ASIAN AFFAIRS INTERVIEW WITH WU JIE

State Commission for restructuring economic systems Vice Minister

THE ECONOMIC REFORMS

Serge Berthier - Mr Vice-Minister, can you explain for our readers how the State Commission for restructuring economic systems (SCRES) works? What is its scope?

Wu Jie - The SCRES (1) has a simple task. It is there to make proposals to the State Council (2).

S.B. - But what sort of proposals?

W.J. - Proposals in line with the reform goals of the country. The SCRES is in charge of the comprehensive management of the reform of the country's economic system.

S.B. - That is a very large scope. On a practical angle, how does the SCRES work? What are the lines of responsibility? In other words, who is doing what?

W.J. - The SCRES is in touch with all the central and provincial departments as well as the state-national enterprises. Our task starts at the drafting stage of macro or micro-economic regulations. But it does not stop there. Once policies and regulations which have been put forward to the State Council have been given the green light, we monitor them wherever they have an impact. In particular we take charge of the work of dovetailing the reforms of the urban and rural economic systems. Of course, we do so together with the relevant departments but our strength is that we can see the whole picture across the social and economic spectrum whereas a specific department has a limited scope.

S.B. - In other words, you act at the same time as a Research Institute and as a trouble-shooter?

W.J. - Not really as a trouble-shooter, but effectively as a coordinator. We deal with the problems concerning connection and co-ordination in the formulation and implementation of the programs and plans for the economic system reform…

S.B. - But is this not the task of the State Planning Commission?

W.J. - The State Planning Commission has a different task. Actually we sometimes heard people saying that our duties sometimes overlap. But it is not so. The SCRES is not involved in the allocation of money, subsidies, investments and so forth. This is the task of the State Planning Commission (3). To allocate and to check. We are working at a different level. We are not in charge of the macro-planning of the economy. We deal in major experimental reforms. We guide. We also study the evolution and development trends not only of the Chinese economy but also of foreign economic systems.

S.B. - Is there an economic model that you use as a guide? Is there a theory behind the thinking?

W.J. - No. There is no economic model as such. No economic theory. We work and analyze on a case by case basis. Then we propose a solution.

S.B. - A theoretical solution?

W.J. - No. A practical one. A workable one that can be implemented.

S.B. - But most of the time, economic reforms means that a new legal frame work must be put in place…

W.J. - The SCRES has a department of Policy and Legislation to deal with that aspect. The organizational structure of our Ministry is multi-functional. We have a Department of Rural Economic System, to deal with our rural economy. We have also a Department of Production Systems to deal with the State sector, one to deal with the circulation of goods, etc.…

S.B. - Is social security part of the scope of the SCRES?

W.J. - Indeed. We do have a Department of Distribution and Social Security Systems. We are actively working on the establishment of a new social security system.

S.B. - What are the major problems?

W.J. - First, a chaotic management system. The Ministries of Labour, Personnel, Civil Affairs and Public Health, the State Family Planning Commission, the People's Insurance Company of China respectively participate one way or another in the management of social security. It can't work. Second, our laws are incomplete and do not meet the needs of the development of multiple economic forms and multiple employment systems. We have, for example, many difficult problems related to social insurance in foreign-funded enterprises.

S.B. - Such as…

W.J. - There are no laws to go by or they take advantage of loopholes in China's laws and evade employees' social insurance.

S.B. - Are they the only problems in the social security system?

W.J. - No. A third problem is the fact that the coverage of existing social insurance is very limited. People can enjoy at best a low-level social security. Furthermore, its development is uneven. The current coverage of rural social security is less than five percent of the rural population. There is a wide gap in the average social insurance coverage in various provinces and cities. Another problem is the fact that our system is based mainly on enterprise security. It limits the universality of security. In addition, there are many covert but few overt security projects, therefore labourers take only shallow impression of them. Although the state and enterprise have spent huge amounts of expenses, social effect is not notable. To compound the situation, you also have to take into account that our security system features a high integration of employment and welfare. Social security funds were and still are being borne mainly by the enterprises. Personal rights being dissociated from personal duty, the result is that the enterprise welfare funds are out of control most of the time.

S.B. - China is not the only country to suffer from this phenomena. Welfare and social systems are also out of control in Europe…

W.J. - We are studying this phenomena. Actually we have a Department of International Comparative Studies. It studies systems elsewhere, whether we are talking about social security systems or macro-economic systems or state enterprises. If something works, then we can try it.

S.B. - What did you find that works?

W.J. - It is difficult to say that a system works and another doesn't because time and scale are important factors. Such factors are not immutable. Therefore, the aim of our research is to decipher the mechanisms of systems that do not work successfully at a given stage. Nowadays for example. Because if we understand what's wrong with such system at a given time, we might be able to avoid the same situation. We always learn more about what should not be done than what should be done. Social security systems prevalent in countries such as France or Germany have, for example their own latent defects and ingrown problems due to aging factors. We can learn some clues on the aging process of such systems by studying them. But that's about all.

S.B. - One of the tasks of the SCRES is to dovetail the reforms of the urban and rural economic systems. In doing so, does the SCRES play the role of an inspector?

W.J. - To a point, yes. We do examine the implementations of the programs and plans of the Central government, and we submit timely reports to the Sate Council on what we have seen. As we only report to the State Council, we are able to judge across the board what the problems of co-operation and co-ordination between various departments or administrations.

S.B. - Who make the final decisions?

W.J. - As regards our proposals, it is the State Council.

S.B. - In the West, people like to say that the architect of economic reform is Vice-Premier Zhu Rongji. However the SCRES does not report to him and he has never been the minister of this Commission. Is there in fact an architect of the reform?

W.J. - The reform is a process. It is not the work of one decision-maker. Initiatives are coming from all corners. It is not a top-to-bottom approach.

S.B. - What do you mean?

W.J. - As you know it is Deng Xiaoping that has reembarked China on the long march towards modernization. Notwithstanding his ideas about modernization and his overall strategy for China's economic development, the realization of the modernization is the product of the people's initiatives. It could be a labourer in a remote rural area who decides to improve something which will increase the output of his village or will enrich himself. In the end the village committee, or the mayor, will start making it known to the party, or to a government officer. Sooner or later, someone from the SCRES is bound to know about the experiment. We then go and look at what was done. If it can be done elsewhere on a larger scale, then we will promote whatever was done which has been beneficial to the village, to the people. Initiative can also arise out of criticism. A bank officer might criticize the banking system. A lot did. Or a high ranking government official, a minister touring the country, listens to people's grievances about this or that. Complaints, criticism, suggestion, spontaneous initiative, everything is looked at. Then we try to rationalize it into a march towards progress.

S.B. - What are the criteria, if any, that you use to gauge a reform?

W.J. - There are three criteria, or rather three questions to answer: does the reform improve the economic output? does it strengthen the nation? does it increase the standard of living?

S.B. - Which one is the most important?

W.J. - The three criteria have an equal weight. None of them is more important than the two others. In other words, the answer must be yes to the three questions for the reform to be launched.

S.B. - None of the criteria seem to be politically colored!

W.J. - That is correct. There is no political criteria. The question is a very simple one, not a political one. Does it work or not?

S.B. - Ten years ago, the world was divided into two economic systems: the capitalist one and the communist one. Do the three criteria belong to one of the two systems?

W.J. - What you say is correct. Economic systems have for a long time been divided into two categories. But our criteria belong to none of them.

S.B. - When the answer has been yes to the three criteria, then what happens next?

W.J. - We proceed with an experimental reform in a specific area. It could be a village, a township, a region, a state enterprise, a province. It all depends upon what the reform is about.

S.B. - What is the scale of such experimental reform? Is the SCRES involved in the tiniest reform taking place in the country?

W.J. - Of course not. Actually, the less the central government is involved in the process of reform, the better. That is to say that, unless it is a major change, we let the local authorities supervise all sort of new ideas. But in China, you are very quickly talking in big number. Even in a remote part of China, an experimental reform might affect 100,000 people or even one million. That is not a small number. That's why we have to be careful. A rippling effect on a million people is a different matter from that on a township of 10,000 inhabitants.

S.B. - The State Commission for Restructuring the Economic systems was formally established in 1982. That is 15 years ago. Without going too far back, what are the most important reforms that SCRES has initiated and implemented successfully?

W.J. - The reform of the banking system is one. We did it in 1994. Of great importance too was the introduction of a system of sharing revenue between the local and central authorities. The reform of the foreign exchange system has been crowned with impressive achievements. But for me, the most important reform has been the introduction of the law that bars the government from borrowing from the Central Bank. This is a fundamental law that will help to keep inflation under control.

S.B. -With 9% average growth per year for the past 20 years, the Chinese economy is in a category of its own. However critics say that such statistics give an exaggerated impression of the performance of the economy because the Chinese economy was very weak 20 years ago. Do you agree with this approach?

W.J. - The comment is reasonable. However, it is inaccurate. True, the Chinese economy was not very large. It is still a fact if you compare the size of our output to the size of the population. But we have to be careful when we say that. We have to look at it from a different angle. We are 1,200 million. 800 millions of us are peasants and live in rural areas. In terms of manpower, this is a tremendous quantity. We are at least a one billion manpower economic power. Furthermore China has a vast territory and natural resources. Then if we take the long view, we can see that for the past twenty years, our economic reform has been the right one. Who could say we could have done better? Or could do better? Nevertheless, even with high-speed development, China remains a developing country and will remain so for a long time…

S.B. - Western economists doubt that China can sustain such high-speed growth now that the economy has a substantial size. Do you agree?

W.J. - Of course this is an important question but our belief is that we can sustain the present high growth rate we currently enjoy for another 15 years. This is so because of the vast reservoir of manpower we have. The economy has not yet reached the point where its sheer size will weigh it down as it is the case in the developed countries. But after 15 years, we can expect our growth rate to slow by two points, to seven percent per year. It is not that our economic policy will be different then but that the economy being then large, will have a weakened velocity.

S.B. - Is the size of the economy the only factor in the equation?

W.J. - No. You have to take into account the level of foreign investments. Over the past few years, China has attracted large amount of foreign investments. We are currently nº 2 in the world. In the long-term, the ratio will most likely diminish

S.B. - It is already the case in 1997. The amount of commitment has dropped dramatically since 1996.

W.J. - We are aware of this phenomena and studying it. It might be the unwanted result of some other factors.

S.B. - Foreign investors are grumbling about the tax on the importation of goods and machinery of joint-ventures or foreign funded ventures. Could it be "the factor"?

W.J. - Maybe. In any case, it is too early to judge as we only have partial statistics. But we have taken notice and will monitor closely the situation. If indeed the tax reform has been a disincentive, then we will have to be pragmatic.

S.B. - Is the level of foreign investments in China critical to the velocity of its economy?

W.J. - I would not say that although I know that it is what is said in certain quarters. What is critical to its velocity is the saving ratio of its population. And this is why I believe that the economy will keep its velocity for a long while. So far, the saving ratio of the Chinese is the highest in the world. We like to save. To summarize, I am just saying that the question of the Chinese economy losing its velocity is a premature question.

S.B. - Is it correct to say that if the growth rate falls below 9%, then the social structure of the country might be at risk?

W.J. - What I am saying is that we can sustain a high-speed development for another 15 years. Then, we will reach a platform where 7% will be achievable and this relative slow-down will not affect the social structure of the country.

S.B. - President Jiang Zemin has outlined the reforms of the state firms mentioning mergers, bankruptcies and privatization in his report to the Fifteenth Party Congress as the avenue to pursue to overhaul the system. Does it mean that the public sector will be sized down?

W.J. - No. People are confusing two issues. The public sector is not going to be sized-down. It is going to be reorganized to be more efficient.

S.B. - What can make it then more efficient today than yesterday?

W.J. - We now have the proper environment to overhaul the sector. The reform of the State sector is not a new thing, but before 1994, we did not have the necessary environment to carry out in-depth reforms of the State sector.

S.B. - Do you mean the economy was not strong enough to support the burden of the reform process?

W.J. - We had first to carry out the reform of fiscal, financial, foreign trade and foreign exchange systems. These reforms have been achieved, thus enabling today the enterprise reform to make further progress.

S.B. - You say that the reform will not diminish the weight of the public sector in the economy. But the State sector is going to be sized down if the reform is fully implemented. Isn't it contradictory?

W.J. - First, let's be clear about what the public sector is. It comprises not only the state-owned enterprises where the State is the sole owner or the controlling shareholder but the collectively owned enterprises. Let me add to this that state-owned enterprises does not mean exclusively the enterprises attached to the ministries and commissions under the State Council but also the enterprises attached to or controlled by the provincial governments, the municipalities, etc.… Often what the people have in mind when they are talking about state enterprises are just state-owned enterprises attached to the central government. If you want, this segment of the public sector is the one to be down-sized, but it is just a matter of shifting assets and responsibilities. But it is a slow process.

S.B. - What is the weight of the public sector?

W.J. - About 70% of the GDP. And it will remain basically close to that even though its structure is going to change. The reforms persist in the ownership of the state. At the same time we are to separate the ownership of the State from the property rights of investors; and separate the property rights of enterprise investors from the property right of legal entities.

S.B. - Isn't this a bit confusing?

W.J. - It was very confusing. But to simplify, let's say that the enterprises will independently manage all the assets contributed by investors, the government included. So what we are saying is that the government will be a major shareholder and will globally remain so under different legal entities set up at provincial or municipal or central level. But such legal entities will only be shareholders, not managers. The reform does not mean that the total weight of the state-owned enterprises will diminish but that the repartition will be different since part of them will be transferred through shareholding, merged or closed. We currently have 9,000 state-owned enterprises who have been technically converted into shareholding companies. However only 700 of them have existing shareholders. In 1995, the number was 500. What we want is all these 9,000 enterprises to have real shareholders, the sooner the better.

S.B. - What are the difficulties facing the enterprises who are unable to find shareholders?

W.J. - They are not attractive. Not all state-enterprises are in bad shape, but most of them are not performing. As in the Western world, a state company always has a long history. You could say it is weighted down by history, or it is just too old. In fact, to be aging means four things: the factories or workshops are archaic, the enterprise is in debt, the number of pensioner exceed the number of employees, the machineries and tools are out of date.

If all the state-owned enterprises share these problems, the economic reform has not weighted on them the same way. In fact, the reform has split the State-owned enterprises in two categories: the non-competitive ones, the obsolete ones.

These are two different problems. The non-competitive enterprises can be reorganized. It means money. For the obsolete enterprises, it is the end of the road. Closure is the only option. They are the victims of the progress.

S.B. - What then will happen?

W.J. - For the obsolete enterprises, the State will take care of the pensioners. There is no choice. As I mentioned earlier, our social security system has a high level of integration of employment and welfare. The disappearance of the enterprise means the disappearance of the social security funds.

S.B. - Then what about the employees?

W.J. - This is a social issue, an employment issue. A question of retraining them. In this respect, Shanghai is doing a better job than the other cities. Now, you have to keep in mind one thing. The difficulties of the state-owned enterprises are a direct consequence of the high-speed development that we have engineered. Therefore the problems of the state sector are a positive factor, not a negative factor. It does not mean that the Chinese economy is running into problems, it means the contrary. And now we are taking steps to adapt the sector to market forces.

S.B. - Ultimately is the reform of the state-enterprises opening up the way to decentralization, to regionalism?

W.J. - You could say that.

S.B. - Jiang Zemin didn't give a specific timetable for the reforms, saying only that state enterprises should have "markedly improved their operations" in the next three years. Then he did not give a specific method for them to do so. Is there a method beside closing down the obsolete enterprises?

W.J. - There is not one answer. Of course, you can summarize the method by saying that a restructuration of the enterprises is going to take place. But it is already the case (4). Some protruding problems add difficulties to the enterprise reform. Mutual default of payment between enterprises is one, but without mentioning the human factor you can add excessive stock, slow-selling products, poor location. You can't fix a universal rule and say it will apply to all, except to say that the old internal labour, personnel and distribution systems will be scrapped. Where national interest is at stake, in sectors such as energy for example, the State will keep control. It will be the majority shareholder. But for the other sectors, the State might only keep a minority shareholding position. There are no rules except the principle of national interest in key areas. The target is to achieve the overhaul of the sector during this plan.

S.B. - The department of Market Circulation System of the SCRES participates in drafting and coordinating plans for reform of the foreign trade. Could you comment on the everlasting argument that the United States has with China about their trade relations?

W.J. - This comes from the calculating method used to calculate the trade between the two countries. For example last year, according to the United States Commerce Department, their trade deficit with China is about US$ 30 billion. But according to our own calculation, the surplus with the US is only about ten billion.

S.B. - What is exactly the point of disagreement?

W.J. - A very big part of our exports, 60% to 70% are the output products of processing factories. Such factories get about ten percent of the price of the goods. Ninety percent of the price goes to the original owner of the goods or the final exporter, who often happens to be the same and is not a Chinese company. This means that the processing plant get only one-tenth of the price that is used as the value of the exported goods.

S.B. - But if the discrepancy is so obvious, why is the argument dragging on and on?

W.J. - You have to keep in mind that some countries use their trade as a political weapon. Furthermore there is also a problem with Hong Kong. We also disagree on the way to calculate the trade going through Hong Kong which is an independent custom territory. As regards China, it is clear to every one that it is a developing country. We produce goods with low or weak added-value. Our manpower being cheap, we produce consumer goods with low added value. The Chinese processing factories get little out of each article. This process, as a whole, is good for the consumer in the rest of the world. Of course, China is not the only one to produce cheap goods. Every developing nation is doing so. When you look at foreign trade matters, you should stand on higher ground than the trade balance issue. How can you understand the mechanisms of the trade you are looking at only if you don't take into account the economic criteria which make it work?

S.B. - Why are the Western countries so focused on their trade relations with China?

W.J. - I don't know. But there is one thing I would like to say about it. The international trade is expanding step by step all the time. Therefore the view that we are dealing with a limited market does not square with the fact. The Chinese market is growing and so is the international market. If there is a new product coming onto the market, there will be a market for it. This is what we see all the time. What it means is that the market is therefore an unlimited quantity, not a finite quantity. This is as much a philosophical concept than an economic concept. Unfortunately, it is missing in all the recurring arguments we can see coming year after year.

S.B. - Talking about foreign trade, one important factor is competitiveness. The financial turmoil that has embroiled the Asian currencies during the summer, in particular the financial crisis in Thailand, must be a source of concern for China…

W.J. - Not really.

S.B. - Why?

W.J. - I can see four reasons. The first one is that the Chinese currency is not fully convertible. This provides a stable environment for our international trade and the foreign investors. Two, our macro-economic management is sound. Furthermore we have reformed the banking system in 1994 and we favoured long-term foreign debts over short-term papers. The third one is that the foreign trade is regulated. We monitor our trade balance. And the last reason is that the over-heating of the economy has stopped and that the speculative bubble in real estate has been brought under control in early 1996. Actually, the speculative activities in the real estate market, in particular in Shanghai, were a consequence of the over-heating of the economy. This is under control and was only a minor regional problem.

S.B. - Do you think that the present turmoil will give the Chinese government second thoughts about the full convertibility of the Chinese currency which is supposed to happen one day?

W.J. - To have a fully convertible currency, you need to have a production level in the country that is commensurate with the country. We are far from that level and it will take at least a decade to reach it. Therefore the financial turmoil that we have witnessed has no bearing on our approach to the question of the full convertibility of the currency.

S.B. - Then do you agree that, maybe, the ASEAN countries have been too fast in opening up their economies and financial services and now pay the price?

W.J. - It is not for me to judge. However it is obvious that the path from developing country to industrialized one is a long one. The United Kingdom needed 500 years to switch from a rural to an industrialized economy. France took 400 years, the United States 200 years. We believe that China will achieve the switch in about 50 years. So time is of the essence. And what is paramount is to sustain a steady growth pace, whatever its level.

S.B. - One of the direct consequences of the financial turmoil in Asia is to make Chinese goods more expensive on the export market. The baht has slipped by 30% and so has the Indonesian rupiah. The Malaysian ringgit is down by more than 20%. Is it a worry?

W.J. - Not so far. If what you imply is that the Chinese currency is overvalued or that we should devaluate, then I must point out that we want the Chinese currency to be a stable one. If you start playing with parity, you destroy the trust people have in the currency. Foreign investments are bound to be affected. As I said, we have no proof so far that Chinese exports might be affected. We will only know in six months time. If the devaluation of Asian currencies has erased the competitiveness of the Chinese exporting sector, then they will have either to find ways to improve their productivity or find new markets.

S.B. - But if they fail to do so ?

W.J.- Then we will have to look at it. But the way to look at it is not by playing down the currency. It is through fiscal measures. But as I said it is too early to tell what will be the impact, if any, of what we have seen on the currency market in Asia.

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Notes:

1.- The State Commission for Restructuring the Economic System was formally established on May 4, 1982. The first minister was then Premier Zhao Ziyang (concurrently, from May 1982 to April 1987); the second was Li Tieying (April 1987 to April 1988); the third was Premier Li Peng (concurrently, from April 1988 to September 1990); the fourth was Chen Jinhua (September 1990 to March 1993). Then Li Tieying was appointed again when Premier Li Peng reshuffled his second cabinet.

Li Tieying, 61 years old, is a member of the Political Bureau (Politburo) and a state councillor since 1988. He was educated in former Czechoslovakia. He first made his mark as a reformist cadre in the Northeast Liaoning province. In 1993, almost a third of deputies to the National People's Congress (NPC) opposed his reappointment as a State Councillor. 722 legislators voted against him and 137 abstained. 2037 supported him. Under the Chinese constitution, a simple majority is required for confirmation of ministers. Only 2132 endorsed his candidacy as minister of the State Commission for Restructuring Economy, while 655 voted no. Other ministers got through with on an average 2 600 votes in their favour. The low votes for Li Tieying were attributed to the fact that he was stepping down from the State Education Commission and was blamed for the chronic problems in education.

2.- The State Council is the executive body of the highest organ of state power. The State Councillors who shall serve no more than two consecutive terms (in the same capacity) are :

- Premier: Li Peng

- Vice-Premiers : Zhu Rongji, Jou Jiahua, Qian Qichen, Li Lanqing

- State Councillors: Li Tieying (currently minister in charge of the SCRES), Chi Haotian, Song Jian, Li Guixian, Chen Junsheng, Ismail Amat, Peng Peyun, Luo Gan.

The secretary-general of the State Council is Luo Gan. The State Council will be reshuffled when Premier Li Peng steps down in March 1998, having completed two terms in office.

3.- The current minister of the State Planning Commission is Chen Jinhua. Former vice-mayor of Shanghai, he was the Minister of SCRES from September 1990 to March 1993. The lower profile of the State Planning Commission is highlighted by the fact that Chen Jinhua is not a State Councillor, nor a member of the Politburo.

4.- Since the promulgation and enforcement of the Corporation Law in 1993, there has been a rapid development of China's shareholding enterprises which is the first step in the reform process. The first 17 state-owned enterprises to complete their reorganization in line with the shareholding system that is now going to be extended, did so in 1994. They raised HK$19.23 billion in overseas funds and US$958 million.

The first company to be transformed from state-enterprises registered in China directly into a listed company abroad (in New York) was Shandong Huanen Power, one of 22 pilot enterprises at the time designated by the State Council. Since then, many have been listed either in Hong Kong or New York.

published in Autumn 1997

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