5 billion each (total authorized $45 billion; equivalent to RMB 186 billion each). - Interest rate example (December 2003): benchmark one-year loan rate 5.31 percent → lending band 4.78 percent to 9.03 percent; benchmark deposit rates: demand deposits 0.72 percent; three-month time deposits 1.71 percent. - Employment projections (central scenario): urban unemployment rate projections: 4.5 (2002), 5.8 (2003 est.), 7.7 (2004), 9.7 (2005), 10.4 (2006), 9.0 (2010) (percent). *Source: Occasional Paper overview chapter and staff analyses in _op232.* ### 1. China—Foreign economic relations. 2. Prices—China. 3. Foreign ### I Overview ### Rapidly Expanding International Trade - China’s growth performance over the last two decades: GDP growth averaging almost 8 percent. - China’s rank: sixth largest economy in the world (at market exchange rates). - China’s share in world trade: rising from less than 1 percent in 1979 to about 6 percent in 2003. - Exports and imports growth: grown at an average rate of 15 percent each year since 1979. - World trade growth comparison: 7 percent annual expansion over the same period. - China’s per capita income: $1,060. - China’s contribution to world growth: accounted for about 24 percent of world growth during 2001–03 (using purchasing-power-parity-based GDP). - Import status: China is now the third largest importer of developing countries’ exports after the United States and the European Union. - Commodity demand: China is now the world’s largest importer of copper and steel, and among the largest importers of other raw materials, including iron ore and aluminum. - Structural trade pattern: China increasingly serves as the final processing and assembly platform within the Asian region, handling imports from other Asian countries for reexport to Western countries. - Bilateral trade shifts: increasing trade surpluses with Western industrial countries offset by rising trade deficits with many Asian countries. - Short-run distributional effects: - Likely beneficiaries: exporters of capital- and resource-intensive products. - Likely adversely affected: countries specializing in labor-intensive exports similar to China, which will face significant adjustment needs. - Domestic implications within China: - Potential for increased regional income disparities. - Foreign competition could aggravate social pressures from job dislocation and rising unemployment. - Historical context: Other Asian economies (Japan, Korea, newly industrialized economies of Asia) maintained even higher export growth rates, on average, for about a 30-year period, implying China could sustain relatively strong export growth for years. ### Price Dynamics - Market integration: Prices in China are increasingly market determined as a result of greater integration with the global economy and continued domestic price liberalization. - Convergence: Traded goods’ prices have achieved substantial convergence with international prices. - Modeling challenge: Not all prices in China are market determined; understanding causes of aggregate price variations remains important and presents challenges for modeling inflation dynamics in China. ### Real Exchange Rate Fluctuations - (Section heading present in table of contents; substantive analysis not included in supplied content.) ### Fiscal Policy - (Section heading present in table of contents; substantive analysis not included in supplied content.) ### Banking System Reform - (Section heading present in table of contents; substantive analysis not included in supplied content.) ### Unemployment - (Section heading present in table of contents; substantive analysis not included in supplied content.) ### The Outlook - Sustained potential: Strong prospects that China’s rapid economic growth and trade expansion could be sustained well into the future. - Reform caveat: A number of macroeconomic and structural vulnerabilities need to be addressed for this potential to be fully realized. - Reform approach: China’s traditional approach to reform has been incremental; given rapid opening to the world economy, a more concerted and multifaceted reform approach will be crucial to maintain rapid growth and manage challenges of global integration. ### China’s Approach to Economic Reform (stylized facts and phases) - Broad characterization: Gradual and incremental, often piloted locally before nationwide application; use of intermediate mechanisms (for example, Special Economic Zones) to smooth transition; preservation of socialist character while introducing market-oriented reforms. - Five broad phases of reform: - Phase 1 (1978–84): Decentralization of farming to the household level; agricultural prices raised; some state-owned enterprises allowed to retain profits. - Phase 2 (1984–88): Urban industrial reforms including some liberalization in enterprise pricing and wage setting, introduction of enterprise taxation, breakup of the monobank system; fourteen major coastal cities opened to foreign trade and investment. - Phase 3 (1988–91): Continued reform but lack of effective macroeconomic institutions; inflation increased after price liberalization; authorities recentralized many price controls and administered sharp contractionary policies to control double-digit inflation. - Phase 4 (1992–1997): Return to stimulative policies; 1992 formal embrace of a socialist market economy, providing political support for restructuring government roles and accelerating enterprise, financial, and social reforms; set stage for globalization. - Phase 5 (1998 to present as of paper): Broader opening of the economy, more broad-based trade liberalization, comprehensive WTO-related commitments to open agricultural and services sectors. *Source: Occasional Paper overview chapter by Eswar Prasad and Thomas Rumbaugh.* ### Box 1.1. China’s Approach to Economic Reform ### Box 1.1. China’s Approach to Economic Reform ### Banking System Reform (price dynamics and causes) - China experienced two recent episodes of mild deflation: 1998–2000 and 2001–02, despite sustained high output growth. - Supply-related factors were key determinants of recent price dynamics, especially during the deflationary episodes: - Transitory supply factors: declines in commodity prices at the beginning of each episode; restraints on administrative price increases. - Longer-term supply factors: productivity gains from strong investment; a series of tariff reductions; state enterprise reform; adoption of new technologies. - Large labor surplus in rural areas and excess capacity in some state enterprises are acting to keep costs and prices down. - Countervailing factor: - Strong growth of monetary aggregates supported price increases, particularly in 2003. ### Real Exchange Rate Fluctuations - China maintains a de facto fixed exchange rate regime, with the renminbi linked to the U.S. dollar within a narrow trading band. - Rapid export growth, expanding market shares, and rapid accumulation of reserves raised questions about possible undervaluation of the renminbi. - Estimating an equilibrium exchange rate is complex and particularly sensitive for a developing country undergoing structural change: - Existing techniques provide a very wide range of estimates of the equilibrium exchange rate from a medium-term perspective. - Each estimate is sensitive to various assumptions. - Medium-term exchange rate path depends on: - Ongoing structural reforms and further opening of domestic markets to foreign goods and services in line with World Trade Organization (WTO) commitments. - The nature and pace of liberalization of capital controls. - Policy implication: - Discussions about attaining a particular level of the exchange rate may be less productive than focusing on the broader benefits of exchange rate flexibility for China. ### Fiscal Policy - Current fiscal metrics: - Explicit government debt: 26 percent of GDP. - Budget deficit: 3 percent of GDP. - Near-term fiscal sustainability: no immediate concerns given the above metrics. - Medium-term fiscal challenges and potential future obligations: - Potential losses in the state-dominated banking system. - Future funding requirements of the pension system. - Rising expenditure pressures, especially for education, health, and other social programs. - Substantial quasi-fiscal liabilities that pose a significant medium-term challenge. - Risks that could exacerbate challenges: - Less favorable macroeconomic conditions, especially growth. - Structural reforms not forceful enough to prevent accumulation of new contingent liabilities. - Intergovernmental fiscal relations: - The 1994 fiscal decentralization reforms raised government revenue and increased the share going to the central government; appeared effective in stimulating provincial growth. - Growth has been unbalanced and income disparities across provinces have widened over time. - Center-local fiscal relations have not been effective in reducing disparities; the transfer mechanism from the center to the provinces is not sufficiently progressive. - Resources available to provinces, especially poorer ones, have not kept pace with rising expenditure mandates. - Subnational governments have relied on indirect sources of financing, creating implicit liabilities at the local level that pose significant fiscal risks. ### Banking System Reform (structure, role, and urgency) - Financial intermediation occurs mainly through the banking system; state-owned banks dominate and are the main official source of financing for companies. - Capital markets are underdeveloped: - Stock market is relatively thin. - There is no corporate bond market. - Household saving and intermediation: - Private saving is estimated to be around one-third of total household income. - Bank lending has supported high investment growth and contributed to China’s growth performance. - Stability of the banking system is crucial for sustained growth. - Reform urgency increased by WTO-related opening: - Domestic banks will need to be prepared to face intense competition when the financial sector is opened up to foreign banks in 2006 under WTO accession commitments. ### Unemployment and labor market challenges - Labor market inefficiencies manifest in unemployment and “underemployment,” especially among the rural population. - Unemployment pressures are expected to worsen over the next few years due to restructuring in the rural and state enterprise sectors, even with strong output growth. - The timing of bringing unemployment under control depends largely on the degree to which structural reforms are undertaken. - Social safety net measures needed to mitigate social pressures as labor shifts: - Strengthening the pension system. - Expanding unemployment insurance. - Improving health care. - Enhancing the minimum living allowance. - Fiscal implications: these social measures will have fiscal costs and reflect interconnected reform needs across multiple fronts. ### The Outlook - Medium-term growth potential is strong, based on: - Attractiveness as a destination for FDI. - High domestic saving rate. - Underlying productivity improvements from reduced barriers to internal and external trade. - Significant surplus labor. - Realizing this potential and continued global integration depends on: - Successful management of diverse financial and social risks. - Pace and effectiveness of core macroeconomic and structural reforms. - Policy imperative: - Implementing a broad and concerted reform agenda in an expeditious manner is the crucial challenge facing Chinese policymakers. *Source: Box 1.1. China’s Approach to Economic Reform* ### conclusion. ### conclusion ### China’s Commitments and Compliance - Tariff trajectory: the tariff reductions planned by China in the context of its WTO accession "are largely the continuation of a long-standing trend" reflected in "the decreasing level and dispersion of tariffs and the continued reduction in NTBs, especially since the early 1990s." - WTO commitment on average tariff: China will further reduce its average tariff rate to 10 percent by 2005. - Domestic tariff profile and exemptions: past reforms introduced widespread import tariff exemptions, especially for processing trade and foreign investment; "a majority of China’s imports were in effect not subject to any tariffs in 2000." - Services and trade-related commitments: recent commitments on trade in services, telecommunications, financial services, and insurance "represent milestones"—plans include opening key services sectors and guaranteeing "full access ... through transparent and automatic licensing procedures." - Trade-related rules: China committed to national treatment and nondiscrimination principles, to remove Trade-Related Investment Measures (TRIMs) mandatory requirements, and to enforce Trade-Related Aspects of Intellectual Property Rights (TRIPs). - Administrative challenge: compliance will require adequate enforcement "including at the provincial and municipal levels, where vested interests and capacity constraints may hamper progress." - Transitional Review Mechanism: a special WTO procedure requires China’s compliance be reviewed by the WTO on an annual basis in the early years; "the 2002 and 2003 reviews did not reveal any major source of contention" and specific difficulties appear primarily technical rather than a broad pattern of noncompliance. ### Market Access Prospects - Immediate benefit: "Increased market access overseas is the most immediate benefit from WTO accession for China." - MFN treatment: China was permanently granted most-favored-nation (MFN) treatment by other WTO members. - Textiles and clothing: accession implies China is included in the Uruguay Round Agreement on Textiles and Clothing (ATC) and "will eventually obtain unrestricted access to textile and clothing export markets." - Box 2.1 selected commitments (exact timing and magnitudes preserved): - Trade in Goods: - "All tariffs on imported goods are to be eliminated or reduced, mostly by 2004." - "Tariffs on industrial goods will be reduced to an average of 9 percent, and import quotas will be removed by 2005." - "Tariffs on agricultural goods will be lowered to an average of 15 percent." - Trade in Services: - "Within two years foreign service suppliers will be permitted to engage in the retailing of all products (implemented at end-2003); within three years (by end-2004) all firms will have the right to import and export all goods except those subject to state trading monopolies; within five years (by end-2006), foreign firms will be allowed to distribute virtually all goods domestically." - Banking: "Foreign financial institutions were permitted to provide services without client restrictions for foreign currency business upon accession; local currency services to Chinese companies within two years (implemented at end-2003); and services to all Chinese clients within five years (by end-2006)." - Trading and Investment Regimes: - National treatment/nondiscrimination: discriminatory measures "will be removed." - Export subsidies: "all forms of export subsidies inconsistent with WTO rules ... were eliminated." - TRIMs: "Foreign investment approvals will no longer be subject to mandatory requirements (e.g., technology transfer or local content requirements)." - TRIPs: "China will enforce the rights protecting intellectual property within China." - Agricultural subsidies: China agreed to limit domestic agricultural subsidies to 8.5 percent of the value of production and "to eliminate all agricultural export subsidies upon accession." - Trading Partner Safeguards: - "Transitional product-specific safeguard mechanism" under the WTO Agreement on Safeguards. - "Special safeguard mechanism for China’s textile and clothing exports." - Antidumping: other members can invoke "nonmarket economy" provisions to determine dumping cases for 15 years following accession. ### Potential Implications of China’s Role in World Trade - General equilibrium model findings: - Most studies agree "China’s WTO accession will entail an overall welfare gain for China and the world as a whole," though the magnitude may be limited because China’s tariffs "have already been lowered substantially." - Gains and losses are distributed "in proportion to the degree of complementarity between their trade patterns and China’s." - Regional and sectoral impacts: - Benefits to many trading partners from sustaining China’s growth: imports for domestic use increased rapidly and "outbound tourism grew by 37 percent in 2002." - NIEs of Asia: "would gain from China’s expanding trade" through complementary trade patterns and processing trade, though China’s movement up the value-added chain could increase direct competitive pressure. - ASEAN and South Asia: exports to China are expanding rapidly; however, competition in labor-intensive products (e.g., clothing) could force significant adjustments in some economies, especially quota-dependent low- and middle-income economies; these impacts could be mitigated by increased opportunities to export textiles to China as inputs. - FDI diversion: ASEAN countries "may also have to adjust to a greater share of FDI in the region going to China." - Limits of existing research: - Model limitations include technical uncertainties in estimated trade elasticities due to rapid structural changes in China’s trade. - Most models do not account for key aspects of China’s WTO membership such as the opening of trade in services or reforms removing obstacles to foreign investment that may further change China’s role as a global export base. ### Key statistics and quantitative points (preserved exactly as in source) - Average tariff rate target: 10 percent by 2005. - Tariffs on industrial goods target: an average of 9 percent. - Tariffs on agricultural goods target: an average of 15 percent. - Agricultural subsidy limit: 8.5 percent of the value of production. - Antidumping "nonmarket economy" provision duration: 15 years following accession. - Tourism growth: "outbound tourism grew by 37 percent in 2002." - Hong Kong SAR intermediation share: "During 2002–2003, Hong Kong SAR intermediated about 22 percent of the mainland’s trade." - Adjusted U.S. trade surplus estimate with China (accounting for Hong Kong SAR reexports): "$74 billion." - WTO accession review years cited: "2002 and 2003." *conclusion.* ### Box 2.2. The International Impact of China’s WTO Accession ### Box 2.2. The International Impact of China’s WTO Accession ### WTO accession: commitments and global opportunities - China’s transformation into a leading international importer of both industrial and consumer goods will generate net gains for Chinese consumers and the world economy. - Key steps: China’s decisions to open sectors crucial to its partners and to substantially improve its business environment. - The process is taking place within global rules defined in a multilateral context rather than through regional or bilateral trade arrangements, which should help spread benefits more broadly throughout the global economy. ### Empirical findings on welfare and regional effects - Empirical analyses predict moderate welfare gains for the world economy; net impacts on individual countries depend on the degree of complementarity between their trade patterns and China’s. - Asian economies with complementary trade patterns with China, including the NIEs, are benefiting from processing trade. - China’s exports moving up the value-added chain could pose a more direct competitive threat even to these economies in the future. - Some ASEAN countries and South Asia may need to undergo adjustment to the extent they compete with China in the export of labor-intensive products. - Example of sectoral shifts: China’s world export market share in textile and clothing products remained at about 15 percent from 1990 to 2002, while its market share in footwear increased from 7.3 percent in 1990 to 28.4 percent in 2000. ### Adjustment challenges and recommended domestic policies - Countries can maximize gains and minimize costs by increasing economic flexibility through structural reforms that facilitate intersectoral mobility. - Transitional problems may arise as resources move to more productive areas, particularly for less-skilled workers. - Recommended responses: - Speed up liberalization and integration to improve resource allocation and better pursue comparative advantage. - Advanced countries: shift factors of production to skill- and capital-intensive activities. - Middle-income developing countries with relatively well educated workforces: enhance labor flexibility and upgrade human capital through education and training to move up the value-added chain. - Countries with a relatively large pool of less-skilled workers: speed up reforms to create employment opportunities for less-skilled workers and increase investment in workers’ training and skill upgrading. - Broader trade liberalization, especially by the advanced countries, could significantly aid adjustment by removing constraints on exports. ### Risks associated with China’s expanding trade role and WTO reforms - Increased risk of trade disputes and retaliatory measures due to use of extensive safeguards procedures, potentially negatively impacting international trade volumes. - Domestic risks to growth sustainability from WTO-related reforms, including impacts on: - the agricultural sector and rural income, - SOE and financial sector losses, - vested interests, especially at the provincial level. - WTO accession will likely mitigate some risks by anchoring market-opening commitments in a multilateral framework and promoting wider distribution of benefits as China maintains strong export growth and increases imports from other regions. *Box 2.2. The International Impact of China’s WTO Accession.* ### Section II). In addition, monopolies are in the ### _op232 - Section II). In addition, monopolies are in the ### Drivers of inflation and deflation episodes in China (1996–2003) - Structural and supply-side drivers - Strong productivity growth in the whole economy contributed to lower CPI inflation (or increased deflation). - Average unweighted tariff rate declined from 23.6 percent in 1996 to 11 percent in 2003, directly reducing consumer prices and indirectly lowering costs of imported intermediate goods and inputs. - World nonfuel commodity prices declined significantly during deflationary episodes; the world nonfuel commodity index declined by 23 percent (year-on-year) by August 1998. - Nominal effective exchange rate: cumulative appreciation of 35 percent between 1994 and early 2002; depreciation of 15 percent between early 2002 and end-2003. - Demand-side and policy drivers - External demand was weak during the Asian crisis, intensifying downward price pressures and diverting some export goods to local markets. - Relatively slow income growth in rural areas may have contributed to lower overall prices. - Macroeconomic policy was broadly accommodative for most of the period: - Fiscal deficit widened from less than 1 percent of GDP (official definition) in 1996 to 3 percent of GDP in 2002. - Monetary policy was accommodative, especially in the last few years of the sample. - Transitory factors - World nonfuel commodity prices recovered by early 1999, peaked in late 2000, and declined again thereafter. - Commodity prices increased around 20 percent during 2002–03, contributing to the end of the second deflationary episode. - Demand pickup in 2003 (except Q2 reflecting the SARS epidemic): output growth above trend, fiscal deficit close to 3 percent of GDP, and money growth picked up — together pushing inflation up by end-2003. ### Regression model: specification, data, and estimation - Model specification (linear form, quarterly data for 1996–2003): - inf_t = f(lagged inf, prod_t, ygap_t, g_t, M2_{t-1}, comm_t, tariff_t, neer_t) - Where: - inf = CPI inflation (four-quarter CPI inflation in final regression) - prod = productivity growth in the whole economy (aggregated differences of output and employment growth rates across sectors) - ygap = output gap (deviation from trend output using Hodrick-Prescott filter, smoothing parameter = 1600) - g = quarterly fiscal balance as a ratio to output (seasonally adjusted using X-12) - M2 = growth of broad money (lagged values used) - comm = change in the world nonfuel commodity price index (overall index aggregated using global weights) - tariff = change in the average unweighted tariff rate - neer = change in the nominal effective exchange rate (trade-weighted index) - Sample and data notes - Sample period is Q1:1996–Q4:2003; sample truncated at 1996 to avoid distortions from China’s high-inflation period. - All growth rates are year-on-year quarterly data from the CEIC database unless otherwise noted. - The index used for world nonfuel commodities is the overall index aggregated using global weights. - The use of domestic credit growth as an alternative to M2 did not fundamentally change results; correlation between M2 growth and credit growth over the period is about 50 percent. - Estimation approach - Ordinary least squares (OLS) used to estimate a reduced-form inflation equation. - General model estimated first; statistically insignificant variables and lags eliminated sequentially. - Diagnostic tests did not indicate serial correlation in errors or significant break points. - Inflation expectations were not modeled explicitly; estimated coefficients interpreted as reduced-form coefficients that capture direct effects and indirect effects through expectation formation. - Nominal effective exchange rate was consistently insignificant and dropped from the final equation. ### OLS regression results (final specification, dependent variable: four-quarter CPI inflation) - Sample period: Q1:1996–Q4:2003. - Coefficient estimates (absolute t-statistics in parentheses): - Constant: 0.50 (0.41) - Lagged CPI inflation: 0.71 (22.15) - Implies strong persistence in CPI inflation; total impact of an inflation shock is spread across two years, with two-thirds of total impact observed within the first year. - Productivity growth: –0.34 (2.65) - A 1 percentage point increase in productivity growth lowers CPI inflation by more than 0.3 percentage point in the same quarter (with continued declining effects through lagged inflation persistence). - Changes in average tariff rates, lagged twice: 0.08 (2.60) - A 1 percentage point cut in the average tariff rate lowers inflationary pressures by 0.08 percentage point in the initial estimated coefficient (text notes effect “close to 0.1 percentage point with a half-year lag” consistent with lagged impact). - Output gap as a percent of GDP: 0.51 (3.07) - A 1 percentage point increase in GDP growth above trend increases inflation by 0.5 percentage point. - Fiscal balance in percent of GDP: –0.09 (1.87) - A 1 percent of GDP increase in the fiscal deficit increases inflation by less than 0.1 percentage point (small but significant). - Broad money growth, lagged once: 0.13 (4.68) - A 1 percentage point increase in broad money growth results in a more than 0.1 percentage point increase in inflation. - Changes in the world commodity price index: 0.05 (6.75) - A 10 percent increase in the world nonfuel commodity price index increases CPI inflation by 0.5 percentage point. - Regression statistics and diagnostics: - Number of observations: 32 - R-squared: 0.98 - Prob(F-statistic): 0.00 - Newey-West heteroscedasticity and autocorrelation consistent covariances used (lag truncation = 3). - Augmented Dickey-Fuller and Phillips-Perron tests rejected the null of a unit root in the inflation rate. - High R-squared partly explained by large coefficient on lagged dependent variable. ### Interpretation of regression results and implied contributions - Persistence: - Lagged inflation coefficient of 0.71 implies shocks to inflation persist and propagate over roughly two years. - Structural vs. demand drivers: - Structural factors (productivity growth, tariff cuts) contributed materially to deflationary pressures during the two deflationary episodes. - Demand-side factors (negative output gap, low external demand during Asian crisis, accommodative fiscal and monetary policy) also influenced price dynamics: - Output gap coefficient 0.51 and broad money growth coefficient 0.13 show demand has sizable first-round effects on inflation. - Fiscal balance coefficient small (–0.09) but significant. - Role of world commodity prices: - World nonfuel commodity price declines were an important contributor to deflation episodes; later commodity price increases (~20 percent during 2002–03) were key in reversing the second deflationary episode. - Exchange rate: - Nominal effective exchange rate changes were not significant determinants of inflation in the sample and were omitted from the final specification. - Quantified first-round impacts (illustrative) - Productivity growth, tariff reductions, world commodity prices, output gap, fiscal balance, and money growth each exert identifiable initial impacts on CPI inflation according to the estimated coefficients (figures and time-series used to compute these first-round impacts are displayed in Figure 3.6 in the source). ### Additional methodological and data notes - Model limitations and choices: - Single-equation reduced-form approach chosen instead of a structural VAR due to limited time series length for richer models. - Inflation expectations not explicitly modeled; coefficients capture reduced-form effects including expectation channels. - Relative CPI/PPI used as a proxy for relative productivity; direct measures not available and proxy has drawbacks (e.g., effects of price liberalization could be confounded with productivity changes). - Sample truncated at 1996 to focus on low-inflation period and avoid distorting estimates with partial high-inflation data. - Appendix: data definitions and sources (selected) - inf: CPI inflation rate. - prod: aggregated differences of output growth rates and employment growth rates in primary, secondary, tertiary sectors (quarterly employment interpolated from annual sectoral data from National Bureau of Statistics of China). - ygap: deviation of quarterly output growth from HP trend (smoothing parameter = 1600). - g: quarterly fiscal balance ratio to GDP (seasonally adjusted using X-12). - M2: growth of broad money. - Comm: growth rate of world commodity price index (source: IMF, Research Department). - Tariff: unweighted average tariff rates (source: Rumbaugh and Blancher, 2004). - Neer: trade-weighted index of nominal exchange rates (IMF bilateral exchange rates). ### Exchange rate dynamics and medium-term REER determinants (overview) - Historical REER movements (1980–2003) - CPI-based REER experienced sharp swings: large depreciation through the 1980s and early 1990s as China devalued nominal rate and opened the economy; appreciation through the mid-1990s while renminbi tied to U.S. dollar as CPI growth in China exceeded partner countries; appreciation during mid-1997–mid-1998 due to foreign currency movements in Asia; subsequent reversal as partner-country currencies rebounded and Chinese inflation remained low. - Average CPI-based REER index in 2003 is depreciated roughly 4 percent relative to its level in 1997. - Alternative REER measures - ULC-based REER (manufacturing unit labor costs) depreciated about 85 percent between 1984 and 1993; ULC-based REER relatively stable between 1998 and 2002 as wage growth aligned with productivity. - PPI-based REER and proxies for relative export prices rose since the mid-1990s, with much of the rise occurring before 1998. - Medium-term determinants and equilibrium estimates - Extended relative PPP approach (incorporates Balassa-Samuelson effects, net foreign assets (NFA), and openness) estimated using nonlinear least squares over 1980–2003. - Key estimated elasticities (nonlinear least squares, column (1) in Table 4.1): - TNT (relative productivity of tradable vs nontradable): coefficient 1.12 (t-statistic 3.46) - A 1 percent increase in TNT → slightly more than 1 percent real appreciation. - NFA (NFA/GDP): coefficient 0.90 (t-statistic 3.03) - A 1 percentage point increase in NFA/GDP → 0.9 percent higher real exchange rate. - Open (sum of exports and imports as share of GDP): coefficient –0.30 (t-statistic 0.75) - A 1 percentage point increase in openness → 0.3 percent decline in real currency value (coefficient signs align with theory though t-statistic small). - Dynamic OLS and alternative specifications produced qualitatively similar results; parameters generally stable over 1987–2003. - Fitted medium-term REER path broadly tracks actual CPI-based REER, though persistent gaps exist in some episodes; recent few years’ differences not large — interpreted with caution (fitted values from reduced-form equations have conceptual limitations as equilibrium indicators). - Macroeconomic balance approach and results - Underlying current account (average for 2000–2002): 2.10 percent of GDP. - Two norms for equilibrium saving-investment balance: - Norm A (panel-based determinants): 3.10 percent of GDP. - Norm B (stabilize NFA/GDP at 2001 level): 0.98 percent of GDP. - Contrasting implications: - Norm A → suggests China should run larger current account surpluses than recently (implying need for real depreciation). - Norm B → suggests China should run lower surpluses (1 percent of GDP) than recently (implying need for real appreciation). - Conclusion: existing methodologies yield a wide range of equilibrium renminbi estimates with substantial uncertainty. ### Structural VAR approach to real exchange rate fluctuations - Motivation and setup - Structural VAR (Blanchard-Quah/Clarida-Gali framework) used to decompose real exchange rate movements into structural shocks: relative supply shocks, relative real demand shocks, and relative nominal demand shocks. - Three-variable structural VAR with annual data 1980–2002: relative output, real effective exchange rate, and relative price level (each expressed relative to trading partners). - Long-run identifying restrictions (consistent with theory): - Relative nominal demand shock has no long-run effect on the level of the real exchange rate. - Relative nominal and real demand shocks have no long-run effects on the level of relative output. - Short-run responses are unrestricted, allowing examination of how different shocks drive medium-term REER paths. - Applicability caveats - Model assumes open economy with flexible exchange rate, capital mobility, and long-run full employment; China has transitioned from a closed planned economy to a more open, market-oriented economy with substantial structural change, making the model increasingly relevant though not perfectly matched to all assumptions. - Capital controls were never fully watertight; FDIs and external borrowing were significant, and capital movements grew in recent years. *Source: IMF staff calculations, _op232 - Section II).* ### Box 4.1. Identification of Shocks in a Structural VAR Model ### Box 4.1. Identification of Shocks in a Structural VAR Model ### Methodology and identification - A structural VAR (SVAR) framework is used to identify three types of shocks: aggregate supply shocks, aggregate real demand shocks, and nominal demand shocks (shocks affecting the money market). - The model is estimated in first differences; resulting impulse responses were cumulated to derive effects on the level of the REER. - The long-run level response of the REER to a nominal shock is restricted to be zero. There are no other restrictions on the short-run and long-run responses of the REER to different shocks. - For additional methodological details, model specification, data calculations, and more detailed estimation results, see Wang (2004). ### Short-run effects (impulse responses) - A positive supply shock leads to a short-term appreciation of the real effective exchange rate (REER) followed by a decline in the long run. - A positive real demand shock is associated with a permanent appreciation of the REER. - A nominal shock has a temporary depreciating impact on the REER with no long-run effects (as imposed by the long-run restriction). - Impulse responses shown are to one standard deviation structural shocks and are expressed as accumulated effects on the level of the REER (in percent). ### Variance decomposition and relative importance of shocks - The structural decomposition indicates that real shocks accounted for most of the variation in real exchange rate changes during the estimation period, whereas nominal shocks were less important. - Real demand shocks are the most important factor, especially in the short run, and account for about half of the variance in exchange rate changes even in the long run. - Supply shocks also have a significant contribution that rises over longer horizons. - Nominal shocks appear not to have played as large a role as in other countries in explaining fluctuations in output growth or real exchange rate movements—possibly because China has a de facto fixed exchange rate system with a relatively closed capital account. ### Historical decomposition and narrative episodes - A historical decomposition of forecast errors of the REER was derived: the total forecast error is the difference between the actual real exchange rate and forecasts based on history up to 1983 and cumulated effects of the various shocks thereafter. Supply, demand, and nominal components sum to the total forecast error. - Episodes and associated shocks: - 1993–1997: real demand factors rose sharply, coinciding with a sharp appreciation of the renminbi. - 1998 onward: external demand fell with the onset of the Asian crisis, leading to a decline in relative demand factors. - 1997: supply factors—major restructuring of state-owned enterprises—may have had a temporary disruptive impact on production and helped keep the REER from depreciating more. - 2001: supply-side factors pushed up the REER, probably linked with strong inflows of foreign direct investment on account of productivity gains in China. ### Comparative and interpretive points - The dominance of real shocks in driving REER fluctuations is consistent with findings for other developing countries. - Compared with studies for industrial countries with flexible exchange rate systems, supply shocks play a more important role here, possibly reflecting China’s major supply-side changes such as structural reforms and productivity shocks. - Hoffmaister and Roldós (2001) also find that supply shocks contribute more than nominal shocks to fluctuations of changes in the REER in the case of Korea. ### Contextual fiscal statistics (from adjacent text) - Overall budget deficit: 3 percent of GDP in 2003. - Debt as a ratio to GDP: about 26 percent in 2003. - Note: These fiscal figures are presented in the subsequent discussion of medium-term fiscal challenges. *Source: IMF staff calculations.* ### conclusion is that, while China’s current fiscal posi- ### _op232 - conclusion is that, while China’s current fiscal posi- ### Recent Fiscal Developments - Overall assessment: China’s current fiscal position appears healthy but could be altered by substantial contingent claims on the central government and deviations from currently very favorable macroeconomic conditions. - Change in trends (last five years): reversal of long-term declining trends in revenue and expenditure, with expenditure expanding faster than revenue, resulting in larger budget deficits on average. - Budget deficit: jumped to a new level in 1998 and has since remained around 3 percent of GDP. - Government debt stock: reached about 26 percent of GDP at end-2002; foreign debt has remained stable at less than 5 percent of GDP over the period. - Central government financing: since discontinuation of central bank overdrafts in 1994 and limited foreign financing, rising budget deficits have been covered mainly by issuance of government paper (including bank recapitalization bonds equivalent to 3.4 percent of GDP issued in 1998). - Revenue performance: - Total revenue (1997–2003, in percent of GDP): 12.1, 13.0, 14.3, 15.3, 17.0, 18.3, 18.8. - Tax revenue (1997–2003, in percent of GDP): 11.1, 11.8, 13.0, 14.1, 15.7, 16.8, 17.1. - Taxes on income and profits (1997–2002, in percent of GDP): 2.1, 2.0, 2.3, 2.9, 4.0, 4.5, … . - Value-added tax on domestic goods (1997–2003, in percent of GDP): 4.4, 4.6, 4.7, 5.1, 5.5, 5.9, 6.2. - VAT and excises on imports (1997–2003, in percent of GDP): 0.7, 0.7, 1.2, 1.7, 1.7, 1.8, 2.4. - Nontax revenue (1997–2003, in percent of GDP): 1.1, 1.2, 1.3, 1.2, 1.3, 1.5, 1.6. - Tax revenue as share of total revenue (1997–2003, percent): 91.3, 90.7, 91.0, 92.0, 92.3, 91.9, 91.3. - Expenditure developments: - Total expenditure and net lending (1997–2003, in percent of GDP): 14.0, 16.1, 18.3, 18.9, 20.1, 21.7, 21.6. - Current expenditure (1997–2003, in percent of GDP): 11.5, 12.6, 13.7, 14.7, 16.1, 17.3, 17.4. - Capital expenditure (1997–2003, in percent of GDP): 2.2, 2.6, 3.5, 3.3, 3.6, 3.9, 3.9. - Pensions and social welfare relief (1997–2002, in percent of GDP): 0.2, 0.2, 1.0, 1.7, 2.0, 2.5, … . - Primary expenditure (1997–2003, in percent of GDP): 13.2, 15.1, 17.6, 18.1, 19.3, 21.0, 20.8. - Drivers of revenue gains: buoyant economic activity, 1994 reform package (modified revenue-sharing in favor of the center, VAT replacing multitier turnover taxes, tax administration reform), and improved tax administration (including the “golden tax” VAT computerization). - Coverage improvements: extension of budget coverage to previously excluded government units and tax-for-fees reform have brought off-budget revenue on budget. ### Medium-Term Fiscal Challenges - Contingent and direct liabilities that could significantly increase government debt if assumed by the center include: - Nonperforming loans (NPLs) and potential bank bailouts. - Unfunded pension obligations. - Liability-creating activities of SOEs and local governments. - NPLs: - Reported NPL stock at end-2003: 16 percent of GDP. - Preliminary assessment: potential losses from NPLs could amount to about 13 percent of GDP for the four big state commercial banks alone, assuming a recovery rate equivalent to asset management companies of 21 1/2 percent. - Caveats: reporting weaknesses and potential implementation problems in prudential regimes suggest actual NPL stock could be significantly higher; part of ongoing bank lending could become nonperforming over the next few years. - Pension liabilities: - Current system: three pillars—public pension, mandatory individual pension accounts, and supplementary voluntary individual accounts; individual accounts largely notional due to pay-as-you-go practice. - World Bank estimate: transition cost to fully funded individual accounts could amount to a net present value of 70 percent of GDP (over the next 75 years) if system parameters remain unchanged (Dorfman and Sin, 2001). - Impact of reforms: relatively marginal parametric reforms (e.g., raising retirement age to 65 and indexing pensions to inflation rather than wages) could lower the financing gap to about 7 percent of GDP; remaining gap could be covered from other sources such as privatization proceeds. - Liabilities from SOE restructuring and local government financing: - Borrowings by SOEs and semigovernmental finance companies, even without explicit guarantees, could become central government liabilities if entities cannot meet obligations. - Social obligations of SOEs transferred to local governments may fall to the center if local governments experience financial difficulties. - Subnational borrowing constraints: although banned by law from direct borrowing, local governments have recourse to bank borrowing and bond issuance through public enterprises, creating contingent fiscal risks; estimates of the size of these contingent liabilities are not available. - Additional public spending needs: - Social needs and adjustment to WTO accession: spending requirements for health, education, environment protection, and retraining displaced workers. - OECD estimate: government primary expenditure would need to increase by at least an additional 2 percent to 3 percent of GDP over the next five to ten years to accommodate these needs. - Fiscal outlook caveat: limited fiscal adjustment would be needed to avoid an unsustainable debt-to-GDP path only under the important assumptions of continued rapid economic growth and no incurrence of new quasi-fiscal liabilities by the government. ### Assessing the State’s Stake in SOEs - SOE ownership: the state has an ownership share in over 150,000 SOEs; more than 1,000 are listed domestically or overseas. - Valuation uncertainty: lack of comprehensive and independently verified financial information yields a wide range of estimates for net value of state equity in SOEs—from zero to 100 percent of GDP; other studies suggest 25 percent to 65 percent of GDP. - Book-value approach: - Book values suggest SOEs are worth about 50–75 percent of GDP. - Ministry of Finance data: book value of state equity in nonfinancial enterprises about 65 percent of GDP, plus 10 percent of GDP in financial and overseas enterprises. - Adjustment for “unhealthy assets” (about one-third of equity) lowers bound to about 50 percent of GDP. - Market-value adjustments: - Applying an average market-to-book ratio of 1.6 (from 19 emerging market economies excluding China) to adjusted book value yields an estimated market value of about 80 percent of GDP. - Alternative valuation methods and resulting estimates: - Price/earnings (P/E) ratio approach (based on 2002 data): - P/E = 20 → estimated equity stake about 50 percent of GDP. - P/E = 15 → estimated equity stake about 35 percent of GDP. - P/E = 40 → estimated equity stake about 100 percent of GDP (likely overstates). - Price/sales ratio approach: - H-shares and Red Chips price/sales ≈ 1.25 → valuation about 100 percent of GDP. - Price/sales from emerging market economies → about 70 percent of GDP. - Sources of potential overstatement and understatement: - Overstatement risks: SOEs may overvalue fixed assets and inventories (low depreciation rates), understate liabilities (exclusion of pension obligations and other contingencies), and overstate profits (Ministry of Finance survey suggests more than half of SOEs covered had overstatements of profits by 10 percent or more). - Understatement risks: book values may understate market values observed in other emerging market economies. ### Implications of State Assets for Fiscal Policy - Potential role of asset divestiture: - Divestiture of state assets could provide significant funding for liabilities (for example, partially fund government pensions). - But the amount available to fund central government liabilities may be considerably less than total net worth of state assets due to competing claims and market absorption limits. - Constraints and competing claims: - Book value of equity in SOEs is about evenly split between central and local governments, but the central government carries responsibility for most explicit and contingent liabilities. - Local governments may dispose of assets for their own purposes rather than funding central liabilities. - Companies, redundant and retired workers, and other parties could lay claim to proceeds from asset sales. - Chinese financial markets’ capacity to absorb large amounts from asset sales in a short period may be limited. - Institutional reform: - Establishment of the State Assets Supervision and Administration Commission in March 2003 should improve management and oversight of nonfinancial SOEs. - Increased public disclosure of SOE accounts and the state’s equity claim would improve public accountability and management of these assets. *Source: IMF staff analysis drawn from the chapter on medium-term fiscal challenges in the provided IMF PDF content.* ### Box 5.1. An Assessment of China’s State Equity Share in SOEs ### Box 5.1. An Assessment of China’s State Equity Share in SOEs ### Key findings and conclusions - Part of the remaining state shares in some of the publicly listed companies have already been earmarked to fund pension liabilities. - Privatization of other SOEs would allow the government to raise funds to offset its liabilities. - Valuations for China’s state equity share in the SOE sector vary greatly, from 25 percent to 100 percent of GDP. - While the government does have valuable assets, divestiture may not raise significant amounts in domestic markets that are not deep and have a limited capacity to absorb a substantial volume of sales. - The eventual realization value for these assets will depend crucially on strengthening management and implementing reforms in SOEs ahead of actual divestitures. ### Assessment of fiscal position and policy context - Positive factors reinforcing China’s fiscal position: - China’s strong growth performance. - The strength and potential of its domestic market. - The availability of considerable domestic savings. - The large endowment of government assets. - These elements make China’s fiscal position, current and prospective, relatively strong, but they do not obviate the need to address past and incipient liabilities that may ultimately fall on the central government. - The authorities’ intention to adhere to a path of gradual fiscal consolidation over the medium term is identified as a step in the right direction. ### Risks, constraints, and implementation priorities - Major source of uncertainty: wide variation in asset valuations (25 percent to 100 percent of GDP) implies highly uncertain potential proceeds from disposals. - Market constraint: domestic financial markets may be too shallow and have limited capacity to absorb a substantial volume of sales, reducing near-term realizable proceeds from privatization. - Implementation priority: strengthening management and implementing SOE reforms prior to divestiture is crucial to enhance eventual realization value. - Use of state shares: earmarking of some state shares for pension funding reflects fiscal reliance on state equity as part of liability management. *Prepared by Ray Brooks.* ### Conclusions ### Conclusions ### Post-1994 reform outcomes - The 1994 reform of the structure of intergovernmental fiscal relations has been successful in a number of areas: it has streamlined the tax system and ... (text continues in source). - After the 1994 reform, financing controlled by subnational governments has continued to increase (Figure 6.3). ### Subnational financing and fiscal risks - Financing constraints have induced subnational governments to seek ways to circumvent legal funding limits by creating channels for raising indirect financing and shifting some public functions to seemingly “nongovernment” entities. - Large-scale infrastructure projects (highways, airports, urban ring roads) have been financed primarily by bank loans on the expectation that sales of appreciated land leases in project areas will make projects financially viable. - These projects may represent significant fiscal risks if local governments, and ultimately the central government, are called upon to shoulder associated fiscal costs. - The shift of public functions to nongovernment entities to overcome legal borrowing constraints might generate opportunities for waste and corruption, without necessarily improving effective service delivery. - The authorities are aware of these problems, as candidly described in the 2002 Audit Report. ### 2002 Audit Report — key findings on fiscal risks - Misuse of Government Loans - 37 sewage treatment projects costed at about RMB 6 billion received about RMB 2 billion in government loans. - Due to inadequate planning, failure to provide counterpart funding, and insufficient operating funds: - Construction was not finished (or, in some cases, not even begun) on 15 projects. - Seven of 16 completed projects failed to meet design specifications. - Completion of supporting facilities frequently lagged behind main projects, causing equipment to lay idle and programs to fail to produce planned overall effect. - Audit of airport projects: - 18 major airports and 38 secondary-route airports were audited. - Nine of 12 major completed airports were losing money, with the combined loss amounting to RMB 1.4 billion. - Thirty-seven of the 38 secondary-route airports had also lost money, with a combined loss of RMB 1.5 billion in 2000–2001. - In 2001, the passenger turnaround capacity of 38 secondary-route airports was only a quarter of that estimated in feasibility studies. - The Mianzhou airport achieved only 3 percent of its design capacity. - Insufficient Funding from the Center and Increasing Arrears - At the end of 2001, 49 cities and counties had a total of RMB 1.6 billion in debt, equivalent to 2.1 times their disposable financial resources for that year. - As of September 2002, 42 counties and townships had RMB 1.8 billion in wage arrears—more than three times the arrears in 1998. - Underlying Reasons Identified by the Audit Report - Lack of stable revenue sources at the subnational level: - Currently, counties and townships rely on transfers from higher government levels for 60 percent of their expenditures. - Many earmarked subsidies require counterpart funds, increasing fiscal pressure on local governments. - “Improper attitudes toward fiscal management,” which induce local governments to “blindly set up projects and even create image projects.” - Excessively rapid growth in the numbers of persons supported by public funds (unfunded mandates): - Since 1994, while the total population of counties and townships has increased by 4.6 percent, the number of people supported by public funds has increased by 22 percent. *Source: _op232 - Conclusions* ### Box 6.2. Fiscal Risks of Local Governments: The 2002 Audit Report ### Box 6.2. Fiscal Risks of Local Governments: The 2002 Audit Report ### Audit Report overview - The Audit Report is produced annually by the National Audit Office of the People’s Republic of China (CNAO), the official institution in charge of auditing government finances. - The CNAO is required by the Constitution to report its findings to the State Council. - A provincial pilot project, launched in 2001, aims to replace the numerous fees with a surcharge on the local agricultural tax. This so-called tax-for-fees reform is to be gradually extended to all provinces. ### Major findings on fiscal federalism and subnational risks - The transfer system, whose aim was to compensate local governments for revenue lost to the center and promote equalization across regions, is in need of reform and has proven inadequate to address the large regional income disparities. - Local governments’ expenditure mandates remain unclear and, in some cases, largely unfunded; pension costs are a case in point, where local governments are ill-equipped to shoulder the related costs and higher-level pooling is called for. - Indirect means of local government financing and creation of implicit liabilities at the local level may represent significant fiscal risks. ### Analysis of fiscal implications and systemic risks - The combination of an inadequate transfer system, unclear and underfunded expenditure mandates, and implicit local liabilities increases fiscal vulnerability at both the subnational and central levels. - These challenges, if unaddressed, risk exacerbating regional disparities and could lead to erosion of social cohesion and weakening of public support for future reforms. ### Policy implications and recommended actions - Reform the transfer system to better address large regional income disparities and to more effectively compensate local governments for revenue shifts to the center. - Clarify local governments’ expenditure mandates and ensure adequate funding, with particular attention to pension liabilities where higher-level pooling is called for. - Strengthen oversight of indirect local government financing and monitor implicit liabilities to contain fiscal risks. - Implement comprehensive and centralized monitoring of subnational operations to detect and manage contingent liabilities early. - Address fiscal federalism challenges early to reduce regional disparities and to prevent erosion of social cohesion and public support for reforms. *Source: Box 6.2, "Fiscal Risks of Local Governments: The 2002 Audit Report."* ### 6.1 percent. It should also be noted that claims on ### VII BANKING SECTOR DEVELOPMENTS ### Overview of recent reforms - 6.1 percent. - China has made significant progress in improving the strength and institutional setting of the financial sector over the last decade. - Recent policy announcements, including the communiqué from the Third Plenum of the Sixteenth Central Committee of the Communist Party of China, emphasize moving forward with banking system reform. - China’s World Trade Organization accession agreement provides impetus to open the banking system to foreign competition. ### Institutional reforms and market opening - The China Banking Regulatory Commission (CBRC) was established in April 2003 to take over supervisory and regulatory responsibilities for banks from the People’s Bank of China (PBC). - CBRC near-term priorities: reduction of NPLs, quicker reform of the SCBs, and reform of the rural financial system (especially the RCCs). - CBRC required all SCBs and JSCBs to adopt the five-tier loan classification system beginning in 2004 (publicly listed banks had already been required to use it). - Market opening commitments under WTO accession: - Commitments call for opening up of the banking sector to foreign financial institutions five years after accession (accession occurred on December 11, 2001). - Commitments specify that by 2006 all geographic restrictions limiting where foreign financial institutions may operate will be removed, nonprudential restrictions will be removed, and foreign financial institutions will be allowed to provide services to all Chinese clients. - Effective December 2003 foreign financial institutions were allowed to operate in four more cities (bringing the total to 13) and conduct renminbi business with Chinese enterprises. - Capital requirements for foreign-funded financial institutions were lowered; ceiling on equity held by a single foreign investor was raised from 15 percent to 20 percent; overall limit on equity held by all foreigners remained at 25 percent. ### Performance of the state commercial banks (SCBs) - NPLs: - For the four SCBs combined, the stock of NPLs declined by RMB 170 billion in 2003 to RMB 1.9 trillion. - NPL ratio fell from 26 percent to 20 percent. - Special mention loans: - At end-2002, share of special mention loans was 14 percent for BOC, 19 percent for CCB, and 12 percent for ICBC. - Provisioning requirements (CBRC 2005 standards): - General provisions: 1 percent of all loans. - Specific provisions: 2 percent of special mention loans, 20–30 percent of substandard loans, 40–60 percent of doubtful loans, and 100 percent of loss loans. - A substantial increase in provisioning would have been required for SCBs to meet these 2005 requirements based on end-2002 data. - Capital adequacy ratios (CARs): - At end-2002, only BOC met the 8 percent CAR threshold (the internationally considered minimum and the minimum called for by China’s existing laws and regulations). - Reported CARs are boosted by smaller risk weights on claims on SOEs than suggested by international norms. - If banks provisioned in line with the 2005 rules, CARs would be much lower. - Profitability: - The SCBs’ profitability, by international standards, is fairly low. - The four SCBs were in the top 40 banks in the world in terms of asset size, but none ranked higher than 700 (out of 1,000) in terms of return on assets. - All four SCBs recorded positive net profits in both 2001 and 2002. - Taxes: - Banks are subject to a 33 percent corporate income tax and a business tax levied on gross income. - Total taxes as a share of adjusted profit (total taxes divided by the sum of net profit plus total taxes) was greater than 50 percent for ABC, CCB, and ICBC in both 2001 and 2002; for BOC it was slightly lower but still above 40 percent in both years. - ABC, CCB, and ICBC paid very little income tax with the business tax accounting for virtually their entire tax bill. - The business tax was reduced by 1 percentage point to 5 percent in 2003 (the last of the scheduled annual reductions). - Banks are not allowed to deduct specific provisions from income for tax purposes, creating a disincentive for provisioning against NPLs. ### Specific measures and policy actions - Capital injections and balance sheet support: - At end-2003, the State Council authorized the use of $45 billion of international reserves to boost capital of BOC and CCB. - Each of BOC and CCB received a $22.5 billion (equivalent to RMB 186 billion) capital injection at the end of 2003. - The capital injection was intended to improve balance sheets and facilitate acceleration of NPL resolution for these pilot SCBs, with eventual goals of finding a strategic investor and public listing. - Accompanying measures: upgrading internal management, improved auditing, more prudent provisioning, and closer supervisory oversight. - Interest rate liberalization: - Further liberalization of lending rates in December 2003: the upper band on renminbi lending was raised and consolidated at 170 percent of the benchmark rate, while the lower band was kept at 90 percent. - Example: with the benchmark rate at 5.31 percent for one-year loans as of December 2003, the acceptable range would be 4.78 percent to 9.03 percent. - For RCCs, the upper band was raised from previous ceiling of 150 percent to 200 percent of the benchmark rate. - No change in policy on deposit rates; for renminbi deposits, rates generally must be set at the benchmark (example benchmark rates as of December 2003: 0.72 percent for demand deposits and 1.71 percent for three-month time deposits). - Tax reform implications: - The heavy tax burden reduces after-tax profit and constrains banks’ ability to boost provisioning and CARs. - Continued progress toward a modern and fair tax regime would help promote the commercial orientation of banks and allow them to strengthen balance sheets by earning a reasonable profit. *Source: Excerpt from IMF staff chapter on banking sector developments.* ### Conclusions ### _op232 - Conclusions ### Banking system: progress and remaining challenges - Key areas of progress: - Improvements in the supervisory regime, including the establishment of the CBRC. - Ongoing opening of the market to foreign financial institutions. - Expanded flexibility in setting lending interest rates. - Measures aimed at strengthening and modernizing SCBs, including the December 2003 capital injection into two of them. - Remaining challenges: - Bring institutional and regulatory frameworks up to international standards. - Banks must adjust to regulatory and market changes while improving balance sheets, modernizing operations, and preparing for international competition. - Policy objective: - Ensure a well-functioning and healthy banking system that can promote macroeconomic stability and sustainable growth. ### Labor market: overarching assessment - China’s labor market has shifted toward greater market-orientation over the past twenty years, with growing importance of the urban private sector and downsizing of SOEs. - Overall employment growth has averaged just 1 percent since 1990, led mostly by urban job growth. - Rural employment growth has slowed, prompting migration to dynamic coastal provinces. ### Key labor statistics and structural features - Over 60 percent of the population was classified as rural by the 2000 census. - Population growth in the 1990s averaged just under 1 percent a year; the labor force grew about 1 1/2 percent a year. - Labor force participation rate rose to about 83 percent by the late 1990s. - Urban job growth averaged 3 percent a year (or 6 1/2 million a year) since 1990. - Surplus labor estimates: - Rural sector: about 150 million. - SOEs: about 10–11 million. - Migrant population estimates vary between 80 million and 150 million. - Employment sector shifts: - Job creation concentrated in the tertiary (service) sector and coastal provinces (notably Fujian, Guangdong, Shandong, Zhejiang). - The private sector (including FFEs) created 25 million jobs during 1995–2002. - An unexplained increase of 80 million jobs over 1995–2002, attributed in part to informal-sector employment. ### Unemployment measures and regional variation - Urban registered unemployment (MOLSS): - Relatively constant around 2 1/2–3 percent in the 1990s; rose to 4 percent by 2002. - Alternative measures: - Including xiagang (laid-off workers), registered unemployed and xiagang reached 5 1/3 percent of the urban labor force by end-2002. - NBS new estimates (ILO-consistent) suggest an urban unemployment rate of about 4–5 percent. - Xiagang (laid-off SOE workers): - Peak of about 9 1/2 million at end-1999. - Declined to about 6.2 million by end-2002. - Survey evidence indicates many xiagang engaged in informal work and therefore may be underemployed rather than strictly unemployed. - Regional variation in registered unemployment (end-2002): - Beijing: low of 1.4 percent. - Heilongjiang: high of 6.5 percent. - Northeastern “rust-belt” region faced the largest pressures with almost 8 percent (including xiagang) by end-2002—one and a half times the national average. ### Employment outlook and scenario analysis - Main near-term challenge: absorb surplus labor into quality jobs while adjusting to WTO accession. - Scenario example from the analysis: - If GDP growth averages 7 percent and the elasticity of nonagricultural employment growth to output growth is one-half, the unemployment rate could double over the next three to four years to about 10 percent before declining as SOE reform is completed. - Mitigating factors: - Stronger economic growth, particularly in the private sector and labor-intensive service industries, could limit unemployment pressures. ### Labor market reforms: progress and instruments - Major reform elements: - Gradual marketization of hiring and firing, especially in the nonstate sector. - Greater wage flexibility: bonuses and piece wages reintroduced from 1978; Labor Law of 1994 increased management discretion over wages. - Labor contracting system introduced in mid-1980s and strengthened in 1994; share of workers on contracts rose to about one-third of urban workers by 1997. - SOEs gained the right to lay off permanent workers, with reemployment centers (RECs) and a xiagang safety-net program providing retraining, job search assistance, and lower monthly benefits. - Hukou reforms initiated in the 1990s, with more significant steps in 2003 (barriers to migration remain in fees, sectoral prohibitions, and portability of pensions/health insurance). - Institutional adjustments: - From 2002, newly laid-off workers receive only unemployment benefits; RECs to be phased out by 2004. ### Remaining challenges and policy implications - Labor market data limitations complicate accurate measurement of unemployment and layoffs (issues in comparability across surveys and partial coverage of private/informal sectors). - Key policy priorities implied by the assessment: - Strengthen data systems and labor market statistics to better measure unemployment, xiagang, and informal employment. - Promote private-sector and service-industry growth to generate labor-intensive employment. - Complete SOE reform while expanding retraining and mobility measures to absorb displaced workers. - Address barriers to internal migration (fees, sectoral restrictions, portability of social benefits) to facilitate labor reallocation. - Ensure safety nets and active labor-market policies accommodate transitions from xiagang and informal employment to higher-quality formal jobs. *Source: Conclusions and Chapter VIII, “Labor Market Performance and Prospects,” from the provided IMF content unit.* ### Box 8.1. Steps Toward Labor ### Box 8.1. Steps Toward Labor ### Market Flexibility - Table 8.4. Selected Asian Economies: Labor Productivity, 2000 (Defined as value added divided by the number of employees) - China 0.19 - Indonesia 0.25 - Korea 0.40 - Malaysia 0.42 - Philippines 0.33 - Taiwan Province of China 0.25 - In 2002, average payments to xiagang were around 35–40 percent of the average earnings for workers in the manufacturing sector. ### Labor Market Reforms, SOE and Rural Surplus - SOE productivity and redundancies - Labor productivity of SOEs still lags behind the nonstate sector. - If SOE labor productivity could be raised to nonstate levels, about 10–11 million SOE workers could be considered redundant (Table 8.5). - Box note: In 2001, industrial sector SOE labor productivity was only 71 percent of nonstate enterprises; matching non-SOEs could render almost one-third of the 15½ million SOE industrial workers redundant. With 22 million SOE workers outside industry, total SOE labor surplus is about 10–11 million. Using foreign-funded enterprises as benchmark, almost half the SOE workers (or 18 million) could be considered redundant. - Rural hidden unemployment - OECD (2002b) estimate using average GDP contribution per worker in nonagricultural jobs: rural hidden unemployment around 275 million. - If benchmark set at one-third of nonagricultural productivity (in line with other Asian countries): rural hidden unemployment around 150 million. - WTO accession pressures - Li and Zhai (1999) estimate gross job losses from WTO accession could amount to about 14½ million: 13 million in rural areas and 1½ million in urban areas (mainly automobile and machinery industries). - Textile and clothing industry may get a boost from 2005 onward with elimination of quotas; a shift toward labor-intensive sectors could increase job growth (example: if textile output increased 50 percent while automobile and ordinary machinery output fell 50 percent, net increase in jobs would be about 1 million, assuming no productivity changes). - Household registration (hukou) system reforms - Hukou system set up in mid-1950s constrained national labor market and access to city services. - 1997 experiment: relaxation in some small towns/cities allowed migrants with stable income or house ownership to obtain an urban hukou; by end-2000 only 540,000 people had applied in small towns and cities. - 2001 reforms: since October 2001, persons with stable work and residence should be able to obtain a hukou in more than 20,000 small towns and cities while retaining land use rights in countryside; State Planning Commission required removal of charges on migrants (e.g., “temporary residence fees” and “birth control fees”) by early 2002. - Guangdong abolished division between agricultural and nonagricultural hukou categories. - August 2003: Ministry of Public Security announced further loosening to encourage movement to less-developed regions; professionals working in small towns/rural areas or migrating to invest/work in undeveloped western regions may retain original urban hukou. - Remaining hukou barriers - A hukou in small towns/cities is less attractive than in large/medium-sized cities where reforms are less far-reaching. - Residence ownership requirement is demanding for most rural migrants. - Access to social services (education, welfare, pensions) remains problematic; migrants often must return to permanent residence or pay sizable fees. - Localities may resist removing migrant fees due to potential revenue loss. - Those obtaining an urban hukou can give birth to only one child, while many rural areas permit two children. ### Training, Education, and Social Safety Nets - Low skill levels - Relatively low skill levels among rural labor and urban unemployed make finding quality jobs difficult. - Illiteracy rates much higher among rural population; few rural residents completed secondary school or college. - Northeastern provinces (Heilongjiang, Jilin, Liaoning) have low skill levels; only about one in five people have education beyond junior-middle school. - Note: Illiteracy exceeded 15 percent of population (aged 15 and above) in six predominantly rural western provinces in 2000 but was less than 5 percent in many eastern provinces. In the same western provinces, proportion with education beyond junior-middle school was less than 15 percent; in eastern provinces of Beijing, Tianjin, Shanghai it was in range of 30–40 percent. - Government action on training and education - Authorities moving to improve training and education of unskilled xiagang and migrants. - World Bank (2001) notes government programs increased poor’s access to education in 1990s, including effort to achieve nine-year universal basic education by 2010; funding inadequate in many poorer regions. - Strengthening social safety net outside RECs - Unemployment insurance fund established separate from RECs; covers more than 100 million urban workers (about 40 percent of urban workforce). - Fund is a defined-benefit system funded by mandatory contributions: employers 2 percent of payroll and employees 1 percent of salary, with benefits lasting 12–24 months (12 months for 1–5 years contribution, 18 months for 5–10 years, 24 months for more than 10 years). - Actual contribution rates vary by local unemployment situation, amplifying regional disparities; national pooling of the unemployment fund would help reduce disparities. - Minimum wage legislation introduced with Labor Law in 1993; minimum wage standards established in all provinces but enforcement is difficult, especially for migrant workers. ### Some Illustrative Projections - Context and methodology - Labor market must absorb about 160 million or so surplus workers in rural and SOE sectors. - Econometric estimates: a 1 percent increase in GDP correlated with a 0.4 percent increase in nonagricultural employment in past two decades (Table 8.6). Elasticity higher in eastern provinces (about 0.43). Elasticity lower in late 1990s (about 0.3) as SOEs cut labor. - Central scenario assumptions (numbered as in source) 1. The working age population grows by 11–12 million annually through 2006, before slowing thereafter, based on projections by Wang (2001). 2. The labor force participation rate stays at the 2002 level of 83 percent. 3. All new entrants to the labor force seek jobs in the nonagricultural sector. 4. Nonagricultural GDP grows by 7½ percent annually through 2010 (implying overall GDP growth of about 7 percent). 5. The elasticity of employment growth to output growth is 0.45 percent. 6. The impact of wage growth on employment is relatively minor. - Central scenario projections and implications - Projections for nonagricultural growth of 7½ percent suggest unemployment could rise in coming years (Table 8.7). - New job growth projected at about 12–13 million annually in 2004–2006, before taking account of future SOE downsizing (higher than the 8 million average annual increase in 1995–2002). - Most new jobs assumed taken by new entrants to labor force (9–10 million annually). - Implies labor market can absorb about 3–4 million surplus rural and SOE workers annually in 2004–2006 without increasing explicit urban unemployment rate. - If most SOE downsizing occurs within next three years and about 6 million rural migrants move to urban areas annually, survey-based unemployment rate could more than double to a peak of over 10 percent by 2005, then decline to below 10 percent by 2010 as labor force growth slows and SOE downsizing completes. - Alternative scenarios (Table 8.8 summary) - Optimistic: 8½ percent nonagricultural growth and employment elasticity of 0.6 (growth led by labor-intensive service sector) could absorb over 90 million surplus workers in 2004–10, more than half of rural and SOE surplus. - Pessimistic: 6½ percent nonagricultural growth and employment elasticity of 0.30 (growth led by capital-intensive sectors) suggests labor force growth outstrips job growth in 2004–10 by 7 million, putting upward pressure on unemployment. - Migration assumption crucial: rural migrants unlikely to move to urban areas unless jobs available; urban unemployment rate may not rise significantly if migrants remain on farms as part of surplus rural labor. - Key quantitative projections (from Tables) - Table 8.6: Estimated elasticity of ∆ log (provincial employment) to ∆ log (provincial GDP) - National 0.38 - Eastern provinces 0.43 - Mid and Western provinces 0.35 - 1978–93 0.47 - 1993–2000 0.30 - Table 8.7 (selected figures, In millions; assuming 7 percent GDP, 7½ percent nonagricultural GDP growth, and 0.45 employment elasticity) - Nonagricultural employment end-2002 357 - Nonagricultural employment 2010 404 - New jobs (annual increase) 2004–2006: 12–13 - Total population 2002 1,285; 2010 1,315 - Working age population (15–64) 2002 903; 2010 951 - Increase of working age population (annual change) 9 (2002), 13 (2003 est.), 11 (2004), 12 (2005), 11 (2006), 8 (2010) - Increase of labor force (annual change) 9, 11, 9, 10, 9, 7 - New jobs less increase in labor force: −2 (2002), 3 (2003 est.), 3 (2004), 4 (2005), 8 (2006), 10 (2010) - Surplus labor seeking jobs: 29, 97, 75, 25, 50 - SOE reemployment: 1, 33, 20, 8, 10 - Rural migrants: 1, 66, 55, 17, 40 - Change in urban unemployment (survey based): ... 4 6 6 3 −3 15 - Urban unemployment rate (in percent): 4.5 (2002), 5.8 (2003 est.), 7.7 (2004), 9.7 (2005), 10.4 (2006), 9.0 (2010) - Table 8.8 (Projections of Jobs for Migrants and Laid-Off Workers from SOEs) - A. 2004–06 job increase, in millions (Defined as new jobs less increase in labor force due to working age population growth) - Assumptions: Growth rate (in percent) 6.5 | 7.5 | 8.5 - Employment growth 0.30–7–30 (note: table formatting indicates ranges and elasticities) - Elasticity 0.45 yields 2 | 3 | 6 (implied values for jobs for migrants and laid-off workers) - Elasticity 0.60 yields 1 | 6 | 23 | 30 (table indicates higher absorption with 0.60 elasticity) - B. 2004–10 job increase, in millions - Assumptions: Growth rate (in percent) 6.5 | 7.5 | 8.5 - Elasticity 0.45 yields 2 | 23 | 65 | 0 (table entries reflect wide variation) - Elasticity 0.60 yields 5 | 37 | 29 | 3 (table entries reflect wide variation) - Source note: For the nonagricultural sector. Roughly equivalent to 6, 7, and 8 percent, respectively, for overall GDP growth. - Footnote: About three-quarters of the annual rate indicated in the Tenth Five-Year plan, which targeted the transfer of 40 million rural labor force into urban areas over the period 2001–2005. ### The Road Ahead: Policy Directions and Challenges - Main policy priorities - Create quality jobs for new entrants and absorb SOE and rural surplus—focus on encouraging job growth in private sector, especially services (main source of job growth in recent years). - Remove hurdles faced by private firms to foster job creation (noted as a crucial priority). - Further liberalize the hukou system to allow surplus rural workers to move to cities and permit unemployed and xiagang in low-job-growth regions to relocate to higher-growth regions; this would help address urban–rural income gap. - Enhance worker skills through education and training. - Provide easier access to information on job opportunities and foster establishment of private employment agencies. - Strengthen unemployment insurance scheme and other social safety nets to protect vulnerable groups. - Remaining challenges - Magnitude of absorbing unemployed and underemployed persons is large and projections are subject to wide uncertainty. - Regional disparities in social insurance contribution burdens and enforcement of minimum wage standards remain concerns. - Migration responses depend on availability of urban jobs; many migrants may remain on farms unless job opportunities arise. *Source: Box 8.1, Steps Toward Labor, from the supplied IMF content unit.* ### References ### References ### Major themes covered by the cited literature - Trade policy and WTO accession - China’s accession to the World Trade Organization: timing, economic impacts, services dimension, and implications for national and provincial economies (references include Adhikari and Yang, 2002; Hertel and Walmsley, 2000; Ianchovichina and Martin, 2003; Mattoo, 2002; Panitchpakdi and Clifford, 2002; Wang, 2001). - Analyses linking WTO accession to sectoral and institutional adjustments (e.g., Bottelier, 2002; Li and Zhai, 1999; Martin, Dimaranan, and Hertel, 1999). - Exchange rate determination, assessment, and misalignment - Methodologies and empirical studies on equilibrium and real exchange rates, and real exchange rate fluctuations (Alberola et al., 1999; Balassa, 1964; Bayoumi, Faruqee, and Lee, 2003; Chou and Shih, 1998; Clarida and Gali, 1994; Lane and Milesi-Ferretti, 2000; Zhang, 2001; Wang, 2004). - IMF methodological work: Isard and Faruqee, eds., 1998 (IMF Occasional Paper No. 167); Isard, Kincaid, and Fetherston, 2001 (IMF Occasional Paper No. 209). - Fiscal policy, decentralization, and intergovernmental transfers - Fiscal federalism and recentralization in China (Ahmad, 1997; Ahmad, Li, Richardson, and Singh, 2002; Jin, Qian, and Weingast, 2003a and 2003b). - Redistribution and intergovernmental transfer reform options (Ahmad, Fortuna, and Singh, 2004, IMF Working Paper, forthcoming). - Studies on fiscal decentralization, regional disparity, and provincial finances (Findlay, Wu, and Watson, 1995; Ministry of Finance, 2002; National Audit Office, 2002; World Bank, 2002). - Financial sector reform and banking system soundness - State-owned banks, corporate governance, and enterprise reform in China (Bottelier, 2002; Tenev, Zhang, and Brefort, 2002; Karacadag, 2003). - Global and comparative analyses of banking and financial stability (Banker, 2003; Tseng and Rodlauer, eds., 2003). - Labor markets, social protection, and demographic projections - Labor market performance, distortions, and employment challenges (Brooks and Ran Tao, 2003; Cai, Dewen, and Yang, 2001; Solinger, 2002; Zhao, 2001). - Social security reform options and population projections (Dorfman and Yee Mun Sin, 2001; Wang, G., 2001). - Growth, productivity, and structural transformation - Productivity growth during reform and sectoral restructuring (Young, 2000a; Young, 2000b; Studwell, 2000; Lardy, 1998 and 2002). - Analyses of China’s integration into the global economy and implications for developing countries (Yang, 2003; Prasad and Rumbaugh, 2003). - Macroeconomic fluctuations and policy regimes - Sources of macroeconomic fluctuations, business cycles, and exchange rate regime choices (Blanchard and Quah, 1989; Ahmed, 2003; Hoffmaister and Roldós, 2001; Chadha and Prasad, 1997; Chen and Wu, 1997). - Country and regional case studies on external sustainability and current accounts (Chinn and Prasad, 2003; Isard et al., 2001). ### Representative cited works and exact identifiers (selection) - IMF Working Papers and Occasional Papers explicitly cited: - IMF Working Paper No. 02/168 (Ahmad, Li, Richardson, and Singh, 2002). - IMF Working Paper No. 03/210 (Brooks and Ran Tao, 2003). - IMF Working Paper No. 03/245 (Yang, 2003). - IMF Working Paper No. 04/18 (Wang, Tao, 2004). - IMF Occasional Paper No. 107 (Bell, Khor, and Kochhar, 1993). - IMF Occasional Paper No. 167 (Isard and Faruqee, eds., 1998). - IMF Occasional Paper No. 209 (Isard, Kincaid, and Fetherston, 2001). - IMF Occasional Paper No. 114 (Tseng et al., 1994). - World Bank and other institutional studies: - World Bank Policy Research Working Paper No. 3053 (Ianchovichina and Martin, 2003). - World Bank publications on China: China: Overcoming Rural Poverty (World Bank, 2001); China—Provincial Expenditure Review, January (World Bank, 2002); China—Promoting Growth with Equity, Country Economic Memorandum, September (World Bank, 2003). - OECD publications: Realizing the Benefits of China’s Trade and Investment Liberalization (OECD, 2002a); China in the World Economy: the Domestic Policy Challenges (OECD, 2002b). ### Occasional Papers listing excerpt (exact entries preserved) - 232. China’s Growth and Integration into the World Economy: Prospects and Challenges, edited by Eswar Prasad, 2004. - 231. Chile: Policies and Institutions Underpinning Stability and Growth, by Eliot Kalter, Steven Phillips, Marco A. Espinosa-Vega, Rodolfo Luzio, Mauricio Villafuerte, and Manmohan Singh. 2004. - 230. Financial Stability in Dollarized Countries, by Anne-Marie Gulde, David Hoelscher, Alain Ize, David Marston, and Gianni De Nicoló. 2004. - 229. Evolution and Performance of Exchange Rate Regimes, by Kenneth S. Rogoff, Aasim M. Husain, Ashoka Mody, Robin Brooks, and Nienke Oomes. 2004. - 228. Capital Markets and Financial Intermediation in The Baltics, by Alfred Schipke, Christian Beddies, Susan M. George, and Niamh Sheridan. 2004. - 227. U.S. Fiscal Policies and Priorities for Long-Run Sustainability, Martin Mühleisen and Christopher Towe, editors. 2004. - 226. Hong Kong SAR: Meeting the Challenges of Integration with the Mainland, edited by Eswar Prasad, with contributions from Jorge Chan-Lau, Dora Iakova, William Lee, Hong Liang, Ida Liu, Papa N’Diaye, and Tao Wang. 2004. - 225. Rules-Based Fiscal Policy in France, Germany, Italy, and Spain, by Teresa Dában, Enrica Detragiache, Gabriel di Bella, Gian Maria Milesi-Ferretti, and Steven Symansky. 2003. - 224. Managing Systemic Banking Crises, by a staff team led by David S. Hoelscher and Marc Quintyn. 2003. - 223. Monetary Union Among Member Countries of the Gulf Cooperation Council, by a staff team led by Ugo Fasano. 2003. - 222. Informal Funds Transfer Systems: An Analysis of the Informal Hawala System, by Mohammed El Qorchi, Samuel Munzele Maimbo, and John F. Wilson. 2003. - 221. Deflation: Determinants, Risks, and Policy Options, by Manmohan S. Kumar. 2003. - 220. Effects of Financial Globalization on Developing Countries: Some Empirical Evidence, by Eswar S. Prasad, Kenneth Rogoff, Shang-Jin Wei, and Ayhan Kose. 2003. - 219. Economic Policy in a Highly Dollarized Economy: The Case of Cambodia, by Mario de Zamaroczy and Sopanha Sa. 2003. - 218. Fiscal Vulnerability and Financial Crises in Emerging Market Economies, by Richard Hemming, Michael Kell, and Axel Schimmelpfennig. 2003. - 217. Managing Financial Crises: Recent Experience and Lessons for Latin America, edited by Charles Collyns and G. Russell Kincaid. 2003. - 216. Is the PRGF Living Up to Expectations?—An Assessment of Program Design, by Sanjeev Gupta, Mark Plant, Benedict Clements, Thomas Dorsey, Emanuele Baldacci, Gabriela Inchauste, Shamsuddin Tareq, and Nita Thacker. 2002. - 215. Improving Large Taxpayers’ Compliance: A Review of Country Experience, by Katherine Baer. 2002. - 214. Advanced Country Experiences with Capital Account Liberalization, by Age Bakker and Bryan Chapple. 2002. - 213. The Baltic Countries: Medium-Term Fiscal Issues Related to EU and NATO Accession, by Johannes Mueller, Christian Beddies, Robert Burgess, Vitali Kramarenko, and Joannes Mongardini. 2002. - 212. Financial Soundness Indicators: Analytical Aspects and Country Practices, by V. Sundararajan, Charles Enoch, Armida San José, Paul Hilbers, Russell Krueger, Marina Moretti, and Graham Slack. 2002. - 211. Capital Account Liberalization and Financial Sector Stability, by a staff team led by Shogo Ishii and Karl Habermeier. 2002. - 210. IMF-Supported Programs in Capital Account Crises, by Atish Ghosh, Timothy Lane, Marianne Schulze-Ghattas, Ales Bulirv, Javier Hamann, and Alex Mourmouras. 2002. - 209. Methodology for Current Account and Exchange Rate Assessments, by Peter Isard, Hamid Faruqee, G. Russell Kincaid, and Martin Fetherston. 2001. - 208. Yemen in the 1990s: From Unification to Economic Reform, by Klaus Enders, Sherwyn Williams, Nada Choueiri, Yuri Sobolev, and Jan Walliser. 2001. - 207. Malaysia: From Crisis to Recovery, by Kanitta Meesook, Il Houng Lee, Olin Liu, Yougesh Khatri, Natalia Tamirisa, Michael Moore, and Mark H. Krysl. 2001. - 206. The Dominican Republic: Stabilization, Structural Reform, and Economic Growth, by a staff team led by PhilipYoung comprising Alessandro Giustiniani, Werner C. Keller, and Randa E. Sab and others. 2001. - 205. Stabilization and Savings Funds for Nonrenewable Resources, by Jeffrey Davis, Rolando Ossowski, James Daniel, and Steven Barnett. 2001. - 204. Monetary Union in West Africa (ECOWAS): Is It Desirable and How Could It Be Achieved? by Paul Masson and Catherine Pattillo. 2001. - 203. Modern Banking and OTC Derivatives Markets: The Transformation of Global Finance and Its Implications for Systemic Risk, by Garry J. Schinasi, R. Sean Craig, Burkhard Drees, and Charles Kramer. 2000. - 202. Adopting Inflation Targeting: Practical Issues for Emerging Market Countries, by Andrea Schaechter, Mark R. Stone, and Mark Zelmer. 2000. - 201. Developments and Challenges in the Caribbean Region, by Samuel Itam, Simon Cueva, Erik Lundback, Janet Stotsky, and Stephen Tokarick. 2000. - 200. Pension Reform in the Baltics: Issues and Prospects, by Jerald Schiff, Niko Hobdari, Axel Schimmelpfennig, and Roman Zytek. 2000. - 199. Ghana: Economic Development in a Democratic Environment, by Sérgio Pereira Leite, Anthony Pellechio, Luisa Zanforlin, Girma Begashaw, Stefania Fabrizio, and Joachim Harnack. 2000. - 198. Setting Up Treasuries in the Baltics, Russia, and Other Countries of the Former Soviet Union: An Assessment of IMF Technical Assistance, by Barry H. Potter and Jack Diamond. 2000. - 197. Deposit Insurance: Actual and Good Practices, by Gillian G.H. Garcia. 2000. - 196. Trade and Trade Policies in Eastern and Southern Africa, by a staff team led by Arvind Subramanian, with Enrique Gelbard, Richard Harmsen, Katrin Elborgh-Woytek, and Piroska Nagy. 2000. - 195. The Eastern Caribbean Currency Union—Institutions, Performance, and Policy Issues, by Frits van Beek, José Roberto Rosales, Mayra Zermeño, Ruby Randall, and Jorge Shepherd. 2000. - 194. Fiscal and Macroeconomic Impact of Privatization, by Jeffrey Davis, Rolando Ossowski, Thomas Richardson, and Steven Barnett. 2000. - 193. Exchange Rate Regimes in an Increasingly Integrated World Economy, by Michael Mussa, Paul Masson, Alexander Swoboda, Esteban Jadresic, Paolo Mauro, and Andy Berg. 2000. - 192. Macroprudential Indicators of Financial System Soundness, by a staff team led by Owen Evans, Alfredo M. Leone, Mahinder Gill, and Paul Hilbers. 2000. - 191. Social Issues in IMF-Supported Programs, by Sanjeev Gupta, Louis Dicks-Mireaux, Ritha Khemani, Calvin McDonald, and Marijn Verhoeven. 2000. - 190. Capital Controls: Country Experiences with Their Use and Liberalization, by Akira Ariyoshi, Karl Habermeier, Bernard Laurens, İnci Ötker-Robe, Jorge Iván Canales Kriljenko, and Andrei Kirilenko. 2000. - 189. Current Account and External Sustainability in the Baltics, Russia, and Other Countries of the Former Soviet Union, by Donal McGettigan. 2000. - 188. Financial Sector Crisis and Restructuring: Lessons from Asia, by Carl-Johan Lindgren, Tomás J.T. Baliño, Charles Enoch, Anne-Marie Gulde, Marc Quintyn, and Leslie Teo. 1999. - 187. Philippines: Toward Sustainable and Rapid Growth, Recent Developments and the Agenda Ahead, by Markus Rodlauer, Prakash Loungani, Vivek Arora, Charalambos Christofides, Enrique G. De la Piedra, Piyabha Kongsamut, Kristina Kostial, Victoria Summers, and Athanasios Vamvakidis. 2000. - 186. Anticipating Balance of Payments Crises: The Role of Early Warning Systems, by Andrew Berg, Eduardo Borensztein, Gian Maria Milesi-Ferretti, and Catherine Pattillo. 1999. *Source: References and Occasional Papers listing from the PDF content unit _op232 - References.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/op/232/_op232.pdf_