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Samad Sadri

Economic of Post-reform China

Daniel Nielson

December 14, 2010

The Chinese Economy

Currently China is the second largest economy in the world and recently it has reached

the second highest GDP after the United States. China has the fastest growing economy in the

world and the largest producer of the world’s consumer products. With the largest labor force in

the world, China has sufficed the economic needs of many other nations in the world. Yet, there

are 135 million people living under the poverty line in China, spending less than a $1 per day.

This amount is five times larger than the population of Afghanistan, and is equal to the combined

population of California, Texas, New York, Illinois, Pennsylvania, Massachusetts, Florida, and

Washington DC. The unemployment rate in China is about 4.3 percent and there are 20 million

people suffering from unemployment. Despite this the GDP is rising and the economy is

experiencing a faster growth than any other country in the world. The large gap between the

income of working class, middle class, and rich shows that a high GDP does not mean that

everyone in the country is doing well. GDP growth does not necessarily correlate to the

economic growth. A few individuals can own the majority of a nation’s wealth and the GDP can

still rise, regardless of how people in the middle class and lower class are doing economically. A

portion of the Chinese population is enjoying the economic growth while the other 135 million

are not doing well. In this paper I will explore some of the efficient economic policies through

which China can rebalance its economy in order to help those who are living under the poverty

line and decrease the unemployment rate. As a result of the economic reform, the Chinese
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economy has developed in sectors of agriculture, industrial, and other services. The economic

reform was fruitful for the economy in general, but by changing/adding some policies the

government can help improve the life standard for everyone and reduce the gap between rich and

poor in China.

According to David Bardoza, with an economy worth $1.33 trillion, China has passed

Japan and has become the world’s second-largest economy after the United States. It is not that

far-off for China to become the world’s new economic superpower. China produces a large

portion of the world’s consumption goods and supplies. China is the supplier of almost

everything to the rest of the world starting from food, clothing, machinery, technology, and

means of transportation. It is the largest trader and the biggest exporter of passenger vehicles in

the world. According to the International Monetary Fund (IMF), Beijing accounts for one-fifth of

the worldwide economic growth, 2009. “China accounted for about 46 percent of the global coal,

sink and aluminum consumption in 2010 for example. China is the biggest exporter to Brazil

accounting for 12.5 percent of Brazilian imports in 2009; it also accounts for 18.9 percent of

Japan’s and 21.8 percent of Australia’s. China is not the engine of demand, but more of a

conveyor belt. China is an important market player in a global context. As a conveyor belt it is

part of a closely knit web of global interchanges” (Henrique Schneider, 2010). Yet China has a

much lower standard of living. China’s per capita income is close to $3,600 while the United

States per capita income is about $46,000.

Although some studies indicate that the living standard in China has rapidly changed in

the past few decades, a large number of people are living under the poverty line. “Since 1949 the

People's Republic of China redistributed the national income to provide the entire population

with minimal necessities of life and to consistently allocate a relatively high proportion of
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national income to productive investment” (Robert L. Worden, Andrea Matles Savada, and

Ronald E. Dolan). The average national life expectancy rose from around thirty-two years in

1949 to sixty-nine years in 1985. Since the economic reform, health care has improved and the

collective medical care has been switched to private oriented sector. The Economic reform

expanded productivity which helped improve the living conditions during 1980’s. China’s

economic achievements in recent years have contributed in raising the living standards. Richard

Herd, Samuel Hill and Yu-Wei Hu under affirm that, “The slowdown associated with the global

financial and economic crisis was contained by massive fiscal and monetary policy stimulus,

which has boosted domestic demand” (Economic Survey of 2010). Although through many

changes the Chinese economic system has experienced a steady improvement, there are people

still suffering from unemployment and poorer living standards.

There is an immense gap between the life of rich and poor; middle class and working

class; employers and employees. Income differences existed even in the 1980s as the economic

reform policies opened up new income opportunities. The average annual income of the state-

owned units’ employees was higher than those of urban collective units. In commercial

environments people earned larger incomes than those in regular state-owned and collectively

owned units. Converting rural labor into township enterprises led to higher nonagricultural

productivity and increased average rural incomes. The most serious differences in living

standards between rural and urban areas were in education and health care. Economic reform had

a positive effect on education and health care in communities where people used their higher

income to improve schools and hospitals, and had a negative impact “in localities where the

reduced role of the collective resulted in deterioration of collective services” (Robert L. Worden,

Andrea Matles Savada, and Ronald E. Dolan). The economic reform helped decrease the gap
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between rich and poor and healed some of the economic problems to an extent, but since 1995

the rate of declining the income inequality has decreased.

According to an economic survey in 2010, by Richard Herd, Samuel Hill and Yu-Wei

Hu, “The Western Development Plan has aimed at narrowing the income gap between the

sparsely populated and underdeveloped West and the more prosperous and faster-growing East.”

Large, capita-intensive projects are the main focus of such development plans rather than

focusing on education and other social spending. To reduce the income gap, there should be

more emphasis on education and other social projects.

Explaining China’s Changing Income Inequality: “Market vs. Social Benefits”, an article

by Qin Gao and Carl Riskin, argues that the decline of income inequality might have slowed or

even halted in recent years, at least in some respects. Using the national China Household

Income Project (CHIP) survey data, Khan and Riskin (1998; 2005) revealed declines in income

inequality—slightly in urban areas but quite substantially in rural areas—from 1995 to 2002,

after sharp increases between 1988 and 1995 in both areas. “Such tendency was dominated by

the great rise in market income inequality from 1988 to 1995” (Khan and Riskin, 2005). The

large increase in wage-earning jobs in poorer regions of the country between 1995 and 2002, and

the decline in the extreme repressiveness of net taxes have contributed to the income inequality.

Social benefits will equalize the market impact and narrow income gaps. Qin Gao and

Carl Riskin suggest two sets of key factors: market development and social policy changes.

Social policies create wage earning jobs among the rural population and facilitate market

economy reforms to stimulate economic growth. Between 1995 and 2002 the public policies

have reduced inequality, through public investment programs that created jobs in poor areas,

reduced taxes in rural areas, and helped improve the distribution of taxes in both cities and
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countrysides. “Chinese post-reform social welfare policies were designed to replace this system

of income supports and safety net with one deemed more appropriate to a marked economy, one

which provides pensions, health care, other supplementary supports and a safety net, provision of

unemployment subsidy and insurance in the cities, for the vulnerable who are left behind by the

market economy” (Qin Gao and Carl Riskin, Market vs. Social Benefits).

A large amount of people in China are suffering from unemployment and this can lead to

social unrest. There are no accurate statistics on unemployment in China because the government

officials agree to tell the least and the statistics do not include the migrant workers. According to

the Ministry of Human Resources and Social Security the rate of unemployment in urban areas is

4.2% but only 8.86 million urban residents were registered to receive unemployment benefits.

According to Juliet Ye and Andrew Batson, a 2008 survey by the Ministry of Agriculture puts

the number of lost jobs at roughly 20 million, out of a total migrant population of about 130

million and said about 23 million were looking for new work either in cities or in their home

region. Evidence shows that annually 15 million people are added to the labor force in China but

there are only 8 million jobs available. The unemployment situation is going to get worse in near

future.

The main cause of unemployment in China is its colossal population. The amount of

labor available exceeds the number of jobs. The increasing population contributes annually to the

labor force/unemployment and it has slowed down the increase in GDP per capita. In 1979 the

government announced the one-child policy to prevent further over-population.

Another major cause of unemployment is the lack of education and skills that a high skill

job requires. Shaun Rein, the founder and managing director of the China Market Research

Group wrote that this year more than 25% of university graduates failed to find a job. The
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biggest challenge that multinationals are facing is recruiting and retaining talent. . For every

thousand resumes that they receive only two candidates are qualified for the job, because those

jobs require high skills which recent graduate students lack. The reform helped and improved

many aspects of Chinese society but higher education. As Rein said, “Students typically focus on

a single discipline, like accounting, for their entire four years of college, leaving them unable to

adjust to a global business environment that demands flexible thinking. They are bright and

eager, but unprepared to work effectively for a global corporation.” (Rein, Shaun 2010). The

education system in China needs to change especially now that it is transitioning from low-cost

manufacturing to a more service-oriented economy. Annually there are 6 million university

graduate students who are entering the labor pool without proper training which might lead to

growing stability risk if job opportunities are not available. For China, in order to transition to a

service economy it must have a labor force with business minds that can lead the way there.

China needs to reform the educational system by adopting more interdisciplinary thinking. “If

China's workers are to realize their dreams, and if China is to become what it wants and needs to

become, the country needs to make drastic changes to its education system, and make them

soon” (Rein, Shaun 2010).

The economic reform contributed to the economic growth; however, it also led to

increasing unemployment in the Chinese economy. The restructuring of the state owned

enterprises, used to provide high job security, added to unemployment in China. The reform led

to increasing demand for skilled workers and many unskilled workers ended up being

unemployed. Since the early 1990’s many companies/industries shut down as a result of market

competition and this led to more unemployment. More than one million jobs were lost in

Shanghai alone. To help businesses run and create job opportunities, the National Bank of China
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should provide low interest loans, and the government should provide financial rewards and

reduce taxes for small scale businesses. The main focus of such plans should be private sectors

because they provide more job opportunities.

In order to rebalance the Chinese economy, Michael Pettis sees increase in consumption

growth as a good way to increase the GDP. In the short run the rebalancing of an economy will

cause some problems such as a higher unemployment rate. From the perspective of Michael

Pettis raising the value of renminbi, higher interest rates, and an increase in wages will boost the

household income share of national income. It is a disadvantage for businesses and upper class

families, but it helps the lower and middle class families. Michael Pettis suggests three major

changes in order to increase the household income:

A higher rate of exchange for the Chinese currency will result in low prices on imported

goods, which will encourage consumers to buy imported goods for cheaper prices. To boost the

Chinese goods’ export, China has kept its currency exchange rate very low in order to make its

good affordable for international markets. The excess in export has lead to a trade surplus for

China but a trade deficit for the United States and the European Union who are borrowing from

China. Pettis predicts that this will hurt the Chinese exports because Chinese goods will cost

more to foreign consumers as a result of the change in currency conversion rate.

If the exchange rate goes down, the households as consumers will benefit because the

reduction in import prices implies a real increase in their income. According to Michael Pettis,

“Middle and lower middle classes benefit most since the very poor (especially the rural poor) are

likely to have a relatively low import component in their consumption, and the rich consume a

very low share of their total income” (Michael Pettis, 2010). From the lower currency rate,
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companies that sell imported goods and companies that benefit from an increase in domestic

consumption will benefit too.

His second suggestion is to raise interest rates. Higher interest rates will encourage

people to save money in banks since the profit is higher, but it will hurt big businesses who have

to borrow money from banks. Saving money itself lowers the consumption rate since the

incentive for saving money is greater than spending it. Households who are net savers will

benefit the most if Beijing raises interest rates and the higher their savings rate the more they

benefit.

Pettis’ third suggestion is to increase worker wages. Workers will benefit from an

increase in wages if inflation is kept under control. Higher wages will contribute to household

income, but if prices for goods increase people will consume the same amount as before and pay

more. An increase in wages will hurt business and factory owners because they have to spend

more money on wages. As a result, they will increase the output and the prices. As a result of

faster rise in wages workers benefit by increasing their share of national income. 

Michael Pettis deems the privatization and distribution ownership of state-owned

assets. To help household income, China should transfer ownership of state assets to the

household sector. “If the assets are simply transferred to the pension funds, the middle and lower

middle class, and urban workers, will benefit the most” (Michael Pettis, 2010).

The Chinese government should spend more money on TVEs businesses, and a portion of

trade surplus that flows into the United States and Europe should be spent to develop TVEs

businesses. According to Naughton, TVEs businesses were appropriate and profitable in the

Chinese economy and over the long run, gave them an competitive position. By entering the

previously protected market, TVEs shared in a portion of the monopoly profits.

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The money that local governments received from firms at the township and village, recycled on

new and expanded TVEs, as a result of high return for their funds. TVEs provided employment

and money to local economies. RCC also give away loans to TVEs. “Local money stayed local,

and so those areas that enjoyed successful TVE development were able to ‘snowball’ rapidly into

significant production scale” (Naughton, Ch. 12). The trade surplus/government spending can

contribute in TVEs as did RCC.

The growth of China’s rural industries has occurred primarily in suburban areas or city

neighborhoods. A steadily increasing share of TVEs, enterprises located in the townships and

villages, was privately run. Since TVEs were not constrained to a single organizational form,

localities were able to adapt as the advantages and disadvantages of various options became

evident. TVEs drove much China’s economic dynamism in the 1980s and the early 1990s. TVEs

public-sector ownership became a liability in the more competitive economic environment of

the1990’s and, as a result the TVEs began to fail. The private ownership identity of TVEs was

fully known to the government. According to Ministry of Agriculture data, there were more than

12 million TVEs, of which 10.5 million were private. Before the mid-1990s, there were more

collective TVEs than privately run TVEs. In four years the number of private-run TVEs more

than doubled, whereas there was almost no change in the number of collective TVEs. Private

TVEs were a result of rural reforms and began only in the early 1980’s. “In 1989, private TVEs

accounted for 49 percent of employment, and in 1990, they accounted for 50 percent. In 1989,

the private TVEs claimed 58 percent of the after-tax profits and 45 percent of the total wage bill

of all TVEs” (Haung P. 80).

China is rapidly growing but the social unrest as a result of unemployment and income

inequality still exists. To decrease the income inequality and provide more jobs in the economy,
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the Chinese government should bring some changes into its economic policies. The country is

relatively poor per capita, but China has an authoritarian government that is capable of taking

decisive action — to stimulate the economy, build new projects and invest in specific industries.

Programs such as unemployment benefits will prevent desperation and social unrest. The

government should support businesses such as TVEs that are profitable and create more jobs.

Lower interest rates and financial rewards should be provided to TVEs and collective sectors

should convert to private sectors. An increase in taxes and wages might cause unemployment in

the short run but in the long run it will help the middle and working class. A lower exchange rate

will provide cheap Chinese goods in international market, but a higher exchange rate will help

Chinese consumers to buy imported goods in lower prices. There should be equal focus on

development plans, education, health care, and other social programs. Development plans and

social spending will create job opportunities and education will help people qualify for high skill

jobs. Reforming the education system will help the future generation to learn needed skills for

the transition to a service economy. Considering social benefits will equalize the market impact

and narrow income gaps.

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Bibliography:

Robert L. Worden, Andrea Matles Savada and Ronald E. Dolan, editors. China: A Country
Study. Washington: GPO for the Library of Congress, 1987.
http://countrystudies.us/china/97.htm

Richard Herd, Samuel Hill and Yu-Wei Hu

Economic Survey of China 2010
http://www.oecd.org/document/43/0,3343,en_2649_34571_44477419_1_1_1_1,00.html

BARBOZA, DAVID August 15, 2010 NYT

China Passes Japan as Second-Largest Economy
www.nytimes.com

Gao, Qin and Riskin, Carl

Explaining China’s Changing Income Inequality: Market vs. Social Benefits
http://www.networkideas.org/ideasact/jun07/beijing_conference_07/carl_riskin.pdf

Ye, Juliet and Baston, Andrew April 2, 2009.

http://blogs.wsj.com/chinarealtime/2009/04/02/calculating-chinas-unemployment-rate/

Schneider, Henrique November 22nd, 2010

Who is dependent on China?
http://www.alphabric.com/2010/11/22/who-is-dependent-on-china/

Dependence on China
Oct 28th 2010, HONG KONG 
http://www.economist.com/node/17363625

Economy Watch
http://www.economywatch.com/unemployment/countries/china.html

Rein, Shaun Rein 09.07.2010

China's Surprising Unemployment Problem
http://www.forbes.com/2010/09/07/china-economy-unemployment-leadership-managing-
rein_2.html