Analysis of Chinese Macroeconomy

By Fengbo Zhang

For a developing country like China, there is a need for economic studies that will aid in its economic development and progress. In relation to this, author Dr. Fengbo Zhang presents a comprehensive study on the Analysis of Chinese Macroeconomy.

In Analysis of Chinese Macroeconomy, the author uses the econometrics method, which so far has not been attempted by anyone, to depict definitively the development process and the existing state of the Chinese economy. Highly recommended for Chinese research scholars, businessmen and readers interested in China, this book provides the suitable materials for understanding modern China and the future of economic reform. Recently, Western economics is being introduced positively in Chinese economic policymaking decisions. This is the first genuine book, which quantitatively analyzes Chinese economy by an energetic and innovative Chinese scholar. The achievements of the time-series analysis and existing State analysis in this book are bound to give us the valuable guideline to predict the future of Chinese economy.

The Pinnacle of Chinese Economic analysis, the First Genuine Research Book

An energetic and innovative Chinese scholar uses the econometrics method, so far not attempted by anyone, to depict definitively the development process and the existing state of the Chinese economy and to provide the suitable materials for understanding modern China and the future of economic reform. This book is required reading for Chinese research scholars, business men and readers interested in china.

Recently Western economics is being introduced positively in the Chinese economic policy decision. This book is the first genuine book which quantitatively analyzes Chinese economy by an energetic and innovative Chinese scholar. I firmly believe that the achievements of the time-series analysis and existing state analysis in this

• Language: English
• Publisher: Xlibris US
• Release date: Jul 3, 2008
• ISBN: 9781462817702

Book preview

Analysis of Chinese

Macroeconomy

Fengbo Zhang

Copyright © 2008 by Fengbo Zhang.

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

This book was printed in the United States of America.

To order additional copies of this book, contact:

Xlibris Corporation

1-888-795-4274

www.Xlibris.com

[e-mail]

47738

Contents

Chapter 1

General Introduction

Chapter 2

Historic Analysis

Chapter 3

Public Finance

Chapter 4

Money

Chapter 5

Price

Chapter 6

Consumption

Chapter 7

Agriculture

Chapter 8

Foreign Trade

Chapter 9

Model of China’s Economy

Chapter 10

Dynamic Analysis of Investment Policies

Chapter 11

Analysis on Macroeconomic Situation

Chapter 1

General Introduction

—The Objects and the Method of China’s Macroeconomics Studies

Economics—a theory that undertakes a deep study and analysis on the actual economic structure, the economic activities, the economic operational mechanisms, the law of the economic development and variations, then it is raised to the level of theory through summation and induction to guide the economic decision and development. Therefore, a scientific economic theory should be the guide and promotion to the economic development, and create enormous economic effects and social benefits.

1.    The Significance of China’s Economic Studies

Why should there be a study on the economic structure, the economic operational mechanisms, and the rule of the economic development in China?

1.   A system of scientific economic theory is needed as a guide in the actual economic activities and development.

An economic theory that reflects the objective law of economy is a result coming out from the research and accumulated experience in the long-term economic activities; it’s an effective weapon of mankind in fighting against the great nature and it’s also a scientific doctrine that has been tested again and again in practice over a long period.

The experience of the development in all countries of the world tells—a set of economic theory as guidance in economic policy-making is very important in order to get the economy going smoothly. Economic theory is the foundation in economic policy while the economic policy is the practice of economic theory. Economic policy needs the guidance of economic theory but the theory needs to be tested, accomplished, and perfected in the practice. Nowadays, the main developed countries possess a comprehensive set of economic theories. This set of theory system includes the macroeconomic analyses on the history of economic development, national macroeconomic control, finance, banking, price, foreign trade, industry policy, investment, consumption, and employment through summating the experience of the economic growth. There are also microeconomic analyses on the utilization of capital, production cost calculation, personnel administration, price determinants of the market, competition strategy, and consumer’s behaviors. Due to the effort of the analyses mentioned above, a set of most high efficiency experience has been obtained, forming a rather mature theoretical system. This system acts as a guide in the economy and society of every country. The economic theory, which closely connects with the actual economic activities, has been introduced in high schools and universities, therefore the basic knowledge of economic phenomenon, law of the operational economy are put into people’s minds at the right time. Those who are engaged in macroeconomic policy-making, executing, and enterprise management have more training and education on this set of economic theory, on the economic policy formed under the theory, and on the operational management method. Therefore, high economic efficiency has been reached through the utilization of the comprehensive set of macroeconomics and microeconomics theory of the macroeconomic policy guided by the theory and of the administration method. This becomes the primary condition in every nation’s economic development.

A set of comprehensive economic policy is urgently needed in order to promote the step of economic development while the building of China’s economic theory, which scientifically generalizes the law of economic development, is the precondition of the economic policy.

When China was in the feudalism, semifeudalism, and semicolonialism period, its economy stayed undeveloped for a long time. At that time, there were no objective conditions that existed to generalize the objective law of economic development, not to say to form a set of economic theory. Since the founding of new China, economy has been developing quite rapidly. But as the history of socialist construction is not long, plus the hardship it has gone through in this period, till now, a complete set of economic theory has not come out. In this case, we are short of scientific theory to guide the economic policy; to some extent, the economic activities are interfered by disciplinary means. There are lots of examples to show how harmful it is to ignore the economic law, to make unrealistic plans, and to aimlessly make economic policy in the case of economic development. The big leap of 1958 went against the economic development law of China; this plan was made by subjective wish instead of science, which brought about a great fault in macroeconomic policy-making and great loss in national economy. During the Cultural Revolution, subjective idealism was even more popular in the economic planning which almost pushed the national economy to the collapsing edge. In recent years, the economic decision-making has become scientific; but since there is still shortage of a complete set of macroeconomic theory system to guide the economic decision-making, the phenomenon of the imbalance of national economy occurs frequently so there are adjustments often, which hinders the rapid growth of the national economy.

What is the stage of economic development? What is the right speed for the development according to present capacity? What are the means we should take in the macroeconomic control? What’s the difference in the effect and function of each means? What are the key factors in causing the Chinese inflation problem? What is the interaction of these factors? How to stabilize the price, so and so forth? To answer all these kinds of economic questions, we have to make a comprehensive analysis on national economy and on the relations of each factor in the economic structure.

2.   To make a comprehensive study on economic structure and law of economy, to design a systematic theory of economic development and reform is the premise of ensuring the success of the economic reform.

One of the reasons for the slow growth of national economy is that the old traditional system cannot fit the economic development and impedes the smooth circulation of national economy. So it is absolutely necessary to reform the old system—it would be a great cause with historic significance. The goal of the economic system reform is to serve the economic development. The final economic effect is the only judge of the economic reform.

The original economic system was overcentralized. It didn’t pay much attention to the law of value and the role of regulation though the market, the country, relied too much on the instructive plan to carry out its administration; the economic operational mechanisms were too rigid. All the enterprises and the economic units at the basic level were state-owned; they were centrally controlled as a matter of fact and they became dependent of government superdepartment responsible for the work. So gaps occurred in responsibility, power, and interest. No competition, bad economic effect. As the old structure seriously binds the economic development, it becomes the utmost importance to reform the old traditional system in order to release the production potentiality.

After eight years of economic reform, in the countryside, we basically undertake the contract policy while in the city, we take many kinds of operational forms, such as contracting and leasing which strengthened the vigor of the firms. The market mechanisms are forming and exerting effects through enlarging the range and proportion of market regulating. The government disposed and arranged capital was reduced to a great extent, there were also changes in the fiscal capital, which were unconditionally offered, financial means began to play its right role in the economic activities. In a word, the economic reform has made the country and its people better off.

After years of reform, we are facing problems that need us to do deep thinking: why are the problems under the old system not totally wiped out and new problems keep coming up in the economic life after the series of reform by transfer power and benefit to the lower level? There are also the administrative reforms on management system and capital operation by transferring from state-owned government enterprises to private companies, but the actual effect of the company’s performance shows that there is still a gap between the subjective wish and the real result. In the developed countries, there are groups of excellent firms run either by individual or by state. Those badly managed firms will go bankrupt no matter if the owners are self employed or private shareholders.

It’s clear: besides the rearrangement of power or capital or changes in the management system, capital funding method, we must generalize the law of economic development through China’s reality to build up a complete set of theoretic system for China’s economic decision-making, to build up the business management theory and method for companies as well; lots of highly qualified staff should be trained out to meet the needs. Otherwise, it would be impossible to reach the expected result.

For a long time, we have had many problems in using the economic means for the macrocontrolling, which therefore resulted in big faults in decision-making. When these faults came up, we could only use administrative measures to solve them. Before establishing the scientific theory system for macrocosmic decision-making, government couldn’t find the right way to adjust and control the economy. It would be hard to solve the problems only by handing the power and capital to the leaders of the companies. Before establishing the scientific theory and method of business management and qualified staff are trained, when the companies themselves are badly managed, the leaders of companies could hardly use the power and capital effectively.

As the economic reform needs the guide of scientific theory so the economic theory probe should go ahead. Before the reform, we first have to find out the main problem’s need to be reformed by making a deep analysis on China’s economic structure, law of the economic variation. We should also find out several models of the reform by making a deep analysis on the way of reform, its expected result, its influence, and the countermeasures. But all these works are to be done upon the analysis, which have been made systematically, and scientifically on China’s economy. The economic reform should result in enhancement of macroeconomic research and the microbusiness management level. The economic reform should not become an administrative reform only around the relocation of power and capital.

As the reform goes, the government turns to carry out indirect adjustment in the economic activities by using economic means and guiding plan instead of administrative means and instructive plan. Since this is the first attempt in China’s history, there might be problems coming up so a new economic theory would be crucially needed to ensure the success of the reform. Otherwise, it would be hard to implement effective macrocontrol on the economic activities. At the same time, setting up a scientific management theory and method is also essential for the operational microeconomic system of China.

The case of the reform is the case of criticizing the old system and establishing a new system. But it would be difficult to undertake an effective reform without a better understanding of the operational economic mechanisms of the law of the economic development under the old system. It would be impossible to get an overall expectation of the gain and loss in the reform; it would not be possible either to have an actual overall prediction on the advantage and disadvantage brought about by the new system.

Briefly speaking, economic system reform is a profound historic reform; it is important as well as imperative to China’s economic development. Nevertheless, it cannot replace the studies of the law of economic development. The study of the economic science is the indispensable condition for the success of the reform.

3.   The economic development and economic reform closely connect China’s reality and connect the practical economic theory, which reflects China’s reality.

Economics should be the useful guide to the real economy as it is borne and developed in dealing with the practical economic problems. The present economics in China is less close to the practice; it cannot meet the need of the economic growth and reform. The economic theory does not exert its function as the guide in the real economic activities. As Chinese Premier pointed out, At present, economic theory study is lagging behind the reform and the construction practice, it fails to summarize the colorful practice. We should insist in the principal of uniting theory with practice, to encourage the brave probe on theory and practice. At the same time we should select and learn from the good experience of the other countries including the capitalist countries of the world for their advanced management experience in the large scale production to enhance the full development of the socialist commodity economy.

Some of the economic studies are satisfied only with deduction from conception to conception, with demonstration and quotation, with tedious dispute, or they just copy the foreign countries economic achievement to find the answer to China’s economic problem without quite understanding the background of the emerging of the theory and the social economic environment. Or they just pile up new terms, new conceptions to decorate the article. They don’t even consider whether these studies would clarify the real economic phenomena or solve the real economic problems, or what is the economic and social effect after utilizing extensive manpower and financial resources to complete the studies.

China is different from the West countries in political and social system, economic structure, and in the national economic accounting system. What’s more, the macroeconomic imbalance of the West countries is caused by the demand insufficiency while in China it is caused mainly by supply insufficiency. So it would not help to copy the economic achievement to solve China’s economic problems. Especially that the classical, traditional theory cannot properly handle the present economic structure which is very complicated and changeable. Thus in adopting the foreign economic research achievement for China’s use, we must first make an analysis on China’s present situation.

Why could Japan develop so fast after the Second World War? The economic theory has played a very important role. After the war, Japan also imported the modern Western economic theory while it didn’t copy the theory. When the theory was introduced to the Japanese economy, it had been selected according to Japan’s condition then formed a new school—government economics that differed from the Western economics. The economists of this school have done great work in studying Japan’s economic problems, making Japan’s economic development policy. Every year, they edit the economic white book, write all kinds of economic analysis books and articles; their achievement is really a push to Japan’s economic development. They are seldom filled with abstract conceptions and technique terms from the Western economic theory but focus on analyzing Japan’s practical economic problems, on making economic decisions.

Finally, analyzing the operational economic mechanism, studying the theory and policy would be good for us to keep a stable political situation, strengthening and perfecting the socialist economic system.

2.    The Objects of China’s Macroeconomic Studies

When studying China’s economy, we should use the achievement of foreign countries’ economic study for reference, closely analyze our own country’s economic situation to make a scientific analysis on China’s economic development and variation, then the studies should be raised to the theoretic level to guide the economic decision-making. Thus, economic theory should reflect the law of economic development; it should be the guide of the economic development and produce real economic and social effects. The macroeconomics study takes the national economy as a whole to analyze the general law of the economic activities. The microeconomics study takes the individuals, families, and firms as its objects; it studies the law of the economic individuals. The former is forest, the latter trees. They are integrated with each other, but they are different.

China’s macroeconomics study should start with the analysis on the history of China’s economic development, finance, price, foreign trade, industry policy, investment, consumption, and the total circulation model to find out the law of the variation then to act the guide in China’s macroeconomic decision-making.

The historic analysis of China’s economic development is a vertical analysis of the macroeconomics. In thirty years of socialist economic construction, there are lots of experience and law to be summarized, lots of lessons to be learned. From the year 1949-1960, except for the big leap period, economic development went rather satisfactory, industry became dominant instead of agriculture in the economic development, the national economy gradually ran well. From 1961-1976, because of the natural disaster and the culture revolution, the speed of the economy fell slow, the industry suffered a great loss, and the national economy was going bankrupt had it been without the maintenance of the agriculture at a low level. From 1977-1986, the national economy grew very fast while the growth mainly relied on the growth of the agriculture. New economy entered a historic stage of industry domination to replace agriculture-do-minting once again. Economic development experiences fluctuating waves during each five-year cycle. The chief factor of the wave is the investment. Besides the factors, such as energy, transportation, politics, etc., would produce great influence on the wave of the economic variation. Having gotten a clear vision of the stage of economy, we shall take measures to accomplish the industry-dominating model in the national economic development to put the economy to the sound circulation by ameliorating the economic structure, advancing the technology, and keeping certain a ratio of accumulation.

Finance is part of macroeconomics study. One of the main tasks of the governmental macroeconomic decision-making is to analyze the characteristics of the financial structure, the function of the financial policy. The main contents of the financial study are as follows: the characteristics of the changes of the financial scale, the main ones of the financial revenue and its relations with the economic growth, the promotion of the financial expenditure items, the reason of the financial deficit and its countermeasure, the relations between the central finance and the local finance, the direction of the financial system reform, the impetus of each financial policy to the economic society, the function of the finance in the insurance of social welfare and people’s life. After positive analysis, we will have a better understanding of the law of financial change. For example, the relations between the financial revenue and the national economy are extremely close as the former determines the latter. In the period of 1950-1985, the average elasticity value of the financial revenue to the national income is one; that means in thirty years, they grow at the same speed. But there is a discrepancy before and after the reform. In 1950-1975, under the traditional economic system, the average growth of the financial revenue overran the national income since the central government exerted a tight control over the economy. In 1976-1985, as the central finance started to give power and interest, the average elasticity value of the financial revenue to the national income declined to 0.7213. The basic content of the financial positive analysis is to study the relations between finance and national economy to find out the variation regularity of the finance from the characteristics of the national economy to state out the function of the finance to the national economy.

Banking is the weak part in Chinese macroeconomics study. The premise of the banking study is to decide the kinds of circulating currency based on the extent of the monetary cashing. For a long time, the speed of monetary circulation in China tends to decline. The reasons of it include the following elements: the variation of the economy, rate of interest, price, the consumption, the expanding of foreign economic relation, and the recent year’s economic system reform.

To study the speed of the currency circulation would be useful to make precise prediction to the currency demand. The amount of currency issued has lots to do with the national economy, production and price. Under the old economic system, the influence of the variation of the money demand to the industrial production was as long as five months. The key point of making a scientific financial policy is to be clear about the regular variation of the monetary demand. The monetary demand is mainly determined by GNP, speed of currency circulation, import and export trade, price, etc. These independent variables forming the function formula could correctly reflect the variation law of the monetary demand, and it could make a better prediction of the tendency of the monetary demand. The money supply of China depends on finance, consumers’ credits, international account, and the bank itself. By analyzing these factors’ relations with the amount of currency, we could control the money supply mechanisms and fix the money supply.

Price is one of the most things concerned in the economy, and it is one of the works of the macroeconomics to study the price variation. Why is there price inflation? What are the chief causes of it? What measures should be taken to stabilize the price? Originally, the price was controlled by administrative means so there were fewer changes in price. After the reform, since the market mechanisms strengthened, the commodity economy became active; changes of the other factors’ reflection on the price became quite sensitive. There are several causes for the inflation: the direct factor is the increase of individual salary and other income, which pushes the consuming demand and investment to go up. The increase of the issued money is the basic means of the price inflation. The import and export trade also impels the inflation to some extent. So we should first take all these into consideration when trying to stabilize the price. Thus, we must use economic means to adjust and control the price.

Consumption is also the object of the macroeconomics study. Consumption is determined by the national income; for quite a long time, the consumption rate in the NI was seldom stable. When initiating large-scale economic construction, consumption is cut down. When the production is declining, the consumption rate is raised too high. Now it is thought to be proper to keep the rate at 70%. The average elastic value of the consumption to NI was 0.905 from 1952-1957, i.e., the speed of the consumption growth was slightly lower than the national income, which was regarded as reasonable. From 1958-1976, it was reduced to 0.831, slightly lower. From 1977-1986, it was 1.0, i.e., they increased at the same speed. From the present level of China, the speed of consumption is still high. Recently, people’s consumption, especially that of the peasants, have increased too quickly. From the analysis of the expenditure items of the consumers, we could see the following: as the living standard rises, food expense declines, the proportion of the expense of housing rises relatively high, the income elasticity of the high quality goods becomes high, the living necessities remains low. What’s more, the price elasticity of most of the consumption goods is quite obvious—price has been playing its role in adjusting the demand and supply. The consumption also changes according to the changes of the season; to analyze these changes with econometrical method would rightly get to know the consumption inclination.

Agriculture has played a special role in the macroeconomics study. Agriculture always runs first among other departments, its population, labor force, and production value. Relatively speaking, China is still an agricultural country. But now, the agricultural labors are slowly moving to the other department. For a long time, agricultural structure was unreasonable; it’s economic effect unsatisfactory because of the overstresses on grain. From the analysis of the agriculture function, we could see that land has little effect to the agricultural production because of the low mechanization level, the low technical level of utilizing the fertilizer; agriculture production relies mostly on labor. So the only solution of transferring the labor to the other departments is to raise the technical natural disaster would act badly on the extent of the influence, so we can analyze the influence exactly by the quantitative analysis method to provide scientific basis for the agriculture policy making.

Foreign economic relations should also be taken into the macroeconomics study. Especially in the recent years, the foreign economic relation has become so active under the open-door policy that it is exerting greater and greater effect on the national economy. The structure of foreign trade has been unreasonable for a long time. The finished goods have been the most portions of the imported goods; the primary goods have been the most portions in the exported goods. In the foreign trade, there has been too much emphasis on the increase of quantity; while neglecting the economic effect of importing to meet the need of the national economic growth, there should be a deep analysis on the relations among foreign trade, national economy, and industrial structure. By using the method of analyzing the import-and-export-trade function, we could achieve a rather satisfactory result. What commodity is to be imported? What’s the real ability of export? What measures are to be taken in order to constrain some commodity to be imported? What commodity are they? How to increase export? How to fix the right exchange rate? How to make good use of the exchange rate? The answers can be found by studying the present state of foreign trade and its policy.

China’s macroeconomics is a very complicated system consisted of many factors. The interaction and change of these factors form the operational mechanisms of China’s economy. The effective way of understanding the operational law is to make a systematic and comprehensive analysis with the econometric pattern. This pattern tends to find out the inside relations of the national economy of China. The production part of the pattern consists of the production function of agriculture, industry, architecture, transportation, commerce, or national income. Additionally, foreign trade, finance, consumption, accumulation, investment are included in the system of macroeconomy. Factors such as labor, investment, energy production, price, income, grain acreage, index of agriculture technique determine the endogenous variable in the function formula. The independent variable of the formula also includes the endogenous variable, which is determined by the