Catalog

The year 2001 was heralded by many around the world as the year of the PRC.

Last year, the PRC experienced important events, including a successful bid to host the 2008 Summer Olympic Games, and the national football team’s invitation to the 2002 World Cup in Japan and the Republic of Korea.

Especially important was the PRC’s entry into the World Trade Organization (WTO) after 15 years of negotiations.

Many Chinese see the PRC’s accession to the WTO as the start of a new era in opening up the country and a foundation for another business takeoff, one that will benefit not only the PRC but also the rest of the world.

The PRC’s economy maintaining a strong 7.3% growth rate over the past two decades—amid a series of downturns in the global economy—is a major factor in the country’s confidence.

The PRC bypassed the troublesome challenges of the 1997 Asian financial crisis that hurt so many other countries in the region, and the global economic downturn of the past 2 years. The PRC seems to have defied economic gravity amid the difficult recent external economic climate.

However, even with its current positive and exciting internal economic environment, many challenges remain for maintaining solid economic growth.

Experts warn that the country should not let down its guard. They suggest that there are warning signs of factors that could negatively affect continued growth over the next several years.

In my view, there are a series of factors to consider.

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It has long been believed that faster economic growth will be necessary for the PRC to maintain a sound economic system and counter possible negative effects of the ongoing restructuring of state-owned enterprises.

However, different from the mainstream optimistic voice, some analysts express worries about sustaining a high economic growth rate over the long term. These worries are based in slipping export growth—exports have been a major driving force of the economy.

With the recent global economic slowdown, last year’s export growth was at a virtual standstill.

The dramatic export slowdown—2.3% growth last year, down from 28% in 2000—seems to be an ominous sign. Although most economists optimistically forecast a rebound in the world economy, mainly the United State’s economy, there still is the possibility of another devastating shock.

Sustained global recovery is not guaranteed. This fear, coupled with other emerging uncertainties, such as the world terrorism situation, poses other doubts as to the external environment for healthy PRC economic growth.

Although PRC central authorities repeatedly indicate a focus on unlocking the country’s vast domestic demand, it seems this may be another question with respect to sound and expanded economic performance.

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Government spending often is seen as a stimulus to ensure a buoyant economy. The year 2001 witnessed the PRC’s fifth year of deficit spending to spur investment and help maintain economic growth.

PRC leaders have said that the national deficit is affordable, reaching 18% of GDP this past year. However, some observers fear possible difficult financial burdens and call for deceleration of the massive public spending policy.

Starting in the late 1980s, the PRC launched campaigns to strengthen its underdeveloped infrastructure system, among other things as a move to satisfy calls for infrastructure that would better support foreign investment.

This effort was accelerated in the 1990s, especially in coastal areas, such as Shanghai, the country’s financial hub and a city reflecting the flourishing PRC business environment.

Sweeping reforms of the past have achieved many sound developments.

However, the PRC’s WTO accession, which is an indication of the acceptance of international trade rules, poses daunting challenges for the country to further reform a philosophy accepting wholly market-oriented norms.

Reforms and service improvements in governance and legal systems at all levels will be a difficult challenge for the country’s move toward a market economy.

The PRC also must be on guard against the challenges of a shaky financial system, although two decades of reform and opening to the world financial system have helped strengthen the county’s financial system. Many difficult issues still must be tackled.

Although large state-owned asset management companies have been launched to collect the huge pool of nonperforming assets from the four largest state-owned commercial banks, a bad loan problem still exists, which, according the head of the PRC central bank, accounts for 26% of total loans, and must be addressed to fend off possible financial turmoil.

And the country’s burgeoning, but still shaky stock market — which saw a dramatic decline in 2001, from a peak of 2,245 points to just over 1,300 points — also faces a daunting challenge, as the reduction of the mammoth level of state-held shares remains a problem untackled.

Even a moderate recovery or reshuffling might not provide much relief when parallel external measures are not matched.

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In coping with overall economic issues, the PRC now is facing an unemployment problem, fueled by WTO-based competition and ongoing reshuffling of state-owned enterprises.

This poses a possible threat to social stability. Many people could lose their jobs as restructuring intensifies in the many inefficient state-owned firms.

The need to cut thousands of jobs in the pursuit of greater efficiency and profitability in the move to face international competition resulting from WTO accession will be a challenge.

Some analysts put the PRC real urban jobless rate at about 10%, an alarming figure that is nearly triple the current official figure.

The problem will become even more serious with an expected large-scale influx of the rural workforce to the urban job market. The country’s official jobless rate for 2001 was announced as 3.6%, with the Government aiming to create 8 million new jobs in 2002 to keep the urban unemployment rate below 4.5%.

Certainly, the PRC’s fast-growing nonstate sector, with both domestic and foreign firms, could help ease unemployment by absorbing laid-off workers from the state-owned sector.

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Counteracting costs of environmental degradation is a must.

The Spring Festival, the most-celebrated holiday in the PRC, usually in late January or early February, signals the start of spring, but increasingly is being accompanied by phenomena such as dust storms, making residents of Beijing reluctant to leave their houses.

Over the past decades, the PRC has worked hard to develop its economy, but now must play catch-up in environmental protection campaigns.

The environment has become one of the biggest concerns among Beijing residents, as only a few hundred kilometers away are deserts that not long ago were grasslands or forests, and where ecological systems are becoming increasingly vulnerable.

The PRC Government has put among its top concerns the Western Development Campaign to fight the onslaught of desertification and improve the overall ecological system in the Western Region.

The State Council, the PRC’s cabinet, has approved a 10-year reforestation project to provide a protective greenbelt around Beijing and Tianjin.

The Government has spent money on ecological protection projects in Inner Mongolia to prevent sandstorms. Still, more funds and efforts are needed.

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All this poses profound challenges to PRC economic policymakers in the years ahead.

However, it is obvious that central authorities are moving forward to meet the challenges and maintain the country’s vibrant recent economic performance. As Premier Zhu Rongji outlined in his annual working report this past March, the Government will pursue every measure available to maintain a sound economy.

Care for vulnerable groups—including farmers, migrated workers, and laid-off workers—was stressed in the last session of the PRC’s legislative gathering.

Most important, the Premier vowed to boost economic demand by increasing farmer incomes, a new step toward uplifting the quality of rural life.

The Government is working to improve tax collection, and has unveiled plans to reform the tax system in an effort to increase revenue collection, an important aspect of maintaining state spending and keeping a burgeoning budget deficit under control.

Premier Zhu’s Government has issued state bonds to mobilize capital to invest in various development projects, including more than 25,500 kilometers of highways and 4,000 kilometers of trunk railway lines.

The PRC has demonstrated time and again that it has both the determination and the capacity to withstand difficult external pressures—and there are sound prospects for tapping the world’s greatest reserve of domestic demand.

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Viewpoint is a regular feature of ADB Review. Prepared by a senior journalist, academic, or analyst, the articles are meant to provide fresh perspectives and stimulate debate on development issues. The material in this article does not necessarily reflect the official views of ADB.