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Country Assistance Plans - People's Republic of China : I. Country Performance Assessment
A. Economic Performance Assessment3. Helped by two successive fiscal stimulus packages (Y100 billion in 1998 and Y60 billion in 1999), PRC’s economy grew close to the Government’s growth targets of 8 percent in 1998 and 7 percent in 1999. Strong economic growth continued in the first half of 2000 when gross domestic product (GDP) grew by 8.2 percent. For the whole of 2000, GDP growth is likely to be about 7.5 percent. If the current favorable external economic environment continues and there are no major external shocks, GDP growth will be close to 7 percent over the medium term, 2001-2003. 4. Growth in 2000 in 2000 is mainly driven by domestic consumption. Retail sales growth, Aafter slowing for six consecutive years, retail sales grew by 10.1 percent accelerated in 2000. Iin the first half of 2000, retail sales grew by 10.4 percent, compared to 7.5 percent in 1998 and compared to 6.8 percent in 1999. The pick up in consumer demand and the overall strengthening of prices in Asia are gradually causing a hardening of domestic prices. In the first half of 2000, the deflationary trend of the previous two years has been arrested. For the full year 2000, the consumer price index is estimated to increase by about 1 percent. Inflation is forecast to be in the 2-3 percent range during 2001-2003. 5. Since 1998, monetary and fiscal policies have supported domestic demand and growth. Monetary policy has been eased by lowering interest rates and reserve requirements for banks. This overall policy stance continued in 2000. The 2000 targets for broad money supply growth for 2000 is (14-15 percent), and for narrow money supply growth it is (15-17 percent). These rates are similar to those experienced in 1999. As of end June 2000, broad money supply increased at an annual rate of 13.7 percent, and narrow money supply at 23.7 percent. To prepare the economy to the post-WTO era, the People’s Bank of China (PBC) is considering introducing mechanisms to that would gradually allow a greater role for market forces in determining the exchange and the interest rates. The March 2000 Budget continues the expansionary fiscal stance. For 2000, Government expenditures (IMF definition) are targeted to increase by 17.8 percent, and revenues by 14.2 percent. The deficit in the 2000 Budget is Y320 billion (equivalent of about 3.6 percent of GDP) as compared to Y333 billion (equivalent to 4.1 percent of GDP) in 1999. 6. With the recovery in the Asian economies, PRC’s export growth has picked up substantially. Largely due to the severe recession in Asia, PRC’s export growth was subdued in 1998 and the first half of 1999. However Exports, which grew by 0.6 percent in 1998 and 6.2 percent in 1999, grew at an annualized rate of 38.3 percent during the first half of 2000. There was Continued robust growth of the economy, rising prices of oil and oil products in the international market, and increased imports by enterprises for technology upgradation to prepare for the post-WTO competition resulted in an equally strong growth (36.2 percent) in imports. Despite the strong import growth, Despite the strong growth in imports, PRC will post a significant current account surplus in 2000, close to the $16 billion surplus achieved in 1999. Capital account developments continue to be very difficult to predict, with actual foreign direct investment (FDI) declining by 8.2 percent and contracted FDI increasing by 25.6 percent during January-May 2000. However, with foreign exchange reserves of about $160 billion, an external debt of $151 billion, and debt-service ratio of 15 percent, the external payments situation is comfortable. 7. Given the forces of globalization, any unexpected external shock would have negative impacts on PRC’s exports, foreign investment inflows, and the growth of the economy. PRC's positive economic outlook is also subject to certain domestic risks and uncertainties: (i) an unexpected external shock, (ii) a deterioration in the fiscal situation in the PRC, and (iii) failure to contain the social costs of state-owned enterprises (SOE) reforms within manageable levels. Given the forces of globalization, any unexpected external shock would have negative impacts on PRC’s export and foreign investment inflows. 8. At about 4 percent of GDP, the estimated of the fiscal deficit in the PRC is moderate by international standards. However, this estimate does not give a full picture of the country’s potential fiscal vulnerability as it does not take into account: (i) the quasi-fiscal operations of the Government, (ii) the unfunded pension liabilities of the Government, (iii) the Government expenditures necessary to finance the social security obligations, and (iv) the Government expenditures necessary to cover the unrealized portions of the non-performing loans taken over by the four asset management companies (AMCs). Adjusting for these factors, the fiscal situation is weaker than it appears and could deteriorate further unless handled appropriately. 9. As a result of the lay-off of redundant workers and rural migration, urban unemployment and urban poverty have been increaseding in recent years. The official estimate of urban unemployment (3.6 percent) covers only the workers registered with the Ministry of Labor and Social Security (MOLSS). It does not include workers who are laid off as xiagang workers (workers who have lost their jobs but keep a legal link to their enterprises and receive a fraction of original salary and benefits). Adjusting for these limitations, urban unemployment rate could be upwards of 10 percent. Until now, About. Given that by end 1996 there were about half of the estimated 30-35 million surplus workers in SOEs have been laid off by mid-2000., the process of labor shedding in SOEs has only reached the half-way mark. Additional Significant lay-offs are expected in the coming years. in the coming years. The social safety net in PRC is yet to be developed to prevent many of the laid off workers from falling into poverty. Failure to contain the social costs of SOE reforms within tolerable levels by expeditiously reforming the social security system could increase the country’s economic vulnerability.
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