This is an analysis of the Chinese economy by a certain scholar in 1998, and the following is translated into English.
I'm a little surprised now that the Chinese economy was not doing well at that time.
Modern China Studies
www.modernchinastudies.org
China's Economy in 1998: "Cloudy to Sunny" or "Cloudy to Overcast"?
Zhong Ding
Chinese scholar in the U.S., freelance writer
Economic recession has already appeared.
From the point to the whole: Guangdong's economic decline, the machinery industry is precarious.
The shrinking exports are worrying.
Where are the new economic growth points?
If economic growth is low, China can hardly bear it.
1998 may be a year of significant turning points for China's economic trajectory, not "cloudy to sunny," but "cloudy to overcast." If you only look at the People's Daily Overseas Edition, you will always see how good the situation is, and only at the end of the news report, after "but," will you read some understated "existing problems." In fact, what truly determines the direction of China's economy are these "existing problems."
China's economy entered a phase of high growth and high inflation in 1993, with a GDP growth of 13.5% that year. After four years of "soft landing," many domestic experts believed that China could enter a new stage of "low inflation and high growth." Now it seems that this estimate was overly optimistic. Due to insufficient demand, difficulties in economic structural transformation, and a lack of investment confidence, China's economy has already shown signs of recession. The actual economic growth rate in 1997 was 8.8%, lower than predicted. The government's forecast for 1998 is an 8% growth rate, but the actual possible economic growth may be much lower, perhaps only 4% to 5%.
Economic recession has already appeared.
A survey on industrial prosperity released by the National Information Center on February 18 this year stated that China's overall economy has entered a recession for the first time since 1992. The operating conditions of small industrial enterprises have deteriorated sharply, and there is a lack of momentum for recovery. According to the total number of industrial enterprises, nearly half of state-owned enterprises are losing money. Among dozens of industrial sectors, only tobacco, petroleum, and electronics are still profitable; other industries are either breaking even or losing money. More than ten million employees of state-owned enterprises have been laid off.
One of the simplest ways to gauge a country's economic direction is to look at changes in inventory and prices. If demand shrinks, product inventories will inevitably pile up, and prices will fall sharply. Recently, domestic newspapers reported that as early as the end of 1996, the national backlog of industrial products had reached three trillion RMB, equivalent to half a year's industrial output. Many products produced by enterprises are mismatched in demand, of poor quality, and overpriced, but to maintain operations and pay wages, they continue to produce, resulting in long-term unsold stock, ultimately leading to price cuts or scrapping. In the second half of 1997, nearly one-third of over 600 major commodities were in oversupply. Due to severe inventory accumulation and insufficient demand, prices have continued to decline. The National Development and Reform Commission announced on February 12 that since October 1997, China's retail price index for consumer goods has fallen for four consecutive months. At the same time, a survey by the China Material Information Center revealed that in January of this year, over 60% of 176 major production materials saw price declines. This situation has not occurred for many years.
Excess inventory and falling prices will inevitably impact production. In November last year, the output of one-third of 70 major raw materials and chemical products began to decline, while nearly half of 30 major electromechanical products saw production decrease. According to the Economic Daily, as of February 25 this year, steel companies have implemented production limits due to severe backlogs, power plants have begun shutting down some generators due to decreased electricity usage, and coal production has been cut back due to sales difficulties and excessive inventory. Even some previously tight railway segments are now experiencing insufficient transport volume. These signs indicate that China is experiencing economic recession. If this recession continues, corporate losses will further expand, and layoffs will significantly increase, leading to substantial economic and political costs.
From the point to the whole: Guangdong's economic decline, the machinery industry is precarious.
Guangdong Province has always been the driving force behind China's economic growth. In 1991, when the national economy was still in a slow recovery phase, Guangdong took the lead by attracting a large amount of foreign investment, ushering in an economic boom. In 1997, Guangdong's foreign trade accounted for 40% of the national total, so the direction of Guangdong's economy can, to some extent, be seen as a barometer for the national economy. However, in 1997, Guangdong's economy showed obvious signs of decline, being the first in the country to experience falling prices. In the first half of 1997, the price index for six months was 2.5%, 1.1%, -0.2%, -1.3%, -1.1%, and -0.3% respectively. The growth rate of Guangdong's exports also showed a downward trend month by month, peaking at 80% at the beginning of the year, but only increasing by 9.8% in December. The bursting of the "bubble economy" in real estate led to bad debts in Guangdong banks reaching 100 billion RMB. Since 1996, the number of foreign investment contracts signed in Guangzhou and the amount of foreign investment introduced have begun to decline, with a more significant decrease in 1997. The number of foreign investment contracts signed in 1997 dropped by 49.3%, and the amount of foreign investment introduced fell by 39%. It is foreseeable that this year the actual amount of foreign investment in Guangdong will be significantly reduced, which will greatly slow down Guangdong's economic growth rate.
Currently, China's industry is generally in a difficult phase, and among various sectors, the cloud hanging over the machinery industry is perhaps the darkest. The entire machinery industry consists of nine sectors, but eight of them are either losing money or barely breaking even, with only the automotive industry being quite profitable. Currently, the entire machinery industry relies on the automotive sector to sustain itself. There are 123 automotive companies, but only the Shanghai Automotive Factory is making decent profits; other automotive manufacturers are suffering losses and struggling to survive. It can be said that "the machinery industry relies on automobiles, and the automotive industry relies on Shanghai; thousands of enterprises are unprofitable, yet the Santana stands out."
In the automotive industry, aside from Shanghai Automotive Factory, there is a bleak scene of losses. The famous Changchun First Automotive Works is losing money, Hubei Second Automotive Works is losing money, Tianjin Dafa Automotive is losing money, and Beijing's Cherokee Jeep factory has seen production, sales, and profits decline by 20%. The Shanghai Automotive Manufacturing Factory, which produces the Santana sedan, enjoys special protection from a 100% import tariff on automobiles set by the state, allowing the domestic price of the Santana to exceed that of similar models in the international market by about double, thus yielding substantial profits. Last year, the profits of Shanghai Automotive Manufacturing Factory accounted for nearly 75% of the total profits of China's entire machinery industry and over 90% of the profits of the automotive industry. The profit from Shanghai Automotive Factory alone is nine times that of the remaining 122 automotive factories in China and three times the profits of thousands of enterprises in the machinery industry. This is the "pride" of Shanghai Automotive Manufacturing Factory, but it is also the sorrow of China's machinery and automotive industries. If Shanghai Automotive Manufacturing Factory is pushed out of the market in the future due to fierce competition, where will the profits come from to support the entire machinery and automotive industries?
The shrinking exports are worrying.
In 1997, China's exports grew by 21%, and the overall economy grew by 8.8%, with 3 percentage points attributed to increased exports. If exports grow slowly in 1998, the economic growth rate will decrease by 2 to 3 percentage points compared to last year, as estimated by Long Yongtu, the Deputy Minister of the Ministry of Foreign Trade and Economic Cooperation, during a recent visit to Australia.
This year, China's exports are facing unprecedented difficulties, mainly due to three reasons. First, foreign enterprises' investments in China are shrinking, leading to slower exports. Second, after the East Asian financial crisis, the currencies of these countries have depreciated, which benefits their exports and increases competition with China, as their export structures are similar to China's. Third, China's dependence on consumer markets in major export countries is increasing, requiring continuous expansion of exports to sustain the survival of Chinese exporting enterprises and drive economic growth. However, to protect state-owned enterprises, China is reluctant to open up imports, resulting in an increasing trade deficit with Western countries, leading to frequent trade frictions, which restricts the further increase of China's foreign trade exports.
The pattern of foreign investment is that foreign investments and equipment typically take about two years to materialize after contracts are signed. Therefore, the actual foreign investment introduced in 1997 was mainly the result of contracts signed in 1995. The scale of foreign investment that China may introduce in 1998 and 1999 will depend on the situation of foreign investment contracts signed in 1997. In the first ten months of 1997, the amount of foreign investment contracts signed in China decreased by 35% compared to 1996, indicating that the number of foreign investments in the coming years will decrease by at least 30%. Considering that these contracts were signed before the East Asian financial crisis, many investors from Hong Kong, Taiwan, and East Asian countries have seen their investment capabilities severely diminished, and many joint venture contracts may be canceled. Therefore, the amount of foreign investment introduced in the coming years may be halved compared to 1997.
The decline in foreign investment has already shown signs since 1997, with foreign-imported equipment for investment decreasing by 28% compared to 1996, indicating that the peak of foreign investment in China has passed. At the same time, the quantity of raw materials and components imported by foreign enterprises for processing and export can also reflect the future scale of exports. In the first half of 1997, the growth rate of raw materials and components imported by foreign enterprises for processing and export reached nearly 50%, but in the second half of 1997, the growth rate dropped to 7%. The slowdown in the import of raw materials and components indicates that foreign enterprises are not preparing to expand exports. This situation shows that this year, in addition to the significant decline in the amount of foreign investment directly weakening China's export growth capacity, the exports of existing foreign-funded enterprises may also not see significant growth. Meanwhile, the export growth rate of Chinese enterprises is also declining sharply, having reached 26% in the first half of 1997, but only 6.3% in November and December 1997. The possibility of a significant decline in China's exports in 1998 is very high, which will lead to an overall economic growth rate that is 2 to 3 percentage points lower than in 1997, resulting in a national economic growth rate of 4% or 5% in 1998.
Where are the new economic growth points?
If economic growth cannot rely on the driving force of exports, it can only hope for domestic demand. In 1997, the Chinese government identified automobiles and housing construction as new growth points to drive overall economic growth, implementing measures such as accelerating the establishment of housing provident funds and promoting housing mortgage loans. Automotive manufacturing and sales companies also widely adopted installment payments, but so far, neither housing nor automobiles have gained traction.
Although China repeatedly claims that there are more consumers with the means to buy private cars, these consumers mainly consist of wealthy private entrepreneurs, cultural and sports stars, and some journalists who have become rich from paid news, as well as well-known scholars who lecture and write articles. Now, the dormitory compound of the People's Daily is filled with reporters' private cars, many of whom actually "resell" news space. However, these individuals are still a minority in Chinese society, likely making up less than 1% of the urban population, while 99% cannot afford cars, leaving the automotive industry without a market. Although China's reforms have allowed a significant number of officials to become "rich first," they cannot directly use their earnings to buy private cars due to the lack of exposure, and many can use public vehicles for personal use, eliminating the need to buy cars.
Recently, due to weak car sales, the automotive industry has begun price-cutting competition, with the Shanghai "Santana" sedan leading the price drop, forcing other manufacturers to follow suit and endure losses just to sell cars; otherwise, the market would be dominated by the Santana. However, those already in the red cannot afford to sell more cars at lower prices; this price-cutting phenomenon reflects the overly optimistic notion that car purchases can serve as a new growth point to stimulate economic recovery.
The situation in housing construction is similar. Due to excessive speculative elements in the real estate sector in previous years, there has been an oversupply of land transfers, construction, and completed units. Currently, there are over 66 million square meters of unsold commercial housing nationwide, equivalent to one million vacant residential units. The real estate sector is now cooling off, with housing investment decreasing rather than increasing. In the first half of 1997, nationwide residential investment, construction, and completed areas all decreased by 3% compared to the same period last year. In Shanghai, the city with the fastest growth in recent years, nearly 40% of all office buildings constructed from 1986 to 1997 are vacant, with one-quarter of commercial properties also unoccupied. Given the oversupply, it will be challenging to rent or sell these long-vacant properties in the coming years. If new residential units are built in large quantities, it will clearly be a case of blind investment.
Some domestic economists suggest that urban consumption can be stimulated by encouraging individuals to purchase homes, which would in turn drive demand for furniture, interior decoration, and daily household items. In 1997, the government introduced personal housing consumption credit to encourage home purchases and create new consumption hotspots. However, personal housing consumption credit has not gained traction and has had little effect on promoting home purchases. The reasons include excessively high housing prices and low rents relative to income, creating a significant disparity that discourages people from taking out loans to buy homes.
Although the National Development and Reform Commission and the Ministry of Finance announced the cancellation of 48 unreasonable housing construction fees at the beginning of 1997 to suppress housing prices, prices remain too high. According to a World Bank survey, the ratio of housing prices to annual income in market economies ranges from 3:1 to 6:1, while the ratio of housing prices to monthly rent is around 100:1, thus encouraging residents to actively take out loans to buy homes. However, in China, the price of an ordinary 50-square-meter apartment is between 12:1 and 30:1 relative to annual income, while the price-to-rent ratio is about 10,000:1, making buying a home less attractive than renting. Furthermore, in China, housing is often allocated based on various factors such as power, qualifications, seniority, age, workplace, and position, with rents being very low and distribution following a clear hierarchy. As long as this system remains in place, housing construction will not become a consumption hotspot.
If economic growth is low, China can hardly bear it.
In developed countries, a 4% or 5% economic growth rate indicates high prosperity, and central banks worry about inflation. However, such growth rates in China signify economic recession; this is the "characteristic" of the Chinese economy. The root cause is that state-owned enterprises in China essentially lack a system of elimination, allowing both good and bad firms to persist. Only when the economic growth rate exceeds 10% can subpar enterprises take advantage of market prosperity and rising prices to sell their inferior products and "survive normally." If the economic growth rate falls below 8%, these enterprises will have no market for their products, leading to inventory buildup, unpaid wages, and debts. Once the growth rate drops below 4% to 5%, two-thirds of state-owned enterprises will be on the brink of bankruptcy, and both enterprises and employees will struggle to survive, exerting pressure on the government to accelerate economic growth. Because these underperforming enterprises should have been eliminated long ago, there is a significant "water content" in China's growth rate, which includes the "output value" of these lagging enterprises, making such fictitious growth rates incomparable to those of developed countries. I refer to a drop in the economic growth rate below 8% as "cloudy to overcast" for the Chinese economy, specifically in relation to China's "national conditions." This "national condition" has persisted for decades without resolution. Although many employees of loss-making enterprises have retained their jobs, the number of such enterprises is increasing, and their quality is declining, becoming a heavy burden on society. The more burdensome it becomes, the less the government dares to let go; as a result, it can only make concessions to lagging enterprises, re-stimulating economic growth to give them a breather for a few more years, leading to overheating and inflation. Since the reform, China's economy has been trapped in this cyclical pattern.
This year, in the face of economic recession, experts from the National Development and Reform Commission's Macro Department are calling for the expansion of demand to restore necessary economic growth, as current investment and consumption demand are insufficient for recovery. However, expanding demand now is much more difficult than in the past because the government lacks funds. Over the past two decades, the fiscal situation has already been depleted. Recently, at the 13th National Conference of Directors of Provincial Planning Commissions, the Director of the Comprehensive Department of the National Development and Reform Commission stated that the current fiscal deficit in China has reached 258 billion RMB, relying entirely on issuing treasury bonds to "borrow" money from the public to maintain operations. Currently, for every one RMB the government pays in wages, 0.6 RMB is "borrowed." The government is not only unable to increase wages to stimulate consumption but also lacks the capacity to significantly increase investment. On the contrary, it needs to cut expenditures by streamlining government institutions and reducing staff. In the future, to stimulate the economy, the central government may slightly increase infrastructure investment, but relying solely on the limited financial resources concentrated at the central level to invest in infrastructure projects is unlikely to drive overall economic growth.
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