September 19, 1997
Ladies and Gentlemen
On behalf of the Chinese Government, I would like to extend a warm welcome to everyone participating in the Seminar on Asia and the IMF, which, I think, is particularly meaningful following China's resumption of sovereignty over Hong Kong.
As is well noted, with a good record of growth performance, Asia has become the most dynamic regional economy in the world. According to the May issue of the World Economic Outlook, the 8.2 percent output growth rate of Asia (excluding Japan and the Middle East) in 1996 was more than double the global rate. However, Asia has encountered its own difficulties in economic development. The recent turbulence in the currency market in Southeast Asia is one example. While views vary on the causes of the turbulence, we believe the recent events to be temporary in nature. The Asian economy remains healthy on the whole and its prospects are favorable.
As a member of the Asian community, China has also experienced steady economic development since the introduction of the policy of reform and opening to the outside world. With an annual growth of about 10 percent, the real GDP quadrupled between 1978 and 1996. The improvement in the macroeconomic management has resulted in the gradual easing of the cyclical fluctuations. This has been illustrated by the successful soft landing achieving during 1994-1996. Real GDP grew by 9.7 percent in 1996, decelerating by 0.8 percentage points and 5 percentage points, respectively, compared with 1995 and 1992. Inflation in the year as measured by the retail price index eased to 6.1 percent, decelerating by 8 percentage points from the previous year. The stable macroeconomic performance continued in the first half of this year. The accomplishment of the soft landing was mainly attributable to the follow four factors.
1. The Implementation of Appropriately Tight Monetary Policy
The growth rates of M2 and M1 were respectively reduced from 34 percent and 31 percent in 1994 to 24 percent and 18.9 percent in 1996. The effective control of money supply helped contain the excessive demand, particularly for fixed asset investment, and thus provided an important condition for a soft landing. The success in controlling the money supply may be attributed to a number of factors. But the most important one has been the implementation of a series of reform measures in the financial sector, including the change in the policy mix and monetary policy instruments. Priority has been accorded to the control of money supply with a greater reliance on a combination of indirect instruments, such as central bank lending, rediscount, interest rate adjustment and open market operations. In order to prevent the unfavorable impact of the capital inflow, the central bank took sterilization measures through recalling its loans to the financial institutions and absorbing special deposits as well as open market operations in the inter-bank foreign exchange market. In addition, a nation-wide inter-bank money market was established in 1996 and the interest rates for this market were liberalized.
2. Increasing Effective Aggregate Supply
In order to control inflationary pressures, the Chinese Government has made great efforts to increase effective aggregate supply. The increase has been particularly evident in the supply of agricultural products in the past three years as a result of such measures as upward price adjustment and input increases. China's grain reserves reached a record level of more than 500 million tons at end-1996. The bottlenecks to economic development including underdeveloped infrastructure and basic industries have also been substantially alleviated. This is largely attributable to the fact that the investment in the energy, transportation, post, and telecommunications sectors has been growing much faster than in other sectors.
3. Persevering With the Policy of Reform and Opening to the Outside World
In recent years, China has made significant progress in the reform of the fiscal, taxation, financial and foreign trade systems as well as the investment mechanism. As the non-state sector has increased its share in the industrial output to about 60 percent, enterprises have generally become more responsive to price signals, including interest rate changes. The reform in the state-owned sector accelerated in 1996 with the adoption of the policy of strengthening the management of large state-owned enterprises (SOEs) while freeing up the small ones. An increasing number of previously lossmaking SOEs began to make net profits. The reform efforts have also resulted in greater openness of the economy. The ratio of trade to GDP reached 35.5 percent in 1996. The improved performance of the SOEs, the dynamic growth of the non-state sector and the expansion of trade as well as the inflow of foreign investment have provided favorable conditions for a soft landing and enhanced the resilience of the Chinese economy.
4. Strengthening the Confidence in Sustainable Growth
The Chinese population has benefited a great deal from the implementation of the reform since 1978. From 1978 to 1995, the per capita household income of the urban and rural population increased by 187.2 percent and 275.4 percent, respectively, while social protection was significantly strengthened as the ratio of social security and welfare benefits to the total wage payment increased from 13.7 percent to 29.2 percent. Such tangible benefits have contributed to public confidence in the Government's macroeconomic management and growth prospects. The strong confidence was reflected by the fact that the two downward interest rate adjustments last year only resulted in a temporary and limited decline in household savings deposits growth. Public confidence is a fundamental condition for maintaining social stability, which, in turn, is a precondition for reform.
Some people ask whether such a steady and strong growth momentum is sustainable. My answer is positive. Nevertheless, we are also well aware of the constraints to sustainable growth. First, the reform of the state-owned sector will take time as many SOEs have yet to struggle to rise from inefficiency. Second, the Government is faced with high unemployment pressures. Its annual capacity of creating 8 million jobs still falls short of the need to accommodate about 12 million job seekers. Third, there is a need for a fundamental improvement in fiscal performance, including a significant increase in the ratio of fiscal revenue to GDP and the ratio of the central government revenue to total revenue.
Notwithstanding all these constraints, we have full confidence in China's economic prospects. The Government has given priority to deepening the reform of the SOE sector. The central bank will continue its appropriately tight monetary policy. We believe that the deepening of the SOE reform will help solve the unemployment and fiscal problems and facilitate sustained economic growth.
The implementation of the reform measures has resulted in greater integration of China with the world economy, particularly with the rest of Asia. China's two-way merchandise trade reached US$289.9 billion in 1996, about 60 percent of which was transacted with our Asian partners. The same year registered US$51 billion of capital inflow, about 70 percent of which came from investors of the rest of Asia. The mainland has become Hong Kong's largest trading partner and the bilateral trade increased by 118 times from 1978 to 1995. While the mainland has become Hong Kong's largest market and largest supplier of re-exports, Hong Kong serves as a main channel of foreign financing for the mainland.
The prosperity and stability of the mainland has a significant bearing on Hong Kong and on Asia in general. The Chinese economy is projected to grow at an annual rate of 8-9 percent, and inflation to remain below 6 percent in the next few years. We are confident that, with the hard work of the Chinese people, the mainland macroeconomic targets for the Ninth Five-Year Plan and the long-term objectives for the period through the year 2010 are within reach, and at the same time Hong Kong will become even more prosperous. A more modernized China will be better able to contribute to the prosperity of the Asian region.