Although the one-child policy still remains active, there are times when it’s not strictly enforced. This is often the case for females whom are considered minorities. Due to the high mortality rate among minorities, non-Han people have typically been granted more cultural freedom by the government to have larger families. This stance also serves the government who wishes to appear to be sympathetic towards the desires of the various ethnic groups within China.
The one-child policy has led to an uncommonly high ratio of males to females. The preferences for males are due in part to a complicated set of cultural traditions. For example, the birth of a son ensures that the family name will be carried on. Sons are also necessary to be able to fulfill the customary requirements of ancestral worship. Most importantly, men are charged with the obligation of taking care of their natural parents once old age sets in. Women also care for their husband’s parents which can make it difficult financially for the parents of daughters in old age because the Chinese government provides little to no retirement funds in rural areas where a majority of the population is located.
To adhere to the one-child policy the Chinese often take what would elsewhere be considered extreme measures to ensure the birth of a son. Males are so preferred that it’s common to see baby girls abandoned and left for adoption in public places. Some employ new technologies to determine the sex of unborn fetuses so that a pregnancy can be terminated if a daughter is expected. It’s also not uncommon to hear of baby girls being killed soon after being born so that another attempt at a son is possible.
The overall population density for China in 2004 amounted to 359 individuals per square mile; although, this figure doesn’t accurately reflect the widely varying population concentrations among the country’s regions. Under closer examination it’s clearly evident that a majority of the Chinese population is focused in what’s called the heartland of the country. This region in eastern China is marked by fertile plains, plateaus and basins which make it the foremost food producing land in the entire country. Typical metropolis population densities in eastern China can top 5,800 persons per square mile. On the other hand, the landscapes of the western regions are less favorable consisting mostly of steep mountains with unforgiving climates; thus making it difficult to live in this area, which is reflected by the low population concentration figure of 26 individuals per square mile.
To prevent further crowding in the east, the Chinese Communist Party instituted a policy in the 1950’s that required individuals to obtain permission from the police before they could move. Initially this was enforced because of the scarcity of jobs in urban centers. The government’s policy changed during the 1970’s when urban demand for unskilled workers skyrocketed. Out of necessity to fuel China’s booming economy, the government became more lenient with regard to urban migration. To assist in the development of the eastern city’s infrastructures, short-term migration was allowed. Searching for employment and a better way of life, many Chinese that once lived in the countryside flooded the cities. This has resulted in a dual class system within many cities, which is comprised of an upper class that primarily works for state-supported organizations and a lower class consisting of migrant workers that fulfill the construction and low-level service job needs. Although this transformation has taken place, it’s apparent that significant segments of the Chinese people still prefer the rural lifestyle because as of 2002, 62 percent of the overall population lived in a country setting.
There are many ethnic groups and nationalities in China although a vast majority (92 percent) is considered to be ethnic Han. When the people of northern and central China absorbed the inhabitants of southern China a shared culture was developed. This shared culture was based on similar values that were held between the two peoples. These values were primarily derived from the teachings of Confucius. They also had a mutual written language and a coordinated agricultural system that provided them with wheat, rice and other grains.
Although the northern and central Chinese were accepting of the southerners, the same respect wasn’t held for many of their surrounding neighbors. This included groups of Mongols in the north and northwest, Muslim Turkics in the west, Manchus in the northeast and Tibetans in the west and southwest whom they considered uncivilized. Traditionally the Chinese have kept to themselves unless it was agriculturally advantageous to associate with other societies.
Many of these nearby societies have adopted the Chinese way of life over the centuries. The more populous groups, out of the 55 ethnic Chinese nationalities, that have been acculturated include the Zhuang, Hui, Uygur, Mongol, and Tibetan peoples. The minorities that have been integrated into the Chinese culture also enjoy the benefits that go along with this status such as improved nutrition, medicine, and opportunities for further economic development.
Some cultures have rejected integration attempts though. The Koreans and Vietnamese are among those that have refused to accept Chinese acculturation. Even though the Korean and Vietnamese civilizations are considered to be separate entities under their own rule, they have retained what can best be described as an intimate relationship with the Han people.
It’s important to note that outburst along China’s borders, where many of the country’s minorities live, are not all that uncommon. For example, an uprising occurred after the Chinese occupied Tibet in the 1950’s. The Chinese military took a strong-arm approach to overpower the Tibetan unrest, which included the exiling of their spiritual leader, the Dalai Lama. The international community has widely denounced this response and other actions taken by the Chinese government to repress their minority groups although it’s projected that it will be a long time before these oppressive policies change.
Mandarin, pu tong hua in Chinese, is the official national language of China and is spoken by approximately 70 percent of the country’s population. There are many Mandarin dialects that are mutually unintelligible. Similar in nature to the various Romance languages in Europe, French, Italian, and Spanish, the dialects are related but each is a separate language.
The dialects are dissimilar to others in that they share a single common written form using exactly the same characters. This commonality is due in part to the Chinese Communist Party’s efforts to standardize the Chinese language. As a result of these efforts, many of the Chinese characters have been simplified. This simplification has also expanded to include many of the unique minority languages that now have written scripts based on the pinyin method of Romanization for transliteration. The pinyin method is also frequently employed to transliterate Chinese words for diplomatic, official and media purposes.
The differentiation between the regional dialects lies within the pronunciation of the characters. Consequently, each dialect assigns a unique tone for a given word, making their spoken forms unintelligible. Differences between the spoken Chinese dialects are most distinguished among the regions of southern China. The dialects provide each region a separate identity and to some degree ethnic distinction among the Han people.
Today, English is often mandatory part of the curriculum in many schools although the same cannot be said of previous generations. As a result, there are relatively few people in China that speak English well, compared to other nationalities. Therefore, it’s often recommended that business people and tourist know some Mandarin Chinese to carry on conversations more smoothly. Spoken Mandarin is considered to be relatively simple grammatically so it shouldn’t take too long to get the basics down. Plus, foreigners who take the time to learn the Chinese language are usually granted a warmer welcome.
Religion and Philosophy
Prior to 1949, Chinese people practiced Confucianism, Taoism (Daoism), and Buddhism. Individuals often practiced these distinct schools of thought in parallel with one another as opposed to Western ideologies where a single religion is typically followed. Thus, Chinese people have historically been very flexible about accepting new ideas and or gods into their dogma.
In 1949, when the Communist took control over China, organized religion was officially banned because it was considered to be incompatible with Communism. Atheism is professed by the Chinese communist government today. Although, the latest constitution drafted in 1982, allows for religious freedom. This freedom was granted in an effort to improve the strained ethnic minority relationships with Muslims and Buddhist. There are a small number of Chinese citizens who practice Christianity; however, it’s primarily done in secrecy because this religion isn’t covered as one of the officially sanctioned legitimate religions.
It’s important to note that Confucianism isn’t a religion but more of an ethical system or social conduct code that has shaped the lives of Chinese citizens for more than 2,000 years. Confucian teachings stress obedience to and respect for superiors and parents, duty to family, loyalty to friends, humility, sincerity, and courtesy, which if followed will lead to personal salvation. It’s theorized that doing business with China can be cost effective because Confucian ideology is so deeply embedded in the lives of its citizens that they unconsciously function in a Confucian manner. Thus the honesty, loyalty and the utmost respect for proper social relationships that go along with Confucian tenants can be favorable when trying to develop new business relationships in China as long as the foreign organizations adhere to these same principles.
Education has had a major affect on China’s cultural tradition although its role of importance has changed dramatically in the last few decades. Once the People’s Republic of China was founded, the education of its citizens became of extreme importance because the government understood the pivotal role it played for the future economic and social development of the country. Although the Cultural Revolution had a major negative impact on China’s educational programs for approximately a decade, the barriers have since been removed.
Today access to primary and secondary education is available to everyone. Primary education in China starts at age 7 and lasts until they are 12 when secondary education begins. Secondary schooling then lasts for another 5 years after which a student may apply for higher education. The following chart illustrates the education system in China as of 2001.
Prior to 1949, before the new education policies went into affect, approximately 80 percent of China’s population was illiterate. In comparison, today China boasts official literacy rates of 80 percent, which is well above the average for most other third world countries. Not only are the citizens becoming more literate, but they are also being educated with the skills necessary to take on the jobs of today and tomorrow. This is primarily due to Deng Xiaoping’s influence that made it a policy for the educational systems to gear their curriculum towards the demands of modernization, of the world and of the future.
Previously, higher education was state-funded and students were told for the most part which classes they would have to attend. After which, graduates were forced to accept the employment the government considered appropriate to assign them. Now students are required to foot the bill for their own higher education.
By paying for their own college education, students can essentially take whatever courses they are interested in. The only prerequisite is that all students must complete one full year of political education prior to being enrolled in college as a result of the Tiananmen Square incident. After graduation, students are now granted the opportunity to pursue a career in the profession of their choice be it a state supported or foreign investment enterprise.
The most popular areas of study in China’s colleges have been and continue to be within the engineering and science disciplines. Recently though, the fields of economics, law, medicine, and literature have been gaining in popularity. An additional development includes the rapid growth of Chinese students who choose to study abroad for their higher education. As of 2002, 501,000 Chinese students were attending school in foreign nations, primarily in North America, Japan, and Europe.
When the Communist came into power, traditional Marxist values became the norm for the Chinese social structure. This meant that poor peasant farmers were regarded with high respect and esteem within the party. As such, the peasant farmers had a great deal of authority in Chinese society. In contrast, educated elites and landlords were viewed with suspicion and many lost their land or were punished. Deng Xiaoping’s policy’s, which began to focus on education and human resources again in 1978, has modified this social structure to some degree.
Today, it’s still important for individuals to have peasant upbringings for advancement within the party’s chain of command. As was the case before 1949, the best way to achieve advancement in the social structure is once again through education to refine one’s skills. Although this change has allowed elites to have more important roles in society again, China continues to be a Communist state. As such, elites will continue to be viewed with some distrust by other members of the Chinese society as long as this political system remains in tact.
The Leninist model of one-party rule was adopted when the Chinese Communist Party came into power in 1949 and it still stands as China’s governmental system today. The Communist party’s legitimacy lies in their declaration to serve the interest of the Chinese people. As a result, the CCP has assumed the primary role for creation and implementation of all policies. This is carried out through its party affiliates who dominate the various governmental functions.
The following figure illustrates China’s current state (governmental) organs according to their constitutional framework. Although the National People’s Congress is illustrated at the top of the legislative command, in practice this organ isn’t the prevailing power. Instead, the State Council is the predominant state organ in the cabinet, which is lead by the premier.
The remaining structure of China’s government is a reflection of the economic reforms initiated by Deng Xiaoping which were continued by Jiang Zemin and his successor today, Hu Jintao. New government agencies have been added or strengthened as a result of these economic reforms, which support a socialist market economy (mixed economy). This has allowed for these agencies to function with more independence versus the days of the government-controlled planned economy.
As a result of the restructuring, local governments have far more control over the way they adapt national policies to their respective environments. This has also increased the amount of tax revenues retained for local purposes and in turn decreased the share submitted to the state government. Even though the Chinese Communist Party has handed over many of the daily government functions to local authorities and agencies, the party is still the driving force when it comes to the proposition or amendment of major policies.
The current constitution that was adopted in 1982 is a hybrid of the 1975 and 1978 ones although it’s very similar with respect to the detail and formality of the first constitution of the People’s Republic of China that went into effect in 1954. The 1982 constitution specifically addresses citizen’s obligations and rights and it defines the parameters of the government structure.
The 1982 State Constitution pronounces that "citizens of the People's Republic of China enjoy freedom of speech, of the press, of assembly, of association, of procession, and of demonstration." The 1978 constitution guaranteed these rights as well as the right to strike and the "four big rights," otherwise known as the "four bigs": to speak out freely, air views fully, hold great debates, and write big-character posters. The 1982 Constitution declared the four bigs to be illegal stating that citizens must abide by the law and follow labor discipline and social order. The new constitution made the four bigs illegal in an attempt to prevent criticism of the CCP which might cause social unrest and hinder economic development during a period when political stability was considered to be crucial to the modernization efforts.
The government’s structure is redefined in the new State Constitution in that it more specifically addresses the roles and duties to be carried out by the various organs. Although the government’s structure wasn’t fundamentally altered, certain practices were admonished including the concentration of power in the hands of a selected few and permitting lifelong terms in leadership positions.
An extensive legal framework was also developed to support liberalizing economic policies. This paved the way for the limited development of private enterprises and it granted previously unrecognized rights to the rural economic collectives. For example, the rural collectives are now able to "farm private plots, engage in household sideline production, and raise privately owned livestock," according to the constitution. These measures have been justified on the basis of expanding the national economy through centralized planning with the addition of market regulation.
An important difference between the 1978 and 1982 constitutions, specifically for the international community, is the latter’s attitude towards foreign assistance with the modernization agenda. The previous constitution called for “self-reliance” in the development of the modernization program. Conversely, the 1982 State Constitution laid down the essential groundwork that enabled the People’s Congress to pass numerous laws in the ensuing years to open China’s economy to outside involvement. This “open door” policy has allowed for a vast amount of foreign participation in virtually every segment of the Chinese economy that would have previously been off limits.
The National People’s Congress is comprised of 3,000 to 5,000 members that serve 5-year terms. The members are chosen by indirect elections held by the people’s congresses at the provincial level, although the delegates recommended by the Chinese Communist Party are typically the ones who are selected to hold office.
There are many top level functions that the National People’s Congress (NPC) is responsible for. In no specific order, they include: making amendments to the state constitution and ratifying laws; overseeing enforcement of these laws and the constitution; electing the republic’s president and vice president; choosing the State Council’s premier (based upon the president’s nominations); electing the state Central Military Commission’s members; electing the Supreme People’s Court’s president as well as the procurator-general of the Supreme People’s Procuratorate; reviewing and endorsing the national economic plan and state budget; sanctioning the founding of special administrative regions, e.g. Hong Kong, and to make decisions on questions of war and peace.
Considering the scope and significance of these functions, it’s natural to assume that the NPC meets regularly to debate over these issues although this is not the case. Instead, a meeting with all the members that usually lasts less than a month is conducted once a year. Therefore, the members never have enough time to thoroughly examine and question all the economic and budgetary reports it’s supposed endorse, the legislation that is proposed, or the official appointments it decides upon.
Due to the infrequent meetings, a permanent body known as the Standing Committee acts in its place when congress is not in session. The Standing Committee is comprised of approximately 150 elected members from the NPC. These members are primarily prominent figures in the Chinese Communist Party and other major organizations. This body presides over the annual congressional sessions and it has legislative powers as well that enable it to perform almost all of the NPC functions when they’re not in assembly.
The president is the head of state in China. Unlike the president of the United States, the Chinese president is for all intents and purposes a ceremonial position. Consequently, the president doesn’t have any executive power; instead, the State Council holds the executive powers. The premier, which leads the State Council, is nominated by the president and elected by the NPC to serve for 5-year terms.
Generally there are 40 members in the State council that are derived from the heads of national-level commissions and ministries. These members also serve 5-year terms and are elected by the NPC based on the premier’s nominations. Even though the NPC elects the State Council members, the individuals chosen to fill these positions are typically based on the CCP’s desires.
In actuality, the individual with the greatest amount of real power over China’s government is the CCP’s general secretary. This is due to the party’s overwhelming influence and control. Second in line would be the premier although an individual’s personality to a large degree determines the amount of power truly exercised by each position. Since the general secretary isn’t formally recognized as a position of power, often the general secretary will hold the state presidency position as well.
The State Constitution that was most recently promulgated defines a legal system with four components: a public security administration (police component); a court system; an office of the procurator (public prosecutor); and an arrangement of labor camps and prisons. China is a civil code country for the most part; as a result, the legal system is founded on codified laws. This being said, in some instances China’s courts will recognize doctrines based on custom as long as the doctrines don’t directly conflict with written statutes.
The highest level in the court system is the Supreme People’s Court, which is the foremost appellate forum in the state. Thus, the Supreme People’s Court is charged with the supervision and administration of justice by all subordinate local and special people’s courts. Based on the level within the court system, judges are said to be appointed by the corresponding level of the people’s congress although in reality they are chosen by specific groups within the CCP. It’s important to note that constitutional supervision lies within an independent body known as the People’s Procuratorate, not the Supreme People’s Court.
Unlike the U.S., China’s courts don’t necessarily recognize case precedents. However, an interpretation of the law by high level state organs, with the proper authority, is considered binding on subordinate government bodies and the lower court levels. Since the central governments decisions and changes in direction must be adhered to by the lower levels, the local organs are in essence extensions of the central government acting within the direct control of a unified leadership.
There are 3 major governmental layers below the central government that constitute China’s local government. The first tier under the central government has 5 autonomous regions, 4 autonomous municipalities, 2 Special Autonomous Regions and 22 provinces. The 5 autonomous regions are Guangxi Zhuang, Inner Mongolia, Ningxia Hui, Tibet and Xinjiang Uygur. The 4 autonomous municipalities include Beijing, Chongqing, Shanghai, and Tianjin. The 2 SARs are Macao and Hong Kong. Anhui, Fujian, Gansu, Guangdong, Guizhou, Hainan, Hebei, Heilongjiang, Henan, Hubei, Hunan, Jiangsu, Jiangxi, Jilin, Liaoning, Qinghai, Shaanxi, Shandong, Shanxi, Sichuan, Yunnan, and Zhejiang are the 22 provinces. China considers Taiwan to be its 23 province. Since Taiwan is a rouge province governed by the party that lost the civil war in 1949 to the Communist, it will not be considered in this comprehensive analysis of China. The following figure illustrates the locations of these provinces, regions, etc.
The second tier of the administrative levels is made up of prefectures, municipalities, and counties. Rural townships, municipal subdivisions and administrative towns constitute the lowest level under the central government. Grassroots organs such as resident’s committees within cities or villages in rural region are common. Although these organs are below the state’s structure, they do serve important governmental functions, e.g. overseeing population planning and collecting taxes.
The Chinese Communist Party, which was founded in 1921, is the vanguard of the Chinese working class. It established the People’s Republic of China in 1949 after years of armed struggle and currently has more than 60 million members in more than 3 million grassroots organizations. Marxism-Leninism and Mao Zedong Thought guide the CCP’s actions in concert with Deng Xiaoping Theory. “Building socialism with Chinese characteristics” and “holding the high banner of Den Xiaoping theory” are central mottos of the CCP. The Party’s fundamental line is to utilize economic development to unite and lead all the Chinese ethnicities to build a prosperous, strong, and highly civilized modern socialist state. The CCP is doing this by reforming wasteful state-run enterprises permitting them to operate autonomously, having an open door policy, and allowing some privatization.
The highest organ of the CCP is the National Party Congress. Similar to the National People’s Congress, the National Party Congress meets infrequently and has a permanent smaller organ that acts in its place when it’s not in session known as the Central Committee. The Central Committee elects the general secretary as well as the members of two smaller groups: the Politburo and the Standing Committee of the Politburo.
The CCP represents the interest of the people in China’s socialist dictatorship through multi-party cooperation and political consultation. There are 8 other parties in addition to the CCP that function in China: the China Revolutionary Committee of the Kuomintang, the China Democratic League, the China Democratic National Construction Association, the China Association for the Promotion of Democracy, the Chinese Peasant’s and Worker’s Democratic Party, the China Zhi Gong Dang, the Jiusan Society, and Taiwan Democratic Self-government League. These parties are allowed to coexist with the CCP because they were established before the founding of the PRC, they acknowledge that the CCP is the only true power China, and they continue to follow the unyielding CCP leadership.
The unified front also includes representatives from mass associations of labor, women, and the youth. Of these associations, the Communist Youth League is considered to be most important to the CCP because new political party constituents are often drawn from this organization once they are old enough to vote (age 18). Through these political parties and associations, political consultation takes on the organizational form via Chinese People’s Political Consultative Conference.
Absolute command of the State’s armed forces rests in the Central Military Commission. The chairman of the Central Military Commission is determined by the NPC or the Standing Committee. Therefore, as an organ of the CCP, it operates independently from civilian influence. The People’s Liberation Army (PLA), the People’s Armed Police Force and the Militia make up the armed forces of the PRC. The following graph illustrates a comparative analysis of military expenditures for China versus 9 other nations.
The PLA is the standing army of the state, which includes the national army, air force, and navy. The PLA is a voluntary force composed of approximately 2.8 million members making it the world’s largest armed force (250,000 in the navy, 400,000 in the air force, and an army of 1.7 million). Its primary functions include internal security and defensive military operations. Even though China spent roughly $60 billion in 2003 on military expenditures (an estimated 3.5-5% of GDP) it lacks weapons and training of a modern day militia. Thus, the PLA is primarily defensive in nature; although, China does have small supply conventional warheads and nuclear missiles with significant range capabilities.
China is home to the world’s second-largest economy (in terms of purchasing-power parity). China’s economy has been growing by leaps and bounds ever since the state decided to initiate reforms to the old Soviet-style centrally planned economy 20 years ago. Government officials began the reforms due to the growing economic gap between China and the industrialized countries of the world. In some respects the planned economy model worked well because it assisted with the stable growth of the languishing economy although it also prevented the economy from reaching its full potential.
The new system that was adopted is referred to by the Chinese as a socialist market economy. The reforms have proven successful with average annual economic growth rates of 10.2% and 9.7% during the respective periods of 1980-1989 and 1990-2002. These staggering growth rates were among the highest in the world for these periods. As a result of the economic development that occurred in the last couple of decades, China’s GDP has quadrupled since the reforms began in 1978.
Although the reforms have benefited the country greatly, there have been some drawbacks. For instance, economic prosperity hasn’t been enjoyed equally by all of China’s people resulting in further widening of income gaps (the largest discrepancies occurring between urban and rural peoples). Due to strict migration policies, unemployment has been on the rise. In addition, the rapid unbalanced expansion has caused inflation and difficulties for China’s economic planners.
As of 2002, China had the largest labor force in the world, roughly 769 million strong. A vast majority of this force, nearly 64%, is located in rural areas. The distribution of the workforce among industry groups hasn’t changed much over the last decade. According to 2001 estimates, 50% of the labor force was in agriculture, forestry and fishing. Manufacturing, mining and construction, which make up the industrial sector, employed 22%. The remaining 28% worked in banking, government, transportation, tourism, and retail trade that are grouped within the service sector.
In spite of sustained growth rates, unemployment and underemployment have become serious problems for the PRC. Towards the latter half of the 1990’s, the official urban unemployment rate lingered around 3.1%; although, the figure is considered to be unreliable due to the difficulties associated with conducting censuses in China and the large population of rural refugees who float from city to city picking up employment anywhere they can find it. The following graph illustrates a comparative analysis of unemployment for China against 9 other nations.
Unemployment and underemployment problems have been exacerbated by new trends that have occurred as a result of the reforms. For example, now that state-owned enterprises have been given more independence, they have been laying off superfluous workers to improve their efficiencies. Additionally, by moving away from the inefficient cooperative farming practices, there’s now a large collection of unemployed and underemployed rural citizens. Therefore, the true unemployment rate is estimated to be anywhere from 2 to 4 times the officially published figure.
The economic reforms have brought many changes to the workplace as well. In the past people were assigned to a work unit, where they often remained for a lifetime. Today the employment conditions are becoming more flexible with the introduction of labor contracts. Through labor contracts, enterprises are permitted the freedom to hire and fire new employees for a fixed-term period on a contractual basis as opposed to bringing on a lifelong worker. The state is also encouraging new compensation systems. These systems are based on the idea of paying for performance through merit raises and promotions. Although these freedoms now exist, many are reluctant to adopt them due to the insecurity that goes along with change.
On the surface, women are encouraged to enter the workforce and are treated as equals to their male counterparts. In actuality, this differs somewhat. Traditionally China has been a patriarchal society, which is evident by the unbalanced number of women that are still concentrated in lower paying positions. Some progress has been made through legislation aimed at protecting women’s rights. Specifically, legislation that was passed in 1992 known as the Law on the Protection of Rights and Interests of Women sought to restrict gender discrimination by outlawing the consideration of pregnancy, maternity leave, or child-care issues in hiring or firing decisions.
Trade unions are present in virtually every industry sector in China. Primarily they operate in the interests of the union members: settling labor disputes, protecting jobs, and looking out for employee’s welfare. The All China Federation of Trade Unions (ACFTU) is closely tied to the CCP and acts as the central hub from which all other unions are an extension. In contrast to the industry specific unions, the ACFTU doesn’t play a role in the protection or promotion of worker’s interests. Instead, the ACFTU focuses its attention and efforts on ways to improve production. Primarily this is accomplished through the education of new entrants and the retraining of existing employees in the workforce.
Banking System & Monetary Policy
Along with other significant economic reforms, China’s banking system has also been radically upgraded over the last two decades to more closely emulate those of free markets. Previously the banking system was entirely controlled by the State. Today, more autonomy has been granted to the country’s financial institutions although the government still plays a significant role in their operations.
The People’s Bank of China (PBOC), established by the CCP in 1948, is China’s central financial institution. Under the planned economy model, the PBOC essentially acted as cashier, simply doling out funds to state enterprises for use as working capital. Instead of receiving interest payments, all revenue that was collected was handed over to the government as part of the state ownership system. Thus, no loans were ever paid off or removed from the books.
Beginning in the 1980’s, a series of new legislation has been passed aimed at changing the PBOC’s role in the economy and its relation to the government. As a result, the PBOC shifted away from its previous role as direct lender. In relinquishing many of its micro-level operations to lower level financial institutions, the PBOC has taken on many macro-level operational and policy matters: formulating and implementing monetary policies; issuing renminbi or yuan (China’s currency) and managing its circulation; supervising the establishment of financial institutions and regulating them; regulating the financial market; issuing rules and regulations concerning the operation of the financial industry; holding, managing and operating state foreign exchange reserves and gold reserves; operating the state treasury; safeguarding the normal operation of payment and clearing systems; compiling financial statistics, conducting financial investigations and making forecasts; engaging in domestic and international financial operations. Thus the PBOC is playing a crucial role in the modernization efforts by transforming China’s financial system to a more market driven sector; although, the State Council still maintains the final say with regard to economic policies.
The Commercial Bank Law that was promulgated in 1995 standardized the operations of China’s commercial banking institutions. There are 4 major state-owned commercial banks: the Bank of China, which handles foreign exchange reserves and China’s international accounts; the China Construction Bank, which handles the moneys for basic construction; the Agricultural Bank of China, which deals with loans in rural sectors; and the Industrial and Commercial Bank of China that works with commercial and industrial credits for international business. Taken together, they control China’s commercial banking system handling in excess of 50% of all the deposits and loans in the PRC banks. Due to the monetary policies that were in place prior to the reforms, there are a significant amount of non-performing loans in these 4 major commercial banks. These monetary policies allowed the state-owned enterprises to become heavily indebted without repercussion. This lack of action now weighs down the state in the form of non-performing loans, which is estimated to account for at least 30% of the loans in the portfolios of the state banks. The following chart details a breakdown of savings deposits and loans for all of China’s financial institutions in 2003.
In addition to the commercial banks, the PRC also has 3 major “policy” banks: the Agricultural Development Bank of China, which funds agricultural development projects in rural areas; the China Development Bank, which focuses on infrastructure financing; and the Export-Import Bank of China that specializes in trade financing.
Fiscal Policy & Taxation System
China has been using bond issuance to stimulate the economy ever since the government first began issuing bonds over 20 years ago. The bonds have historically been used to offset government budgetary deficits caused by the heavy spending needed to develop the country’s infrastructure, a poor tax collection system, and corrupt state officials. Bond issuance has had a positive affect on China’s GDP although many in the banking system feel that monetary policies will lead to even greater GDP growth rates over any fiscal policy that might be enacted. This argument seems valid because 55.6% of every yuan spent by the government in 2003 resulted from revenue stemming from bond issuance. Since the central government can only issue national bonds, the debt burden falls wholly on the central government thereby weakening the state’s payment capabilities.
For the last couple of decades, China has been focused on fiscal decentralization as its main economic strategy. This has been one of the most important measures taken by the government to stimulate the economy in accordance with the modernization efforts. Although China’s GDP growth has been among the highest in the world, the wealth creation hasn’t been enjoyed equally among the country’s people. This is due in part to fiscal strategies that flooded regions in the East with money to spur development. The government fully accepted unequal growth for all the regions so that some would have an opportunity to catch up to the global economy. In fact, Deng Xiaoping put it quite simply stating, “Let part of us be richer first.” Today the government is changing its position stating that much more fiscal attention will be focused on poorer regions of the West.
Up until 1984, China used a single tax system for handling tax management, which was based on the state’s unified control over income and expenditures. A multiple tax system had been gradually adopted since then to meet the demands posed by economic reform and development. Today this multiple tax system no longer meets the needs of a growing market economy. As such, China’s tax laws have once again been revamped to create an overall tax system that conforms to the generally accepted practices of the world’s economic community.
To prevent further corruption and tax evasion that’s been common over the past few decades, China has broadened its tax collection base and monitoring tools. This has involved close scrutiny of foreign companies, wealthy individuals and high paying professions. The money spent to prevent tax evasions recently has paid off with the government recovering 15.2 billion yuan in unpaid taxes for 2002. It’s projected that these and other tax evasion counter measures will be further expanded in the near future to offset losses incurred by reduced tariffs.
Currently the Chinese government is developing a unified corporate tax regime to provide fair and equal treatment between foreign and domestic organizations as required by the WTO. To date there have been two sets of tax laws that have governed the amount of taxes levied against foreign and domestic organizations. Foreign enterprises have been taxed at 15% and above, which is lower than that imposed on domestic companies (33%). It will be a challenge for the state to create the single tax rate system because China doesn’t want to discourage foreign direct investment based on the new fiscal policy.
China’s economy has been founded on the agricultural business (primary industry) for centuries. Although 20% of the world’s population lives in the PRC, it’s home to only 7% of the world’s arable land. Just over 40% of the 280 millions acres of cultivated land is irrigated, second only to India. China is now able to meet the basic dietary needs of its citizens due to irrigation projects, agricultural reforms and the adoption of advanced farming methods. Agriculture also supplies many of the countries raw materials needed in the industrial markets.
Significant agricultural reforms have increased this industry’s development over the past couple of decades. One of the State’s first experiences with privatization occurred in the agricultural segment, commonly referred to as the household contracting and responsibility system. This system enabled households the freedom to sell any additional crops they could grow in the open market, after they satisfied their communal requirements. This system was initiated with the intent of eliminating the country’s reliance on the commune system, and although it has proved itself successful, the government still operates a number of large scale farms to supplement agricultural production. The following chart details China’s 2003 agricultural output.
Today China is the world’s largest producer of rice, millet, tobacco, barley and sweet potatoes. In addition, the PRC yields a significant portion of the world’s supply of wheat, soybeans, cotton, tea, raw silk and oilseeds. Also noteworthy is the country’s production of peanuts, sugar beets, sugarcane, and an assortment of fruits and vegetables. Of all the crops produced, rice is the country’s most important with 26% of the cultivated land devoted to its production. Furthermore, China is one of the world’s top producers of meat, eggs, and seafood.
Manufacturing & Industry
China’s manufacturing and industrial sector (secondary industry), which accounted for 51.7% of the country’s GDP and 22% of the workforce in 2003, includes mining, utilities, and construction. China has developed a solid industrial foundation from what used to be considered a backward economy which by necessity had to import most if its finished industrial products. In less than half a century, many of the country’s 39 branches of industry have been built from ground up. From 1978 to 2001, this sector has observed a sustained growth pattern averaging 10.5% every year and an estimated 16.2% in 2003. Although the industrial sector has rapidly expanded, there are still a number of outdated and inefficient facilities which are primarily operated under the state’s control.
The pace at which this sector developed is mainly due to reforms that granted enterprises more independence and rights among other factors. Since enterprises didn’t have to operate under the State’s control, profits remained in the hands of the organizations that earned them. Operations improvements have been achieved through the use of the enterprise contracting and responsibility system, which is similar to the household contracting and responsibility system that was adopted in the agricultural sector. In addition, the Chinese government has encouraged its citizens to travel abroad to learn sophisticated management techniques and gain technical knowledge that can be used domestically. Plus the creation of Sino-foreign joint and wholly foreign owned enterprises provided another mean through which capital could be obtained.
China’s manufacturing and industrial sector has 5 main contributing branches: the iron & steel industry, the medium & light industry, the textile industry, the coal industry, and the petroleum industry. China’s government has given the iron & steel industry top priority because its development is considered crucial to further carryout the modernization strategy. This focus enabled China to become the world leader in the production of steel and steel related products such as stainless steels, seamless pipes and tungsten steels. The following chart depicts China’s major industrial outputs in 2003.
Medium & light industries have also received a significant portion of the industrial development funds because they are less capital intensive than heavy industry and they can generally turn a quicker profit. China’s textile industry is the largest in the world, which is why it’s typically referred to on it’s own as opposed to being grouped within the light industry branch. Chinese enterprises have a competitive advantage in the textile industry because of the abundant supply of cheap resources, which includes labor and raw materials such as cotton.
China ranks among the world leaders in the production of coal and oil. Coal is the primary energy source among petroleum, electric power, and coal in China. Therefore, a vast majority of the coal that is mined is consumed domestically. On the other hand, the petroleum industry has expanded beyond the domestic consumption capacity. Thus, the petroleum industry also services foreign markets with crude oil and other refined petroleum products to a certain extent.
China’s service sector (tertiary industry) includes many industries such as food & beverage, banking & financial services, retail trade, commerce, legal services, health services and insurance services. Similar to the manufacturing and industry sector, China’s service sector has blossomed with the economic reforms of the last two decades. Before the reforms China’s service sector was virtually non-existent. Today the service sector has grown to account for 33.8% of the country’s GDP (2002 est.).
Retail trade has taken in China’s urban areas. The roads are now lined with a multitude of privately owned shops and street markets. In the larger towns and cities immense shopping centers and department stores are also common. Western food and beverage chains such as Kentucky Fried Chicken, Pizza Hut and McDonald’s are also popping up in residential areas.
Before the reforms, tourism was very limited because government policies prevented almost all foreigners from visiting China. Today this industry is receiving more attention because the government sees this market as an opportunity to earn foreign dollars. To accommodate tourism many hotels have been built, airline destinations within the country have grown and historic sites, such as the Great Wall, have been opened to foreigners.
The communications industry has also benefited from the economic reforms. The telecommunications industry boomed during the 1990’s and now telephone service can be found in basically every locality although only 16.7% of households have a phone. Today there are many magazines and over 2,000 newspapers published across China. Radio and television broadcast are also in abundant supply reaching 75% of the population although only 1 citizen out of 3 owns a television. The State’s heavy hand compels the media to refrain from reporting on politically sensitive issues. As a result, the media adheres to a strict code of self regulation to ward off further government manipulation.
Trends and Outlook
According to the official figures reported for real GDP, China’s economy grew to $1,405.95 billion, an increase of 9.1% which is higher than the rate that was forecasted. Government officials speculated that with the spread of the Severe Acute Respiratory Syndrome (SARS) virus across China the consequences would be felt in the form of an underperforming economy, especially in the services sector. Therefore, an annual growth of 7-8% was predicted although many in the economic community felt this figure was too low. Chinese officials aren’t intentionally sandbagging the forecasts. Instead they are still acquiring the knowledge and skills necessary to make accurate macroeconomic forecasts, which can be quite difficult in China whose economic statistics are generally misrepresented, especially at the provincial and local levels. The following 2 graphs illustrate China’s GDP, CPI & RPI since 1996.
After falling 0.8% in 2002, China’s consumer price index (CPI) increased slightly in 2003 by 1.2% compared to the previous year. By location, CPI increased by 0.9% in urban areas and by 1.6% in rural areas. The increase in CPI is somewhat misleading because of state interference. Although price controls for commodities are virtually nonexistent, the state indirectly influences the prices for 13 broad categories of items such as electric power, transportation, communication, and some services. Retail prices continued to drop by 0.1% from the 2002 level, which has been on a downward trend for 6 consecutive years. Analyst believe this downward trend is an indicator that China might not be able to sustain or create the needed high levels of consumption and investment required to fix the structural problems that plague the country’s economy, especially from the private sector.
China essentially fixes (pegs) the exchange rate of the yuan to the U.S. dollar allowing it to float against other currencies in accordance with changes in the values of the dollar. Although officials recognize the need to eventually switch over to a market-based exchange rate mechanism, the time frame for implementing such a mechanism hasn’t been defined. Consequently, the yuan exchange rate remained relatively stable in 2003.
China’s balance of payments remained in a strong position as a result of interest rates that fell for countries in the west (United States) and due to China’s current account which continued its good standing. Although the trade surplus was $25.5 billion in 2003, this was a decrease from the previous year by $4.9 billion. The country’s foreign exchange reserves saw considerable growth to $403.3 billion, an increase of $116.8 billion compared with 2002 end of year figures. The following 2 graphs depict China’s foreign exchange reserves and foreign direct investment.
The principal growth sectors in China continue to be within the secondary and tertiary industries. The value added in the secondary industry for 2003 was $744.31 billion and $453.84 billion for the tertiary industry which represents an increase of 12.5% and 6.7% respectively over last year. Conversely the value added for the primary industry, which employs half of the labor force, was only $207.8 billion representing a meager growth of 2.5% year-on-year. The continued high growth rates in the secondary industries is fueled by government spending to build the state’s infrastructure, technical upgrades by leading enterprises, and a tremendous upsurge in the output of steel, which is needed to supply the construction materials and manufacturing equipment required to service real estate development. Although the SARS outbreak had detrimental effects on the retail sales and other service industries, this segment is expected to show signs of a rebound in the near future. This holds true especially for the telecommunications sector. China is now home to the largest wireless and wireline networks in the world and preferential government policies have made this sector very attractive.
Although it’s not reflected in official figures, China’s labor surplus continues to be problematic for the economy. Income inequality is also an area of concern where urban residents annual disposable per capita income amounts on average to $928 compared to rural figures of $298 which is will below the World Bank’s $1 per day, i.e. $365, poverty line standard. Other main problems that quell economic and social development include energy shortages, a weak legal structure, corruption, nonperforming loans, inefficient state operated enterprises and most important a socialist system that interferes too much with pricing, interest rates & fees, and general market control.
China ranks 4th in the world for exports at $431.6 billion based on 2003 estimates, trailing the United States, German, and Japanese exports. On the other hand, 2003 estimates indicate that the PRC ranks 3rd in the world’s imports at $397.4 billion. The trade balance between the values of imports and exports continued China’s long standing trend of having a trade surplus. As China’s foreign relationships improve and barriers against trade fall, it’s projected that the trade surplus will eventually diminish in magnitude.
The world’s economic community frequently had problems with China’s human rights policies during the 1990’s. American disapproval was particularly poignant to the point that the United States teetered on the verge of withdrawing China’s normal trading status (historically referred to most-favored-nation trading status). Understanding how important the normal trading status was for the country’s continued growth, Chinese officials radically changed the regulations and rules governing trade and investment. The sweeping reforms were aimed at increasing international competition and investment, decreased protectionism for domestic enterprises by limiting previous barriers on U.S. imports of agricultural and industrial goods, and by decreasing tariffs. In turn, the U.S. Congress ratified legislation in 2000 granting the PRC permanent normal trading status based on the belief that improved trading relations will foster labor, environmental and human rights reforms in China.
Regulations and Standards
China’s foreign investment and trade policies have historically lacked transparency. This has resulted in a system that generally creates a great deal confusion when it comes to trade and foreign investment because the rules and regulations governing business activity can not be obtained easily; therefore, they aren’t applied consistently and they often vary by region. Other downsides include poor protection of intellectual property, unequal treatment between domestic and foreign companies, and an inadequate mechanism for resolving disputes.
December 11th, 2001, marked China’s accession to the World Trade Organization (WTO). Even though China is now a standing member of the WTO, the PRC still has a long way to go to adopt all the necessary WTO regulations, which is being accomplished through reforms and the passage of new legislation. China’s entry into the WTO has not only improved the country’s growth potential but it will also service the Chinese people by improving labor, environmental, and human rights conditions, which will ultimately affect the Chinese culture to a certain degree.
Significant changes resulting from the WTO accession include tariff cuts and a dramatic expansion of trading rights in 2002. In 2003, China further reduced tariffs and reformed its tax system in an effort to lessen the distinction between foreign and domestic enterprises based on the principle of national treatment. Quotas on imported goods have also been considerably lowered. The latest change deals with the WTO’s transparency requirement.
As of July 1st, 2004, the Chinese government promulgated reforms for business licensing. In the past enterprises wishing to do business with China had to undergo an approval process through the Ministry of Commerce which was time consuming, cumbersome, and not clearly defined. The new system utilizes a registration process that is clearly defined and easily accessible with little or no barriers to trade for individuals or legal entities seeking import and or export licensing. Therefore, the registration process is expected to remove yet another trade barrier by making China’s market more accessible to foreign entities wishing to operate within and to China.
Tariffs & Value Added Tax
Although the Chinese government has changed many policies and regulations that have historically restricted trade, there are still many barriers that exist. Improvements in lowering tariffs have been achieved, yet on the whole they still remain relatively high. This is due to the state’s reluctance to reduce domestic protectionism across the board. For example, large motorcycles that are currently imposed a 60% tariff rate will only drop to 45%, video and audio players and recorders are subject to a 30% duty, and by 2005 passenger vehicle tariffs will only be reduced to 25%.
China Customs calculates, charges, and collects tariffs based on three categories: general rates, most-favored-nation (MFN) rates, and Bangkok Agreement rates. Most-favored-nation rates apply to imports from the U.S. although special duty discounts or exemptions might be obtained through business with the 5 Special Economic Zones, open cities, and foreign trade zones within cities. Also, rates that fall way below the MFN rates are sometimes applicable to goods recognized by the State as being critical to the growth of important industries. According the WTO regulations, fair valuations of all imports are to be assessed when determining the dutiable value of an imported good. Since China Customs only uses an 8-digit harmonized system of tariff codes as opposed to the more comprehensive 10-digit system, customs officers are granted a great deal of discretion when it comes to classifying goods that determine what tariff will be applied.
China imposes a value-added tax (VAT) and business taxes on top of tariffs to both domestic and foreign enterprises. The VAT is assessed on imports coming into the PRC and goods sold within the country. Conversely, business taxes are collected for providers of services or the transfer of intangible assets. Although WTO regulations stipulate that equal taxes are to be imposed on both domestic and foreign goods and services, it’s widely observed that domestic enterprises are overlooked when it comes to collecting taxes. Similar to tariff duties, discounts and exemptions on VAT rates apply in certain instances. For example if a good is considered a necessity such as fuel, agricultural goods, or a utility, the VAT rate may be reduced from the normal 17% to13%. In addition, small business falling under a certain dollar value in annual sales might only be required to pay a VAT rate of 4 to 6%. Eventually the dual system for VAT will have to be eliminated according to WTO rules.
Imports & Exports
In 2003 rapid growth was registered in foreign trade. The total value of both imports and exports reached $851.2 billion, which marks a 37.1% increase over 2002 figures. The value of imports was $412.8 billion, up 39.9 percent and the value of exports was $438.4 billion, up 34.6 percent. Significant growth was also recorded in imports and exports with China’s leading trading partners who include Japan, the United States, the European Union, the Association of Southeast Asian Nations, the Republic of Korea, and Russia, which are listed in order of rank for total dollar value of trade. The following graph illustrates China’s imports and exports over the last decade.
Primary exports from China include clothing, accessories, and footwear; textiles; petroleum and petroleum products; and telecommunications and audio equipment. Conversely, chief imports to the PRC include machinery, steel products and other metals, automobiles, synthetics, agricultural chemicals, rubber, wheat, and ships. China’s accession to the WTO will make future trade more desirable and less cumbersome. As a result, exports and imports with the PRC are expected to continue to grow.
The initial foreign investment policy for China began in 1979 and by 1980 the first Sino-foreign joint venture was established. With the advent of relaxed trade restrictions, foreign direct investment in China has experienced significant growth. China has received the most foreign direct investment the world over for the last 2 years and has experienced essentially nothing of the declining trend in investment since 2000, which affected so many other countries. The high levels of FDI in China are a direct result of the countries enormous market potential, low labor cost, and abundant supply of natural resources. In 2003, roughly 41,000 foreign investment enterprises (FIE) were approved and established. Contracted foreign capital through FDI stood at $115.1 billion, whereas the utilized foreign capital was $53.5 billion.
Among all the sectors, manufacturing remains the prominent investment industry with the real estate development and social services following. Within the manufacturing sector, electronics and communications facilities manufacturing, oil processing and coke making, and garment and other fiber products manufacturing typically consume a majority of the foreign investment funds. The following chart illustrates foreign direct investment by sector for 2003.
Before China entered the WTO, multinational companies often worked with Hong Kong enterprises to gain access to China’s markets. Now that China is a member of the WTO and reforms aimed at attracting more foreign investment have been instituted, Shanghai is becoming an alternative hub for FDI. Overall though, foreign capital is primarily invested in cities throughout the countries eastern border followed by regions in central China.
In the past, joint ventures were the only vehicle through which an FIE’s could exist in China and in some sectors this trend still stands. However, today there are 3 foreign investment vehicles that can be used in many of the PRC’s markets: wholly foreign-owned enterprises (WFOE’s), both equity and contractual joint ventures (EJV’s and CJV’s respectively), and foreign-invested companies limited by shares (FICLS). Of the 3, WFOE’s are currently the most popular FDI vehicle in China exceeding JV new registrations for the first time in 2000. By 2002, WFOE’s comprised nearly 65% of the approved projects and by value 69% of the deals. It’s expected that WFOE’s will grow even more in number and value once more of China’s industrial sectors become open wholly-owned ventures that are currently restricted to JV’s.
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