By ZHONG HE

The advent of economic globalization has led to an increasing interdependence between countries. China’s further opening to the outside world, particularly its WTO accession in late 2001, indicates its positive efforts in adapting to the global economy. To cope with the Asian financial crisis of 1997 and the subsequent economic fluctuations around the world, since 1998 the Chinese Government has implemented a proactive fiscal policy, a prudent monetary policy and the principle of expanding domestic demand so as to maintain rapid and steady economic growth. During the period from 1998 to 2002, the annual growth rate of China’s GDP reached 7.7 percent, the comprehensive national strength considerably strengthened, people’s living standards greatly improved, and the country’s impact on the world economy grew. The sustained growth of China’s economy not only benefits the Chinese people, but also the world economy.

I. Sound Performance of China’s Economy

China’s sound and steady economic growth over the past few years can be attributed to an effective macroeconomic control mechanism and to the Chinese Government’s unwavering efforts in deepening reform and opening up.

China’s economic growth mainly depends on the expansion of domestic demand. After the Asian financial crisis of 1997, the Chinese Government adopted a proactive fiscal policy and a prudent monetary policy, which promoted the fast growth of investment and consumption. This is the main reason for the fairly fast development of the Chinese economy, while the world economy as a whole remained sluggish.

In regard to the composition of China’s GDP, net exports take up a limited proportion in total demand, and the share has continued to decline year on year. The goods and service export in 1997 made up only 3.8 percent of China’s GDP, and this rate dropped further to 2.2 percent in 2001. In comparison, China’s domestic demand accounted for 96.2 percent and 97.8 percent of its GDP in 1997 and 2001 respectively. (see Table 1). In 2002, net exports still made up a small amount of the overall demand, despite a slight growth.

Deflation in the typical sense is non-existent in China. Although China’s consumer price index has dropped for 14 consecutive months since November 2001, it cannot be said that the Chinese economy is suffering from deflation. Typical deflation is characterized by continuous sliding in the price of commodities and labor, continuous decline in monetary supply, and the appearance of an economic recession (defined as negative GDP growth for more than six consecutive months). Currently, China’s commodity price is coming down slightly, but its money supply has increased continuously. Between 1998 and 2002, the supply of narrow money (M1) grew by around 15 percent annually, and the national economy kept a high speed of development. Hence, it is incorrect to conclude that China is suffering from deflation due to price drops.

At present, the price fluctuations are well within the 1 percent range, which is internationally recognized as a measure of price stability. China’s consumer price index in December 2002 was 99.8, dwindling only 0.2 percent from 2000, far lower than Japan’s 1.8 percent decline during the same period.

The drop in commodity prices was chiefly brought about by favorable factors, such as technological progress, increased efficiency and the enlarged impacts of opening up and reforms. The factors can be divided into short-term and long-term ones.

The first short-term factor is the reduction of tariffs following China’s WTO accession. The general level of tariffs was lowered from 15.3 percent in 2001 to 12 percent in 2002. The reductions involve more than 5,300 tarrif items of import commodities, which accounted for 73 percent of the total items for imports.

The second short-term factor is the quickened pace of reform in the formerly state monopolized power, transportation and telecommunications industries. Effective measures have been taken to break the state’s monopoly in these
sectors, introduce competition mechanisms, and regulate the pricing procedures for some public commodities and service items. These efforts have initially curbed the formerly arbitrary collection of educational fees and the unreasonably high prices of medicine and rural electricity rate, and weakened the policy role in consumer price hikes. The growth of service prices dropped from 10 percent a couple years ago to 7 percent in 2001, and further to 1.8 percent in 2002.

The primary long-term factor influencing price drops is the improvement in efficiency. China’s further opening to the outside world has attracted more overseas investment. The influx of advanced technologies and management expertise, when combined with China’s large labor force, has helped improve the country’s productivity and reduced production costs. In addition, with China’s deepening of its domestic reforms, a market competition pattern has taken shape, and the role of market in resources allocation has been enhanced. This has helped increase the efficiency of economic operation and reduced the cost of market transactions.

II. A Robust Chinese Economy Benefits the World Economy

Any country’s progress is an important component of human civilization and contributes to the progress of mankind as a whole. The survival and development of the Chinese people, who make up more than 20 percent of the world’s total population, is a major issue for global development. Past years have witnessed a great improvement in China’s conditions for survival and development, thanks to China’s rapid economic development. China’s achievements have also significantly contributed to the world economy and human civilization as a whole. For instance, the reduction of the poverty-stricken population in China has contributed to the global poverty reduction effort. Statistics released by the World Bank show that the number of poor people in developing counties except for China increased by 69.7 million from 1990 to 1998. In contrast, the number of Chinese citizens living in poverty decreased by 147.2 million during the same period. If China’s economy was terrible, try to imagine what an awful problem the country would pose for the world.

Respecting international rules and in line with its present realities, China has chosen a road for its economic development that is conducive to the progress of mankind. China’s 25 years of reform and opening up, its WTO accession, and the guideline for the development of the coming 20-50 years set by the 16th National Congress of the Communist Party of China, indicate that China is a large, responsible and trustworthy developing country that fully respects international rules. Its economy has expanded through fair competition and has made important contributions to the world economy. Just like the world sports competitions that follow Olympic principles have improved the physical strength of mankind, fair economic competition between different countries also spurs the prosperity of the world.

China also provides a huge market for various countries, while making full use of international resources. China’s inexpensive and high-quality products let other countries benefit from free trade through rational competition. On the one hand, they help increase the purchasing power and stimulated the consumption of importers. On the other hand, China’s products have reduced the production cost of enterprises, which helps sharpen their competitive edge in the world market.

More than 50 percent of China’s export products are manufactured by foreign-funded enterprises. Between 1999 and 2002, the ratio of products exported by foreign-funded enterprises rose from 45.5 percent of China’s total exports to 52.2 percent, and this rate will continue to increase. Foreign-funded enterprises have become a driving force in China’s exports. During this period, the trade surplus generated by foreign-funded enterprises accounted for 30 percent of the national total. China’s low-cost labor, stable political and social environment, and huge market potential have created a favorable investment environment and development opportunities for overseas investors.

China’s trade surplus derives mainly from the processing industry, with 55 percent of the country’s export products processed with imported materials or assembled with imported parts. A considerable part of China’s export products are imported products processed for export. This is quite different from that of developed countries. Theoretically, trade in the processing industry will lead to a trade surplus, because the export value—the value of imported materials plus that for processing—is larger than the value of pure imports. The past 14 years have witnessed a trade surplus in China’s processing industry, but a trade deficit or slight surplus in the country’s general trade. For instance, in 2001, China’s processing industry surplus totaled $53.5 billion, but its general trade saw a deficit of $1.6 billion.

As China has opened its economy wider to the outside world, transnational companies have increased their investment in the country. Their advanced production technologies and management expertise, combined with China’s labor advantages, have increased China’s productivity and improved the global commodity supply structure.

Moreover, China’s steady economic growth has given confidence to people worldwide. Currently, the prospects for a world economic recovery are still bleak, with the United States, Japan and the European Union showing no clear signs of economic growth. Under this circumstance, China’s sustained, steady, and rapid economic development is conducive to expanding global demand and enhancing the confidence of various countries, which at present is necessary for economic recovery.

China has a responsible monetary policy conforming to its national conditions. Since 1994, China has introduced a regulated floating exchange rate system that is based on the supply and demand of the market.

China has maintained the value of the Renminbi, even when most of its neighbors devalued their currencies during the Asian financial crisis of 1997. The stability of the RMB has played a significant role in stabilizing and developing the world economy and the global financial market.

China’s sound economic development benefits the world. The relationship between the Chinese and global economies is mutually beneficial. Giving up prejudice against China, establishing confidence and protecting China’s economy—an engine of world economic growth—are the correct way to push economies worldwide onto a sound development road and to spur the common progress of humankind.

At present, China’s impact on the world economy remains limited, despite its rapid economic development over the past 20 years. Though the country retains a strong momentum for continuous economic growth, as called by the World Bank and the International Monetary Fund as a driving force of world economic development, neither its aggregate economy nor its total trade volume exerts a huge influence on the world economy. In 2001, China’s GDP accounted for only 3.7 percent of the world total, lagging far behind the United States’ 32.6 percent and Japan’s 13.6 percent. China’s export and import trade made up 4.3 percent and 4 percent of the world total respectively, both ranking sixth in the world, far behind the United States’ 11.9 percent and 15.2 percent, Germany’s 9.2 percent and 8.4 percent, and Japan’s 6.6 percent and 5.9 percent. As a nation with a huge population of 1.3 billion, China records an annual per-capita GDP of less than $1,000, less than one-13th that of developed countries such as the United States, Japan and Germany. As a developing country, China faces an arduous task to make great contributions to human civilization and progress, which well match its huge population. It should intensify cooperation with other countries for further economic development on the principles of mutual benefit and fair competition.