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4 Published by ANU E Press The Australian National University Canberra ACT 0200, Australia anuepress@anu.edu.au This title is also available online at National Library of Australia Cataloguing-in-Publication entry Title: ISBN: China : new engine of world growth / Ross Garnaut and Ligang Song, editors (pbk.) (ebook) Subjects: Commerce. China--Commerce. China--Economic conditions China--Economic policy Other Authors/Contributors:: Garnaut, Ross. Song, Ligang. Dewey Number: All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of the publisher. Book and cover design by Jude Shanahan This edition 2012 ANU E Press

5 Contents Tables Figures Boxes Symbols Abbreviations Contributors Macroeconomic performance and new challenges 1 China: new engine of world growth RossGamaut 2 The impact of SARS Jong-Wha Lee and Warwick J. McKibbin 3 The travails of current macroeconomic and exchange rate management Wing Thye Woo 4 The changing pattern of economic growth Yiping Huang Financial system reform: an unfinished task vii x xii xiii xiii xvii 5 Transforming the banking sector 82 Yiping Huang 6 Financial opening and eocnomic growth: a quantitative assessment 94 Jordan Shan 7 Rural financial markets and institutions: new developments Enjiang Cheng 111 Foreign trade, trade policy and FDI 8 Entry into the WTO: commitments and implementation 131 GeoffRaby 9 WTO commitment: further marketisation and trade liberalisation 141 JiadongTong 10 A changing role in world trade 151 Ugang Song and Sizhong Sun

6 11 China and the world economy: the FTA strategy Christopher Findlay Sectoral impact and policy adjustment 12 Location determinants and provincial distribution of FDI 189 Chen Chuniai 13 The impact of urbanisation on economic growth 217 Xiaolu Wang and Ronald Cuncan 14 Trade reform, macroeconomic policy and sectorallabour movement 231 Jennifer Chang and Rod Tyers 15 Internet development 276 Fang-Fang Tang Income distribution and social security 16 Accession to WTO and foreign pharmaceutical firms' business opportunities YifengWu 17 Political capital and wealth accumulation MengXin 18 Reforms and challenges of the social security system Qun Shi Enterprise reform and regional development 19 The National Social Security Fund Tim Murton 20 Building modern enterprises: challenges and requirements MeiWen 21 Challenges facing small private enterprises Kim Houghton and lan Cavies 22 Industrial location and regional development JaneGolley 23 Government transfer payments and regional development Tingsong Jiang and Zhao China's role in the world 24 A new engine for pragmatism in the international security order? 458 GregAustin

7 TABLES 1.1 Output growth and inflation performance in China, Cumulative number of reported probable cases of SARS, Health expenditure and sanitation indicators for selected countries Chronology of SARS and major responses by the Chinese government, November 2002-July Percentage change in GDP in 2003 due to SARS, Forecasts for China's GDP growth Employment in China's industries, Growing fiscal spending Investment trends by ownership Rising fragility of China's banking sector Contingent liabilities in China, end of Investment by the state and non-state sectors China and Asian economies: growth of GDP components and investment-gdp ratio Contingent liabilities Selected Asian economies, long-term growth potential Citigroup estimates of long-term growth potential, selected Asian economies China committed to open up banking sector after WTO accession Estimated contingent liabilities for China The new policy framework for banking reform Loan provisioning standards for Chinese banks Variance decomposition percentage of 36-month error variance Granger causality test Changes in rural deposit savings and loans Changes in real institutional rates of interest Imports and exports by different types of enterprise, Selected Chinese tariff rates prior to WTO accession, Shifting patterns of export specialisation in selected industrial sectors, Foreign direct investments in China, Actual FDI inflows into China, Actual FDI inflows into China's provinces, vii

8 12.3 Accumulated FDI stock in China's provinces, List of variables of provincial FDI inflow equation 12.5 Regression results of provincial FDI inflow equation 12.6 Provincial FDI attractiveness index 13.1 Growth of the agricultural sector and rural population in the pre-reform and reform periods, 1952, 1978 and Agricultural sector, share of GDP, employment and population, Agriculture as a source of rural income, Rural-urban income disparity, 1980 and Modelling results: urbanisation and economic growth Official price level changes since the Asian crisis Model structure Chinese equivalent import tariff and export tax rates Ancillary effects of WTO trade reforms Simulated long-run effects of a unilateral liberalisation of China's 2001 trade policy regime Short-run closure Simulated short-run effects of a unilateral liberalisation of China's 2001 trade policy regime: by macroeconomic policy regime 14.8 Comparing simulated trade reform-driven labour relocation demand with historical experience A 14.1 Chinese labour relocation 15.1 Growth of networked computers 15.2 International bandwidth distribution 15.3 Distribution of domain names under 'CN' 15.4 Growth of online users 15.5 Demographics of online users 15.6 Education level of online users 15.7 Geographic distribution of online users 15.8 Methods of financing online access 15.9 Monthly income distribution of online users Main location of going online Time of usual online use Hardware used to go online viii

9 15.13 Main purpose for going online Type of information users read online User perception of important problems of online transactions Goods or services purchased online Proportion of users who purchased Structure of the Chinese pharmaceutical industry in Research and development expenditures, of large and medium-sized pharmaceutical enterprises International trading competitiveness indices of chemical raw medicines and pharmaceutical products Price indices of chemical raw medicines and pharmaceutical products Number of patent applications in the field of medicine Summary statistics and inequality measures of real income and wealth, 1995 and Effect of housing reform on housing ownership, Determinants of net total wealth, 1995 and Determinants of financial wealth, 1995 and Determinants of net housing wealth, 1995 and Direct and indirect effects of unemployment and party membership on wealth Employment structure by ownership in urban China, Number of retrenched workers of SOEs, Summary of Chinese unemployment insurance reforms in the 1980s and 1990s A summary of public pension reforms in the 1980s and 1990s Retiree/employee ratios by ownership structure in China, Selected aggregate figures for the UMLS program, Contributions, employment and replacement rate of pensions Siying Qiye and Getihu in Harbin and Qingdao, Responses by business type and survey mode Distribution of respondents by industry and legal structure, by city Age of businesses, by city Average hours worked per day, by legal structure Sources of start-up capital, by city 394 ix

10 21.7 Registered capital, by legal structure, Siying Qiye Main barriers in starting up businesses, by city Use for expansion capital in next 12 months, by city Sources of expansion capital, by city Difficulties expected in accessing expansion capital, by city Business skills sought in next 12 months, by city Preferred skills training delivery modes, by city NRC, SC and lc combinations Rankings of GDP growth, GVIO shares and changes in per capita GDP Gini coefficients NRCs, SCs and types for each province and sector Summary of types Composition of local government revenues by region, Coefficients of variation for per capita revenue and expenditure across provinces, Trends in the inter-regional distribution of fiscal resources, Summary of simulations Simulation results of increasing transfer payments to inland regions 453 FIGURES 2.1 Impacts on China of temporary versus permanent SARS shock Credit conditions Consumption and investment growth Annual GDP growth, China, Hong Kong, Taiwan, Korea, Japan and India Average shares of various components of GDP Contributions to GDP growth of various components High investment growth and rising investment-gdp ratio Annual GDP growth and share of TFP in GDP growth, China's fiscal deficits, , Growth of inventories by industry, end April Retail sales, Bank deposits, x

11 4.10 Consumer Price Index and money supply (M2) growth Growth of GDp, credit and investment in China Credit and investment in GDP in China EG responses to a 'shock' in TC, LAB, INV and TRADE TC responses to a 'shock' in EG, LAB, INV and TRADE China's average tariff rate, Major countries' share in world trade, Destination of Chinese exports, Change of export markets, Source of Chinese imports, Changes in import sources, Trends in export composition, Composition of exports, Composition of imports, Trends in import composition, Share of labour-intensive products in total exports, China's cumulative exports, Changes in export composition and specialisation, Changing share of some East Asian economies in total labour-intensive manufactured exports, Actual FDI inflows into China, FDI inflows into China, by region, FDI stocks in China, by region, Relationship between rural industrialisation and rural income, Relationship between urbanisation and rural household income, Per capita annual income of urban and rural households Gap between urban and rural incomes, Employment by industry group, Official growth rate of real GDP, Official growth rate of the average real manufacturing wage, The domestic capital market without capital controls The domestic capital market with capital controls Trade reform with capital controls Trade reform without capital controls Average hours online per week 292 xi

12 15.2 Time users usually go online Number of people using mobile devices and info home appliances to access internet Output of chemical raw medicines and traditional Chinese medicines Growth rates of net asset profits and output value, pharmaceutical and total industry Imports and exports of Chinese medicines Medicine patents in China: proportion granted to foreign applicants Lorenz curves of wealth Net wealth distribution by percentile of permanent income Actual and predicted net total wealth by income percentile Expenditure of major social security programs in China, World population aging, The UN projected old-age dependency ratio and the PAYGO tax rate Optimal payroll tax rate between to payoff historical pension debts up to 2000, but not beyond Reporting structure of the National Social Security Fund Funding of the National Social Security Fund Pattern of agglomeration Per capita GDp, Composition of transfer payments by region, The relationship between regional income and transfer payments, Provincial average tax rate versus per capita GDP, Regional average tax rate, Structure of CERD National migrant labour market 451 BOXES 19.1 Qualifying conditions to manage funds in the NSSF 363 xii

13 CSRC DFN DPP EEFSU EEM ETE FDI FPC FTA GAIT GDP GlS GTAP HRS HSBC ICBC ldc UR MCA MFI MFN MNE MOF MOFERT MOFTEC NBS NGO NATO NIE NPC NPl NRC NSSF NYSE China Securities Regulatory Commission Deutsche Forschungsnetz [German Research Network] Democratic Progressive Party Eastern Europe and the former Soviet Union electronic equipment and machinery electronic and telecommunications equipment foreign direct investment Funding the Poor Cooperation Free Trade Agreement General Agreement on Tariffs and Trade gross domestic product generalised least squares Global Trade Analysis Project Household Registration System Hong Kong and Shanghai Banking Corporation Industrial and Commercial Bank of China less developed country labour insurance regulations Ministry of Civil Affairs microfinance institution most-favoured nation multinational enterprise Ministry of Finance Ministry of Foreign Economic Relations and Trade Ministry of Foreign Trade and Economic Cooperation National Bureau of Statistics non-governmental organisation North Atlantic Treaty Organisation newly industrialised economy National People's Congress non-performing loans net relative change National Social Security Fund New York Stock Exchange xiv

14 SYMBOLS n.a. not available not applicable zero insignificant ABBREVIATIONS ABC ADB ADBC AEC AMC APEC ASEAN BOC BVAR CANET CAR CBC CBRC CERD CES CESG CET CGAP CIA CNY CNNIC CPC CPI CRN Agricultural Bank of China Asian Development Bank Agricultural Development Bank of China ASEAN Economic Community asset management corporation Asia Pacific Economic Cooperation Association of Southeast Asian Nations Bank of China Bayesian vector autoregression China Academic Network capital adequacy ratio Construction Bank of China China Banking Regulatory Commission Chinese economy with regional details constant elasticity of substitution cultural, educational and sports goods constant elasticity of transformation Consultative Group to Aid the Poorest Centrallnteliigence Agency Chinese yuan China Internet Network Information Centre Communist Party of China consumer price index China Research Network xiii

15 OECD PAYGO PBOC PECC PEa PPI PRC RCA RCC RCCU RCF RFI RIETI RMB RPI RPS SARS SA SAC SCO SCORES SITC SME SEZ SOB SOCB SOE SSF TFP TIFA TRQ TVE UHIDS UMLS UNCTAD Organisation for Economic Cooperation and Development pay-as-you-go People's Bank of China Pacific Economic Cooperation Council Pacific Economic Outlook producer price index People's Republic of China revealed comparative advantage rural credit cooperative Rural Credit Cooperative Union rural credit foundation rural financial institution Research Institute of Economy, Trade and Industry Renminbi retail price index rural postal savings Severe Acute Respiratory Syndrome State-Owned Asset Supervision and Administration Commission Shanghai Cooperative Organisation China Society for Research on Economic Systems Standard International Trade Classification small and medium enterprise special economic zone state-owned bank state-owned commercial bank state-owned enterprise social security fund total factor productivity Trade and Investment Framework Agreement tariff-rate quota township and village enterprise Urban Household Income Distribution Survey Urban Minimum Living Security Program United Nations Conference on Trade and Development xv

16 VAR VAT VECM WHO WIO XUAR vector autoregression value added tax vector error correction model World Health Organization World Trade Organization Xinjiang Uighur Autonomous Region xvi