American Studies in China Vol.3, 1996 THE INTERNAL ECONOMIC FACTORS ACTING UPON CHINA¬ðS RELATIONSHIP WITH THE UNITED STATES ZHU Shanli The economic factors influencing China¬ðs relations with the United States are many, but they can be classified into two categories: factors related to economic development and those associated with economic reform. I will deal with the two kinds of factors in this article and analyze how they affect Chinese policyª²makers¬ð formulation of policy toward the U.S.. I. Factors Related to Economic Development¡¼BT)] China¬ð objective is to achieve modernization in industry, agriculture, national defense and science and technology in the next century. Correspondingly, the main tasks of the Chinese economy in a fairly long period have been maintaining highª²speed economic growth, reducing unemployment rate, controlling the general price level, effecting a coordinated economic and social development and finally raising the living standard of its people and the quality of their livelihood. Speeding up economic growth was the most important economic objective the Chinese policyª²makers determined following the Third Plenary Session of the Eleventh Central Committee of the Chinese Communist Party convened in 1978. Since then, economic construction has replaced class struggle as the center of all work. The adoption of this new line became essential as a series of political campaigns after the founding of the people¬ðs republic, especially the cultural revolution, had pushed the Chinese economy to the brink of disintegration, and the low efficiency resulting from the people¬ðs commune system had made it impossible to feed the ever increasing rural population, to say nothing of providing job opportunities to those urban inhabitants who could not find employment in the cities and were compelled to go to the countryside to do manual work. In fact, young graduates of secondary schools sent to the countryside, unable to earn their keep, had come back successively and swollen the rank of the unemployed in the cities. Only rapid economic growth can solve the question of employment and survival of innumerable residents. It was under this circumstance that China began the economic reform and openingª²up, and improved and gradually strengthened its relationship with the United States and other countries with a developed market economy. The Chinese policyª²makers realized that only by carrying out the marketª² orientated economic reform, implementing the opening up policy, increasing economic and commercial ties with countries and areas overseas and especially with countries having a developed market economy, can China develop its economy at a fast rate, increase job chances in the economic development and bring about step by step a change in people¬ðs livelihood - from striving to feed and clothe themselves adequately, to being fairly wellª²off, and then to attaining a modernized living. The Internal Economic Factors American Studies in China China has adopted the gradualist approach in reform and opening up. That is to say, it has not introduced the marketª²oriented economic reform to all economic sectors. The reform of labor and financial markets, for instance, is rather rudimentary. Neither has it opened all fields to the outside world, a case in point being the numerous domains in finance. China¬ðs present status of economic growth and development objective, which decide that it should apply the stepª²byª² step mode of reform and opening up, likewise condition its relationship with foreign countries, the United States included. Then what is the present status of economic growth in China? How will it condition China¬ðs relationship with the United States? To understand the influence of China¬ðs economic development, employment and price level on the Sinoª²US relations, it is necessary to know something about these factors themselves. China¬ðs rate of economic growth, since the implementation of reform and opening up 17 years ago, has been high in comparison with other countries. Growing at an annual rate of nearly 10%, it managed to quadrupled its 1980 GDP in 1995, and has solved the question of feeding and clothing its people and attained the wellª²toª²do level in some regions. However, things were not quite so good as far as employment went. According to the official statistics, China¬ðs population rose to 1.1985bn by the end of 1994 (and surpassed 1.2bn in 1995), in which the labor force came to 825m, its portion in the total population being 68%. The employed population was 614.7m, 168.16m in the urban areas and 420.1m in the countryside, and its percentage in the total labor force coming to 74.5. The number of the unemployed in the cities, according to the statistics of the labor department, was 4.76m that year, the urban unemployment rate being 2.8%,1 and the percentage for 1995 was 2.9%. No official statistics are available for the rural unemployed. The state of employment in China is pretty good, judging by the stati stics of employment and unemployment published by the government. The urban unem ployment rate is lower even than those countries with a developed market economy . However, a careful study and analysis of the actual situation, including the s tatistics arrived at in nonª²official surveys and all employmentª²related offici al data, reveals that the official employment and unemployment figures do not refl ect the entire situation; they fail to mirror at least two important questions. The first question is rural unemployment. Absence of statistical data do not mean that this question does not exist. On the contrary, it is even worse than in the urban areas. According to official figures, the total number of the employed in the rural areas in 1994 was 446.54m. About 70% of them worked in the primary industry (farming, forestry, animal husbandry, fishery and so on), and the remaining 30%, in the secondary and tertiary industries. However, the farmers in the primary industry included some surplus laborers. The total rural surplus labor was estimated to be around 120m, which amounted to one fourth of the farmers with work. About half of the jobless farmers left their native places to seek work outside. This has resulted in a great pressure on employment in the whole country. The second question is redundant personnel in urban enterprises and institutions. Most of the 168.15m urban employees, 67% to be more exact, work in the stateª²owned economic bodies (see Table 1 attached at the end of this article). Seriously affected by the traditional planned economy, these bodies have more questions left over from the past. The most serious expression is the existence of a large portion of redundant personnel, at least 15% or 16m in 1994 according to the most cautious estimation. Though these people will not lose their jobs in the near future, they inevitably will as the reform deepens and especially when the state economic entities are transformed to adopt a modernized enterprise system. This question exists at a different degree in collective economic bodies and even in enterprises of other ownership, and these personnel must be cut as well. If this task is to be fulfilled in 15 years¬ð time, an average of 1m, allowing for the legal retirement and natural reduction of workers and staff, will lose their jobs each year. This, undoubtedly, will mean an added pressure on employment. In fact, replacing superfluous personnel has been the most difficult question encountered in the reform of the stateª²owned enterprises since1995. Difficulty in getting jobs for the workers of those enterprises who are running at a loss or whose assets can not cover their debts, once they are annexed or go into bankruptcy, is retarding the trial of optimizing capital structure in the selected cities. This question has become the main factor conditioning enterprise reform. It can be said that the deepening of the Chinese economic reform is out of the question if no proper solution can be worked out to handle redundant personnel. If these people - those rural surplus laborers who have gone out to seek a job but have not got it so far and the workers and staff of the bankrupt enterprises in the cities who have been thrown out of work and have not found new employment yet - are all counted as unemployed, China¬ðs unemployment rate will be around 10%. It can be easily imagined what pressure a contingent of 60m unemployed means to the Chinese economy and society. And that is not all. The rapid growth of labor resources also adds to the seriousness of the question. China¬ðs population surpassed 1.2bn in 1995. Though population growth speed has slackened since the implementation of family planning in the 70s, and the natural growth rate dropped from 2.583% in 1970 to 1.121% in 1994, the absolute amount of increase is enormous, as the base number was so big. If China¬ðs population is to grow at the 1994 natural rate, it will have a population of 1.28bn by the end of 2000. Counted at the average 1993- 94 rate of 68.8% (the portion of workforce in total population), China will have an annual increase of almost 9m laborers in the 5 years from 1996 to 2000. The question of employment is weighty indeed with this new addition and the 60m unemployed. The question of unemployment has always existed. Under the planned economy, it took the form of underª²employment or invisible unemployment, that is, as people say, ¡°Five persons did the work meant for three.¡± In the shift from the planned economy to the market economy, the invisible unemployment has become visible. The release of large numbers of laborers from the land (as a result of the farmers¬ð attaining the right to freely employ their labor following the contracting of land), the gradual discharge of surplus personnel from enterprises and the increase of a considerable number of new laborers each year - all these demand that China must tackle this serious question in the economic reform and development. China can hardly agree to occurrences detrimental to its efforts to reduce unemployment in the diplomatic dealings with the United States, or any other country for that matter. Now let us look at the question of commodity price. Since reform and opening up, a fairly high inflation rate has appeared together with the high economic growth rate. How to control inflation while endeavoring to ensure a high economic growth rate and reduce the unemployment rate is another difficult question the Chinese policyª² makers have to solve. It is at the same time another important economic factor influencing their formulating foreign policies. For several years, a doubleª²digit inflation rate has persisted. The reasons for this are many. In the transformation from the planned economy to the market economy, the invisible inflation has inevitably become apparent. Big demands for investment and export have also substantially pushed up commodity prices. Two factors, a big portion of China¬ðs capital being invested in the fixed asserts and a swift increase in foreign direct investment in China, have led to the fast rise in the demand for investment. For many years, especially over the last few years, China¬ðs investments in fixed assets have been growing at a very fast speed. The average rate of the first 4 years of the 8th Fiveª²Year Plan (1991- 95) was 37.5%, which surpassed that of the 11.8% of the 7th Fiveª²Year Plan (1986-90) by 25.7 percentage points. This has led to a continuous rise of the portion of fixed asset investment in the GDP, from 27.2% to 33% in the same period. As China¬ðs fixed asset investment is controlled by the government and not determined through the workings of the market competition mechanism, huge investments have not brought about good efficiency, and the production capacity formed thereby has been low. As a result, the gap between supply and demand is widening, and the inflation has been intensified. Direct investments from overseas have increased fast in recent years. As these investments have been made after carefully examining and assessing the projects concerned, they have usually brought in fairly good returns. These investments, while heightening pressure on demand, cause increase in supply capacity in the long run, and can therefore finally bridge the gap between a smaller supply capacity and a greater demand and help cut the inflation rate. But foreign investments have indeed aggravated inflation. The inflow of foreign capital influences prices mainly because it affects China¬ðs total money supply. To a large extent, expansion in money supply since 1994 has been due to increase in the funds in foreign exchange in the national banking system credit. Take the year 1994 for instance. Money supply rose by 458.621bn, 34.5% more than in 1993. The central bank¬ðs asset structure (see Table 2) shows that the main items the increased money supply went to had greatly altered. They were the central bank¬ðs loans to the commercial banks, government overdrafts and loans to other departments before 1994. A series of financial and budgetary reform measures adopted that year changed the whole picture. As the central bank stopped government overdrafts on the whole, their percentage dropped from 9.3 in 1993 to 2.5 in 1994. The retrenchment policy incurred large cuts in the central bank¬ðs loans to the commercial banks, the portion precipitating from 78% to 20.1%. But the funds in foreign exchange, which had constituted just a small portion before, became major source of money supplied, the percentage soaring from 7 to 75.1. Sharp growth in foreign direct and indirect investments contributed to the great increase in foreign currency. Of course, expansion in export and enlargement of trade surplus due to the devaluation of the Renminbi yuan and the merging of the two foreign exchange systems were also important causes for the big increase in foreign currency. China¬ðs foreign exchange reserve at the end of 1944 was 52.5bn. A year later, it rose to 73.5bn, an increase of 21bn.2 The portion for the funds used by foreign exchange in the national banking system credit is still rising. China¬ðs present status lags far b ehind the demand of the coordinated economic and social development. China¬ðs GD P has grown considerably, but the mode of growth is basically an extensive one, a nd the economic growth has been accompanied by waste of resources and serious pollution. The theoretical circles and policyª²making departments have come to s e e the gravity of the situation. The shift from the extensive to the intensive mo de of economic growth has therefore become an important objective of China¬ðs ec onomic policy. Obviously, it is not so easy to bring into line such objectives as economic growth, reducing unemployment rate, lowering inflation rate and achieving coordinated economic and social development. The aim of economic growth is identical with that of increasing employment, and the positive correlation of the two has been proved by the histories of economic development of various countries. Japan, comparatively insufficient in natural resources, has suffered a shortage of labor, because its rapid economic growth has set a great demand on labor power, apart from the fact that it has a pretty low natural population growth rate. The low unemployment rate of the United States over the last few years has also been the result of economic development. Since the beginning of reform and opening up17 years ago, China¬ðs GDP has been growing at an annual rate of nearly 10%, and in 1991-95, the average rate reaching 11.7%. It was this highª²speed economic growth that enabled China to furnish employment to over 10m new laborers each year. China¬ðs employed population rose at an annual rate of 2.7%, from 401.52m in 1978 to 614.7m in 1994, an increase of 213.18m. Compared with the GDP growth rate of 9.4% over the same period, the employment growth rate was 4.5 times greater. In other words, an increase of 1% in employment necessitates a 3.5% rise in the growth rate of GDP. In recent years, thanks to the development of science and technology and the rise of labor productivity, the gap between the two growth rates has widened, to 5.8:1 approximately. From this year to the year 2000, China¬ðs labor resources will grow at the estimated annual rate of 1.1%. That means, to ensure the employment of new laborers alone, China¬ðs GDP rate must grow more than 6% each year. A twoª²digit increase is needed, if the vast urban and rural surplus laborers are to be reª²employed. To keep up a relatively high economic growth rate calls for a relatively high investment growth rate. This was one of the reasons why the GDP growth rate in the 8th Fiveª²Year Plan period (11.7%) surpassed that in the 7th Fiveª²Year Plan period (7.9%). But it should be seen at the same time that inflation rate in the latter period was far more serious than in the earlier period. Obviously, the high inflation rate was linked with the higher investment rate in fixed assets at the time. China¬ðs economy has benefited from the development of its foreign economic relations in the last decade and more. The import and export value has been growing at a faster rate than that of the GDP in this period. The average annual increase of import and export value was 12.8%, 10.6% and 19.7% respectively in the 6th, 7th and 8th Fiveª²Year Plan period, while the GDP average annual growth rat e came to just 10.1%, 7.8% and 11.7%, the portion of the import and export value in th e GDP g rowing from year to year.3 After 1994, this portion surpassed 40%. Though the statistical method used has some faults and the portion should not be as high as the national income accounts showed, there is no denying that the dependence of the Chinese economy on export is rising. The rapid development of China¬ðs economic and trade relations with foreign countries is one of the most important factors promoting its highª² speed economic development. True, big increase in exports and in investment from overseas has aggravated inflation. But without this increase, China could not have maintained such highª²speed economic development, and unemployment would have been even more serious. China¬ðs relation with foreign countries, the United States included, has been established on the basis of such policy objectives as achieving fast economic growth, greater employment, stability of prices and coordinated economic and social development, as has been elucidated above. In developing its foreign ties, China will make an allª²round evaluation of the influence its economic relations with foreign countries may have on these objectives. II. Factors Associated with Economic Reform The United States is the world¬ðs biggest country embracing the market economy and the biggest developed country, while China is the biggest developing country and had a highly centralized state power implementing the planned economy before reform and opening up. However, China¬ðs policyª²makers are not copying the USª²type market economy and are building a marketª²oriented economic system with Chinese characteristics in the present reform. This system will keep the dominant position of the state economy in the near future at least, so that the government will not lose control of the economy while introducing the mechanism of competition. As there is no precedence of such an economic system, China has been traversing an arduous road in the shift to the new economic system. In spite of the fact that pricing has been freed in the main and business is frisk, the deeperª²level reform, such as the reform of the enterprise and financial systems, is difficult to advance further. The lumping up of the functions of the government and enterprises, unclear delineation of property ownership due to the multiª²level entrustingª²agent relationship, and lack of a competition mechanism in the selection of managerial personnel have resulted in the low efficiency of the Chinese state enterprises, and most of them are running at a loss. Many state firms have long depended on raising loans from the specialized banks monopolized by the state for their survival, their debt ratio getting to as high as 75%. The assets of many of these firms cannot cover their debts and they should have long gone into bankruptcy. But as there lacks a sound social security system, they have not gone into liquidation so far. Of course, some of them are capable of reducing losses and increasing profits through altering the capital and governing structure and changing the managerial personnel. At present, however, not much can be done to remedy the situation, as the enterprise reform along the line of the shareª²holding system advances too slowly and these firms¬ð structure of capital (contributed entirely by the state) is difficult to change. Delay in financial reform has seriously affected the development of the financial market and conditioned the deepening of the enterprise reform. China has tried to make some changes in the financial field, such as permitting the specialized banks or government departments to set up trust institutions so as to stop monopoly of credit by the stateª²owned specialized banks. In Shenzhen and Shanghai stock exchanges have been opened, and in many big cities stock exchange institutions h ave been set up to deal in securities. The direct financing market has been organized as well. Especially since 1994, a series of reform measures have been taken in this respect. They include: 1. Speeding up financial legislation. The Law on the People¬ðs Bank of China, the Law on Commercial Bank of China, the Insurance Law and the Bond Law have been promulgated and implemented. 2. Separation of policy finance and commercial finance and severance of connectio n between loans of policy consideration and basemoney supply. Three banks, i.e., the State Development Bank, China Import and Export Bank and China Agricultural Development Bank, were successively founded in 1994 to handle business of policy considerations. They are now in normal operation. 3. Trying out the transformation of the stateª²owned specialized banks into commercial banks. The assetª²liability management within the loan ceiling has been propagated, and a mechanism for selfª²restraint has been established through strengthening the internal management of the banks, so that the asset risk management can be enhanced and the modernized operational mechanism of commercial banks can be gradually introduced. 4. Expanding the function of the instrument of monetary policy and trying to use the indirect instrument of monetary policy. Since the latter half of 1995, the central bank has taken the lead in restructuring the monetary market. The first item tackled was the CHIBO market. After two months¬ð preparation, the CHIBO system was put into trial operation on January 3, 1996, and the central bank began to announce the CHIBOR on each business day. The second item was standardizing the bond market. In the 1996 state credit plan, a certain amount for rediscount has been set, and the rediscount interest rate, as a relatively independent interest rate system, becomes an intermediary means of the central bank to regulate the supply of money. The third item was fostering a stock buyª²back market and developing the open market operation. On November14, 1995 the central bank invited 14 commercial banks to attend a reception for the issuing of the financing certificates and set off the trial run of the financing certificate buyª²back operation on 28th of the same month. On April 9, 1996 the open market operation formally began, and it has become one of the most important instruments of the central bank for carrying out the monetary policy. 5. Achieving a smooth merging of the two foreign exchange systems and applying throughout the country the system of converting and selling foreign currencies. The China Foreign Exchange Trading Center was set up in April 1994. It has functioned normally over the last two years, and its business has developed at a fairly fast speed. A national unified foreign exchange market has taken initial shape. 6. Enlarging the scope of opening up and international contacts in the financial field. By the end of 1995, 519 agencies of foreign financial institutions and 137 foreignª²funded financial establishments had come into existence in China, their gross assets reaching almost $20bn.4 In spite of t he reform measures taken, the financial market is still underdeveloped, for refo rm in this field began later than in other fields and some deeperª²level reform, such as placing the commercial banks on an enterprise basis, has not yet started . With regard to the monetary market, some change has taken place in the bank management system and the use of the instrument of monetary policy, but the development of the monetary market lags behind the switch of the entire national economy onto a market basis. Interest rates, as the prices of the monetary market, are not regulated in the main by the demand and supply of money, but by the measures of the government. When the inflation rate is high and the nominal interest rates are low, the actual interest rates bring only negative interest, and interest rates do not play the role of regulating money supply. Economic growth and the switching of the economic system have caused a sustained demand of money that outstrips the supply. The government is still using the old method of numerical control and checks money supply through limiting the credit quota. The scope of the bond, stock and capital markets is small, and their operations have not yet been standardized. In the bond market, state bond occupies a monopolistic position, and corporate bond forms but too small a portion. The Chinese government began to issue treasury bond in 1981 to solve the problem of budgetary deficits, and the amount has increased from year to year. By the end of 1990, a total of 261.915bn yuan of state bonds and financial bonds had been issued, the balance reaching 175.3bn. In 1995, over 150bn yuan of state bonds were issued, the biggest in size since 1981. By the end of the year, the balance had topped 330bn, constituting around 5% of the year¬ðs GDP. More is forthcoming in 1996, over 190bn yuan according to an estimation.5 Corporate bond is very small in amou nt compared with state bond, and almost all such bonds have been issued by the s tate enterprises. The quantities of bonds and their interest rates are all fixed by the government. In the 9 years from 1986 to 1994 only 73.734bn yuan of bonds were issued by enterprises at the central and local level (see Table 3), less t han half of the 1995 state bonds. Business in corporate bond was far less brisk than in state bond. As interest subsidy is given to longª²and mediumª²term state bonds when the inflation is high, state bond, compared with other financial assets, has a lower risk and higher return and becomes the first choice of the public, the other forms of investment being all kept in check at the present stage. State bond is also an important item of transaction in the financial market. Against the background of increasing issues of state bond, bond business began to develop in the middle and latter half of 80s, and the trading market, correspondingly, has come into being. Business is good in the primary and secondary markets. The open market operation system went into operation formally on April 9, 1996. On the same day, the People¬ðs Bank bought back from the commercial banks 290m yuan of state bonds.6 But the same can not be said of the corporate bond. Higher risk and lower return have left the corporate bond market without much transaction.. The stock exchanges in Shanghai and Shenzhen held only over 270 listed enterprisese, and most of the stocks they deal with, 65% and 80% respectively, are unfloatable institutional shares. The two systems of quotation in Beijing held merely 15 listed companies by the end of 1995, and they are subject to many policy restrictions, as they have been classified as securities trading departments. Such a small number of listed companies are indeed nothing compared with China¬ðs 4,000 companies that can raise fund in the form of shares from targeted quarters and its over 6m state and collective enterprises. Their influence on the entire economy is not worth mentioning. The institutional shares of the incorporated companies being mostly state and collective stocks, there lack final trustees to concern themselves with the returns of the shares. Nor are there many people caring about the achievements of the companies, and no effective supervision over the companies is in existence. Where the institutional shares constitute the majority of the stocks, the operations are usually poor and ineffective. The 1995 report about the listed companies showed that the average perª²share return in the Shanghai stock market was 0.27 yuan, 20% less than the previous year. The rate of the annual net asset income averaged 10.24%, a reduction of 26.5%. In the wake of low return, a sluggish stock market appeared. Take the Shanghai stock market for instance. The volume of transactions in the first half of 1995 came to only 180bn yuan, half of the amount in the same period of the previous year.7 In the first half of 1996, the stock price index fluctuated slightly around 600 points. No big improvement can be expected, if the reform of the enterprise system can not go on in depth. The funds market has been organized only recently, and its turnover is very small. Take Shanghai for instance. Most of its 12 funds have been established by trust companies attached to the financial institutions. Their shares total just 768m yuan, in which 715m yuan is made up of floatable shares. Underdevelopment of the bond, stock and capital markets has made direct financing by enterprises almost impossible. They can raise funds only through the financial intermediaries. The state commercial banks constitute the majority of these intermediaries, and they finance mainly the state enterprises. Having no way to obtain sufficient capital, the nonª²state enterprises have great difficulties to develop themselves. So, a strange phenomenon has appeared in China¬ðs economic operations. Poor operations, improper management and low stock return plague most incorporated companies because of irrationality of the structure of stock rights; the inhabitants, with no other channels for investment, put huge amounts of money into the monopolistic state banks as savings or buy state bonds; the banks give these money to the state enterprises in the form of loans for their survival; the state enterprises run at a great loss as there are no restrictions on property rights and management to bind them; and the banks continue to issue loans to the state enterprises fearing that they can not get their money back if these enterprises go bankrupt.... This vicious circle goes on and on. The state revenue can not support all these state enterprises, as they form too great a portion in the total enterprises of the country. The enterprises need government input badly, but can rely only on the bank loans for the capital they require and are therefore up to their ears in debt. This state of affairs hinders not only the development of the enterprises and banks, but also the construction of such bottleneck sections as communication and telecommunications. The banks, with their funds tied up in the losing state enterprises, can not finance these and other infrastructure facilities, for they require large amounts of inputs and their period of cost recovery is longer than ordinary projects. As there lacks a multiª²channel financing system, the bond, stock and capital markets can hardly raise so much money to finance projects of infrastructure facilities. As a result, the social infrastructure lags far behind the demand of economic development. The problems China faces in the marketª²oriented reform oblige its policyª²makers to determine the country¬ðs relations with foreign countries in the light of the overall objectives of the reform. III. Sinoª²US Relationship in China¬ðs Economic Reform and Economic Development The Chinese policyª²makers have invariably determined their relations with foreign countries in accordance with the actual conditions of the economic reform and economic development. The same is true in their handling of the relations with the United States. They can hardly be expected to develop relations with America at the expense of China¬ðs own interests. In spite of the fact that China can not always achieve all the purposes of furthering the economic reform and development in its dealings with the United States, it is important to both countries that a stable cooperative relationship be maintained, no matter from what angle one looks at the question. True, the levels of economic development of the two countries differ greatly, their economies, however, are highly complementary. This can be seen from the commodities they exchange in the bilateral trade. The harmonized commodity description and coding system groups the commodities into 22 categories. The goods China exports to the United States have been mostly laborª²intensive products. They mainly consisted of textiles, clothing, toys and sports equipment before. In recent years the portion of mechanical and electric products in the total exports has risen, and these commodities have become the biggest category exported in 1995. But they were mainly home electric appliances with low addedª²value, and those for industrial use with a higher addedª²value occupied just a small percentage. The products China imported from the United States, on the other hand, consisted chiefly of such technologyª²and capitalª²intensive manufactures as mechanical and electric products, chemical products, vehicles, aircraft, ships and transportation equipment, among which the value of chemical fertilizer came to around 60% of that of chemical products. What merits our attention is that vegetable products became the second biggest category of China¬ðs imports from the United States, in which cereals products occupied 92.7% of the total vegetable products (cf. Table 5).8 The import and export structures of China and America show that develo ping a stable commercial relationship is important to both countries. US consume rs can benefit from China¬ðs lowª²price laborª²intensive commodities, while Chin a c an raise the technological level of those enterprises which import from America production equipment with a high technological content. Developing agriculture w ill always remain a matter of first importance with China, and this means it can import large amounts of chemical fertilizer, agricultural insecticides and farm machinery from the United States. A vast population need importing agricultural products to make up their insufficiency, and this signifies that the United Sta tes can have an outlet for its surplus farm produce. It is precisely the complementarity of the economies of the two countries which has brought about a swift development of their bilateral trade. The United States is now China¬ðs third biggest trade partner as far as trade value goes (see Table 6). The growth rate of the value of China¬ðs trade with the United States, however, surpasses that with Japan and Hong Kong (see Table 7). Development of Sinoª²US trade is very important to China. Increase in exports to the United States promotes China¬ðs economic development, which in turn improve the country¬ðs employment. The foreign currencies China has earned from export have raised its ability to import advanced equipment and technology from the United States and other developed countries, thus enabling it to shorten the process of modernization. China has to absorb large amounts of foreign capital, as sharp growth of demand for capital in the highª²speed economic development has caused capital deficiency in the country, while the United States has an abundance of capital to supply other countries. China wants to get capital from the American financial market to further its construction, reform the state enterprises, improve capital and management structures and check the state enterprises from getting deeply in debt. It has imported advanced technology from the United States to speed up the modernization of its enterprises. China also hopes the American institutions will help develop its financial market. However, as the Chinese financial market is rather weak, China has been cautious in introducing foreign capital and learning foreign experience to build its financial market. It is even selfª² contradictory sometimes on many concrete questions. It invites foreign businesspeople to make investments but fears an overflow of foreign capital will push up inflation and affect its national industries. The policymakers encourage foreign businesspeople to invest in infrastructure facilities with all sorts of preferential policies but restrict them to invest in those economic sectors its state enterprises maintain a monopolistic position. It draws on the American experience to develop its financial market but is anxious that the opening of its financial market will have a bad consequence. For this reason, the division of A share (sold exclusively to Chinese citizens) and B share (sold to foreigners) still remain in the Chinese financial market, and they are unlikely to be merged into one in the near future. China may open, to a certain extent and gradually, its financial market to the outside world, but it will impose some restrictions on foreignª²funded financial institutions, such as not allowing them to engage in Renminbi and serving clients other than foreign organs and individuals in China. Since developing relations with the United States can have both positive and negative influences on China¬ðs economic growth and reform, the Chinese policyª²makers weigh naturally all the pros and cons of a policy before deciding whether it should be adopted. China and the United States have had great differences over China¬ðs reª²entry into the GATT and joining the World Trade Organization (WTO). Some of them have been solved gradually through consultation in the talks, the others remain still and no solution is in sight. China made concessions, for instance, on the questions of transparency in the foreign trade policy, the opening of service trade, reducing tariff and cutting and finally demolishing nonª²tariff barriers. But it can not possibility make any concession on the question that it should join the WTO as a developing country. China is among the world¬ðs foremost nations in aggregate economic strength, but its perª²capita GDP is very low, merely around $500. The Chinese state enterprises, which have long enjoyed the protection of the government and played a dominant role in the economy, have generally lost their competitive edge. If China is denied the preferential treatments accorded the developing countries by WTO, its young industries in want of protection will perish in international competition, and the bankruptcy of large numbers of big enterprises will inevitably aggravate unemployment and frustrate China¬ðs efforts to realize the aims of economic development. Therefore, it would rather stay outside WTO than join it as a nonª² developing country. As entering the world trade organization and enjoying the reciprocal treatment among its member countries is conducive to its economic growth, employment and marketª²oriented reform, China is striving as before to get into the organization. It will show flexibility on many questions, but can never be expected to promise that it will enter the organization as a nonª²developing country. China takes the same stand in its overall relationship with the United States. It needs to strengthen economic and commercial cooperation with America to promote economic development, improve employment and stabilize commodity prices. To put it more concretely, China hopes to further expand its export to the United States for these considerations and earn more foreign currencies to buy advanced equipment and technology from America and other developed countries to speed up modernization. The Chinese policyª²makers hope to get loans from the US government and unofficial quarters in the building of infrastructure facilities and expect that the American businesspeople will increase their investments in China, as that will help lower the unemployment rate. A study of the employment situation in the economic sectors of different ownership shows that the state sector¬ðs capacity for absorbing laborers is on the decline, and only the nonª²public owned economic sectors can be counted on to reduce the unemployment rate. Take 1994 for instance. About 316.65m people9 (not reckoning those engaging in farming) were employed in urban and rural economic entities of diverse ownership, 22.26m more than the previous year. The public owned economic sectors increased only by 8.91m people, while the nonpublic enterprises, including the foreignª²funded enterprises, absorbed 13.35m more.10 As the reform of the enterprise system deepens, many state enterprises will be annexed or go bankrupt. Large numbers of redundant personnel in the public economic departments will be cut, and these departments¬ð ability to increase employment will dwindle still further. Only development in the nonª²state economic sectors can mitigate the pressure of employment. Under the condition that large amounts of capital are tied up with the losing state enterprises, introducing foreign capital seems to be a realist alternative for the policyª² makers. As investments in the tertiary industry can better raise employment,11 China will step by step open finance, insurance and other branches of the tertiary industry to enterprises of the United States and other countries. It also hopes that America will help meet its great demand on agricultural insecticides, chemical fertilizer and farm produce in the economic development. Deterioration of Sinoª²US relations will incur great economic losses to both countries. For this reason, the Chinese policyª²makers have attached great importance to the relations with the United States and take a positive attitude to solve disputes once they arise. An obvious case in point is how the disputes over the intellectual property have been resolved through negotiations each time this question propped up. With the internal development and reform in mind, the Chinese policyª²makers will surely continue to work for a stable development of Sinoª²US relations. Appendixes: Tables Table 1 Workers Employed in Urban Economic Entities of Different Ownership Unit: 1m persons TotalState Economic Entities Collective Economic EntitiesJoin t Economic Entities Joint Stock Comp. 168.15112.1432.850.522.92 Foreignª²Funded Comp.H.K.ª², Macaoª² and Taiwanª²Funded Comp.Other K inds of Comp.Private Comp.Microª²businessª²es 1.952.110.093.3211.25 Table 2 Central Bank¬ðs Asset Structure (Percentage of Main Items in the year¬ðs Increased Asset Value) 19931994 Loans to Commercial Banks78.020.1 Loans to Nonª²Banking Financial Inst.1.60.7 Funds for Foreign Exchange7.075.1 Government Overdrafts9.32.5 Loans to Other Departments3.71.1 Source: The Financial Research Department of the C hinese People¬ðs Bank, 1995. Table 3 Bonds Issued Between 1986 and 1994 Unit: 1bn yuan Year19861987198819891990 Central Enterprises Local Enterprises10331.4834.933 Year1991199219931994Total Central Enterprises7.4107.410 Local Enterprises11.52525.8772.0064.566.324 Source: Financial Times, January 12, 1996. Table 4 China¬ðs Six Biggest Categories of Exports to the United States in 1992-95 Unit: $1,000 YearTotalFirstSecondThird Cat.Amount (%)Cat.Amount (%)Cat.Amount (%) 19928593730112090000 24.3%121575860 18.3%16 791640 9.2% 199316964000113303010 19.5%123125270 18.4%16 2926370 17.3% 199421461478164596283 21.4%123546295 16.3%11 3160925 14.7% 199524711327165530006 22.3%123748730 15.2%20 3504848 14.2% YearTotalFourthFifthSixth Cat.Amount (%)Cat.Amount (%)Cat.Amount (%) 199220694650 8.1%5607520 7.1%6463400 5.4% 1993202156870 12.7%8909860 5.4%15679380 4.0%1994203035465 14.1%81299321 6.1%7908846 4.2% 1995113171714 12.8%81311841 5.3%151257257 5.1% Notes: (1) The number of a ¡°cat. (category)¡± refers to one of the 22 categories of go od s listed in The Harmonized Commodity Description and Coding System. Cat. 5 are m ineral products; Cat. 6, chemical and chemicalrelated products; Cat. 7, plasti c s and rubber and their products; Cat. 8, leather, fur, bags and casings; Cat. 11 , textiles and their raw materials; Cat.12, shoes, hats, umbrellas, feather prod ucts, artificial flowers and hair products; Cat. 15, basic metals and their prod ucts; Cat. 16, mechanical and electric products, audiovisual equipment and the i r components and parts; and Cat. 20, miscellaneous products. (2) The percentage refers to the portion of Chinese exports in the total US imports of these manufa ctures. Source: Customs Statistics (1992-1995). Table 5 China¬ðs Six Biggest Categories of Imports from the United States in 1992-95 Unit: $1,000 YearTotalFirstSecondThird Cat.Amount (%)Cat.Amount (%)Cat.Amount (%) 19928899840162132950 24.0%171465730 16.5%6 1458140 16.4% 199310688060163858180 19.5%171949890 18.2%6 942740 8.8% 199413970421164525389 32.4%173330893 23.8%6 1446467 10.4% 199516118233165129573 31.8%62159306 13.4%2 1592234 9.9% YearTotalFourthFifthSixth Cat.Amount (%)Cat.Amount (%)Cat.Amount (%) 199218592980 6.7%11590640 6.7%2509650 5.7% 199318708040 6.6%15610730 5.7%7542210 5.1% 199411864099 6.2%18674368 4.8%7660823 4.7% 1995111350839 8.4%171125134 7.0%7814643 5.1% Notes: (1) The number of a ¡°cat. (category)¡± refers to one of the 22 categorie s of goods listed in The Harmonized Commod ity Description and Coding System. Cat. 2 are vegetable products; Cat. 6, chemic al and chemicalª²related products; Cat. 7, plastics and rubber and their product s ; Cat. 11, textiles and their raw materials; Cat. 15, basic metals and their pro ducts; Cat. 16, mechanical and electric products, audiovisual equipment and th e ir components and parts; Cat. 17, vehicles, aircraft, ships and transportation e quipment and Cat. 18, optical and medical instruments, watches, clocks and music al instruments. (2) The percentage refers to the portion of US imports in China ¬ðs total imports of these manufactures. Source: Customs Statistics (1992-1995). Table 6 China¬ðs Main Trade Partners in 1995 Area or CountryAmount ($1bn)Ratio in Total Imp. & Exp. Value (%) Japan5.7467420.46 Hong Kong4.4574915.87 USA4.0829614.54 EU4.0343614.37 Others9.7632534.76 Total28.08480100.00 Source: Customs Statistics (1987-1995). Table 7 Average Annual Growth Rate of China¬ðs Value of Trade with Some Countries and Areas (%) Country or Area1987-901991-95 China¬ðs Foreign Trade Value Growth Rate11.819.9 Growth Rate of Value of Trade with USA12.530.2 Growth Rate of Value of Trade with Japan-1.029.8 Growth Rate of Value of Trade with EU5.025.3 Growth Rate of Value of Trade with H.K.27.7-2.6 Source: Customs Statistics (1987-1995). (Translated by Wang Huaiting) NOTES 1 Source: Chinese Statistics Yearbook (Zhongª²Guoª²Tongª²Jiª²Nianª²Jia n), Chinese Statistics Publishing House, 1995. 2 Cf. ¡°China¬ðs Economic and Financia l Operations in 1955,¡± Financial Times (JinRongShiBao), Janua ry 21, 1996. 3 Cf. Chinese Statistics Yearbook, 1985-1995. 4 Cf. Financial Times, April 28, 1996. 5 Cf. ¡°¡®Phnomª²Penh Bonds¡¯(?) Having a Good Time,¡± Financial Times , May 11, 1996. 6 See Footnote 2. 7 See Footnote 5. 8 Source: Customs Statistics (1992-95) (Haiª²Guanª²Tongª²Ji), a Chinese quarterly and monthly published by the Editorial Department of Customs Statistics under the Customs General Administration of the People¬ðs Republic of China. 9 In the economic sectors other than agriculture, the enterprises can be classified, according to their ownership, into the state economic entity, the collective economic entity, the joint economic entity, the shareª²holding company, the foreignª²funded company, the company with fund from Hong Kong, Macao or Taiwan, other kinds of companies, private company and microª²business in the cities and towns, and township enterprise, private company and microª²business in the countryside. 10 The public economic sector includes the state economic entities, collective economic entities and township enterprises in the urban and rural areas. Other enterprises are all classified as the nonª²public economic sector. This classification is not very scientific, as the public shares of some stock companies make up a great percentage. These companies should have been categorized into the public economic sector. However, there are also many township enterprises which hang the signboard of collective economy but are actually privately owned, for the collective economy enjoys greater policy protection than the private economy. The figures in the text have been arrived at from the data published in Extracts from Chinese Statistics (1995) (Zhongª²Guoª²Tongª²Jiª²Zhaiª² Yao), Chinese Statistics Publishing House, 1995. 11 An estimation shows that to employ one person in the tertiary industry requires much less investment in fixed assets than the amount invested in the secondary industry. Take 1994 for instance. The investment in the fixed assets of the secondary industry was 494.13bn yuan, and the net increase in employment was 4.44m people. In the tertiary industry, the figures were 443.37bn yuan and 13.86m people. This means that employing one more person in the secondary industry needs averagely an investment of 124,000 yuan in the fixed assets, and only 32,000 yuan is required in the tertiary industry. Though the amount of new employment each year has not been decided entirely by the scale of investment in fixed assets, statistics show however that such is the general rule all these years. It can be concluded that the same amount of money invested in the tertiary industry can get more persons employed than invested in the secondary industry.